Location Strategy Chartbook 05.17.25

Bloomberg: The US was downgraded by Moody’s Ratings on Friday thanks to government debt that’s approaching a mind-numbing $37 trillion. It was a dramatic move that cast further doubt on the polarized nation’s status as the world’s highest-quality sovereign borrower. Moody’s lowered the US credit score to Aa1 from Aaa, joining Fitch Ratings and S&P Global Ratings in grading the world’s biggest economy below the top, triple-A position.

The one-notch cut comes more than a year after Moody’s changed its outlook on the US rating to negative. The federal budget deficit is running near $2 trillion a year, or more than 6% of gross domestic product, and Congressional Republicans are pushing through budget legislation that could add trillions of dollars more. “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s wrote in a statement.

Goldman Sachs Research expects a slower pace of rate cuts by the Federal Reserve on signs of tariff de-escalation between the US and China.

Our economists now expect the Fed to begin a series of three 25-basis-point cuts in December rather than in July, and to implement them at every other meeting rather than sequentially. The Federal Open Market Committee meets roughly every six to eight weeks.

Jan Hatzius, Goldman Sachs Research's chief economist, writes in the team's report that the rationale for interest rate cuts in our economists' forecast has shifted. Previously, the rationale had been insurance: pre-emptive action when the central bank sees potential weakness in the economy.

Now the team expects that the Fed will instead start cutting with a view to slowly returning interest rates to a more conventional level “as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced,” Hatzius writes.

The team's estimate for the terminal rate — the point at which the Fed will stop cutting interest rates — is unchanged at 3.5-3.75%.

Bloomberg: The US inflation report that came out this week was either comforting or confounding, depending on your point of view. Comforting, because the consumer price index was lower than economists had expected—an early sign, perhaps, that President Donald Trump’s erratic and, to critics, heavy-handed approach to negotiating trade deals might not be as disruptive to the economy as feared. Confounding, because Econ 101 says that tariff rates, which have gone way, way up since Trump’s April 2 “Liberation Day” announcement, should cause prices to soar as companies pass on those costs to consumers.

And yet, it’s probably too early to know where prices are headed. It’s definitely too early to say that Trump’s tariffs (even in their slightly toned-down form, amid a 90 day pause) won’t eventually lead to higher prices, Covid-style product shortages or even a recession later this year. That in turn makes it hard to make any kind of financial decision—whether to take a new job, to figure out your retirement account or even to decide when to buy a new smartphone—without setting aside some time to think through the news, hear from experts and consider differing points of view.

New data from Friday showed US consumer sentiment has fallen to the second-lowest level on record, and inflation expectations climbed to multi-decade highs. The preliminary May sentiment index declined to 50.8 from 52.2 a month earlier, according to the University of Michigan. That was lower than all but one estimate in a Bloomberg survey of economists. The main reason cited was President Donald Trump’s trade war.

Nearly three-fourths of respondents to the Michigan survey spontaneously mentioned tariffs. The topic crosses partisan lines, including a notable share of Republicans bringing it up. The new, sobering survey data comes as inflation data from the Trump administration’s Department of Labor has been unexpectedly upbeat, coming in softer than estimates three months in a row.

The Promote: The Traveling HFC, the lemonade stand of property-tax forgiveness, the escape hatch for multifamily syndicators’ “dogshit deals,” the manna from loophole heaven for consultants and attorneys and debt brokers, and the gravy train for jurisdictions in the boonies of the great state of Texas, is now decidedly on life support. The most punitive version of a bill designed to torpedo it flew through the Texas Senate this week, in a move that took everyone – from its biggest proponents to those with the most to lose – by surprise.

“The fact that you [HFC] went from $250,000 to $6M in the span of 6Y says that you are doing something right – the problem is I’m not sure what it is that you’re doing right, and I don't know how much of that benefit is for the people of Cameron County.” – Judge Eddie Treviño, Cameron County Commissioners Court

When multifamily syndicators descended upon Texas in the feverish ZIRP days of ‘21 and ‘22, their hunger for fees (development fee, 10% CM fee, 25% “entrepreneurial profit”) pushed them into many questionable deals, deals that are now deep underwater or have been kicked back to their long-suffering lenders.

In ‘15, the Texas legislature introduced an incentive for affordable housing: if a developer built apartments through a special vehicle known as a Public Facility Corporation, and committed to reserve at least half the units for households making below 80% AMI, then property taxes would be waived entirely. The spirit of the incentive was that you cut developers a deal in exchange for bringing much-needed AH to the community

“It worked for a long time, but then it started being abused,” said one local developer. PFCs began being used in places where the delta between the 80% AMI rent and the market rent didn’t exist, in effect making it a freebie. And then, some PFCs went full cowboy: since the state legislature had neglected to restrict PFC activity to the locality, they began peddling their wares in much hotter markets: Austin, Dallas, Houston. A rando school or water district in Travis County or Garland could, in exchange for a nice upfront per-unit fee, create several dozen PFCs all across the state, PFCs that became a magnet for syndicators’ “dogshit deals,” as one market participant put it. These deals were typically structured as ground leases – The Promote has reviewed a number of the agreements and will dive into them in upcoming eds. – and resulted in hundreds of millions of dollars being wiped off city tax rolls for 75Y – here’s an e.g. from a UT Austin study.

The Dallas City Council officially approved its Off-Street Parking & Loading Code Amendment, ushering in a new era of smarter, more flexible parking policies that support housing affordability, walkability, and sustainable growth.

