FIG Topics of Interest



Sales of U.S. grocery anchored shopping centers rose more than 5% in 2017, bucking the trend of declining trading volume across most major types of commercial property last year as investors poured into the grocery sector seeking to take advantage of its near-legendary income reliability. 
Neighborhood centers anchored by supermarkets and other grocery retailers have continued to attract buyers, even as grocers slowed expansion, opening nearly 29% fewer stores last year following a burst of expansion and store openings of 2016, according to JLL’s recent Grocery Tracker 2018 report. 
Meanwhile, market fundamentals for neighborhood centers that constitute the bulk of grocery-anchored centers continue to look very healthy relative to malls and power centers, CoStar analysts say. 
Annual demand growth for neighborhood grocery-anchored centers has outstripped supply since 2010 and is expected to do so again in 2018 before reaching a tipping point next year, according to CoStar's 2018-2022 retail forecast.

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Four of the Federal Reserve's 12 districts saw a marked increase in steel prices, due in part to a decline in foreign competition. Price growth for lumber and other building materials picked up due to an uptick in construction activity, according to the Fed's latest Beige Book survey released Wednesday. A combination of stronger demand, supply constraints and higher materials prices increased non-labor costs, especially in construction, manufacturing and transportation. 
"[U.S.] steel producers reported raising selling prices because of a decline in market share for foreign steel and expectations about potential outcomes of pending trade cases," the Fed said. "Manufacturers further down the supply chain reported sizeable increases in the price of steel that they purchased." 
Ken Simonson, chief economist of the Associated General Contractors (AGC), said the tariffs could be "damaging to the construction industry in multiple ways." 
"Steel is nearly ubiquitous in construction," Simonson said. "Aluminum is used in all types of buildings for window frames and curtain walls, siding and other architectural elements. The price of both imported and domestic metals is likely to rise immediately. That will reduce or eliminate any profit for contractors who have already signed a fixed-price contract for a project, but who have not yet bought metal products." 
The increases in materials will cause bidder to hike prices for future projects, causing governments and other public owners of property, who generally on fixed budgets, to reduce the number or scope of projects put out to bid such as schools, highways, bridges or other infrastructure. Some private projects will be shelved or canceled, as construction cost increases make them uneconomic, Simonson said. 
Simonson said price increase notices continue to hit contractors' inboxes, noting that he saw an announcement from the American Buildings Co. South division of Nucor Buildings Group of a 7% price increase on pre-engineered metal buildings effective March 20. 
According to an estimate this week by Trade Partnership Worldwide, an international trade and economic consulting firm, the plan would increase U.S. iron and steel, aluminum and other non-ferrous metals employment by about 33,450 jobs.  The tariffs would eliminate 179,334 jobs throughout the rest of the economy for a net loss of nearly 146,000 jobs, including more than 28,000 construction positions. 
The tariffs "threatens to drastically increase the prices of many building materials specified by architects," said Carl Elefante, president of the American Institute of Architects (AIA). 
"Structural metal beams, window frames, mechanical systems and exterior cladding are largely derived from these important metals," Elefante said. “Inflating the cost of materials will limit the range of options they can use while adhering to budgetary constraints for a building." 
Elefante added that the administration’s proposed $1.7 trillion infrastructure program will not achieve the same value if critical materials become more expensive," and the potential for a trade war puts other building materials and products at risk. 
"Any move that increases building costs will jeopardize domestic design and the construction industry, which is responsible for billions in U.S. gross domestic product, economic growth and job creation," Elefante said.

