Economic Update (Monday, March 15, 2021)

[Lloyd Segal]

Economic Update
(Monday, March 15, 2021)

Almost exactly one year ago, March 11, 2020, the World Health Organization declared a “Pandemic” for the first time in a hundred years. Look at all that has happened in the past twelve months; over a half million people have died, millions more sickened, over ten million workers still out of work, and our economy struggling to gain its footing. Despite these challenges, I have seen acts of human kindness that bring tears to my eyes. And thanks to several gigantic government stimulus packages, vaccines developed in record time, and essential workers dedicated to the cause, we have survived and adapted. Today, as we have adapted, we can finally see the “light at the end of the tunnel.” So with “adaptation” on our minds, let’s wash our hands, put on our face masks (yes, you!), social distance, and shake the tree…

The Consumer Price Index. The Consumer Price Index (“CPI”) rose 0.4% in February, matching consensus expectations. The CPI is up 1.7% from a year ago. If you remember, prices dropped at a steep 4.4% annual rate in March thru May last year as the COVID-19 and related restrictions hit our economy. Since then, they've grown at a 3.8% annual rate, the fastest pace of price gains in nearly a decade! The typically volatile food and energy categories played a significant role in February, as energy prices rose 3.9% (led by a 6.4% jump in the gasoline) and food prices increased 0.2%. Note that when measuring housing, the Bureau of Labor Statistics uses rental prices, which have been held down by government moratoriums on evictions as well as a shift away from rental (as people flee to the suburbs). As a result, "core" inflation was up only 0.1% in February and is up only 1.3% versus a year ago. But I like to follow "cash inflation," which is everything in the CPI except for owners' equivalent rent. Cash inflation increased 0.4% in February and is up at a 4.4% annual rate since prices began to rise last June. A dig into the details shows higher prices for medical care, recreation, and motor vehicle insurance were offset by lower costs for airfare, apparel, and used autos. Overall, the fundamentals point to higher inflation in the next few years. For example, the M2 money supply is up more than 25% in the past year. And government stimulus checks and boosted unemployment insurance payments in response to the pandemic have replaced more than 100% of lost wages for many workers, all of which inevitably leads to inflation. So don’t say I didn’t warn you. Nevertheless, don't expect that to change the Fed's plan to keep short-term rates near zero…at least for the foreseeable future.

Foreclosure Activity Sees an Uptick. ATTOM Data Services released its latest “2021 U.S. Foreclosure Market Report,” which shows there were a total of 11,281 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) in the United States in February, up 16 percent from a month ago (but down 77 percent from a year ago). Federal Government’s foreclosure moratoriums and lenders mortgage forbearance programs continue to keep foreclosure activity historically low. These government actions, and the efforts of lenders and mortgage servicing companies, have helped millions of homeowners avoid foreclosure during a year-long global pandemic and recession. States with the highest foreclosure rates were Utah (one in every 3,883 housing units with a foreclosure filing); Delaware (one in every 5,219 housing units); Florida (one in every 6,232 housing units); Illinois (one in every 6,336 housing units); and Louisiana (one in every 7,923 housing units). Metropolitan areas with a population greater than 1 million, with the worst foreclosure rates in February 2021 including Cleveland, OH were: Jacksonville, FL (one in every 5,707 housing units); Riverside, CA (one in every 6,478 housing units); Birmingham, AL (one in every 6,532 housing units); and St. Louis, MO (one in every 6,651 housing units). Despite the government moratoriums and lender forbearance programs, lenders started the foreclosure process on 5,999 properties in February 2021, up 15 percent from last month (but down 78 percent from a year ago). How is that possible? Because loans on commercial properties, investment properties, and properties that are vacant and abandoned do not always have the same protections. This could be why we’re seeing a slight increase in foreclosure starts despite the government programs. The counties that had the greatest number of foreclosure starts in February 2021 included: our very own Los Angeles County (leading the way with 234 foreclosure starts); followed by Utah County, UT (224 foreclosure starts); Cook County, IL (154 foreclosure starts); Harris County, TX (97 foreclosure starts); and Riverside County, CA (74 foreclosure starts).

