Economic Update (Monday, February 15, 2021)

[Lloyd Segal]

Economic Update
(Monday, February 15, 2021)

I was never a big believer in “Herd Immunity” until now. The term “herd immunity” represents a hypothetical threshold of our population that needs immunity to the coronavirus in order for transmissions to stop and the pandemic end. The scientific consensus for this threshold seems to be about 70%. So how close are we to herd immunity? So far roughly 34 million Americans, or 10% of our population (332 million people) have received at least one dose of the vaccine. So from a vaccine based measure we are about 1/7th of the way there. But let’s look at a different measurement. First, let’s include the people who have already had COVID-19 in the U.S.? The official count of positive tests is currently 26.9 million according to the COVID Tracking Project. Second, the CDC estimates that we only test about one out of every four infected people, meaning north of 100 million Americans have likely been infected at some point in the past year and now have antibodies from the virus. By my calculations, including official positive tests (26.9 million), estimated additional infections (75 million), and vaccine doses (34 million), roughly 40% of the US population currently has antibodies. That means we are currently over halfway to the 70% goal. Plus, about 1.5 million Americans are being vaccinated a day, putting us on pace to easily beat the Biden Administration's original goal of 100 million doses in 100 days. Projecting vaccinations forward we should reach 70% herd immunity by mid-April as vaccines continue to do the heavy lifting. In fact, with recent COVID data showing daily cases and hospitalizations down by 57% and 36% respectively since the peak, immunity may already be playing a role in driving down infections. This is positive news for our economy because it means we will be able to roll back the pandemic restrictions (that remain the biggest impediment to a further recovery) sooner than expected. So stay positive and stay invested because immunity to COVID-19 is closer than you think.

Consumer Price Index Rose in January. The cost of U.S. consumer goods and services rose in January at the fastest pace in five months, largely because of higher gasoline prices. But fortunately, inflation more broadly was still quite mild. The Consumer Price Index climbed 0.3% last month, the U.S. Bureau of Labor Statistics reports. The rate of inflation over the past year was unchanged at 1.4%. (Before the pandemic erupted, consumer inflation was running at a higher 2.3% clip.) Most of the increase in consumer inflation last month stemmed from higher oil and gas prices. For example, the cost of gasoline rose 7.4%. Energy costs have risen in the past few months, but they are still much lower than they were a year ago. As we are all aware, the pandemic crushed travel and reduced how much people drive. The cost of food, another household staple, edged up a scant 0.1% last month. The prices of groceries and food purchased from restaurants (i.e. “to go” and “delivery”) have both risen close to 4% over the past year, reflecting shortages of certain foods and higher costs tied to coping with the pandemic. As you’ve probably experienced, Postmates and GrubHub are making out like bandits! Last month prices also rose for clothing, medical care, rent and car insurance, but those increases were offset by lower costs of new and used cars, passenger fares and recreation. Nonetheless, talk of inflation is suddenly back in the news again after a nearly year-long absence. What’s the worry? Some economists [not me] fret that a stronger economic recovery (fueled by trillions in fresh coronavirus stimulus) could push the rate of inflation above the Federal Reserve’s 2% to 2.5% baseline later this year or next. The rate of inflation is likely to top 2% this spring simply because a pair of unusually negative readings from last March (-0.3%) and April (-0.7%) will drop out of the yearly average. Yet for now there’s little evidence to suggest rapidly building inflationary pressures in the guts of our economy.

Slumping Retail Market. The retail real estate market has been especially hard hit by Covid-19. Nevertheless, the industry still managed to log some big sales in Los Angeles County during the second half of 2020. At the beginning of 2020 (if anyone can remember back that far), it was looking to be a bright year for retail and a robust year for food and beverage, the movie industry, and the gym industry (even I joined). But last year those sectors ended-up being the hardest hit, and many tenants within that sector are now struggling for survival. Most of last year’s highlights in sales activity for the retail category came from “daily-need” tenant properties, such as grocery stores, and grocery-anchored shopping centers. As you can imagine, some grocery stores have seen double-digit sales growth during the pandemic! As a result, 1031 exchange buyers and institutional capital are both intensely interested in grocery-anchored centers, thereby increasing demand. In addition to grocery stores and grocery-anchored centers, restaurants like Starbucks or Chick-Fil-A that offer drive-thru service are of special interest now. Investors are in the hunt for value-added opportunities. Other commercial investors are showing more interest in suburban assets. After all, as we’ve all been working from home, there’s been a lot more interest in sub-markets. Most shopping centers with multiple tenants are having issues with at least one tenant (if not more) right now. But owners having tenant issues don’t want to sell and accept a discounted price versus the value they would have received pre-pandemic. At least not yet! Properties that did sell were for “redevelopment opportunities,” transitioning to other uses. Indeed, most of the top 10 retail sales since June were redevelopment opportunities. Looking ahead, industry experts don’t see a bright future for the retail category in the near term. After a year like we had in 2020, expectations are low for 2021. Most investors are fearing that only by third quarter 2021 we will start seeing things turn around. Restaurants could take even longer to bounce back, but single-tenant net investments of drive-through properties and sale leasebacks are likely to be favored investments. In fact, single-tenant net leased properties are seen as a relatively safe asset class. With these properties, the tenant has a triple-net lease where they are responsible for everything at the property, including taxes, insurance, and maintenance. It’s a reliable monthly check for the landlord.

