August 2021

The BAN Report: Fed to Taper / Retail Sales Slump / Tech Disrupts Housing Market / Overstated Hybrid? / American Dream (Nightmare) / ClarkStreetCapital.com Launch-8/20/21

Fed To Taper

The Federal Reserve, which is currently holding an $8.2 trillion stockpile of assets, is preparing to modestly reduce its asset purchases, according to the minutes from the July Federal Reserve meeting.

Federal Reserve officials at their July gathering made plans to pull back the pace of their monthly bond purchases likely before the end of the year, meeting minutes released Wednesday indicated.

However, the summary of the July 27-28 Federal Open Market Committee gathering indicated that the central bankers wanted to be clear that the reduction, or tapering, of assets was not a precursor to an imminent rate hike. The minutes noted that “some” members preferred to wait until early in 2022 to start tapering.

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes stated, adding that the economy had reached its goal on inflation and was “close to being satisfied” with the progress of job growth.

So, the Fed isn’t planning rate hikes, but reducing its asset purchases could lead to higher rates.    But tapering doesn’t mean the Fed’s balance sheet will shrink.

Analysts and economists are coming to the conclusion that U.S. central bankers will keep slowly expanding their $8.2 trillion stockpile for the foreseeable future, even if the economic recovery stays on track and they start to pare back their $120 billion monthly bond purchases.

Societe Generale’s Subadra Rajappa could see a $1 trillion boost to the assets already held by the Fed within the next 12 months, even with a taper on asset buying. Steven Ricchiuto, chief U.S. economist at Mizuho Securities, said he expects the Fed to keep expanding its books at the pace of nominal gross domestic product, even after it stops its latest round of quantitative easing.

At least for now, the Fed is going to slow down its purchases, but the balance sheet is still growing. The Fed has doubled its balance sheet since the end of 2019, when it stood at $4.2 trillion.

Retail Sales Slump

As customers shift their purchases from durable goods to experiences, retail sales are declining on balance and fell 1.1% in July.

Shoppers in the U.S. cut back their purchases in July even more than expected as worries over the delta variant of Covid-19 dampened activity and government stimulus dried up.

Retail sales for the month fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline and below the upwardly revised 0.7% increase in June.

Excluding automobiles, sales declined 0.4%, according to Commerce Department figures released Tuesday.

Though July saw a month-over-month decline, the $617.7 billion in sales still represented a 15.8% acceleration from the same time a year ago.

Most of the monthly decline came from motor vehicles and parts dealers, which fell 3.9%. The auto sector has been a major contributor to the inflation surge in 2021, with used car prices jumping higher amid swelling demand.

Clothing stores saw a 2.6% decline, and sporting goods, musical instrument and book stores fell 1.9%. Online sales also posted a 3.1% drop.

With energy prices continuing to rise, gasoline sales increased 2.4%, and the return of businesses to bars and restaurants pushed food and beverage sales up 1.7%. Eating and drinking establishments saw a 38.4% increase in sales from a year ago.

Government stimulus can’t last forever, and we will get a better picture of the true health of consumers and businesses as we return to a more normalized environment. There’s a possibility that, at least in the short term, spending patterns revert somewhat back to 2020 levels as the Delta variant leads to increased public health restrictions.  Chicago, for example, is requiring masks in all public settings starting tomorrow, regardless of vaccination status.

Tech Disrupts Housing Market

Several tech firms are on a buying spree, purchasing homes direct from consumers and then flipping them hopefully at a profit.

Zillow is doing a $450 million bond deal to get the money it needs. Opendoor went public via a Chamath Palihapitiya-backed SPAC deal to scale as quickly as it can. Even Rocket Homes is getting into the action. The race is on among tech firms to gobble up U.S. housing stock and dominate the increasingly competitive high-tech house-flipping market, otherwise known as the fast-growing “iBuyer” industry.

“There’s almost an arms race to get the most inventory possible,” said Daren Blomquist, vice president of market economics at Auction.com, who described the state of the iBuyer market as “almost frenzied.” “It’s less about making money off that inventory, at least initially, and more about who can get the most inventory the fastest.”

High-tech middlemen like Opendoor and Zillow Offers, Zillow’s home-buying platform, first inserted themselves into the housing scene a few years ago, armed with cheap money and hoping to profit off the bedrock of American middle-class wealth. iBuyers target mid-level homes that are in decent condition, offer to buy the house with cash, and make the selling and moving process quick and convenient. They then make a few repairs and quickly put it back on the market, ideally at a higher rate. In exchange, they charge the homeseller a fee that varies according to a variety of factors. 

