Now home to 53 Fortune 500 corporate headquarters, Texas can boast more than any other state in the U.S. (New York has 51 and California has 50.) The list, which includes giants such as Exxon Mobil, AT&T, Valero Energy, American Airlines and USAA, just got longer. The Lone Star State will soon add a 54th: Caterpillar, which announced in June that it too plans to move its headquarters to Irving, Texas from Deerfield, Illinois.

“We believe it’s in the best strategic interest of the company to make this move, which supports Caterpillar’s strategy for profitable growth as we help our customers build a better, more sustainable world,” Chairman and CEO Jim Umpleby said in a statement announcing the move.

Caterpillar, the world’s leading manufacturer of construction and mining equipment, boasted sales and revenues of $51 billion in 2021.

“Caterpillar’s global headquarters relocation is a major win for the people of North Texas and the entire state,” Governor Greg Abbott said in a statement. “I am proud to welcome Caterpillar’s headquarters to Texas and am excited for the economic opportunities this will create for Texans.” Click to read more at www.rednews.com.

Getting ever closer to normal. That’s happening today in the hospitality industry according to the Midyear State of the Industry Report from the American Hotel & Lodging Association.

According to the report, hotel room revenue and state and local tax revenues are expected to exceed 2019 — or pre-pandemic — levels by the end of 2022.

The lodging association predicts that hotel room revenue will exceed $188 billion by the end of 2022. That is higher than 2019 figures on a nominal basis. But the news isn’t all good: When adjusted for inflation, revneue per available room (RevPAR) is not expected to surpass 2019 levels until 2025.

The association also said that hotels are expected to generate nearly $43.9 billion in state and local tax revenues this year, up almost 7% when compared to 2019.

The association’s midyear report largely showcases an industry in recovery mode following the COVID-19 pandemic. The report says, for example, that hotel occupancy is expected to average 63.4% in 2022, which is close to pre-pandemic levels. And by the end of this year, hotels are expected to employ 1.97 million people, 84% of their pre-pandemic workforce.

“After a tremendously difficult two-and-a-half years, things are steadily improving for the hotel industry and our employees,” said American Hotel & Lodging Association president and chief executive officer Chip Rogers.

The news isn’t all good, though. Hotels are still struggling to hire enough workers. In 2019, U.S. hotels employed more than 2.3 million people, according to Oxford Economics. That’s far more than the 1.97 million employees the lodging association says that U.S. hotels will employ by the end of this year. The hotel industry is not expected to reach its 2019 level of employment until at least 2024.

According to a May survey from the lodging association, 97% of hotels said they are experiencing a staffing shortage, with 49% saying that their shortage was a severe one.

Few places seemed riskier during the early, pre-vaccine peaks of the Covid-19 pandemic than nursing homes and senior housing facilities. That includes Arbor Court Retirement of Topeka, the oldest retirement community in Topeka, Kansas.

“There was a lot of fear,” says Linda Clements, the director of business development at Arbor Court of Topeka, an independent living community for people 55 and older. Arbor Court contained the few Covid outbreaks it experienced – the 58-apartment community saw one Covid-related death. Nevertheless, like many senior housing communities, the business struggled during the pandemic to bring in new residents to fill empty apartments when residents either passed away or moved to facilities offering more medical care.

Highly publicized Covid deaths at nursing homes early in the pandemic forced many families to rethink congregate living and long-term-care plans, but experts and senior housing groups say demand is now picking back up.

Click to read more at www.forbes.com.

Insatiable. That’s the best way to describe investor demand for multifamily assets during the last five years.

Need proof? Consider a bulletin released late last month by Yardi Matrix. According to the company’s research, Yardi Matrix tracked more than $215 billion of U.S. multifamily property sales in 2021. And these properties traded for an average of $192,100 a unit.

Both of these figures are all-time highs, according to Yardi Matrix.

The company found, too, that 4,500 multifamily properties in the United States sold at least three times during the last decade. That’s about 5.3% of all U.S. apartment properties.

According to Yardi Matrix, investors have been most interested in smaller apartment properties that target working-class residents, mostly because these properties have the potential for higher rent growth. When investors purchase these properties, they tend to have lower rents even though they sit in markets with above-trend rent growth.

This gives investors the opportunity to raise rents on these properties, increasing their returns on investment.

The investment numbers that Yardi Matrix tracked are rather impressive. According to the company’s report, transaction activity in the multifamily sector bottomed out at $13.3 billion in 2009. Increasing steadily each year, this figure rose to a then high of $128.7 billion in 2019.

In 2020, a year of decline related to the COVID-19 pandemic, multifamily transaction volume fell to $95.5 million. Then came 2021, and a record-setting $215.3 billion in transaction volume. That is an increase of 67.3% when compared to the prior record-setting year of 2019.

Last year also set new highs for the number of multifamily properties sold — 6,488 — and the total number of units traded, 1.34 million.

Pricing has been on the rise, too. After bottoming out at $62,344 in 2009, the average price per unit has jumped all the way to $192,105 in 2021. That figure climbed 21.6% in 2021, the biggest one-year increase in decades.

Last week, the Fed did something that it had not done since 1994: It raised the fed funds rate by 75 basis points.

