Central Bankers Grapple With Policy Uncertainty, New Challenges

Good morning,

Central bankers grapple with policy uncertainty, new challenges, retail demand continues to rise, albeit at slower pace, and deal flow updates. Let’s delve into today’s topics.

📈 Market Update

🏦 Central Bankers Grapple With Policy Uncertainty, New Challenges

At the annual Jackson Hole economic symposium, central bankers including Fed Chair Jerome Powell and ECB President Christine Lagarde emphasized the uncertainty they face in setting monetary policy amid new economic challenges. Both Powell and Lagarde signaled a need to keep interest rates high to contain inflation but offered little clarity on imminent rate decisions. A key theme was central banks' limited ability to address structural economic shifts like changes in productivity, trade patterns, and public debt levels.

🔍️ Outlook:
Some policymakers argued for further rate hikes to avoid reversing course later if inflation persists. Cleveland Fed President Loretta Mester and Bank of Latvia Governor Martins Kazaks warned against premature policy easing. But others including Philadelphia Fed President Patrick Harker and Banco de Portugal Governor Mario Centeno favored a cautious approach to assess the impact of prior hikes before tightening further. Presentations also touched on how nearshoring and friendshoring in trade could stoke inflation and how swollen deficits may strain Treasury markets. Overall, uncertainty and limits on monetary policy amid new economic paradigms loomed large over the discussions.

☝️ Retail Demand Continues to Rise, Albeit at Slower Pace

Despite rising costs and economic challenges, retailers continued seeking more space in the second quarter, occupying over 10M additional SF for the 10th straight quarter - though at a slowing pace as inflation and shifting consumer preferences weigh on margins. Most demand was for freestanding and smaller multi-tenant centers rather than malls, which lost over 1M SF, continuing a multi-year trend. Fast-growing southern and western markets like Phoenix, San Antonio, Austin, Fort Lauderdale and Kansas City captured an outsized share of gains, while struggling markets like Los Angeles, New York, Sacramento and Seattle saw declines.

🤝 Deal Flow

Kimco Realty is acquiring fellow open-air shopping center REIT RPT Realty in an all-stock $2B deal to expand its presence in coastal and Sun Belt markets and accelerate growth, adding 56 centers totaling 13.3M square feet to its portfolio. The deal valued at $11.34 per RPT share was approved by both boards and is expected to close in early 2024.

KSL Capital Partners is acquiring hotel REIT Hersha Hospitality Trust in an all-cash deal valued at $1.4B, taking the luxury and lifestyle hotel owner private after Hersha's board unanimously approved the $10 per share offer representing a 60% premium; KSL cited Hersha's portfolio of experiential hotels in strategic markets as a key rationale while Hersha's executive chairman said the deal will allow them to deliver value for shareholders and refocus on long-term growth.

Roark Capital announced an agreement to acquire Subway, at a reported purchase price around $9.6B. Ultimately, this bodes well for retail owners, as restaurants have become increasingly attractive acquisitions targets.

Meanwhile, multifamily transaction volume was down 72% YoY in Q2 2023. 1,260 properties were sold at $28.2B, compared to 5,300 properties at a value of $165B in Q4 2021. The quarterly average between 2015 - 2019 was $42B.

✍️ Further Reading

• Banks and Landlords Have Been Pulled Into NYC's Cannabis Trade (BBG)

• How Did Things Go So Wrong at This Arizona Park Built With Muni Bonds? (WSJ)

• Americans Are Bailing on Their Home Insurance (WSJ)

• Life Science Assets Outperform Despite Slowing Economy (CPE)

• Distressing Report: Greenway Plaza Value Trimmed by $575M (RD)

📊 Chart of The Day