2021 February—Are We Seeing Stabilization?
Excitement is in the air. January was certainly high energy on all fronts, and I hope everyone had the opportunity to experience this in a positive way.
Markets and Investments
Wall Street has a positive outlook on the financial markets although most are expecting lower returns across several asset classes (see our 60/40 article for more info on expectations). Most exciting news was on the GameStop and AMC trades. Not a surprise hedge funds crowded in the same trade and had one of their own tricks used against them. Historically these sorts of short squeezes were performed by Wall Street Prop desks. The large Prop desks don’t exist anymore, this time the banner was taken up by a conglomeration of participants not all on Wall Street. Many investors were worried about what this means for their investing portfolios, in the long run not much other than a lesson on the power of large crowds.
January was mixed with small caps and mid-caps leading the way. Small caps were pushed by vaccine and fiscal stimulus hopes. Generally small cap names are more sensitive to economic recoveries which is what everyone is betting on and it does not hurt when there are hyped run ups lifting certain sectors as well. Yields rose in January as US GDP was roughly in line.
| S&P 500 | –1.11% | |
| S&P Midcap 400 | 1.45% | |
| Russell 2000 | 5.00% | |
| Barclays Aggregate Bond Index | -0.72% | |
| MSCI US REIT | 0.04% | |
| 10 Year Treasury Yield | 1.093% |
Commercial Real Estate Market
According to CBRE vacancy rates were 4.5%. Supply outpaced demand as annual completions were the second highest level in the last 25 years. Net absorption of multifamily units was clearly weaker last year at 39% below 2019 levels. This imbalance caused average rents to decline 1.6% in the quarter with a year over year decline of 4.2%. Vacancy rates were up slightly (10bps) at 4.5% but still relatively low on comparison to last decade. Best performing sectors for the quarter were smaller, suburban markets that primarily consisted of Class C and Class B properties, many of which have seen average rent increases; therefore, nationwide metrics always should be taken in their proper context.
NMHC data shows rent payments ending January 20th were at 88.6%. This is 2.5% below Jan 20th, 2020 and compares to a payment rate of 89.8% that paid in December. Vaccine rollout and fiscal stimulus package should stabilize those numbers soon. Unemployment in the US for January fell slightly to 6.3%. Worries in this number is the labor force participation rate also fell. So, this is not further support of turning a corner and caution is urged. The one big positive was the strength in jobs related to the service sector. According to the ISM Services Index January was the strongest month since February 2019. This shows companies have at least begun hiring workers back into service-related jobs in January.
We are still seeing deal flow in Office, Retail, and Mixed-Use properties. We have not pulled the trigger yet as we are still seeing good opportunities in the multi-family space. According to CBRE as shown in the graph below the valuation turn around for the Office and Retail sector are estimated not to rebound until late 2021. We of course will consider a loan that matches our required risk profiles and can be structured accordingly.
Our focus on supporting and funding projects in the micro-balance space has worked well and found our portfolio in a well performing sub-sector while being a lender to the very important work-force housing industry.