Leading up to the announcement, the Fed reiterated that it intended to raise this rate by 50 basis points. The Fed stated that it changed its approach to address high, persistent inflation. Ultimately, that claim seems substantiated. But more directly, it appears that the Fed changed its mind because markets signaled that the Fed was not doing enough to control inflation.

Equity markets fell into bear market territory and fixed income yields pushed higher as bond prices declined. The Fed won’t admit so, but it seems that the markets forced the Fed into doing something that it otherwise wouldn’t have done, even with May’s upside inflation surprise.

The Fed also raised the terminal fed funds rate in its forecast by 100 basis points to 3.8%, well past our estimate of r-star (neutral) at about 2.5%, with the Fed taking a harder stance that more squarely pits interest rates against inflation. Both sides of that battle carry risks, which might prove asymmetrical.

Inflation leads

Let’s take inflation first. Empirical research dating back decades proves that inflation upsets consumers (overall) more than other economic phenomena, including high unemployment and job losses.

But we do not need to reach into the distant past for evidence of this. In early June, consumer sentiment reached its lowest level on record. Yet, empirical research also demonstrates that unless inflation reaches very high levels, it tends to have a negligible cost and impact on economic growth. Our own humble contribution to this research reaffirms this position.

That raises the obvious question: “Why is the Fed so concerned with inflation?” There seems little chance of inflation rising to a high-enough level to impair economic growth. But concerns about inflation, especially outsized ones like we observe now, could influence behavior in a way that negatively impacts the economy. If consumers believe that inflation will cause economic trouble in the future (i.e. a recession), they might alter their behaviors in anticipation of such an outcome, and in the process bring about a self-fulfilling prophecy.

While that risk is likely increasing, it remains far from certain that it would manifest. In the absence of such an outcome, risk of higher inflation on economic growth remains incredibly limited.

Interest rates follow

What about the other side of this battle? Higher interest rates attempt to reduce inflation by impacting the demand side of the economy. Because central banks like the Fed can exert little or no direct control over the supply side of the economy, they raise rates to increase the cost of borrowing, negatively impacting the prospects for interest-rate-sensitive industries such as housing, financial services and durable goods.

As those industries experience lower revenues and slower job growth (if not outright job losses), growth in the economy starts to slow as those businesses and their employees (or former employees) spend less.

That helps to bring demand and supply back into balance. But the risk here is much clearer. If the Fed raises rates too much, the probability of a recession increases significantly because the decline in spending spirals into further job losses in other industries and an even greater reduction in overall spending. Most post-war recessions in the U.S. occurred because the Fed overshot interest rates.

Can the Fed actually reduce inflation?

Against such a backdrop, it might seem foolish for the Fed to start pushing even harder on interest rates. Many have noted such risks since last week’s Fed meeting. But another key question remains unanswered: Can the Fed actually reduce inflation? And here the evidence also seems suspect.

During the last four tightening cycles dating back to the 1990s, the data appears to show limited efficacy. Using the Fed’s preferred inflation measure, the core (excluding food and energy) personal consumption expenditures (PCE) index, monthly inflation did not trend downward during periods of Fed tightening. The monthly data appear somewhat random, and not indicative of deceleration brought about by higher rates.

Moreover, in the current environment, inflation is increasingly driven by food and energy, partially because of war in Europe and partially because of lack of capacity in energy production and refining. The Fed exerts almost no control over these. Therefore, the Fed is targeting what it can – the labor market.

The Fed sees excess demand for labor (most clearly in the 11.4 million open jobs) and believes it is contributing to the inflation problem. Even though wage growth and core inflation have both decelerated in recent months, the Fed seems willing to weaken the labor market to attempt to reduce headline inflation. The Fed would likely accept a higher unemployment rate, slower job gains and even job losses to tamp down inflation.

Yet that path tends to be a slippery slope to recession. To be fair, on multiple occasions the Fed has successfully managed to slow the economy and bring down inflation without causing a recession. It does not receive enough credit for this. But the course that the Fed charted last week could lead to a troublesome destination if it is not careful.

Lookout! Errr … outlook

The upshot? The 75-basis points increase by itself does not mean much. Rates remain low. But the forecast for the fed funds rate creates greater concern. If the Fed follows through, it will almost certainly push past the neutral rate into contractionary territory. How long the economy could sustain such rates without a recession remains murky. And the Fed does not need to adhere to its own forecast.

For those looking for a silver lining, the Fed has a terrible track record of following through on its own forecasts. If the Fed went too far, the Treasury market would likely signal so, much as it did during the last business cycle. That could prevent the Fed from hiking too much.

For now, our base case shows moderate growth for the economy, driven by a strong labor market and robust consumer spending. But the Fed’s increasingly hawkish interest rate forecast is raising recession risk.

What it means for CRE

Commercial real estate is digesting all the changes from recent months, including last week’s Fed decision and forecast. The market has not yet lost faith, but because things are changing so quickly, market participants are taking an extra beat or two to ensure that they are not making a mistake.

Interest remains high, but the rapidly changing environment requires extra homework. Borrowers, lenders, buyers, sellers, landlords and tenants are all assessing rapidly changing conditions, trying to avoid making a costly error. Participants are weighing longer-term confidence in the asset class against short-term uncertainty.

Ryan Severino is chief economist with JLL.