HFF Research Update for March 16, 2017: Economic Data Supports Confidence

Thursday, March 16, 2017

Insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View the Daily Rates on the HFF website.

A “full” employment market and growing consumer costs (finally) gave the FOMC sufficient confidence to raise their Target Fed Funds Rate Wednesday. As savers rejoice for modestly higher returns, President Trump announced record federal discretionary spending cuts to offset expansion in the Departments of Defense, Veterans Affairs and Homeland Security.

In spite of a very low unemployment rate nationally, the country was able to add 235,000 net new jobs in February, the 77th consecutive month of growth and the first consecutive print above 200,000 since last summer. Of note, construction and manufacturing payrolls rose, allowing economists a hint of optimism in the outlook for productivity, and therefore GDP. Improvement in the historically low labor participation rate, a very important metric for the extension of this economic cycle, continued last month.

Wage growth edged higher at 2.7 percent in the year ending February, a “Goldilocks” scenario where wages improve for households but not in a manner that will undercut corporations’ interest in adding additional employees.

On all the above data, consumer confidence hit a 15-year high in February on the outlook for the economy. Within the data, the opinion that jobs are “hard to get” fell to an eight-year low.

Corporate borrowing has been flat since November elections, ostensibly as executive management teams ponder accommodative tax legislation relating to capital expenditures and interest expense. Meanwhile, investors maintain a healthy appetite for fixed-income, driving A/BBB corporate bond spreads to multi-year lows. This bodes well for commercial mortgage spreads and capitalization rates.

Source: HFF Research, Bloomberg, HSBC
Cap Spread = 10-year BBB Corporate Bond Yield less 10-year UST Yield, Loan Spread = Equal Weighted 10-year BBB & A Corporate Bond Yields less 10-year UST Yield

Next week, RCA releases transaction volume data for February. Continued confidence in the economy, and thereby the commercial real estate market, should eventually play favorably into volume metrics.

In the meantime, the screws are turning in the right direction.

About Jimmy Hinton

Jimmy Hinton serves as Managing Director of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties

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