State Economies Show Mixed Results as Inflation Takes its Toll

Good morning,

State economies show mixed results as inflation takes its toll; investor exodus adds pressure to European RE markets; private lenders look to capitalize; and KKR sells 5M SF of industrial for $560M. Let’s delve into today’s topics.

📈 Market Update

📜 State Economies Show Mixed Results as Inflation Takes its Toll

While the overall US economy continues expanding, performance varies widely at the state level as inflation and higher rates disproportionately impact certain industries. States like Nevada, Montana, and Alaska in the West have seen strong job gains recently, aided by rebounds in tourism and long-term migration trends. But Northeast states including Connecticut, Massachusetts and Pennsylvania experienced job losses that erased earlier 2022 gains. Unemployment remains low, though rising minimum wages have boosted rates in states like New Jersey and California. Income growth slowed nearly everywhere, except in finance hubs like New York and D.C. And consumer spending declined in most states, especially affordable locales like West Virginia, but held up better in high-cost states.

🔍️ Key Data to Watch:
All eyes will be on September's jobs report releasing at the end of the week. Hiring has slowed but remains healthy, above the level the Fed hopes to see. Some data, like a jump in job listings, suggests the labor market is still strong. But response rates for that survey have plunged, so the more reliable jobs report will provide a better sense of conditions. Revisions and response rates make the official data more dependable.

💶 Investor Exodus Adds Pressure to European Real Estate Markets

As rising interest rates make other assets more attractive, investors are rushing to exit European property funds, prompting managers to sell assets to pay out redemptions. The dynamic threatens to depress valuations further across Europe's €835B real estate investment fund sector, which controls about 40% of the region's commercial property. With valuations already down double digits, the incentive to sell is mounting, though regulations in countries like Germany slow the process. The pressure is particularly acute for funds in France that amassed portfolios during the boom years and now face a glut of offices amid waning demand.

🫰 Private Lenders Look to Capitalize

With traditional lenders like banks originating far fewer loans amid higher rates and stricter underwriting, private lenders have filled the void to keep deals moving. Companies like BridgeInvest have seen inquiry volume skyrocket, often preferring floating rates that take advantage of higher floors. Though delinquencies are rising in sectors like office and certain regions, private lenders can capitalize on their senior position in the capital stack to make relatively safe loans. They expect smaller banks will face heightened regulation, further opening opportunities, though boosting interest rate caps remains a challenge. Overall, private lending is proving essential in an uncertain climate as other sources of capital recede.

🏭️ KKR Sells 5M SF of Industrial for $560M

KKR recently sold over 5M sf of industrial warehouse and distribution properties across major US markets for more than $560M, capitalizing on still-strong investor appetite for the sector even as demand is cooling. The properties, located across Atlanta, Chicago, DFW, Lehigh Valley, and central PA, were sold to five different groups. The sales come as the national industrial vacancy rate could rise and leasing activity slows from recent record highs, though deal volume remains healthy.

✍️ Further Reading

• Top 10 Markets for Multifamily Deliveries in H1 2023 (MHN)

• CMBS Loan Loss Report: Volume of Loan Losses Slightly Decreases in September 2023 (Trepp)

• Here are the Latest CRE Lending Sources (GS)

• Modest Multifamily Starts Persist Through Third Quarter (CS)

• European LenderHhits Loop Office Landlord with $237M Foreclosure (RD)

• 70% of Households Finding It Harder to Pay the Rent (GS)

• Homeowners Flock to Last-Resort Insurance Policies (WSJ)

• Why 8% Mortgage Rates Aren’t Crazy (WSJ)

• Gains in the Return-to-Office are Fragile and Under Threat (RD)

📊 Chart of The Day