Location Strategy Chartbook 06.21.25

With markets expecting no chance of a central bank move this week, the Federal Open Market Committee kept its key borrowing rate targeted in a range between 4.25%-4.5%, where it has been since December.

Along with the rate decision, the committee indicated, through its closely watched “dot plot,” that two cuts by the end of 2025 are still on the table. However, it lopped off one reduction for both 2026 and 2027, putting the expected future rate cuts at four, or a full percentage point.

The plot indicated continued uncertainty from Fed officials about the future of rates. Each dot represents one official’s expectations for rates. There was a wide dispersion on the matrix, with an outlook pointing to a fed funds rate around 3.4% in 2027.

Seven of the 19 participants indicated they wanted no cuts this year, up from four in March. However, the committee approved the policy statement unanimously.

Economic projections from meeting participants pointed to further stagflationary pressures, with participants seeing the gross domestic product advancing at a 1.4% pace in 2025 and inflation hitting 3%.

While the US dollar has lost some value this year, the case for a dramatically weaker dollar has become somewhat overstated, according to Gurpreet Garewal of Goldman Sachs Asset Management.

Garewal acknowledges that “global investors have become concerned about US policy and see improving opportunities elsewhere.” This, combined with the widespread perception that the dollar has been overvalued, has contributed to the dollar's loss of value compared with a basket of major currencies.

Indeed, while US stocks have recovered from their post-tariff-announcement drop, the country's currency has not.

The Trump administration's tariffs may have a slightly smaller effect on the US economy than previously estimated, according to David Mericle, chief US economist in Goldman Sachs Research:

Inflation readings, while offering only limited evidence at this point, suggest a slightly smaller impact on consumer prices and therefore on real income and consumer spending than was estimated earlier. Broad measures of financial conditions have eased to roughly pre-tariff levels. Measures of trade policy uncertainty have moderated a little as the US and its trade partners take steps toward de-escalation.

Goldman Sachs Research hasn't made any changes to its standing assumption that the US's effective tariff rate will ultimately rise by about 14 percentage points. Even so, our economists raised their GDP forecast for the fourth quarter of 2025 (year-over-year) to 1.25% from 1%. They estimate the unemployment rate will peak at 4.4%, down from the previous estimate of 4.5%. Meanwhile the probability of recession over the next 12 months has fallen to 30% from 35%.

Millionaire bonanza. The US added more than 1,000 new millionaires per day last year, with surging stocks driving the increase. There were more than 684,000 created worldwide in 2024, over half of whom were in the US, according to UBS’s 2025 Global Wealth report. But for average riches per adult, Switzerland topped the list.

There is a consensus among major publicly traded homebuilders that the spring 2025 housing market—especially in many parts of the Sun Belt, where inventory has climbed above pre-pandemic 2019 levels—was softer than they expected. While some builders have started focusing more on maintaining margins—and some have slowed their housing starts—Lennar has continued to push forward. Instead of defending short-term profitability, Lennar—America’s second-largest homebuilder—is using this period of housing market softness as an opportunity to capture market share and maintain sales pace through bigger affordability adjustments. The ResiClub team reviewed Lennar’s Monday earnings report and listened in on its Tuesday earnings call. Here are our top 9 takeaways:

Lennar: “All of the markets we operate in experienced some level of softening”

According to Lennar, it has observed at least some “softening" across all its markets this spring. Even its "strongest" markets have lost some momentum

“All of the markets we operate in experienced some level of softening [this quarter]. Even in our strongest performing markets, buyers needed the assistance of incentives. Incentives will vary across the different markets, but primarily in the form of assistance with mortgage rate buy downs. The markets that experienced more challenging conditions during the quarter were the Pacific Northwest markets of Seattle and Portland, the Northern California markets of the Bay Area and Sacramento, the Southwestern markets of Phoenix, Las Vegas and Colorado, and some Eastern markets such as Raleigh, Atlanta and Jacksonville.” Lennar co-CEO John Jaffe said on their June 17, 2025 earnings call.

Despite some profit margin compression, almost every major homebuilder entered 2024 with gross margins still above pre-pandemic 2019 levels. However, in recent quarters, margin compression has returned—especially for Lennar. During their December 2024 earnings call, Lennar CFO Diane Bessette stated that they anticipate further margin compression, with gross margins expected to range between 19.0% and 19.25% for Q1 2025. Lennar’s Q1 2025 gross margin ended up being 18.7%—and its Q2 2025 gross margin on home sales came in on Monday at 17.8%. On their June 17 earnings call, Lennar co-CEO Stuart Miller said he expects their gross margin to be 18.0% in Q3 2025.