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"This is a very exceptional mechanism that is rarely used. It's a bit considered like an atomic bomb, because really to use this is like saying 'look we are really at a level where we cannot use anti-damping or anti-subsidies'," Luisa Santos, the international relations director at BusinessEurope, told CNBC Monday. U.S.'s allies, including the European Union and Japan, are hoping to be excluded from new tariffs that Trump announced last week. The decision to raise steel import taxes by 25 percent and aluminum by 10 percent could hurt not only those industries directly, but also carmakers and construction firms which use the raw materials. Trump decided that the tariffs would be the best way to deal with overcapacity in these sectors and based his argument on national security. European and Japanese trade officials are meeting U.S. counterparts this week as they seek clarity as to what is the basis for being excluded from the new tariffs. "The issue is that these measures are mainly affecting (U.S.) allies. They claim that the measures are directed to China, but it's basically Canada, EU, Japan, South Korea, these are natural allies of the U.S.," Santos said. "If they exclude all these countries, there aren't many countries left that will be subject to the measures," she added. Meanwhile, European steel and aluminum businesses are reportedly preparing for a collapse in local prices if the tariffs are indeed applied to their region. Charles de Lusignan, from the Steel Association for Europe, told CNBC Monday morning that ultimately the tariffs could mean a scaling back in Europe, with firms letting people go, cutting investment and also innovation.

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"It makes people in the United States who have not stood up to support free trade much more anxious to do so now that they see the possible consequences of the benefits of free trade being taken away," he added.
Capital Alpha's Lucier said an overhaul of U.S. trade policy had long been an issue lawmakers on Capitol Hill wanted to confront, though it had taken Trump's threat to impose global duties to force the issue to the top of the agenda.
"Trade had been on the backburner, Trump is forcing it on the front-burner. The question is with this disruption can we figure out a way to unite with our trading partners and come up with a positive strategy that actually works?
"I think it is actually positive rather than negative even though it is certainly not a conventional approach to motivating people," he said.
Several global trade chiefs have decried the prospect of trade tariffs, with the International Monetary Fund (IMF) and World Trade Organization (WTO) also publicly critical of its potential ramifications.
"For me and for Belgium and for Europe, we are very worried about the possibility of an escalation because Europe can take some measures and then the United States takes some other measures and then we have a (trade) war," Kris Peeters, deputy prime minister of Belgium, told CNBC on Friday.
In reference to the likelihood of an intensifying trade dispute, Peeters said: "Starting a war is not so difficult; ending a war is very, very difficult."

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Big oil and big corn are touting opposing studies released this week on proposed biofuels policy reforms under consideration by the Trump administration, part of an ongoing clash between the two sides over the future of the program.
Valero Energy Corp, a major oil refiner, funded a study by Charles River Associates that supports placing a cap on the price of biofuel blending credits under the U.S. Renewable Fuel Standard (RFS) - a change meant to help refiners that complain the RFS now costs them a fortune.
A rival report from Iowa State University, also released this week, said such a cap on credits would backfire by eroding U.S. demand for corn-based ethanol and potentially lowering corn prices, already under pressure from a supply glut. The corn industry did not directly fund the Iowa State study, but does provide funding to the university.
The studies are meant to inform the administration’s deliberations on how, and if, to reform the RFS - which has become a major point of tension between two of President Donald Trump’s most important constituencies.
The RFS requires oil refiners to blend increasing amounts of biofuels, mainly corn-based ethanol, into the fuel supply each year, or buy the renewable fuel credits, called RINs, from other companies that do the blending.
The regulation was introduced during the administration of President George W. Bush to help farmers, cut petroleum imports, and improve air quality. But a surge in the price of RINs in recent years has upset merchant refiners who say the policy now costs them hundreds of millions of dollars a year.
Trump waded deeply into the debate last week, urging representatives of both sides to accept a compromise deal that caps prices for the credits while also removing seasonal limits on high-ethanol blend gasolines to expand the biofuels market.
A cap would control costs for small refiners and help them stay afloat, said Brendan Williams, vice president of government relations for refining company PBF Energy (PBF.N).
The biofuels industry likes the idea of expanding high-ethanol blend gasoline sales, but has pushed back on the idea of a cap. “The RFS is a well-designed program,” said Brooke Coleman, head of the Advanced Biofuels Business Council. “Part of the whole mechanism working is that the price of RINs may go up, and so you should go long on biofuels.”
“It’s a strategy to kill the RFS and to kill the economic incentive to blend,” said Coleman, referring to a 10-cent cap.

