The Effect of Economic Indicators on Property Value

❓Is a recession on the horizon? The Sahm Rule might have the answer. ➢ Named after former Federal Reserve economist Claudia Sahm, it identifies the start of a recession when the national unemployment rate rises by 0.5 percentage points above its lowest point in the past year. How does this impact the Commercial Real Estate (CRE) market? ➢ 𝐇𝐞𝐫𝐞’𝐬 𝐭𝐡𝐞 𝐟𝐫𝐚𝐦𝐞𝐰𝐨𝐫𝐤 𝐟𝐨𝐫 𝐮𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐞𝐟𝐟𝐞𝐜𝐭𝐬 𝐚𝐧𝐝 𝐭𝐡𝐞 𝐧𝐞𝐱𝐭 𝐩𝐡𝐚𝐬𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐰𝐚𝐭𝐞𝐫𝐟𝐚𝐥𝐥 𝐞𝐟𝐟𝐞𝐜𝐭: 1️⃣ Economic Indicators A rising unemployment rate signals a weakening economy. • Lower demand for commercial spaces. • Reduced business activity. • Impact on offices, retail, and industrial properties. 2️⃣ Tenant Stability Higher unemployment leads to tenant financial instability. • Increased lease defaults. • Higher vacancy rates. • Affects CRE income stability. 3️⃣ Investment Decisions Potential recessions make investors cautious. • Reduced investment in new developments. • Declining property valuations. • Slower acquisition rates. 𝐈𝐦𝐩𝐚𝐜𝐭 𝐨𝐟 𝐒𝐭𝐨𝐜𝐤 𝐌𝐚𝐫𝐤𝐞𝐭 𝐃𝐫𝐨𝐩𝐬 𝐨𝐧 𝐂𝐑𝐄 - 𝐒𝐭𝐨𝐜𝐤 𝐦𝐚𝐫𝐤𝐞𝐭 𝐝𝐞𝐜𝐥𝐢𝐧𝐞𝐬 𝐚𝐟𝐟𝐞𝐜𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐜𝐨𝐧𝐟𝐢𝐝𝐞𝐧𝐜𝐞 𝐚𝐧𝐝 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐟𝐥𝐨𝐰𝐬. • Risk-averse attitudes reduce new investments. • Perceived wealth drop limits investment capital. • Volatility leads to safer investment preferences. ➡️ However there’s one other serious factor at play… 𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐖𝐚𝐭𝐞𝐫𝐟𝐚𝐥𝐥 𝐄𝐟𝐟𝐞𝐜𝐭: The Sahm Rule could accelerate Federal Reserve rate cuts, boosting CRE. • Faster rate cuts reduce borrowing costs. • Increased CRE investment and demand. • Enhanced market optimism and transaction volumes. 𝐓𝐡𝐞 𝐒𝐚𝐡𝐦 𝐑𝐮𝐥𝐞 𝐚𝐧𝐝 𝐬𝐭𝐨𝐜𝐤 𝐦𝐚𝐫𝐤𝐞𝐭 𝐭𝐫𝐞𝐧𝐝𝐬 𝐚𝐫𝐞 𝐜𝐫𝐮𝐜𝐢𝐚𝐥 𝐢𝐧𝐝𝐢𝐜𝐚𝐭𝐨𝐫𝐬 𝐟𝐨𝐫 𝐂𝐑𝐄, 𝐬𝐡𝐚𝐩𝐢𝐧𝐠 𝐭𝐡𝐞 𝐧𝐞𝐱𝐭 𝐩𝐡𝐚𝐬𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐰𝐚𝐭𝐞𝐫𝐟𝐚𝐥𝐥 𝐞𝐟𝐟𝐞𝐜𝐭. How are you preparing for these potential economic shifts in the CRE market?

Consumer confidence has just dropped to a 4 year low, what will its potential impact on both the US economy and Commercial Real Estate be? Today was the March release of the long-running survey of consumer confidence, and it fell to 92.9 this month, from 100.1 in February. Why this is important is that the US GDP is 70% driven by consumer spending, and when consumers grow pessimistic, and feelings of potential individual financial fear and uncertainty grow, they will pull back on spending. A pull back on spending at best will just lead to a slowing economy, but often can lead to a recession. Further evidence of this can be found in today’s report within the so-called expectations index — which measures how people think the economy will look six months from now — which tumbled to 65.2 from 74.8. That’s the weakest reading since 2013. A sustained reading below 80 tends to signal a recession. How this will likely impact commercial real estate is two fold: 1.) Any economic recession will lead to some degree of deteriorating financial performance and operations of commercial real estate properties. A pull back on spending will impact retail and hospitality. Job loss will impact multifamily and office. Overall economic contraction will hurt industrial, etc. Any degrading of operations will bring values down further. however… 2.) A slowing economy, let alone an actual contraction, based on historical precedence will bring down treasuries, fed funds, and overall borrowing costs. When borrowing costs come down, buyers can pay more for the same property, and thus values tend to go up. This push/pull dynamic will be interesting to watch in the event this drop in consumer confidence actually ends up leading to a recession. Not only should you be educated on all of the activity happening at a national level and how it can affect real estate, make sure to be communicating this to existing and potential clients. Adding value is the most important responsibility of a service provider to the client, and helping make sense of everything that is happening for clients adds value.

How I analyze economic indicators to guide real estate decisions Vacancy rates are just the tip of the iceberg - here's what else I track 👇️ While vacancy rates are a key metric, they only paint part of the picture. To truly understand where the industrial market is headed, you need to dive deep into a range of economic indicators: - Net Absorption: This measures total occupied space, indicating if demand is outpacing supply. In the South Bay, net absorption was negative 1.7 MSF, signaling softening demand. - New Construction: A pipeline of 2.1 MSF underway in the South Bay could put upward pressure on vacancy if demand slows further. Watching this closely. - Rental Rates: Rising rents often point to a landlord-favorable market, but unsustainable growth can lead to a correction. Keeping an eye on asking rates in the $1.75-$2.15/NNN PSF range across LA County. - Sale Comps: Price per square foot and cap rates help benchmark values. As interest rates rise, I'm watching to see if sales velocity and pricing are impacted. - Economic Drivers: Cargo volume, port activity, and broader economic growth all have outsized impacts on the industrial market. Monitoring how inflation, consumer spending, and the labor market evolve. The key is to analyze these data points in conjunction, not isolation. Together, they provide a holistic view of where the industrial market is headed, so I can help clients plan their real estate strategies accordingly. What other indicators are you watching closely? ♻️ Repost to share with your network! ➕ Follow for more CRE insights.