The Washington Post had an article in Sunday’s paper discussing the explosive growth of office space in Austin, Texas. Per the article: “Here, about 6 million square feet of new office space will hit the market in the next few years — equivalent to 105 football fields. Between spaces completed since 2020 and what’s still in the pipeline, the office market will grow nearly 25 percent — the fastest rate on the continent. The graphic below from the article highlights the new office space coming. While Austin is attracting many new residents, it appears much of this new office space may go vacant. Cushman & Wakefield expect that nearly 90% of the coming properties will open vacant.
Austin’s problems are symbolic of what is being felt throughout the country. Exceedingly low-interest rates of the prior five years made the construction of office space financially rewarding. Investment dollars chased new construction projects, many of which were not pre-leased. The supply problem is significantly worsened by the work-from-home movement. As the article states:
Zoom out a bit more, and cities nationwide are trying to figure out what comes next. New York and San Francisco are overwhelmed with untapped office space. Some economists fear that midsize cities, from Minneapolis to Memphis, could be even more vulnerable to a kind of “doom loop” that starts with empty offices and canceled leases, and spirals into something scarier for downtowns and city coffers.
What To Watch Today
Market Trading Update
The market rallied off of support at the 20-DMA yesterday. As we noted in yesterday’s Before The Bell commentary, the market is currently trapped between the 200-DMA as support and the 50- and 100-DMA cluster as resistance. With investors underweight equity exposure and a negative bias, the markets will likely have a positive bias heading into month’s end. We are maintaining our equity exposures for now and continue rebalancing our holdings and sector weightings to align more closely with our benchmark index.
CVS Jumps As Competitor Rite Aid Fails
CVS shares jumped Monday morning as Rite Aid, one of its main pharmacy competitors, filed for bankruptcy. In addition to poor sales and increased competition from Target, Amazon, Costco, and Walmart, Rite Aid is also dealing with lawsuits from opioids. In particular, the Justice Department is going after Rite Aid, claiming they knowingly distributed “unlawful prescriptions for controlled substances.” CVS and other competitors may have an opportunity to buy Rite Aid stores or other businesses as the company progresses through bankruptcy. Despite the bankruptcy filing, Rite Aid plans on continuing operations. Per their CEO:
“With the support of our lenders, we look forward to strengthening our financial foundation, advancing our transformation initiatives and accelerating the execution of our turnaround strategy,” … “In doing so, we will be even better able to deliver the healthcare products and services our customers and their families rely on now and into the future.”
The graph below compares Rite Aid to Walgreens and CVS. CVS has held up much better, mainly because they have diversified into insurance, managing benefits, and health services. Additionally, it is much less reliant on its pharmacies, which are up against the increased competition.
Volatility Generates A Buy Signal
The VIX – S&P 500 volatility index rose to the top of its 84-day trading range and has started to reverse lower. Over the last year, when the VIX hit the top of its recent trading range, a rally kicked off. Mind you, the rallies have generally been short-term in nature. The most recent signal coincides with other bullish technical indicators. Below, we share commentary and a graph from last weekend’s Newsletter.
As shown, that happened as stocks pushed higher, triggering the MACD “buy signal.” As we will discuss below, that trigger also signals the start of the “seasonally strong” period of the year. The market did run into resistance at the 50- and 100-DMA but continues to hold above short-term support at the 20-DMA. With the market not yet overbought, we could see some consolidation at these levels into next week before another attempt at resistance.
Tweet of the Day
Please subscribe to the daily commentary to receive these updates every morning before the opening bell.
If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.