There’s an incentive to get going now. Due to the fast-climbing pace of the housing market, “iBuyers are reselling homes for more money than ever before,” according to DelPrete’s recent analysis, grabbing a median price appreciation of 8.1% on the resell, the most ever according to his estimates. Some markets are particularly hot. In May and June in Phoenix, iBuyers snagged a median appreciation of 11.5% on the resale–equating to $39,000–after holding the homes for even just a few days.

What does this mean to the housing market? The more flippers in the market, the more value extracted from the long-term investor and the less commissions paid to traditional real estate brokers. These tech investors may be way over their skis though, as profits are an after-thought for growth-minded tech firms. Zillow said its hoping to break even today as it builds scale with the hope of making a return of 4-5% down the road. The presence of these firms seems to be inflating an already overheated housing market.

Overstated Hybrid?

Many have been touting the hybrid model as the future of office work, in which workers rotate between working remotely and going to the office. However, a survey from Robert Half suggests that most companies will ultimately return fully back to the office when the pandemic ends.

According to a survey of more than 2,800 senior managers in the U.S., 71% of respondents said they will require their teams to be on-site full time once COVID-19-related restrictions completely lift. Far fewer will allow employees to follow a hybrid schedule, where they can divide time between the office and another location (16%) or give staff the complete freedom to choose where they work (12%).

Employers should be aware of the risks of mandating a full return to the office: Previous research reveals nearly half of employees (49%) prefer a hybrid arrangement, and about 1 in 3 professionals (34%) currently working from home due to the pandemic would look for a new job if required to be in the office five days a week. In addition, a separate survey finds 43% of workers feel much more productive when remote versus in the office.

“When it comes to hybrid work, there’s a disconnect between what managers prefer and what employees expect,” said Robert Half senior executive director Paul McDonald. “But in this talent-driven market, especially, companies need to prioritize their people and look to the future. Providing flexibility is a low-cost way to create a positive employee experience and inclusive workplace culture.”

Large organizations, marketing and finance departments are most likely to embrace a hybrid model. The survey though shows the disconnect between management and employees.   Companies certainly appear to be more determined to return to pre-COVID office usage, but many employees are just as determined to find a job that allows them to work remotely.

American Dream (Nightmare)

The American Dream Mall may be the worst commercial real estate investment ever. Nearly two decades after it first broke ground, the current ownership group is in jeopardy of losing control – the third group to give it a go. Over $5 billion has been invested in this project, and it is still hemorrhaging cash.

With the pandemic still making shoppers wary, sales at American Dream amounted to just $139 million in the first two quarters of the year, public disclosures show. At that pace, the mall is poised to fall far short of the nearly $2 billion that a 2017 study projected it would bring in during its first year of operations.

That’s jeopardizing the family’s hold on their $548 million equity stake. And they’ve already forfeited 49% stakes in two other megamalls — Mall of America outside Minneapolis and Canada’s West Edmonton Mall — that they pledged as collateral to American Dream’s lenders. Those holdings, valued at $680 million in bond documents, were seized back in March when the loans defaulted.

The saga began in 1993 when Mills Corp. was seeking to build a massive shopping, office and hotel complex on 200 acres of wetlands a few miles outside of Manhattan. Environmental opposition killed that effort. But Mills’ plans were revived a decade later when New Jersey green-lighted a proposal to redevelop another nearby piece of land — the vast parking lot surrounding what was then known as Continental Airlines Arena.

Mills, which called the project Xanadu, broke ground in 2004; two years later, it was teetering near bankruptcy. Colony Capital Inc., led by Trump ally Tom Barrack, took control in 2007 and fared little better: lenders seized the property in 2010. 

By the time Triple Five took over a year later, the unfinished project had already consumed $2 billion, bond documents show. The Ghermezians, who immigrated to Canada from Iran in 1960, came with their vision of a tourist hub that would lure 40 million visitors a year. Never mind that malls were steadily losing shoppers to online rivals, or that it would have to compete with Manhattan for tourists. Their plan featured a year-round ski slope and an indoor water park with slides, wave pools and tube rides. They added a trampoline park, go-karts and virtual reality entertainment.

