A Tale of Two Cities: San Francisco vs. Fort Worth

Good morning,

A tale of two cities: San Francisco vs. Fort Worth, bond market volatility to persist despite expected pause, and RE market slowdown likely to reduce shelter inflation. Let’s delve into today’s topics.

📈 Market Update

🏙️ A Tale of Two Cities: San Francisco vs. Fort Worth

San Francisco Struggles:
San Francisco is facing numerous challenges that have led to the city’s struggles. The tech industry, which fueled growth in the 2010s, has pulled back, with companies like Meta and Salesforce reducing their RE footprints. This, combined with remote work, the city’s high cost of living, and CA taxes, has led to an exodus of residents.

SF’s downtown office vacancy rate is over 25% compared to the national rate of 16.4%. Retailers like Nordstrom are closing downtown stores. Homelessness, open drug use, property crimes, and lack of public transit continue to plague the area. The city has deployed community ambassadors, including retired police offices, to help provide security, but they are not seen as an overall solution. City leaders are pursuing various measures like converting offices to housing to try to revive downtown.

Fort Worth Rises:
In contrast to SF, Fort Worth has seen rapid expansion in recent years. The fastest growing city in the US touts its quality of life, Western heritage, and infrastructure to attract residents and businesses. Ft Worth gained 50k residents last year.

Ft Worth has benefited as companies like Charles Schwab and Caterpillar have relocated there. The city also has a strong transportation industry, with American Airlines, BNSF Railway, and AllianceTexas based there. New university campuses, hotels, and residential buildings are under construction. While growth is slowing from pandemic levels, the economy remains strong. Ft Worth promotes its small town feel, parks, and public safety - areas where SF is lacking.

San Francisco and Fort Worth provide a stark contrast of the fortunes of US cities since the pandemic. While SF grapples with reviving downtown and combating issues like crime, Ft Worth is benefiting from corporate relocations and quality of life.

💵 Bond Market Volatility to Persist Despite Expected Pause

The growing belief on Wall Street is that the Fed is nearing the end of its interest rate hiking cycle. However, expectations for a pause does not mean stability in the bond market.

Diverging opinions with the FOMC and upcoming speeches by Fed officials at Jackson Hole could reinforce the central bank’s hawkish stance. This would clash with market expectations for rate cuts.

Recent economic data also presents a murky picture. Job growth is cooling but core inflation remains well above the Fed’s 2% target.

The Takeaway:
Treasury yields are likely to remain volatile in the coming months due to economic uncertainty and mixed signals. While markets are pricing in rate cuts in 2024, the Fed’s policy and inflation trajectory will likely keep volatility high. Any hints of a more hawkish or dovish shift by the central bank could spark a major repricing.

📉 RE Market Slowdown Likely to Reduce Shelter Inflation

The San Francisco Fed has released a report predicting the slowdown of asking rents and home prices to cool shelter inflation. Housing costs accounted for 90% of the increase in July’s CPI report.

Forecasts:
The base case model predicts YoY shelter inflation will decline over the next 18 months and could even turn negative by mid-2024. The conservative model predicts shelter inflation slowing to zero in the same time frame. Shelter inflation is a lagging indicator, so we are likely in the depths of the zero to negative rent growth time frame. The overall consensus is that shelter inflation is likely to slow significantly over the next year and a half.

✍️ Further Reading

• CRE & Structured Finance Review for July 2023 (Trepp)

• Revitalizing Real Estate: Converting Underperforming Hotels into Multifamily Units (Trepp)

• Westcore Picks Up Ft Worth Industrial Campus (CPE)

• Hoteliers Look to Reconcile Seemingly Opposing Forces: A Recession and Rising Travel Demand (CS)

• Median-Income Earners Can’t Afford More than Half of US Homes (GS)

• Investment Sales Expected to Improve in H1 2024 (GS)

• What Top Executives are Saying About a Soft Landing (WSJ)

• Fewer Properties Tied to Troubled Loans, College Closing Hits NY Building, Hotels and Suburban Offices Lead Cash Flow Growth (CS)

• Nightingale Properties Under Investigation by DOJ, SEC (RD)

• Bridge Buys Six MF Buildings with 1.7k Units in Greater Boston (RD)

📊 Chart of The Day