Amid the softening market, Lennar has chosen to maintain sales pace over margin. Among the big builders, it has been the most aggressive on that front. It’s now spending 13.3% of final sales price on incentives—and doing some of the biggest net effective price cuts in the Sun Belt—in order to keep sales up.

“We are not there yet, but we are certain that we are finding a floor with margin and getting close to building it back even in a softer housing market environment. As the current market softness unfolded, we focused on consistent [sales] volume by matching our production pace with our sales pace. Although some have questioned why we have maintained volume rather than protect our margin, we are very clear and steadfast on our strategy. Historically, we protected margin as market conditions stalled, and we generally led the way in protecting short term profitability. But we learned through those times that once we step backwards and lose momentum, it becomes increasingly more and more difficult to restart and recapture volume. The machine slows and does not restart easily. We have concluded that by maintaining volume, we can create new efficiencies and new solutions that are durable for the future and will result in meaningful long term efficiencies in our cost structure.” Lennar co-CEO Stuart Miller said on their June 17, 2025 earnings call

Last week’s news that inflation rose less than anticipated cheered market participants who had expected consumer and producer price hikes in reaction to the recent imposition of tariffs on most imports into the United States. However, tariffs are not the only policy proposed or advanced by the administration that risks re-igniting inflation.

Immigration and budgetary policy could also play a role.

The consumer price index, a chief measure of inflation, rose just 0.1% in May over the previous month. The index rose 2.4% over the year, similar to annual increases in March and April. Cooling energy prices compensated for higher prices among other categories, particularly in service sectors. Core inflation, which excludes the volatile food and energy categories, also rose 0.1% over April but gained 2.8% over the year.

Prices of goods, which are more likely to be subject to tariffs, were virtually flat compared to a year ago, falling by 0.1%, while prices of services rose by 3.7%. That was largely due to still-rising rents and rent equivalents, but medical care, personal services (which include legal and financial services) and restaurant meals were also higher over the year — and are still rising on a monthly basis.

The importance of the services side of the economy, which is generally labor-intensive, has led the Federal Reserve to monitor labor market developments carefully, particularly when it comes to wage growth. Labor costs constitute a larger share of service costs, and higher wages in those industries could easily enflame inflation.

Hence, there is concern over the current administration’s more restrictive immigration policies, which would accentuate the slowdown in labor force growth, exacerbated by an acceleration of baby boomer retirements. Fewer workers could restrict businesses’ ability to expand and put pressure on wages.

The impact of more restrictive immigration policies across sectors will likely vary, depending on their reliance on migrant workers. According to research by the American Immigration Council, or AIC, construction and agriculture are the two sectors where migrants account for the largest share of the workforce, at 13.7% and 12.7%, respectively. Other migrant-dependent industries include hospitality, transportation and warehousing, wholesale trade and manufacturing. Overall, the AIC estimates that undocumented workers account for about 4.6% of the national workforce.

Thus, the broader impact of slower immigration on the economy is certain to be meaningful. Besides reducing labor supply, it could affect consumer spending, the driving force of economic growth. Spending would likely fall due to the loss of migrant household purchases. The economy was already expected to weaken as importers were widely expected to pass the increased costs from tariffs onto consumers, raising prices and weakening demand.

U.S. multifamily construction starts dropped sharply in May as the industry copes with economic and tariff uncertainty, as well as elevated interest rates. Even so, permits rose, offering the sector what one trade group considers a positive sign.

Apartment starts were down 30% from April, according to monthly data released by the U.S. Census Bureau. The May start rate for units in buildings with five or more units was 316,000 — the lowest since November's 266,000. The Census Bureau identified the May numbers as preliminary.

The collapse in multifamily starts completely erased the improvement registered so far this year, according to economists at Wells Fargo. Unit starts had increased in February, March and April. However, multifamily groundbreakings in May were at their weakest since last fall.

Monthly multifamily start data is volatile historically, according to the National Association of Home Builders. For example, over the past 12 months, monthly total starts have ranged from 266,000 units in November 2024 to 454,000 units in April, according to census data.

While starts are down, new multifamily permits issued gained 1.4% in May from April and were 13% higher on an annual basis, the census data showed. This suggests that May's deterioration in multifamily construction starts "was more noise than signal," NAHB noted.

Major U.S. supermarket chain Kroger plans to close about 60 stores across the country over the next 18 months, addressing some streamlining it couldn't get to while its failed merger with Albertsons Cos. was pending.

The Cincinnati-based grocery chain — operating 2,730 stores under its own name as well as under such banners as Fred Myers, Fry's Food Stores and King Soopers — discussed the store closings in reporting its first-quarter earnings. Kroger took a $100 million impairment charge in the quarter due to the planned trimming of its store count.

