Daily Update: December 22, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

The Hazardous Nostalgia of Real Estate Markets

Real estate is measured in decades. An office building in Houston or an apartment complex in Weifang, China, once constructed, will exist in the 10- to 20-year increments of leases, loans and interest rates. This means that the longer memory of real estate markets can provide an anchor of stability in the face of market volatility. But at times, real estate markets develop out of phase with emerging trends. When that happens, market players can fall victim to an institutionalized sunk cost fallacy. Certain trends in real estate, specifically some office real estate in the US and Europe and some residential real estate in China, demonstrate the seductive power of wishful thinking when it's tied to concrete, glass and rebar.

In the US and Europe, lower-for-longer interest rates birthed market dynamics in commercial real estate that struggle to persist with modestly higher interest rates. According to S&P Global Ratings, higher interest rates have reduced debt-service coverage and raised refinancing risk. Changing work habits have led to a decline in demand for office space — particularly in major cities across the US, UK, continental Europe and Australia — which is now weighing on the valuations of the underlying assets. Offices are generating lower cash flow just as operating expenses are rising with inflation. S&P Global Ratings forecasts that downgrades will increase, loans may need to be restructured and defaults are possible. If interest rates stay high, these downside risks increase.

In recent weeks, as the Fed has signaled that the current cycle of rate hikes may be coming to an end and inflation has shown signs of moderating, the real estate market seems to be celebrating an imminent return to lower interest rates. Real estate stocks have rebounded as US Treasurys have fallen. The S&P 500's real estate sector climbed 17.6% from Oct. 25 to Dec. 6, while the benchmark 10-year Treasury bond yield fell 86 basis points to 4.12%. At the same time, US real estate investment trust capital offerings have picked up. The industry pulled in $5.06 billion in November, which was 89.3% higher than the $2.67 billion it collected in November 2022. These movements are almost entirely a reflection of long-term rate expectations. However, it is unclear if the market and the Fed have the same expectations for what interest rates will look like in the future. Market nostalgia for recent near-zero interest rates may not be shared by central bankers.

Residential real estate in China has enjoyed an incredible run, buoyed by rapid urbanization and a growing population. As Chinese population growth has started to stabilize, highly leveraged real estate developers have begun to buckle. While some see an eventual slow recovery for China’s real estate market, that recovery will not constitute a return to the conditions of booming growth that have characterized the last 20 years. China will continue to be a large and growing economic power, but nostalgia for a period of unprecedented growth in Chinese residential real estate may be a poor guide to future returns.

Today is Friday, December 22, 2023, and here is today’s essential intelligence. The next edition of the Daily Update will publish on Monday, January 8, 2024.

Written by Nathan Hunt.

Economy

US Retail Sales Rebound In November; 1 Retailer Files For Bankruptcy

US retail sales found renewed strength in November as consumers boosted their spending ahead of the holiday season. Retail and food services sales grew 0.3% from the prior month following a revised 0.2% monthly drop in October, according to US Census Bureau data published Dec. 14. The total beat economists' expectations of a 0.1% decrease, according to data compiled by Econoday.

—Read the article from S&P Global Market Intelligence

Access more insights on the global economy >

Capital Markets

Secondaries Investors Stalk Single-Asset Continuation Vehicles

Private equity secondaries investors are hunting for top-quality single-asset continuation vehicles as the dry powder available for dealmaking continues its push further into record territory. Global secondaries dry powder more than doubled in under four years to reach an unprecedented $201.4 billion as of March, the most recent estimate available from Preqin.

—Read the article from S&P Global Market Intelligence

Access more insights on capital markets >

Global Trade

Major Tanker Owners Avoid Red Sea Voyages Over Houthi Attacks

Belgian shipowner Compagnie Maritime Belge and affiliated tanker operator Euronav have stopped their vessel transit via the Red Sea, the company said Dec. 19 following a spate of Houthi attacks on commercial ships. "We will avoid the area until further notice. We are monitoring the situation very closely," CMB said in an emailed statement. "The safety of our crew and our ships is paramount."

—Read the article from S&P Global Commodity Insights

Access more insights on global trade >

Sustainability

November 2023 – EU Nature Restoration Law, Australia’s Sustainable Finance Taxonomy And China’s Plan To Limit Methane Emissions

Regulation is shaping the sustainability agenda and changing the way companies do business in different jurisdictions, but keeping pace with constant regulatory updates has become a mammoth task for businesses and investors. In this recurring series, S&P Global Sustainable1 presents key environmental, social and governance regulatory developments and disclosure standards from around the world.

—Read the article from S&P Global Sustainable1

Access more insights on sustainability >

Energy & Commodities

Commodities 2024: UK North Sea To See Oil Mini-Revival In 2024 Despite Tax Row

A drive to boost UK energy security is providing some reassurance for a North Sea industry buffeted by tax hikes, environmental opposition and reservoir decline, amid signs of a mini-recovery for oil in the coming years. Never known for over-exuberance, the North Sea industry's mood has worsened of late. Oil output is in sharp decline — it fell 12% year-on-year in the first nine months of 2023 to 720,000 b/d — and the industry has struggled to cope with a 35 percentage point increase in headline taxation under the 2022 Energy Profits Levy.

—Read the article from S&P Global Commodity Insights

Access more insights on energy and commodities >

Technology & Media

2024 EV Forecast: The Supply Chain, Charging Network, And Battery Materials Market

For the electric vehicle sector, 2023 saw waning consumer preferences for EVs, several promising startups fall by the wayside, a decline in battery materials costs and ambitious OEMs and suppliers from mainland China turning their focus to exports of vehicles as well as components. S&P Global Mobility's forecast for 2024 is one of cautious optimism — with an increase in affordable EVs, reliable vehicle-charging ecosystems and profitable returns.

—Read the article from S&P Global Mobility

Access more insights on technology and media >