February Housing Trends. The median listing prices grew at 13.5 percent last year, notching 25 consecutive weeks of double-digit price growth, according to the National Association of Realtors. With home shoppers active and sellers standing on the sidelines (fear of the pandemic), this trajectory seems unlikely to change in the near term. In 2020, lower mortgage rates helped offset the sting of higher prices. But with mortgage rates expected to rise, affordability is likely to become a bigger challenge in 2021. Additionally, even if lower mortgage rates help blunt the effects of higher home prices on monthly payments, they don’t offset the need for larger down payments as home prices rise. New listings continue to fall behind last year’s pace–registering 21 percent lower for the second week in a row. After the upswing in new listings at the end of 2020, new listings have tread a different path in 2021. New listings are a smaller sample and thus the trends are noisier than for active inventory. But the persistent listing declines observed so far in 2021 indicate that potential sellers aren’t in a hurry to sell so early in the year. Fortunately for would-be homebuyers, we expect sellers to return to the market as we see improvement in our economy and vaccine progress against the pandemic. Further, new construction, which has risen at a year-over-year pace of 20% for the last few months, will provide some additional relief. Total active inventory continues to decline, dropping 45 percent. With buyers active in the market and seller participation lagging, homes are selling quickly and the total number of houses available for sale continues to drop lower. In January as a whole, the number of for sale homes dropped below 600,000. More shocking, time on market was 10 days faster than last year meaning that buyers have to make a very quick decision and pull the trigger, if they want to buy a house.

Foreclosures Continue to Hit Historic Lows. A total of only 9,702 U.S. properties received foreclosure filings in January 2021 (i.e. default notices, scheduled auctions, and bank repossessions). According to ATTOM’s “U.S. Foreclosure Market Report” released last week, the filings were down 11 percent from a month ago and 80 percent from a year ago. January foreclosure activity declined at least in part due to the Biden Administration’s decision to continue the foreclosure moratorium on government-backed loans through the end of February. The moratorium and mortgage forbearance programs have effectively prevented millions of seriously delinquent loans from entering the foreclosure process. Lenders repossessed only 1,428 U.S. properties through completed foreclosures (REOs) in January 2021, down 28 percent from last month and down 86 percent from last year (thirteenth consecutive annual decline in completed foreclosures). States that saw an annual decrease in REOs in January 2021 included: Illinois (down 86 percent); Florida (down 83 percent); Maryland (down 83 percent); California (down 82 percent); and Texas (down 82 percent). Among the 220 metropolitan statistical areas with a population of at least 200,000 and at least 100 or more foreclosure starts in January 2021, those that saw double digit annual declines, included: Chicago, IL (down 87 percent); New York, NY (down 85 percent); and of course, our very own Los Angeles, CA (down 80 percent).

The Vessel. The eight “Wonder of the World” has been built. It’s called “The Vessel” and it is a free-standing observation structure in the middle of Manhattan’s Hudson Yards. At its essence, the Vessel is a giant staircase, but so much more architecturally. It’s like an Escher painting come to life. There is only one problem – people go there to commit suicide! On January 11, a young man ended his life by jumping off the staircase. It was the Vessel’s THIRD suicide and it is now closed to visitors pending a safety review. Not an outcome you would have envisioned at extravagant multimedia unveiling when it first opened. While the Vessel is marketed to out-of-towners, it’s also a lure for office workers and residents at Hudson Yards who might occasionally trade a Stairmaster session at Equinox for a workout with a billion-dollar view. But unlike parks, plazas, and sidewalks that accommodate different ages, fitness levels, and degrees of mobility, the Vessel’s one-note program requires stair-climbing. Lots and lots of stair-climbing! The apparent ambivalence towards how different bodies — including bodies in crisis — might relate to the Vessel are the consequence of the structure’s design and construction. The problem is that the Vessel is just too open. The most alarming example is the height of the railings along the 2,500 stairs and connecting walkways, with only chest-high railings. As the recent fatalities have unfortunately demonstrated, a severely distressed person with decent upper body strength can clear the railings with ease. The most obvious straightforward harm-prevention tactic — raising the railings above eye level — may have saved lives, but it would also obstruct the view, the Vessel’s key selling point. And the New York building codes do not account for its unobstructed 150-foot-high drop to the ground below. A higher railing might seem like an ineffective deterrent. But the latest research on suicide prevention and architecture (especially for vulnerable youth), shows it would make a big difference.

