For the week of Dec. 9th-13th
In this week’s highlights, the new PPI and CPI delivered the latest evidence that inflationary pressures continue to hang over the U.S. economy. Despite this, the jump in jobless claims points to a continued softening in the labor market, so analysts believe it is highly likely that a third interest rate cut will come out of this week’s Fed policy meetings. The light is shining on retail as a favored asset class even as some major retailers struggle and spin off unprofitable stores. Washington, D.C. is a metro to watch in the office sector as Trump threatens to reduce the federal office footprint. Also, inside the Beltway, the U.S. Environmental Protection Agency officially announced the long-awaited phase out of PCE and TCE, both of which are hazardous substances under CERCLA.
Here’s our latest top 5 list of the biggest weekly CRE news stories and why they matter.
- CPI and PPI Reports Reveal Lingering Inflationary Pressures
November’s consumer price index (CPI) measured at 2.7%, an expected 0.3% increase over October. Wholesale inflation, measured in the PPI index, came in hotter than expected at 3%. This was a 0.4% increase over the prior month and higher than the expected 2.6%.
Why It Matters: The battle against inflation has been bumpy, but despite periodic jumps, the overall trajectory has been downward since June of 2022 when inflation hit 9%. It is worth noting that the PPI is at the highest annual rate since February 2023, and this recent rise is concerning because it points to manufacturers facing higher costs, which could be a bellwether for retail-level inflation in the months ahead.
- Fed Rate Cut Expected at Year-End Meeting
The Fed’s two mandates of low inflation and maximum employment are moving at different speeds and at times different directions. However, analysts are confident that recent economic data further solidified the third rate cut of the year will occur this week. Traders raised the odds last week to 99%, according to the CME Group’s FedWatch measure. The Fed is closely watching not just inflation numbers, but also metrics on the labor market which are a mixed bag. Hiring rates are low, but so are layoffs. The economy has added more than 140,000 jobs on average over the six months through November, but the unemployment rate has drifted up to 4.2%, from 3.7% at the beginning of the year.
Why It Matters: The markets are strongly expecting the Fed to lower its benchmark short-term borrowing rate by a modest quarter percentage point. After that, however, the outlook on monetary policy is cloudier. It’s possible the Fed will tap the brakes in January and leave rates unchanged as they monitor the impact that the late 2024 cuts have had on the economy, as well as the transition to the Trump Administration.
- Retail Outlook Bullish Despite Major Retailers Scaling Back
At record low vacancies, retail is poised for the best performance of the major property types over the near term as healthy consumer holiday spending ends the year strong. Despite the bullish forecast, some major retailers continue to struggle. Newmark just announced it will be marketing a major portfolio of 120 JCPenney stores in 34 states as part of the retailer’s 2020 bankruptcy process. In related news, Macy’s just released its Q3 sales numbers, showing a 2.4% year-over-year decline, triggering investors to pressure the retailer to sell off its real estate holdings and close 65 U.S. stores by the end of its fiscal year—15 more stores than originally planned at the beginning of 2024.
Why It Matters: Strong-performing retail properties are in investors’ crosshairs and as struggling retailers cycle out underperforming store locations, eager investors stand ready to place capital and transition stores into new uses. Demand for store conversions and redevelopment will be fueling new opportunities in 2025 as retailers like Macy’s shutter locations to get their financials into more favorable positions.
- U.S. EPA Bans TCE and PCE Under Toxic Substances Control Act
EPA finalized the latest risk management rules for trichloroethylene (TCE) and perchloroethylene (PCE) under the bipartisan 2016 Toxic Substances Control Act (TSCA) amendments. The solvents are used in a variety of products, including cleaners, degreasers, sealants, lubricants, adhesives, paints, and commercial applications such as dry cleaning. Safer alternatives are readily available for the majority of these uses. Under today’s rule, all uses of TCE will be banned over time with the vast majority of identified risks eliminated within one year. For PCE, the agency is finalizing a 10-year phaseout for its use in dry cleaning, with the use of the chemical in newly acquired dry-cleaning machines to be prohibited after six months.
Why It Matters: The news marks a major milestone for chemical safety after decades of delays. Among other hazardous substances, TCE and PCE are both chlorinated solvents that are assessed as part of the standard scope of work in a typical Phase I ESA since its presence or potential presence on a commercial property could trigger an owner’s environmental liability under CERCLA.
- Trump Presidency Could Impact DC’s Office Vacancy Rate
According to a study of data from the General Services Administration conducted by S&P Global Ratings, roughly 52% of the federal government’s leased office portfolio either has lease expirations or termination options between now and the end of 2028. Of this, the majority is from expiring leases, totaling about 59.2M square feet. How the Trump administration handles these expiring office leases could have major implications for the owners of commercial properties it occupies, not to mention their investors and lenders.
Why It Matters: Across the U.S., news of office-to-multifamily conversions are making headlines and as such, D.C. could see more interest if these lease expirations translate into new redevelopment opportunities for apartments. In recent news, for instance, the Irvine Company will be spending $24M to revamp four office campuses in Orange County, California, and Extell Development is getting plans underway to construct two residential buildings on Upper West Side of Manhattan on former site of the Walt Disney Company-owned ABC campus.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
Did You Know of the Week
Did you know that the low point in LightBox’s CRE Activity Index was one year ago when December 2023 came in at 48.2? At that time, interest rates were locked at high levels, and Fed Chairman Powell had only just suggested that the Fed was ready to consider lowered rates. Few expected that it would be another nine months before the first rate cut arrived. What will the Index measure as we close out 2024? Stay tuned for the December CRE Activity Index to be published in the first week of the new year!
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