Written by: Harrison LaHaie
What’s in the News
JP Morgan, Citigroup, Bank of America, and Wells Fargo all have put uninsured deposits of $5 billion into First Republic Bank in an effort to prevent bank panic from spreading after several banks have collapsed in the past week. Meanwhile, the ECB continues to raise interest rates by 50 bps. Initial jobless claims remain extremely low as the U.S. labor market continues to perform well despite announcements of layoffs at major companies such as Meta. Tensions between Russia and the rest of the world continue to escalate as a U.S. drone was shot down over the Black Sea by a Russian fighter jet.
What's Next for CRE
The Federal Reserve’s interest rate control is a key part of the commercial real estate market because it dictates borrowing costs. The recent bank failures with Silicon Valley Bank and Signature Bank may cause the Fed to pump the breaks. Although inflation is still far above the Fed’s target of 2%, bank failure is a significant enough event that the sometimes talked about acceleration of rate hikes is highly unlikely. Some better news is that Midwest apartment rent growth is leading the nation. This is likely because the rent growth during the pandemic in the Midwest was more tempered than in the Sun Belt. With rents still within affordable range in the Midwest, there is room for rent growth.
Looking Ahead
Economic data has been difficult to pull any strong narrative out of in recent months. The Fed continues to tighten financial conditions, but almost all economic indicators are doing well. SVB and Signature failing seem to be a byproduct of the Fed’s rate hikes but not representative of a systemic risk in the banking industry. Meanwhile, inflation is still out of control. The Global Supply Chain Pressure Index showed in its most recent reading that supply chain pressure has finally normalized. With the supply chain normalized, how much longer will inflation persist? It may be that the immense increase in money supply during the pandemic is still being digested by the economy. Do not expect the Fed to pivot until inflation comes down closer to 2%.
Sources: Globe St, WSJ, First Trust, Federal Reserve.