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“I can’t believe this is happening,” Michael Purves, Weeden & Co.’s chief global strategist, said by phone. “I wrote up Cohn’s departure this morning as a real risk to consider. I thought it’s like a 35 percent probability event. I was just amazed that Trump is letting this happen.”
“Of all the Trump administration resignations, this will be the one most meaningful for markets,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services. “Cohn was the administration official financial markets had the most confidence in. This opens the environment up to whole new wave of uncertainty. The likelihood of a trade war just jumped dramatically.”
“A lot of people saw him as a calming influence to the Trump administration,” said Nick Twidale, Sydney-based chief operating officer at Rakuten Securities’ Australian unit. “Now he’s gone, there’s that perception that maybe they’re letting loose the hardline aspects of the Trump administration to go even harder on protectionism.”
“Policy uncertainty has underpinned a lot of the market’s recent volatility,” Stephen Wood, chief market strategist for North America at Russell Investments in New York, said by phone. “This speaks to the instability. He’s an advocate for free trade policy so there would be expectation that protectionist voices would be more representative in the administration.”
“Cohn’s huge accomplishment was tax reform, which responded to low corporate taxes abroad by bringing the U.S. corporate sector back to a competitive position,” said Barry Bannister, chief equity strategist at Stifel Nicolaus & Co. “Almost all nations had been under-cutting the U.S. on corporate tax rates and export subsidies such as refunding sales taxes at the point of export, which is prevalent abroad.”

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The value of multifamily housing starts spiked 39% in January, with 11 projects valued at $100 million or more breaking ground as apartment and condominium construction showed fresh legs after three straight months of declines to close 2017. As a group, the commercial construction categories excluding multifamily - office, industrial, retail and hospitality projects - fell 15% in January. The value of new office construction starts declined 31% after a sharp 44% increase in December. Hotel construction dropped 13% in January after a modest 4% gain in December. 
The supply wave has not crested in the U.S. multifamily sector, with CoStar’s forecast calling for delivery of approximately 500,000 units over the next two years, with much of the new development concentrated in large urban projects near CBD office buildings and retail. While office construction starts closed out 2017 below their historical average for the 10th consecutive year, office deliveries are expected to reach a cyclical high this year, with CoStar forecasting that the new supply will cause the U.S. office vacancy rate to begin ticking up as completed construction finally begins to outpace demand. 
Over 225 million square feet of industrial properties delivered in 2017, the highest recorded in over 10 years, and of January 2018, over 230 million square of industrial space had broken ground in the last year, much of speculative development. The level of retail construction remained well below historical average, with just over 60 million square feet under construction as of December compared with last cycle’s peak of nearly 170 million square feet. 
Despite slowing conditions in almost all sectors besides multifamily, optimism abounds in the construction and design industries. The "optimism quotient" in Wells Fargo's 2017 Construction Industry Forecast released this week was 133, a 10-point increase over last year and the highest reading for the index since the late 1990s. 
Total nonresidential construction, including commercial, institutional and public works projects, remained flat, edging up 1% in January to $240.8 billion despite a 149% jump in entertainment-related projects, including the groundbreaking for the $1.3 billion domed stadium in Las Vegas that will be the new home for the Oakland Raiders, slated for occupancy prior to the 2020 NFL season. 

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The president’s decision to impose 25 percent tariffs on imported steel and 10 percent on aluminum raises the probability his administration will take a hawkish approach to other trade issues, such as talks to overhaul Nafta, Goldman Sachs economist Alec Phillips said in a research note.
Negotiators from the U.S., Canada and Mexico have been hunkered down in Mexico City for more than a week in the seventh round of talks to work out an update to Nafta.