The current capital stack is dizzying to follow. At the very top are municipal bonds, which include $800MM in PILOT notes and $290MM in bonds backed by sales taxes. Then, there is a senior construction loan of $1.2 billion and a mezzanine construction loan of $475 million. The sponsor’s equity is then $548MM. All in, that’s an 84% LTC on a twice-failed retail project, which seems crazy by any measure. The good news for the sponsor is they may be the only group that can make this work. And there does appear to be some momentum, as they already have 100 retailers with another 100 on the way.

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The BAN Report: Loan Growth Picks Up / Inflation Eases / Office Return Update / Less Carrot, More Stick / Rideshare Woes-8/12/21

Loan Growth Picks Up

Loan growth may finally be turning the corner. According to the July 2021 Senior Loan Officer Opinion Survey by the Fed, banks are easing lending standards while demand is increasing.

Regarding loans to businesses, respondents to the July survey, on balance, reported easier standards and stronger demand for commercial and industrial (C&I) loans to firms of all sizes over the second quarter.2 For commercial real estate (CRE), standards on multifamily and construction and land development loans eased, while standards on loans secured by nonfarm nonresidential properties remained basically unchanged. Banks reported stronger demand for all CRE loan categories.

For loans to households, banks eased standards across most categories of residential real estate (RRE) loans, on net, and reported stronger demand for most types of RRE loans over the second quarter. Banks also eased standards and reported stronger demand across all three consumer loan categories—credit card loans, auto loans, and other consumer loans.

C&I demand appears to be only modestly stronger, but some more encouraging signs in commercial real estate. Demand for construction and land development loans was either moderately or substantially stronger for about 1/3 of those surveyed, and only 10% said it was weaker. Demand for multi-family loans seems to lead all categories of lending with 43% of respondents seeing strengthening demand. Consumer lending saw modest increases in demand as well.

With the economy growing at these levels, loan demand is finally showing signs of picking up.    Now that borrowers have exhausted forgivable debt from PPP, they are more inclined to start borrowing again. Moreover, banks appear to be easing credit standards in most cases, thus encouraging more borrowers to borrow.

Inflation Eases

While inflation still great at a healthy clip of 5.4%, core inflation rose in July by less than expected.

Prices that Americans pay for everyday goods and services rose in July as pent-up demand for travel and restaurants kept inflation hot, but jumped about as much as economists had expected.

The Labor Department reported Wednesday that its consumer price index rose 5.4% in July from a year earlier, in line with June’s figure and matching the largest jump since August 2008.

The government said CPI increased 0.5% on a month-over-month basis, matching a consensus forecast from economists surveyed by Dow Jones.

So-called core inflation, which excludes energy and food, rose by 0.3% last month, shy of a forecasted 0.4% increase and well below June’s rise of 0.9%. The core figure is up 4.3% over the last year, a slight deceleration from June’s 4.5%.

Used car and truck prices, which rose rapidly between April and June as Americans looked to vacation, gained just 0.2% in July after a climb of more than 10% in the prior month.

Apparel prices were flat after a 0.7% increase in June, and transportation services prices actually declined after a pop of more than 1% at the end of the second quarter.

“Today’s CPI data should help assuage investor fears that the Fed is too laid-back about inflation pressures,” wrote Seema Shah, chief strategist at Principal Global Investors. “The details of the data release suggest some easing in the reopening and supply-shortage driven boost to prices, and tentatively suggests that inflation may have peaked. Investors in the transitory camp will feel slightly vindicated.”

Good to see the used car market cool off after a more than 10% increase in June. Inflation remains the single biggest risk to the economy. With record job openings, it doesn’t seem like the Fed needs to worry as much as unemployment, so hopefully they don’t let inflation get any higher.

Office Return Update

With the recent increase in COVID cases, many companies are pushing back their plans to fully re-open their offices.

The Chicago-based burger giant also postponed the official reopening date of its headquarters and other domestic offices to Oct. 11 from Sept. 7 to allow time for U.S. workers to get vaccinated and build up immunity. Workers must still wear masks in the office regardless of vaccination status, though McDonald’s said the company hopes to make facial coverings optional in the future.

Meanwhile, Comcast Corp.’s NBCUniversal and Capital One Financial Corp. are postponing their return-to-office dates, citing a rise Covid-19 cases. Capital One will require returning employees to be fully vaccinated, while NBC will require that status for U.S. employees.

