For the week of Sept. 30-Oct. 4th
On the heels of September’s interest rate cut, economic data released last week fueled more optimism for the near-term outlook for the commercial real estate (CRE) industry as the 4th quarter got underway. The LightBox CRE Activity Index grew by 10 points year over year, the September jobs report surpassed expectations, office leasing strengthened, and the devastation left in the wake of Hurricane Helene brought property resilience to the fore.
Here’s our latest top 5 list of the biggest weekly CRE news stories and why they matter.
Note to Readers: LightBox would like to highlight the people who are actively working to bring relief, supplies, and assistance to those impacted by Hurricane Helene.
- September LightBox CRE Activity Index Rises 10 points YOY
Compared to August’s 89.9, the LightBox September CRE Activity Index increased to 98.2, a significant 10.3 points above last September’s 87.9. The strength shown by this aggregate index of activity in property listings, appraisals, and environmental due diligence is largely attributable to the Federal Reserve’s first interest rate cut. An increase in property listings is common after Labor Day as sellers are more likely to list properties in September than in the summer months, and then supporting environmental due diligence and appraisal activity follows. The relative strength of these three CRE barometers is a leading indicator of the overall strength of the CRE market and bodes well for continued strength in Q4.
Why It Matters: The CRE market is entering a new chapter after a long slowdown, and CRE professionals, including attendees of the late September CREW Network convention in Vancouver, are hopeful in a way the market hasn’t seen in several years. While bank call reports reflecting on lending volume in the past quarter are often used as a sign of CRE strength, the CRE Activity Index is an early indicator of the extent to which CRE activity is picking up even before it’s evident in public records data. With every new round of property listings and transactions, price discovery is improving, a development that will lure other CRE investors into the market and encourage sellers to list more properties.
- U.S. Economy Added 254,000 Jobs in September, Surpassing Expectations
Adding to the optimism of the first rate cut, the September jobs report from the Bureau of Labor Statistics showed that the U.S. economy added 254,000 jobs last month. It’s worth noting that the data surpassed the consensus estimate of 150,000 by a significant margin. Coupled with job growth, the latest report also showed that unemployment fell to 4.1% in September from 4.2% in August.
Why It Matters: Although job creation is a positive sign of economic health and a key driver of demand for commercial space, this sharp and surprising increase in job creation could also complicate November’s interest rate decision. The Fed will be closely watching inflation data and the October jobs report. If labor market data continues to strengthen or if inflationary conditions return, the Fed could hit the pause button and take the winds out of the sails of those anticipating lower rates by year-end.
- Hurricane Helene Delivers Major Hit to the Southeast U.S.
The devastation brought by Hurricane Helene affected individuals and properties across a broad swath of six states. Early estimates of damages are as high as $35 billion—and likely even higher as assessments are conducted in the coming months. Complicating the damages is the fact that many property owners in the hardest-hit inland areas of North Carolina did not have flood insurance coverage. “The business reality,” according to Holly Neber, CEO of AEI Consultants, “is that climate risk is becoming a more visible financial risk for CRE, and more investors and lenders will be looking at this during their underwriting in the wake of storms of Helene’s magnitude.”
Why It Matters: The growing frequency and severity of storms like Helene brings issues like resiliency assessment and mitigation to the surface. Owners in areas prone to flooding are already being affected by sharp spikes in property insurance (or the inability to obtain insurance), and rates will only continue to rise with more billion dollar-plus loss events. Higher insurance rates impact a property’s net operating income (NOI) and may then affect property value upon exit. Neber is leading an ASTM Task Group that is in the final stages of developing the industry’s first Property Resilience Assessment Standard to help CRE stakeholders identify, during standard environmental due diligence, any hazards that may impact a property and how vulnerable a site may be to those hazards so that mitigation measures can be put in place.
- Office Leasing in Chicago and San Francisco Gain Strength
Based on a review of six-digit square foot office leases, employers in major metros like Chicago, New York, and San Francisco are inking deals for new space. This news is particularly promising considering that these metros have often been associated with dire headlines about major office buildings selling at steep discounts and the retrenchment of tenants cutting office footprints by as much as 60%.
In San Francisco, office vacancy rates are now declining as 1.7 million in new leases were signed over the past month. UC San Francisco just signed a lease for 300,000 square feet at a new building on the heels of the 350,000 square foot lease signed by Open AI in San Francisco just last week. And in Chicago, a medical supply giant, Medline, made headlines last week when it signed the second lease for 210,000 square feet of office space (the first was for a 100,000 square foot expansion).
Why It Matters: A growing number of major firms including Amazon are requiring employees to return the office and some are looking to relocate or expand their office footprint as leases expire. As this happens, office leasing headlines like this will gain momentum, driving improvements in vacancy rates and signaling some stabilization in this troubled asset class. Improved fundamentals could eventually drive more transactions, especially as CRE enters a new phase.
- Port Strike Agreement Allows Market to Dodge Supply Chain Impact
Also making headlines last week was the short-lived strike at 36 ports along the East Coast and Gulf Coast. The strike quickly escalated concerns about a major supply chain impact at a time when the U.S. supply chain had largely returned to historical norms since the upset caused by COVID-19. A long-lasting strike also raised inflationary concerns that an extended strike could potentially derail the progress made by the Fed in battling inflation, as well as triggering job losses.
Why It Matters: The strike was the latest sign that an external shock like a strike could have widespread implications for the U.S. economy and CRE market recovery at a time when the Fed is contemplating its next move. The port workers’ agreement reached last week is in place until mid-January and should mitigate any significant impacts from last week’s strike, despite a short-term backlog.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
Did You Know of the Week
Did you know that the top five metros outperforming the industry benchmark for environmental due diligence volume in Q3 were: Minneapolis, Columbus, Atlanta, Pittsburgh, and Dallas?