“The One” in Foreclosure. Speaking of foreclosure, our friend Nile Niami is in foreclosure again. For years, spec developer Niami has teased “The One” — a 100,000-square-foot mega-mansion in Bel-Air that he hoped to sell for $500 million. But his plans are now in peril. Niami, known for his brazen personality and wildly ambitious real estate projects, borrowed $82.5 million from Hankey Capital in 2018 to build this extravagant home. Over the last three years, that debt has ballooned to more than $110 million, the loan has come due, and now Hankey wants its money. The lender just recorded a Notice of Default, the first step in the non-judicial foreclosure process. If Niami can’t repay the loan within three months, a trustee for Hankey will schedule a trustee’s sale approximately 21 days thereafter. There are multiple solutions for Niami to avoid a forced sale of the property, which include paying back all (or at least some) of the loan or coming to an alternative agreement with the lender. But default notices are nothing new for Niami. He received two in 2020 alone. Profitable sales have been hard to come by for Niami lately. After listing an over-the-top Beverly Hills home dubbed “Opus” for $100 million, he sold it last year for $38.3 million. The buyer turned out to be Joseph Englanoff, one of Niami’s lenders for the project. Englanoff took control of the property, rebranded it and sold it for $47 million later that year. The One estate stretches across eight acres on a promontory lot and centers on a 100,000-square-foot palace that looks more like a futuristic spacecraft than a home. He originally planned to list it for $500 million in 2017, but the home still hasn’t hit the market — a costly delay since the property’s annual tax bill comes in at more than $1 million. Last summer, he posted a cryptic video on his Instagram account declaring it was 10 weeks away from completion, saying, “Seven years ago, I had an idea to create the biggest, most expensive house in the urban world: The One Bel-Air. And I did it.” Well, he may have done it, but he didn’t sell it. If the One goes to auction, it will also be the most expensive foreclosure of a single-family residence in the history of California.

How Industrial Became LA’s Hottest Real Estate Category. Industrial properties have become “the darling of the commercial real estate world.” With $4.8 billion in industrial sales, 2020 was the second busiest year on record for sales volume in the L.A. metro region. There was a slight pause on sales just after the pandemic began, but by the fall, properties were jumping off the shelf. The number of deals that closed this year was similar to previous years, but deal sizes were larger. The demand actually was greater than it was before the lockdown. Industrial has proven to be one of the most if not the most resilient of the asset classes that we’ve had in 2020 during this pandemic. It’s considered to be a less risky asset class. Why? Because Southern California industrial real estate is incredibly difficult to come by to begin with. Further demand from users has increased, and vacancies are very low. Further, the pandemic accelerated the growth of ecommerce, necessitating industrial growth to deal with increased demand. Plus, companies are looking at doing more manufacturing in the United States, also increasing industrial demand. Investors are looking at industrial as a safe haven for investment. I’m seeing a lot of investors migrating to industrial during the pandemic. As a result, there’s more money chasing industrial deals than there are deals. There is only a moderate amount of new construction. Because there is a limited supply, properties are especially valuable, especially newer industrial warehouses.

Project Roomkey is Alive Again. The goal of Project Roomkey (a federally subsidized effort to shelter homeless people in hotels and motels largely emptied by the pandemic), was to find rooms for 15,000 people in Los Angeles. Instead, at its peak, the program housed only 4,300 people. Still, that was 4,300 people off the streets for weeks if not months while COVID-19 was raging — and in rooms of their own. The program started to ramp down late last year as leases gradually ended and the Federal Emergency Management Agency stopped its reimbursements, which covered 75% of the costs. But on Jan. 21, President Biden signed an executive order calling on FEMA to raise that reimbursement rate to 100% through September (and this week, he made the full reimbursement rate retroactive to the start of the pandemic). That offers a tremendous boost to, arguably, the best shelter program Los Angeles city and county have ever run. Short of permanent housing, which continues to be the goal, this is the kind of individual housing — a private bedroom with a bathroom — that homeless people need during a pandemic and beyond. Here’s the biggest problem: The city and county have to shell out the money upfront for leases. FEMA tends to reimburse governments but very V-E-R-Y late. OK, it’s not quite that bad — in reality, county and city officials expect about an 18-month delay for reimbursement from FEMA. But that’s unworkable. County officials estimate they’ve spent a total of $108 million for which they can seek reimbursement from FEMA. At this point, the county has received $12.5 million in reimbursements. It’s good that the 100% reimbursement formula for newly leased rooms will be retroactive to all the rooms leased since Project Roomkey started last year. But it’s not feasible for the county and city to continue to spend tens of millions of dollars upfront while they wait a year or more for reimbursement. The best plan would be for the state to lend the city and county the money they need to go ahead with Project Roomkey. Those funds could later be paid back with the reimbursement from FEMA. City and county officials are already discussing the possibility of a funding arrangement with the state. With reimbursement a sure thing through September, officials should try to lease as many rooms as they can. There were 66,000 homeless people in the county at the last count — the majority of whom were living on the streets, not in shelters. But there are complications. Every hotel and motel in Project Roomkey is supposed to have a service provider on-site to help people obtain services and get into permanent housing. But the ranks of service providers are stretched thin. That’s a grim possibility that the city and county understandably do not want to face. But it shouldn’t stop them from aggressively pursuing all the hotel rooms they can secure now. Yes, they need an exit strategy. But with winter weather and a pandemic now gripping our region, homelessness is too much of an emergency to not find as many rooms at as many inns as they can.

