Alarm Bells Are Ringing For Consumer Spending and Commercial Real Estate

Each one is going to be increasingly important to the direction of the economy and the markets as we head into 2024.

In today's column I am going to circle back on two key themes I have touched on several times in recent months. These trends are going to be increasingly important to the direction of the economy and the markets as we head into 2024. Unfortunately, both of these areas are seeing considerable deterioration.

The first theme is around consumer spending. Investors were well aware that October might be an inflection point for tens of millions of consumers as student loan repayments restarted after more than a three-year taxpayer funded hiatus. This is one of several factors that drove October retail sales down to a gain of just .1% from a revised .9% in September.

A weak consumer showed up in many well-known retail names this week as they reported third quarter results.

Target (TGT) posted it is weakest same store sales comps since 2009. The stock moved up sharply on quarterly results, but that was because they were less dire than predicted and margins as well as earnings were significantly higher thanks to an almost 20% reduction in inventory levels.

Walmart (WMT) was not nearly as lucky on Thursday after it projected lower than expected full year profit guidance. This triggered an 8% decline in the stock in trading yesterday.

The weak consumer environment also was on display at Home Depot (HD) , where big ticket items for goods over $1,000 fell by over 5% from the same period a year ago.

One of the few things deteriorating faster than the environment for consumer spending is the outlook for commercial real estate. It is hard to monitor the situation within many parts of commercial real estate (CRE) and not be increasingly alarmed. It seems every week another major property or two goes delinquent, defaults or enters into special servicing.

This week it was four office properties in Dumbo (the tech hub of Brooklyn) totaling some 750,000 square feet that were put in special servicing. When debt was last refinanced via $180 million worth of commercial mortgage-backed securities(CMBS) in 2018, the buildings were valued at $640 million.

They were also 94.9% leased, with Etsy (ETSY) (29.1%) and WeWork (WE) (21.2%), the latter which just filed chapter 11 bankruptcy, being the two largest tenants. Appraised value today? $207.1 million or 32 cents on the dollar.

I can't recall that kind of haircut on individual residential real estate even during the Housing Bust that triggered the Great Financial Crisis a decade and a half ago. I also wonder what the impacts to the financial system would be if all these types of properties and the loan obligations against them had to be marked to market. As many parts of the CRE space such as office and some retail seem like they are permanently impaired.

Unfortunately, I think we are going to start to see how far down that rabbit hole goes in this space in 2024.

At the time of publication, Bret Jensen was short WMT via bear put spreads.

Article courtesy of Bret Jensen of realmoney.thestreet.com

<< Back