Kroger did not disclose the locations of the stores it plans to close.

Even as Kroger is closing several dozen stores, it said it plans to accelerate new store rollouts in 2026.

"We don’t have a number to share with you this morning, but it’ll be north of the 30 that we open this year," Sargent said, adding that new stores are the biggest driver of market share gains.

"We’re looking at geography across the country," he said. "There’s no specific area. We are probably going to favor areas of the country that are growing faster than others. We’re going to look at where we have competitive opportunities for growth within cities that we operate in. But it’s really scattered around the country, and there’ll be a variety of store formats, although the Marketplace store is a terrific format, and many of them will be Marketplace stores."

One of Kroger's new stores is planned for Aurora, Colorado. It will be a 123,000-square-foot King Soopers superstore.

Office Space in Town (OSiT), the London flexible office space provider, has added beds for staff to sleep in to its offer in what it is describing as a "new era for office life", one that inevitably raises questions about work/life balance.

The launch comes as Wise's new headquarters in London, developed by HB Reavis, have opened with saunas for staff to meet in, the latest example of the battle to provide top-of-the-range amenity and luxury in offices to recruit staff.

The Cabins, which OSiT describes as a suite of five luxury bedrooms, is being launched at its Monument offices in response it says to increasing numbers of commuters wanting to "play late in the city and skip the morning rush hour", and to accommodate international clients looking for a "convenient and luxurious hotel-quality stay close to the office".

The group said the bedrooms form part of a wider vision to create ‘Omni-Offices’ which it describes as a "one-stop shop for all of OSiT’s tenants including nurseries and restaurants to healthcare clinics, yoga studios and dog grooming facilities".

The company said it is now seeking to acquire new, larger Zone 1 London sites ranging from 100,000 to 200,000 square foot to allow it to roll out the vision.

It says its London flexible office locations - including ‘Alice in Wonderland’ in Waterloo, ‘Nautical’, in St Paul’s and ‘Monopoly’ in Liverpool Street - are already equipped with a wide range of high-quality amenities including rooftop bars, gyms and "speak easy social lounges".

Occupiers of The Cabins at OSiT Monument can visit The Deck, a rooftop café and bar open late with views over the River Thames.The five-storey, 83,000-square-foot office pioneers the use of a sauna, nap pods, massage chairs, and a fitness studio.

The addition of luxury beds for staff to sleep in will inevitably lead to questions about work/life balance, particularly at long-hour jobs such as the legal profession.

Giles Fuchs, co-founder of Office Space in Town, explains that the way people have worked has changed and the spaces people work in must evolve with it.

Peter Hall, Global COO/Head of Innovation for legal services firm Cognia Law and a tenant of OSiT Monument, has tested The Cabins and says it is very convenient to accommodate visitors close to the office. He says it simplifies out of time zone calls and meetings that need to be conducted from the office.

It is clear that tenants are demanding more and more from their offices. Dorian Wragg, Partner and Head of Commercial Property at Bruton Knowles, points out: “There’s a clear shift away from outdated, period-style office buildings that no longer meet modern needs. From smart technology and biophilic design to quiet zones and community hubs, the office of 2025 is about creating an experience that brings people together.”

A key question is the cost of introducing this amenity worth it for landlords and office operators?

A recent report from London offices adviser RX London in partnership with autonomous amenity and gym provider for real estate Refit showed that wellness facilities and gyms in particular were proving crucial - and cost-effective - in securing occupiers.

It found that previously overlooked areas, such as basements and storage rooms, are now being reimagined as wellness hubs to maximise the use of low-value spaces but also creating a unique selling point for office buildings for potential occupiers.

Henry Sims, co-founder and COO of Refit, said at The Carter building in London the installation of state-of-the-art gym and studio facilities has exceeded expectations. "Our tenant survey revealed that 20% of respondents cancelled external gym memberships, while over 50% reported increased likelihood of regular office attendance due to these new amenities.

“While the capex was covered by the developer, the occupier was happy to cover the running costs via the service charge, creating an outsized return on investment for both parties.”

Helena Pryce and Hannah Buxton and RX London, who co-authored the report, say wellness amenities have moved from being a luxury to a necessity.

"By investing in multi-functional wellness spaces, landlords are not only improving the lettability of their assets and stickiness of their income, but also contributing to the health, happiness, and productivity of the workforce occupying their spaces," they write.

But landlords will be watching the performance of additions such as beds and saunas to see if they become an essential for staff going forwards, or investments that begin to erode important differences between work and home life.