The Ursidae Family. A member of the local Ursidae family is apparently determined to get a house in Eagle Rock this year. A prodigious black bear has been there twice in the past week, checking out the neighborhood, peering into windows, and scoping out preferable lot sizes. After all, based upon their lifestyle, the Ursidae family is more interested in exteriors than interiors (unless the open house includes a spread for visitors). This particular bear is probably looking for properties with large yards and pools (in preparation for the hot summers back in the forest). This would be logical since Eagle Rock has more pools per capita than the surrounding neighborhoods. The Ursidaes don’t normally looking for living spaces this far south of Angeles National Forest. But based upon the scarcity of inventory, they are apparently willing to deal with the eight-mile commute, which would take them under (not on) the 101 Freeway. In fact, this fella with the thick black coat has his sights set on properties in the 5200 block of College View Avenue in Eagle Rock, but hasn’t bothered to contact the owners or Realtors yet (Thank God!). The problem is this bear is confused about when open houses are scheduled. He keeps showing up at 2:30 am in the morning to look around. So, if you live in Eagle Rock, and you’re up at 2:30 am, and you see our friend roaming your street, let him know the open houses are at 2:30 in the afternoon (not in the middle of the night). And be sure to social distance, of course!

Did You Gain Weight During the Pandemic? If yes, don’t feel bad. You’re not alone. Most people have struggled to maintain their weight during the pandemic, with 61% of American adults reporting undesired weight gain since the coronavirus outbreak. But don’t take my word for it. According to a new  American Psychological Association (APA) "Stress in America" survey of more than 3,000 people, two in five of the surveyed adults (42%) revealed that they gained more weight than they intended over the past 12 months. And they put on 29 pounds, on average! Yes, you read that correctly – 29 pounds on average! In fact, one in 10 said they gained more than 50 pounds, which the APA notes is a textbook sign that people are struggling to cope with mental-health challenges. Duh! (Indeed, the report also found that one in three Americans is sleeping less during the pandemic, and more than half of parents said their stress level has increased). Some 54% reported that they were exercising less, and 68% admitted that they were snacking more. And this has led to people commiserating with alcohol and comfort food during the pandemic. As it turns out, we don’t need to social distance from other people, we need to “social distance” from our refrigerators! But in a sick twist, this extra weight that people gained as a result of the pandemic can actually make them more susceptible to COVID-19. COVID did indeed bring us a year of epic uncertainty. And grown-ups aren’t the only ones with growing waistlines as the country sheltered-in-place. Veterinarians report that pets are getting pudgy, too. Banfield Pet Hospital, the nation’s largest veterinary practice with hospitals in 42 states, surveyed 1,000 dog and cat owners. Some 42% of pet parents confessed that their pets had gained weight during quarantine.

This Week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, Retail Sales will be released on Wednesday (03/16). 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. The next Fed meeting will take place on Wednesday (03/17), but no policy changes are expected. Housing Starts also comes out on Wednesday (03/17).

Weekly Change:
10-year Treasuries:        Rose 0.03 bps
Dow Jones:                   Rose 1.00 points
NASDAQ:                       Rose 300 points

Calendar:
Tuesday, 3/16:               Retail Sales
Wednesday, 3/17:           Fed Meeting
Wednesday, 3/17:           Housing Starts