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Economy

From interest rates to inflation, understand the impact of macroeconomic trends on the real estate capital markets.

The Beyond Insights series aims to deliver timely economic and market-driven insights to better inform your commercial real estate investment decisions.

Markets

From local market rents to cap rates, catch up on the latest capital markets insights.

U.S. Macro Commentary & InsightS

The Unflappable Labor Market

September 8, 2023

  • Unemployment remains stubbornly low throughout Fed’s hiking cycle

  • Demand for workers remains high
The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The Fed’s dual mandate guides monetary policy decisions to target two percent year-over-year inflation with a four percent unemployment rate. Inflation has occupied the macroeconomic spotlight over the past 18 months, reaching record highs in June of 2022 and causing the Fed to hike interest rates at a record pace. Despite the unprecedented hiking campaign, the U.S. unemployment rate remains at a low 3.8 percent.

The Phillips Curve, a frequently cited economic concept, states that inflation and unemployment have a stable and inverse relationship. This concept has not been proven in the short term; over the past year, the year-over-year Headline Consumer Price Index (CPI) figure has fallen from a 9.1 percent peak to the current level of 3.2 percent, while over that same period, the unemployment rate has risen slightly from 3.6 percent to 3.8 percent but remained relatively steady. One might have expected that a consequence of the Fed’s hiking campaign would be a more substantial uptick in unemployment, but despite notable layoffs in the tech sector, this has not been the case. A more meaningful increase in unemployment—one where the increase is coming about from fewer positions rather than an increased labor force participation rate—would be seen as a positive sign for the Fed because it would help curb consumer demand and stabilize prices. Unemployment has remained low, even while inflation has declined, due to the demand for workers. Recent Job Openings and Labor Turnover Survey (JOLTS) data shows that there are 1.57 job openings per unemployed persons in the United States. The July JOLTS data reported that job openings declined by 338,000 to a seasonally adjusted 8.8 million in July from the prior month. That was the lowest level since March 2021, but it was still well above pre-pandemic levels.

Despite the high demand for workers, the labor market is beginning to show slight signs of cooling. Wage growth is beginning to slow: Nonfarm Payrolls in June and July were revised down a combined 110,000. Recent economic prints have been relatively in line with market expectations; Bloomberg’s World Interest Rate Probability (WIRP) function shows a 96 percent chance of a pause in rate hikes at the Fed’s September meeting, as committee members continue to observe the lagging effects of their rate hike cycle.

The September meeting for the Fed also brings a refresh of their Summary of Economic Projections. In this data release, we get updates of the dot plot, where members of the Federal Open Market Committee (FOMC) provide their projections for the year-end Federal Funds rate for the next several years in addition to gross domestic product (GDP) growth, inflation expectations, and unemployment projections. This data set will likely be the most anticipated part of the meeting, as determinations around potential recession and rate cuts will show. Economic releases have been largely meeting expectations, so this treasure trove of data will be the real star of the show for the September meeting.

INFLATION VS. UNEMPLOYMENT

Source: U.S. Bureau of Labor Statistics
Source: U.S. Bureau of Labor Statistics

U.S. Labor Market

Source: U.S. Bureau of Labor Statistics
Source: U.S. Bureau of Labor Statistics

This commentary and any statements, information, data and content contained therein, and any materials, information, images, links, sounds, graphics or video provided in conjunction with this document (collectively “Materials”) has been prepared for informational purposes or general guidance on matters of interest only, and does not constitute professional advice, advertising or a solicitation. The Materials are of a general nature and not intended to address the circumstances of any particular individual or entity. You should not act upon the information contained in the Materials without obtaining specific professional advice. As such, nothing herein constitutes legal, financial, business, investment or tax advice and you should consult your own legal, financial, tax, investment or other professional advisor(s) before engaging in any activity in connection herewith. The information in the Materials is not a substitute for a thorough due diligence investigation. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the Materials, and, to the extent permitted by law, Berkadia Commercial Mortgage LLC ( together with its affiliates, the “Company”) neither accept nor assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the Materials or for any decision based on them. No part of the Materials is to be copied, reproduced, distributed or disseminated in any way without the prior written consent of the Company.

Questions? Contact us.

Josh Bodin
Senior Vice President
Securities Trading
josh.bodin@berkadia.com

Steve Bevilacqua
Assistant Vice President
Securities Trading
steve.bevilacqua@berkadia.com

TIGHTER CREDIT STANDARDS AND BANK LIQUIDITY

Commercial real estate lending by banks represents one of the largest blocks of available debt financing in the U.S. market. In the wake of the regional banking crisis, where three of the four largest American bank failures happened in the span of a couple months and the Federal Deposit Insurance Corporation was forced to take over, the attention of the market and regulators shifted to analyzing CRE lending and any complicity this sector had in the collapse of regional banks.

Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate Loans

Industrial Production U.S.
Source: RealPage

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INSIGHTS

Insights from BOMA International’s 2023 MOB and Healthcare Real Estate Conference

Sabrina Solomiany, Berkadia National Head of Medical & Life Sciences, debriefs the recent BOMA International’s 2023 Medical Office Buildings and Healthcare Real Estate Conference.

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Berkadia Recognized as One of the Best Places to Work

Berkadia is recognized as one of CRE’s Best Places to Work 2023 by GlobeSt.

RESEARCH AND INSIGHTS

TIGHTER CREDIT STANDARDS AND BANK LIQUIDITY

Commercial real estate lending by banks represents one of the largest blocks of available debt financing in the U.S. market. In the wake of the regional banking crisis, where three of the four largest American bank failures happened in the span of a couple months and the Federal Deposit Insurance Corporation was forced to take over, the attention of the market and regulators shifted to analyzing CRE lending and any complicity this sector had in the collapse of regional banks.

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NAVIGATING INSURANCE CHALLENGES IN CRE UNDERWRITING

Watch Berkadia’s Beyond Insights Webinar: Navigating Insurance Challenges in Commercial Real Estate (CRE) Underwriting, hosted on August 10, 2023. Danielle Lombardo, Chair, Lockton’s Global Real Estate Practice, provided her perspective into the significant tightening of the commercial real estate insurance market and the impact it’s had on premiums and coverage for multifamily investors.

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Berkadia Study Argues CRE Lending Hasn’t Dried Up for Multifamily

“My initial hypothesis was we’d see a supreme dry-up in bank lending, and that just didn’t materialize.” said losh Bodin, senior vice president of securities trading at Berkadia, and one of the authors of the report. “While we’re seeing caution in bank lending, the second quarter supported the idea that there wasn’t nearly as much pullback as we thought there’d be.”

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