But talks have been bogged down over U.S. proposals designed to reduce its trade deficit, such as tighter content requirements on cars. Goldman sees the stalemate continuing, along with a “good chance” Trump will at some point follow through on his threat to withdraw from the pact. The talks look set to extend beyond a goal of end-March.
The next shoe to drop could be an investigation by Trump’s top trade negotiator, Robert Lighthizer, into whether China is flouting U.S. intellectual-property rights. Goldman expects the administration to impose restrictions on Chinese investment as a result of the so-called 301 probe, and may even go further. Trump has said he wants to impose a big “fine” as part of that investigation.
To be sure, it’s not the first time the U.S. has cracked down on foreign steel. Ronald Reagan and George W. Bush both imposed barriers on imports, but the U.S. steel industry has continued to struggle in the decades since. “We’ve been here before,” said Robert Holleyman, a partner at law firm Crowell and Moring LLP who served as deputy U.S. trade representative in the Obama administration.
Tariffs probably won’t address China’s “massive excess capacity” in steel, the fundamental problem for U.S. producers, since Chinese steel exports account for a small share of U.S. consumption, Holleyman said.
With his move on steel, Trump is invoking a seldom-used clause of a 1962 law that gives him the authority to curb imports if they undermine national security. World Trade Organization rules allow members to restrict trade that imperil their “essential security interests.” Other countries are expected to challenge the tariffs at the Geneva-based trade body, in what will be the first test of the security provision since the WTO was born in 1995, said Gary Hufbauer, a trade expert at the Peterson Institute of International Economics in Washington.

WTO Director-General Roberto Azevedo on Friday said there’s a “real” risk of worsening disputes because of the tariffs, and that a trade war doesn’t suit any nation’s interests. “The potential for escalation is real, as we have seen from the initial responses of others,” Azevedo said. “The WTO is clearly concerned at the announcement of U.S. plans.”
Hufbauer thinks the U.S. would win a WTO case, though. And even before then, other governments will be emboldened to impose their own barriers in the name of national security, he said. “That really opens a Pandora’s box,” said Hufbauer.

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"All told, we are seeing some signs of a slowdown in the retail market," said McCullough, noting that retail absorption totaled about 69 million square feet for 2017, down about 30% from 2016 and 2015 levels, with developers expecting to deliver roughly 80 million square feet of new retail space in 2018 as demand from retail tenants begins to soften. "Given the slowdown in demand and some uptick in supply, we might anticipate the national retail vacancy rate, which went flat in 2017, to start to rise modestly in 2018," McCullough said.

One sign of the softening market conditions is a moderate rise in vacancies and flat-lining of rental rate growth in recent quarters at the country's top located and most productive Class A malls, urban luxury centers and shopping centers. These properties have consistently logged the highest location quality scores, as ranked by CoStar’s proprietary formula measuring the combined effects of demographics, density of surrounding commercial property and market competition on individual retail centers.

While retailers are readily absorbing some new supply entering the market, especially spaces of 20,000 square feet and below, larger boxes in certain centers that are ranked in the top 10 percentiles of location quality are in many cases taking longer to lease up, reflecting broader weakness among U.S. power center tenants. 

Meanwhile, at the opposite end of the quality spectrum, the number of "zombie" power centers with vacancy rates of 40% or more has increased 60% since 2016, due to a spike in store closures by Kmart, Toys R Us and other big-box retailers and grocers. The closures and bankruptcy filings are mounting weekly and likely will not abate any time soon. Toys R Us plans to close another 200 stores and lay off corporate personnel, in addition to 170 previously announced store closures, the Wall Street Journal reported Thursday. On Wednesday, Northeast supermarket chain Tops Markets LLC filed for Chapter 11 bankruptcy protection.

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“The meaning of the word ‘further’ was far from clear,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington. “Maybe it was meant to convey a continued string of hikes over time? Who knows? I hope the minutes clarify what they meant.”

At Chair Janet Yellen’s last meeting Jan. 30-31, the central bank pledged twice to make “further gradual adjustments” in interest rates as opposed to just “gradual adjustments” at the prior gathering. While the language was consistent with adding more emphasis to the plan for rate hikes, the minutes of the closed-door meeting, due Wednesday, will probably give details on what message officials wanted to send with the wording tweak.

One possibility is that it was an indication the Federal Open Market Committee was debating raising interest rates by more than the three moves officials had penciled in for 2018. Another idea is that policy makers may have discussed increasing their estimate of the neutral interest rate -- a theoretical level that neither speeds up nor slows down the economy -- in light of new U.S. fiscal stimulus.

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