U.S. Economic Growth Picks Up Pace in Q2, Beating Expectations

Good morning,

U.S. economic growth beats expectations in Q2, construction starts slow amid tighter lending, Texas lawmakers send $18B property tax cut package to voters, and JP Morgan purchases discounted residential mortgages from Banc of California. Let's delve into today’s topics.

📈 Market Update

🆙 U.S. Economic Growth Picks Up Pace in Q2, Beating Expectations

The U.S. economy grew at an annualized rate of 2.4% in the second quarter of 2023, according to Commerce Department data released Thursday. The growth rate beat economists' forecasts and accelerates from the first quarter's 2% pace. Consumer spending, which accounts for nearly 70% of economic activity, expanded 1.6% in Q2 despite cooling from the previous quarter. Americans continue benefiting from strong wage gains and a robust labor market even as inflation moderates. Consumer spending drove nearly half of the total GDP growth.

Other drivers of growth: Business investment saw a sharp 7.7% jump in Q2, rebounding from minimal 0.6% growth in Q1. The increase reflects long-term impacts of government infrastructure spending and supply chain improvements in areas like aircraft manufacturing. Housing remains a drag, with residential investment declining for the ninth straight quarter. But the pace of decreases is easing, suggesting the housing market downturn may be nearing bottom.

Outlook remains positive, recession fears ebb: Economists are downplaying chances of a recession this year as inflation falls from 40-year highs while job growth continues. Consumer confidence rose in July, with fewer Americans expecting an imminent downturn. While economic growth is still forecast to cool in the second half of 2023, expectations are for continued expansion rather than contraction. The possibility of a "soft landing" where the Fed tames inflation without triggering a recession now appears more likely.

🏗️ Construction Starts Slow in Major Metros Amid Tighter Lending

The value of commercial and multifamily construction starts fell 14% nationally to $130 billion in the first half of 2023 compared to the same period in 2022. The top 10 metro markets, which accounted for 39% of total starts, saw an overall 10% drop. However, the performance was mixed - 6 of the top 10 markets posted increases in commercial starts, while 4 saw declines. New York, Dallas, Phoenix and Washington D.C. all had double-digit percentage decreases. In contrast, Chicago, Atlanta, Los Angeles, Houston and Boston showed gains. The largest jump was in Chicago with starts up 71%.

Data centers, warehouses lead way: Despite uneven performance, the report cited bright spots like data centers and warehouses breaking ground in many top markets. For example, Atlanta's biggest projects were Facebook and other data centers. Chicago's largest was a $1 billion data center campus. Los Angeles saw office buildings launch but Houston was led by new industrial facilities. The declines are attributed to rising interest rates, slowing demand and lender caution. Starts are expected to further worsen in the second half of 2023.

✂️ Texas Lawmakers Approve $18B Property Tax Cut Package

The Texas legislature has passed an $18B property tax relief package, the largest such cut in the state's history according to Gov. Greg Abbott. The govenor has endorsed the deal, which will now go before voters on November 7 for final approval. The tax cuts would be funded by Texas' record $32.7 billion budget surplus. Abbott had pushed to use at least $13.5 billion to lower property taxes.

Tax savings: The package includes increasing the homestead exemption to $100,000, reducing school property taxes by 10.7 cents per $100 valuation, and capping appraisal value growth at 20% for some properties. Supporters say it will deliver substantial savings for homeowners and businesses.

🏘️ JP Morgan Purchases Discounted Residential Mortgages from Banc of California

JP Morgan Chase recently agreed to buy $1.8 billion of single-family home loans from Banc of California at a discount. This comes as Banc of California and PacWest Bancorp plan to sell around $7 billion in loans and other assets to pay down debt. PacWest previously sold off its entire CRE loan portfolio at a discount to Kennedy Wilson. These moves indicate banks are looking to shrink their balance sheets by offloading commercial real estate exposure.

PE swoops in: The markdowns on bank CRE debt is a "huge opportunity" for private equity firms like BlackRock, according to a company executive. As lenders unload CRE loans, investors can scoop them up at bargain prices. Banc of California currently has nearly $5 billion in various commercial real estate loans on its books, making up 55% of total lending. While it says the merged bank will keep lending to real estate, other banks are clearly cautious and trimming CRE exposure.

Takeaway: This likely means tightened credit and weaker CRE values as discounted bank sales drive down loan prices. But for private equity, it opens the door to buy quality assets on the cheap.

📊 Chart Meme of The Day

📑 Further Reading

• Fed’s Powell Talks Tough After Rate Hike, But a Pause Seen Likely From Here (Morningstar)

• Carlyle Buys Brooklyn Apartment Building for $98M (RealDeal)

• KKR Loan to Goldman Sachs for Silicon Valley Offices in Distress (GlobeSt)

• Nightingale Faces Foreclosure on 111 Wall Street (RealDeal)

• J.P. Morgan REIT Pays $75M for Savannah Industrial Asset (CPE)

• Meta Faces Mounting Expenses as It Slashes Real Estate Footprint (CoStar)