McDonald’s Global Chief People Officer Heidi Capozzi said in the message to U.S. employees: “A resurgence of infections caused by Covid-19 variants has many of us uneasy.” She added, “We’ve heard from many of you that you would feel more comfortable returning to the office if you had more certainty your colleagues were vaccinated.”

Nevertheless, more workers are back in the office than you may think. Only 25% of managers are currently working remotely, down from 57% last year.

In July, roughly 25% of managers and professional workers teleworked at some point because of the pandemic, the lowest since the government started tracking the data in May 2020. It’s a clear sign that the age-old work compact is mostly intact, and that the office model is far from defunct.

The July number is down from 41% in January and 57% in May of last year, according to data from the Bureau of Labor Statistics, which tallies the number of employed who teleworked or worked at home for pay at any time in the month because of the novel coronavirus.

For the overall workforce, WFH has dropped to around 13%, also the lowest since May 2020.

The data treats the worker who works one day a month remotely the same as someone who does it every day.   Certainly, there are many companies experimenting with hybrid models.   But downtown office landlords are feeling more optimistic with leasing brokers throwing expensive parties to show off space.

Less Carrot, More Stick

In order to get their workforce back to their offices, more and more companies are instituting vaccine mandates.

The belief that vaccination should be a matter of personal choice managed to survive almost a year and a half of the Covid-19 pandemic. For months, employers eager to find a way to get workers and customers back to their businesses saw vaccines as vital, but stopped short of measures that felt coercive. Walmart Inc.’s approach—paying the store workers who make up the bulk of its 1.5 million U.S. employees $75 for a jab—was typical. Beverage-maker Bolthouse Farms offered bonuses of up to $500. Even institutions on the front lines of the pandemic hesitated to compel shots. When the New York-Presbyterian Hospital system announced a vaccine requirement for its employees several weeks ago, it triggered demonstrations outside its main campus in upper Manhattan. The signs waved by the protesting workers summed up the delicate dance government officials and employers were attempting: “Vaccination Yes. Mandate No.”

The shift from carrot to stick since then has been abrupt. As the more infectious delta variant has driven a dramatic rise in cases—the vast majority among the tens of millions of American adults who, despite ample opportunity, remain unvaccinated—a growing number of large employers have announced that they are giving up on moral suasion and inducement. In recent weeks, Google and Facebook have announced that employees returning to their offices must be vaccinated. Walmart mandated vaccination for the mostly white-collar workforce at its corporate headquarters. Tyson Foods Inc., the meat processing giant, is requiring it of all its employees. In late July, the U.S. Department of Veterans Affairs made vaccination mandatory for its health-care personnel. This week Citigroup Inc. was the latest financial firm to require employees returning to its offices to be vaccinated, a day after the Pentagon announced a mid-September deadline for vaccinating all of the armed forces. Today, vaccine holdouts still have a choice, but increasingly that choice is between keeping their jobs and losing them.

With job openings above 10 million for the first time ever, companies will need to make exceptions for vaccine mandates, or lose workers elsewhere. Most of these mandates though are not absolute and companies are making exceptions. The US military is making exceptions for health and religious reasons, for example. The good news is vaccination rates are beginning to pick up again.

Rideshare Woes

Anyone traveling today without a rental car should head directly to the taxi stand at the airport, as Uber and Lyft are both pricey and slow.

Not convenient, but it is the new ride-hailing app norm: Pricey fares and extended waits, as Lyft and Uber grapple with a driver shortage that has riders feeling the pain and the companies sweetening the pot to entice more drivers on the road.

The companies are offering one-time signing bonuses for new drivers and other cash perks for completing additional trips. But the incentives aren’t solving the problem.

In some cities, Uber and Lyft prices are up 79% from pre-pandemic levels, according to analytics firm Gridwise Inc.

Uber CEO Dara Khosrowshahi acknowledges that prices are stiffer, though he said outside estimates were exaggerated. He said in a series of tweets in June that fares have leapt just 30%, pointing out that driver pay also jumped by 37%.

“Drivers increasingly want to get back on the road,”Khosrowshahi told investors on an earnings call on Wednesday. “But in major cities like New York, San Francisco and LA, demand continues to outpace supply and prices and wait times remain above our comfort levels.”

Last weekend, it was over $40 to go 2 miles in an Uber. And I’ll take a taxicab drivers knowledge over a part-time Uber driver as well.

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