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It is remarkable how vacancy rates for commercial real estate are moving sideways or higher in a strong economy, see the first chart below. You would have expected that the ongoing strong growth in employment and GDP would push vacancy rates lower. If the Fed succeeds with slowing the economy down, then all these lines will move higher, and potentially very quickly.
Combined with the steep maturity wall for CRE, see the second chart, the bottom line is that the pain in office, apartments, and industrial real estate continues.
Source: Bloomberg, Apollo Chief Economist 
Source: MBA, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Although car sales are very sensitive to higher interest rates, the data for auto sales shows no signs of a slowdown. This suggests significant support for auto sales from wealth gains for households via higher stock prices, higher home prices, and higher cash flow from fixed income.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The top 10 stocks in the S&P 500 now make up a record-high 35% of the index, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There are a lot of commercial real estate investments that need to be refinanced in 2024, see chart below. And rates higher for longer continue to have a negative impact across CRE.
Source: MBA, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The consensus probability of a recession has declined significantly in recent months and now stands at 30% for the US, Europe, and UK, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The TSA has daily data for the number of people scanning their boarding pass with a TSA agent, and it continues to show no signs of the economy slowing down, see chart below.
Source: TSA, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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For the past 12 months, the yield level for IG has been 5.5%, and the yield level for HY has been 8%, see chart below.
The economic data over this period have been strong, so one conclusion is that firms and consumers have gotten used to a permanently higher cost of financing.
However, higher rates will continue to negatively impact leveraged investments done when interest rates were zero, particularly CRE and REITs, where the pain will be felt for many more years.
Source: ICE BofA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Fed expectations have been on a roller coaster ride over the past 12 months, going from six cuts to two cuts to six cuts and now 1.5 cuts, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Removing the business cycle from the government budget balance shows that the US currently has a much bigger cyclically adjusted budget deficit than the Euro area, see chart below. In other words, despite the strong economy, the US is still running a significant deficit.
If the US were to enter a recession, tax revenues would decline, and unemployment benefit payments would rise. Under that scenario, it is not unreasonable to assume that the budget deficit could reach 10% of GDP, as it did during previous recessions.
Source: IMF Fiscal Monitor, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Data from downtowns shows that cellphone activity in San Francisco is at 57% of pre-pandemic levels, see chart below. Las Vegas is at 97%, and Miami is at 82% of 2019 levels. The slow recovery of downtowns combined with rates higher for longer has important implications for retail, restaurants, and offices.
Source: University of Toronto, Downtown Recovery, Apollo Chief Economist. Note: The recovery metrics on this website are based on a sample of location-based mobility data derived from cellphones. Metrics are computed by counting the number of unique visitors in a city’s downtown area in the specified time period, and then dividing it by the standardized number of unique visitors during the equivalent time period in 2019. See important disclaimers at the bottom of the page.
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