Airport Passenger Traffic Plunged in 2020. Final passenger counts are in for 2020, wrapping up the worst year since World War II for the four commercial airports serving Los Angeles County. Just 34.4 million passengers went through the gates at Los Angeles International, Ontario, Hollywood Burbank and Long Beach airports last year as the Covid-19 pandemic took hold. That represented a plunge of exactly two-thirds — 66.7% — from 103.2 million passengers for 2019. Passenger traffic at LAX tumbled 67.3% last year while Hollywood Burbank Airport saw a drop of 66.6%. Long Beach traffic plunged even further, by 70.9%, while Ontario’s decline came in at 54.5%. Keep in mind, the full-year results include two months of “normal” travel in January and February before the coronavirus shutdown in mid-March. For all local airports, the initial Covid hit was brutal. Passenger traffic plunged nearly 96% in April at the four airports compared to April 2019. At LAX, 300,000 passengers went through the gates in April, the lowest monthly total since 1955. Long Beach Airport saw a mere 6,300 passengers during the month. The next six months saw slow but steady improvement in passenger counts. But progress stalled in November, then reversed course in December as a surge of Covid cases and hospitalizations triggered a new wave of shutdowns. December’s cumulative passenger count of 2.31 million for the region’s airports represented a drop of 5% from November and a 74% decline from December 2019 (the largest year-over-year drop for a given month in history). One major reason for our region’s lagging performance was its higher proportion of international travel, particularly at LAX. That airport saw a 75% drop in international travelers in 2020 compared to 2019. So far, 2021 has not been much better! The reality is that we are now in a new “air transportation world,” not just a wounded pre-2020 system. Consumer patterns have changed, and now capacity decisions on the part of airlines are the main driver of passenger levels.

Chemosphere. If you haven’t seen it, it is worth a drive by. If you have, then you know what I’m talking about. This ultra-modern home clings to the slope of the Hollywood Hills on one precarious stilt. To some, the Chemosphere is a well known Los Angeles landmark thanks to its numerous appearances in film and television. But many are unaware that the UFO-shaped abode actually comes from much humbler beginnings. The precarious saucer home was constructed when an aerospace engineer, Leonard Malin, was gifted the severely sloped plot of land from his father-in-law (see, this is what fathers-in-law gift unwanted sons-in-law). Despite his meager engineer’s income, Malin was determined to build something special on the steep hillside property. To this end, he wooed sponsors to help him build an innovative design that would allow the home to jut out from the hillside, supported by one thick stilt. Technically the home was known as the Malin House, but one of these sponsors was a chemical manufacturer whose resins and polymers were used in building the home, hence its nickname, “Chemosphere.” After Malin moved from the home, it was leased for parties, events, and a number of film shoots appearing in such films as Charlie’s Angels and Body Double, securing a place in our popular consciousness. In recent years, looking the worse for wear after years of parties, the interior was finally refurbished. It is now owned and maintained by Benedikt Taschen, owner of the publishing house which shares his name. Despite the private ownership, the Chemosphere still manages to maintain a reputation for wild parties that are literally “on the edge.”

Lookout Mountain Movie Studio? Los Angeles is the epicenter of the movie-making industry, so it should come as no surprise that the US military had its own secrete movie studio in LA. It was known as “Lookout Mountain Air Force Station,” or “Lookout Mountain Laboratory.” But what made this studio special is that the films produced there were all classified. For over twenty-two years, the military operated this secret studio on Wonderland Avenue in Laurel Canyon, the former home of the 1960’s folk-rock scene that included The Doors, Joni Mitchell, the Mamas and the Papas, as well as filmmakers like Steven Spielberg and George Lucas. Like any other film-making compound in Hollywood, the 100,000 square foot, fully-operational studio featured soundstages, screening rooms, film-processing labs, and even an animation department. But as a military compound, it also featured a bomb shelter, a helicopter landing pad, 17 climate-controlled vaults and two underground parking garages. The studio was secretly established in 1947, though the Air Force has since stressed that the facility was used solely for the Atomic Energy Commission. During this time, cameramen, who referred to themselves as “atomic” cinematographers, were hired to shoot footage of atomic bomb tests in Nevada, Utah, New Mexico and the South Pacific. While the Air Force contends that these atomic features were the only movies made, it is believed that some 19,000 “films” were produced on Lookout Mountain between 1947-1969. The studio was finally decommissioned in 1969. Though the studio employed over 250 people, its existence remained unknown to the general public until the 1990s. Today the 2.5-acre studio is a private residence and belongs to actor/musician Jared Leto, who is known for throwing parties with his own type of “atomic” energy. If you want to see it for yourself, go north on Laurel Canyon Blvd, turn left onto Lookout Mountain Blvd, and then slight right on Wonderland Ave.

This Week. While there is broad agreement that government spending will provide needed assistance to individuals and businesses harmed by the pandemic, increased government spending is negative for mortgage rates since additional Treasury bonds must be issued to fund the spending, which causes a rise in yields (and ultimately mortgage rates). Looking ahead, investors will continue watching Covid case counts, vaccine distribution, and the size of the government stimulus spending bill. Beyond that, Retail Sales will be released on Wednesday (2/17). Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Housing Starts will come out on Thursday (2/18) and Existing Home Sales on Friday (2/19).

Weekly Changes:
10-year Treas:     Rose 0.02 bps
Dow Jones Avg:   Rose 200 points
NASDAQ:             Rose 100 points

Calendar:
Monday, 2/17:         Retail Sales
Wednesday, 2/18     Housing Starts
Friday, 2/19:           Existing Home Sales