Key highlights of today’s parking reforms include:

• Eliminating parking minimums downtown and within ½ mile of DART rail and streetcar stations

• Removing parking mandates for office, retail, industrial, and heavy commercial uses (except when adjacent to single-family homes)

• Reducing residential parking requirements and improving standards for loading zones and guest parking. Lowering or eliminating parking minimums for bars, restaurants, historic buildings, and places of worship

• Introducing tiered parking requirements for multifamily developments based on size, with no minimums for developments of 20 homes or fewer

Fort Worth is now home to 1 million people, just one of 13 U.S. cities to ever cross the threshold, according to census figures released Thursday. The city continues to be among the fastest growing in America, adding 23,442 residents between July 2023 and July 2024 to reach a population of 1,008,106, and pass Austin as the nation’s 11th largest city.

For 1 MSA to have 2 cities that surpass 1M residents!

Bankrupt Rite Aid is selling 64 stores in the Pacific Northwest to its drugstore chain rival CVS Pharmacy, while shuttering the remaining 1,000 retail locations in its fleet as part of its Chapter 11 wind-down.

Rite Aid on Thursday said CVS would be acquiring and operating some of its namesake and Bartell Drugs stores in Washington, Oregon and Idaho. Rite Aid has also struck a deal to transfer pharmacy assets from more than 1,000 of its store locations across the U.S. to operators including CVS, Walgreens Boots Alliance, Albertsons Cos., Kroger and Giant Eagle.

CVS issued a statement, saying it had "agreed to acquire the prescription files of 625 Rite Aid pharmacies across 15 states in areas that CVS serves and to acquire and operate 64 Rite Aid stores" in Idaho, Oregon and Washington. It didn't identify which locations it was buying.

LS Commentary -New Homebuilders: Do Buyers really need multiple floorplans if they do not look materially different from each other?

Is it a dream for Buyers to live in X30M or X40N?

Are these the best images you can use to inspire and help Buyers IMAGINE their new home?

Bloomberg: Embracing silence is all the rage in Tokyo. Soundproof apartments developed by Livlan have a waiting list of more than 6,000, up from just 200 in 2020. It’s all part of a global trend: The world is getting louder and people are seeking out quiet. For some, it means being able to scream freely in the confines of their own home.

In Big Cities, Peace and Quiet Is Becoming a Perk Worth Paying For As the world grows noisier, soundproof apartments, noise-canceling fabrics and “no-talking” hair salons are cropping up for people who like to keep things quiet.

LS comment: I will be looking to launch a separate newsletter and website with content such as case studies on all types of real estate, that is focused on the intersection of design, usability, architecture, and experience. For developers, builders and asset owners that are creating a unique product that is differentiated from your competition, that people will pay more for.

What is experiential real estate? Real estate people actually enjoy - want to go to - want to keep going to- enjoyable - usable -provides function and services - doesn’t make you depressed or make you want to leave - you’re willing to pay more for - is beautiful - is memorable - is architecturally interesting or stunning - is grammable (yes in retail, in hospitality, this is a goal) - service - just makes sense - lighting - sound - smells - fosters community - energy- ecosystem - it incorporates the environment - flow not just in the space but in how you go about your day and live

For the developer / owner- they can charge more. It’s unique. Tenants stay longer. It meets multiple needs beyond basic purpose of being retail, a home, an office, etc.

Do you have a project you’d like me to feature? I’m also looking to write about mini-cities and MPCs that are heavily focused on this lifestyle component.

WSJ: Demand from first-time home buyers has hit record lows with mortgage rates stuck near 7%. One corner of the market shows it is worryingly weak even with rates at 5%.

Big home builders such as D.R. Horton and Lennar that have their own lending arms have been funneling part of the profits from high house prices into subsidizing loans. Buyers of newly built houses can get a mortgage rate of around 5% from a major builder, compared with the 6.79% average rate on a 30-year loan for the week through May 8.

The cut-price loans are meant to entice buyers and help builders shift finished stock. But the sweeteners aren’t working well this spring. Home builders’ sales were weaker than expected in their latest quarter. PulteGroup said new orders from first-time buyers dropped 11% in the first three months of 2025 compared with a year ago. Builders now have more completed but unsold homes on lots than at any time since 2009.

This is likely a sign that young, prospective homeowners are losing even more steam. The dysfunctional housing market has split first-time buyers into two camps: Those who are still able to get on the property ladder in the existing-home market, and those who can only afford to buy from a builder with the aid of a subsidized mortgage.

People buying their first homes in the existing market are about a decade older than historical norms, at 38 years of age, according to Jessica Lautz, deputy chief economist at the National Association of Realtors.

Their median household income has shot up to $97,000, and last year they had a 9% down payment on average. These buyers had to wait until they were older and had higher incomes for homeownership to be affordable. The share of first-time buyers in the existing-homes market is at a record low.

Some first-time buyers are putting themselves into a vulnerable financial position to own a home. The delinquency rate on FHA mortgages, which tend to attract first-time buyers because of the loans’ small down-payment requirements, hit 11% in the first quarter, data from the Mortgage Bankers Association show. Barring a short-lived spike during the pandemic, this is the highest level since 2013.

D.R. Horton, America’s biggest home builder, said 63% of the loans closed by its mortgage arm in the company’s latest quarter were to first-time buyers. By comparison, a builder such as Toll Brothers does 70% of its business with wealthy move-up buyers or empty-nesters who have benefited from strong home-price appreciation and can use their equity to fund their next purchase.