No Rate Cut Expected by the Fed After Latest CPI Data

US inflation topped forecasts for a second month in February as prices jumped.

Jordan B. & Han-Gwon Lung
March 13, 2024

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Good morning. Core CPI tops forecasts for a second straight month, led by rising housing and gas prices. Meanwhile, Property Building Corp’s parent company is seeking to buy its debt on 10 Bryant from JPMorgan as its anchor tenant prepares to leave.

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*Data as of 3/12/2024 market close.

CONSUMER CUES

Shelter, Gasoline Costs Increase Consumer Price Index in February

February’s Consumer Price Index (CPI) remained persistent, particularly influenced by housing costs, suggesting rate adjustments might be postponed until later in the year.

By the numbers: February saw the CPI climb to 3.2% compared to the previous year, marking a slight increase from January’s 3.1% YoY rise. This uptick is attributed predominantly to housing and gasoline prices, which collectively contributed to over 60% of the monthly inflation surge.

Housing market: The shelter index, a major component of the CPI, rose by 5.7% in February YoY and experienced a 0.5% monthly increase. Breaking down this index shows a 0.5% monthly rise in rent and a 0.4% increase in homeownership costs, with annual increases of 5.8% and 6%, respectively. The notable increase in housing-related expenses suggests that the Federal Reserve may have a harder time maintaining high interest in managing economic growth.

Perspective: Economists like Mark Zandi from Moody’s Analytics propose excluding owners’ equivalent rent from CPI calculations due to measurement complexities, which would align year-over-year CPI and core CPI inflation closer to the Fed’s target. Ksenia Potapov of First American Financial Corp. notes that shelter inflation’s lag effect may eventually reduce headline inflation, pending the realization of slower rent growth impacts.

➥ THE TAKEAWAY

The path forward: Despite some easing in inflation, Bloomberg Economics believes February’s CPI won’t prompt the Fed to cut rates yet. They expect a gradual decline in housing costs and some goods, like cars, to temper core inflation. With the Fed seeking more definitive signs of disinflation, any rate cuts are likely postponed, possibly until May or June, as the central bank navigates cautiously towards stabilizing economic conditions.

📊 When do you think the Federal Reserve is most likely to start cutting interest rates?

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✍️ Editor’s Picks

Dimon delays: JPMorgan Chase (JPM) CEO Jamie Dimon urges the Fed to delay rate cuts due to looming U.S. recession uncertainty.
Distress rate dip: CRED iQ reported the distress rate fell to 7.35% in February, driven by self-storage loans. The office sector saw the highest rates of distress at 11%.
Taxing times: The Tax Relief for American Families and Workers Act of 2024 bill includes a 100% bonus depreciation extension to 2025.
Construction concerns: In the week ending March 2nd, the U.S. saw a 1.7% increase in construction projects facing delays, pauses, or abandonment.
Financial reins: Empire State Realty Trust (ESRT) secured $715M in financing including a $620M credit facility, with maturity in March 2029.
Too many choices: Choice Hotels International (CHH) ended its $8B bid for Wyndham Hotels (WH), citing a lack of engagement. Choice’s revenue grew 10% to $1.5B last year.
Tower troubles: In 2010, searchCompany bought 452 Fifth Ave for $330M. Today, it plans to raise $400M through Israeli bonds to buy up the debt on that building.
Real estate evolution: The global real estate industry is at a ‘pivot point’ per a PwC/ULI report that anticipates increased investment activity amid economic shifts.

🏘️ MULTIFAMILY

Housing wins: Prop A was approved by 70% for $300M in bonds to build 1.4K affordable housing units. Prop C passed narrowly, cutting transfer taxes.
Riverfront retreat: Californians have cause to celebrate as Resources for Community Development plans 91 affordable apartments next to Guadalupe River in Willow Glen, San Jose.
Bargain hunt: FPA Multifamily buys 888 at Grand Hope Park, a 34-story luxury tower in Downtown LA, for $186M.
Border renovations: Greystone loaned $15.4M for renovating 189 multifamily units near the Texas-Oklahoma border, with plans for permanent financing.

🏭 Industrial

From missiles to megabytes: A Google-linked (GOOGL) data center campus on a former missile factory site in Prince William County, Virginia, was approved by the U.S. Army Corps.
Industrial tie-dye triumph: Elion Partners sells a Coral Springs warehouse for $12.5M, or about $155PSF, as the South Florida industrial market remains active.
Florida’s industrial boom: Stonemont Financial Group completed South Florida Logistics Center 95, a 1.3MSF industrial complex in Fort Pierce.

🏬 RETAIL

Up and up and up: Thanks mostly to retail, the special servicing rate is up to 7.14%, the first time it’s topped 7% in over 3 years. One year ago, it was at 5.18%.
Revamping retail: Four companies purchased North Miami Beach’s Mall at 163rd Street for $46M and are planning to revitalize the 24-acre property.
Publix plays landlord: Publix Super Markets purchased a 230.97KSF property in Key West, FL for $74.5M, becoming owner-operator at the location.

🏢 OFFICE

Renting resilience: Making sense of CRE rents in a rapidly changing market can be challenging, making future rent projections uncertain, which is why CBRE is using a new model.
Leasing shifts: The White & Case law firm is likely moving to Irvine Co.’s 60-story tower at 300 North LaSalle in Chicago, adding 65KSF to its office footprint.
Valuation conundrum: Appraisers in the office market face immense pressure, making values crucial as appraisals can differ by 1%, impacting financing.

DEBT FREE

PBC Aims to Secure $400M in Israeli Bonds for Bryant Park Tower Debt Purchase

In a bold move, the parent company of Property Building Corp (PBC), Discount Investment Corp, aims to secure its future in Manhattan by purchasing its debt on the iconic 10 Bryant Park tower.

Financing the future: Discount Investment Corp has set its sights on the Israeli bond market to facilitate this ambitious buyback, intending to drum up at least $400 million. This move is not just about debt clearance; it’s a play to gain 100% control over the property, especially as it braces for the exit of its main tenant, HSBC. With the fundraising expected to wrap up within 30 to 60 days, the company is on a tight timeline to transition to a debt-free posture.

Repositioning: Purchased in 2010 for $330 million, 452 Fifth Avenue stands tall with 30 stories, boasting a high occupancy rate of 94%. However, the looming vacancy by HSBC next year puts a spotlight on the building’s need for repositioning, now referred to as 10 Bryant. Noteworthy is PBC’s commitment to the property, demonstrated through a hefty investment exceeding $100 million in renovations, adding a layer of historic charm with its Beaux Arts base dating back to the early 20th century.

➥ THE TAKEAWAY

From Sale to sovereignty: Back in 2021, PBC floated the building on the market, part of a grander scheme to liquidate a $2 billion portfolio of U.S. real estate assets. The sale attracted a wide array of bidders, culminating in a deal with Innovo Property Group at $855 million. However, the deal fell through due to financing woes, prompting PBC to pivot towards retaining and repositioning the asset amidst a challenging backdrop of depreciating property values and climbing interest rates.

📈 CHART OF THE DAY

This visualization from Visual Capitalist reveals that delinquent CRE loans at the six largest U.S. banks nearly tripled to $9.3B in 2023, posing risks to banking stability amid many other challenges.

Unsurprisingly, the biggest names in banking are also the most exposed to CRE, with JPMorgan (JPM) at $1.4T in CRE loans, Bank of America (BAC) at $1.1T, Citigroup (C) at $945B, Wells Fargo (WFC) at $648B, and US Bancorp (USB) at $378B.