A Void Of Government Data

The Real Estate Espresso Podcast

A Void Of Government Data

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Welcome to the Real Estate Espresso Podcast. Good morning. ~~Shado~~ 📝Shadow, what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re looking at the continuing signs of weakness in the U.S. economy and what that means for real estate investors.

But first, I’d like to invite you to learn more about an exciting opportunity located in Bradenton, Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium that’s driving one asset class to new heights, and specifically that’s industrial. And my development company, Y Street Capital, is working on this specific property.

It’s a 35-acre property right in the middle of Bradenton, has an existing charter school on 11 of those acres, and 24 acres of land that we’re developing. We’re hosting a webinar on Wednesday evening, October 8th, 7 PM Eastern Time. This is an opportunity open only to accredited investors residing in the U.S. in compliance with SEC regulations, and of course by prospectus only. To learn more, click on the link in the show notes and we’ll see you on Wednesday evening at 7 PM Eastern.

On today’s show, we’re looking at the continuing signs of weakness in the U.S. economy. Now, of course, with the government shutdown, there’s no numbers coming out of the Bureau of Economic Analysis or the Bureau of Labor and Statistics. Today would have been the monthly jobs report, which consists of two reports. There’s the headline employment report, sometimes called the establishment survey, and the household survey.

The employment report made headlines in a significant way last month when the numbers for the past year were revised downward by over 900,000 jobs. Now, the financial markets have come to rely on these reports when it comes to bidding on interest rate futures. The theory is that if the economy is strong and employment is strong, then the Fed will put more emphasis on suppressing demand by raising the cost of capital. This is the so-called hawkish stance when fighting inflation takes center stage.

If the economy is weak and jobs are disappearing, then the Fed, in theory, should take a more stimulative approach to reduce the cost of capital and encourage hiring. This was the stance in the last FOMC meeting, which resulted in a quarter point rate cut. So we have no data coming out of Washington and the market technically doesn’t really know what to do.

But there is data coming from private sources and these are well respected. Payroll processing company ADP produces a regular report based on the aggregated and anonymized payroll data of more than 26 million U.S. employees. This week’s report showed that the U.S. economy shed 32,000 jobs in the month of September, and ADP gather their data weekly.

If we break it down based on company size, we saw that it’s in fact the small and medium-size companies that are in fact suffering the most. Those with one to 19 employees are down 19,000. Those 20 to 49 are down 21,000 jobs. Fifty to 249 employees are down 11,000 jobs, and companies under 500 employees are down 9,000 jobs. Only large employers having more than 500 employees are up by 33,000 jobs.

If we break it down by sector, natural resources and mining is up by 4,000. Construction is down by 5,000. Manufacturing services down by 2,000. Trade and transportation and utilities down by 7,000. Information is up by 3,000. Financial activities down by 9,000. Professional business services down 13,000. Education and health services are up 33,000; a lot of that’s tied to the start of the new academic school year. Leisure and hospitality down 19,000 and other services down 16,000.

So the economy is clearly showing signs of weakness. What are the chances that the ADP data would be showing contraction of the labor market and the Bureau of Labor Statistics would be showing robust hiring? I think the chances would be pretty low. And if that did happen, that the reports contradicted one another, which one would you believe?

So based on the private data, the bond market is signaling what it expects interest rates to be. So let’s look at the various yields for the different duration bonds. Let’s start at the shortest duration. There’s the one-month T-bill at 4.129%. That’s pretty much spot on target with the Fed Funds Rate. If we go to the three months, the 90-day T-bill, we’re at 3.959%. That’s a little bit lower. The six-month, 3.827%. It’s gone a little bit lower. The one-year, 3.645%. And then the two-year is at 3.574%.

So as you see, as we go out in duration, the yield is dropping. That means that there’s an expectation that at that point in the future, interest rates will be lower. We only see interest rates go back up when we get to the 10-year Treasury. That’s at 4.12%. Then, of course, the 30-year Treasury is a little bit too far in the future. That’s way over the horizon; we can’t predict that far.

So based on all of this, we can confidently predict another quarter point rate cut at the next FOMC meeting at the end of October, and very likely a further rate cut at the December meeting. Now for those of us in real estate, that is good news. It means those variable rate loans that are indexed to the Secured Overnight Financing Rate will see a reduction of half a point before the end of the year. It also means the cost of short-term borrowing for things like construction loans will fall as well.

At the same time, we’re seeing people get laid off in construction, and construction activity has slowed significantly. That means contractors and subcontractors are going to be more aggressive in bidding for work, and owners can expect better pricing when undertaking new construction projects.

Yes, there are markets experiencing softness. Austin, Texas; Las Vegas; Cape Coral are some of the most cited examples. Austin is for sure oversupplied with new product. Vegas has seen a significant drop in tourism and has one of the highest unemployment rates in the country.

If you’re willing to be a little bit of a contrarian and find those micro areas of strong demand in the midst of the larger macroeconomic weakness, you can probably do very well in the current environment.

What do you think about that? Have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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