🎙️ Heating Up

The Federal Reserve cleared the way for a September rate cut, citing “some further progress” toward its 2% inflation goal, which helped propel Wednesday’s stock surge. The S&P 500 just clocked its best day since February.

Policymakers said inflation remains “somewhat elevated,” which isn’t ideal by any measure. But Fed Chair Jerome Powell noted that the overall trend is encouraging, explaining that “the broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.”

“A reduction in the policy rate could be on the table as soon as the next meeting in September,” Powell added. “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate, but we’re not quite at that point.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Getting bullish on the AC business

• The surge in commercial real estate foreclosures

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

🆒 Air Conditioning Businesses Are Thriving

It’s the heart of air conditioning season, and one of the greatest beneficiaries of this time of year are the AC companies powering our homes, offices, and other businesses. You could say that the HVAC biz is on fire. 

Rising temperatures amid a warming climate have meant growing sales for many firms in the HVAC industry. There are no signs of the industry slowing down, as this summer is shaping up to be one of the hottest on record (last year was the hottest, per NASA). Some parents even suggest their kids enter the business, which is expected to soar in the coming decades. 

Bullish on AC: The global stock of air conditioners in buildings is forecast to grow from 1.6 billion to 5.6 billion by 2050, according to the International Energy Agency. The AC market has grown 7% per year over the past decade. 

• This summer, demand for air-conditioner replacements in the U.S. has surged due to record-breaking heat. Temperatures exceeded 100 degrees throughout the country, and over 150 million people were under heat alerts in July. 

Staying busy: Some HVAC businesses are struggling to meet the demand, and much of their work amid the record-breaking heat is centered on emergency repairs, often involving poorly maintained or old units. Some contractors are working 12- and 14-hour days, using cooling vests and magnetic umbrellas to cope with the heat. Supply-chain issues from the pandemic continue to affect the industry, too.

Demand for energy-efficient cooling options, like heat pumps, has kept businesses busy. One HVAC CEO said, “It’s always changing, and that, in turn, keeps us busy, which is a good thing… tell my guys, ‘This is what we’ve been looking for. We have three months to bring in the harvest.’ So we have to endure hardship, and the hardship is the heat.”

Why it matters:

The HVAC industry isn’t tiny. In the U.S., it generates around $150 billion in annual revenue and employs over 1.5 million people. Employment for HVAC mechanics, installers, designers, and engineers is expected to keep growing rapidly. 

Smart HVAC systems, green and sustainable tech, and AI are being adopted more widely. The goal is to enhance efficiency and reduce operational costs. 

• Residential HVAC services comprise over 50% of the U.S. market, followed by commercial services at over 30% and industrial services at 20%.

A heat pump is an appliance that uses electricity to heat and cool a building by moving heat from one place to another. They’re energy-efficient alternatives to air conditioners and furnaces and can be used in all climates — heat pumps are two appliances in one because they heat and cool your home. Though the upfront cost is higher, they lower homeowners’ utility bills — something many homeowners are seeking as temperatures keep rising.

Read more

More Headlines

📈 Nvidia, AMD jump as chip stocks rally after earnings

☕ Starbucks sales tumble as consumers reject high-priced coffee drinks

🌎 The most-visited websites in the world

✈️ After a rough five-year stretch, Boeing names Kelly Ortberg as new CEO

🤖 Why the AI future is already here; it’s just not yet productized

🏆 How much do athletes at the Paris Olympics earn for winning medals?

📺 News stars pivot as TV networks cut back

🏬 The Surge in Commercial Real Estate Foreclosures

Banks and other lenders are seizing distressed commercial properties at the highest rate in nearly a decade, signaling that the sector's downturn is entering a new phase and could be at a bottom. Emphasis on could be.

In the second quarter, the value of foreclosed and seized office buildings, apartments, and other commercial properties reached $20.5 billion, a 13% increase from the first quarter and the highest quarterly figure since 2015. 

What to know: The rise in defaults and distress is driven by high interest rates and the slow return of workers to office buildings. Until recently, many lenders hesitated to take over properties, hoping for a recovery — and to avoid foreclosure expenses and losses.

• "Lenders will do everything in their power to avoid that," one analyst told The Wall Street Journal. 

Ripple effects: With more lenders concluding that obsolete office buildings won't regain their former value — even if interest rates drop — distress is moving through the financial system. That’s driven increased sales of foreclosed properties and distressed mortgages, as well as more short sales, where lenders and borrowers sell troubled properties for whatever they can get.

Commercial property values could deteriorate further if the U.S. economy falls into recession, leading to layoffs and reduced office space demand.

• Office properties are the most troubled. In the second quarter, the volume of seized office properties jumped by about $5 billion from the second quarter of 2023. Apartment buildings, affected by higher interest rates and new supply, saw a $975 million increase during the same period.
  

• Historically, surges in foreclosure activity have signaled market bottoms. 

Case study: In Washington, D.C., State Farm Life Insurance sold an office building near the White House for $17.6 million, over 70% below the owner's 2010 purchase price.

• "Lenders are more dispassionate about values, and that’s a sign of a cycle moving toward a bottom," said one developer who has bought two discounted office buildings in D.C. for residential conversion.

Small banks, especially those with assets under $10 billion, have increased their foreclosure pace. 

Why it matters:

Even if the market is nearing a bottom, the commercial property industry's pain is expected to continue, regardless of what the Federal Reserve does this fall. 

• "Risk in commercial property will be with us for some time, probably for years," said Fed Chairman Jerome Powell said in July.
  

• It’s worth noting that despite such concerns, foreclosures and property seizures remain far below the levels seen during the 2008-09 financial crisis. 

Walk away and not fight: In 2013, the total value of foreclosed and seized properties held by lenders rose to over $45 billion, more than double today's amount.

But today, office-building owners are more likely to walk away from their properties than during the financial crisis, when lower interest rates and recovery hopes led investors to hold on to their buildings. Nowadays, owners are increasingly giving up, often working with lenders on short sales, which aren’t usually counted as foreclosures.

• "This cycle, a lot of investors believe office values are challenged," said one managing director. "They’re saying: 'Hey, I’m going to just walk away and not fight.'"

Read more

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Quick Poll

On Monday, we asked: How many cruises have you taken in your lifetime?

— Over one-third of respondents haven’t taken a cruise in their lifetime, while over 40% have taken one or a few.

— “Not a big fan of being confined to a ship,” one reader said. “Really not much to do other than drink and converse with other passengers. If you don't like those two things then find another voyage.” One person wrote, “At one time I always wanted to go on one. However, as I get older, I’d rather just spend time on an individual island. Also, the pictures and videos I see look like it’s just a big drunken party.”

— One reader who has taken over 10 cruises said: “At this point, can't stand them but grateful for the past opportunity to travel the seven seas.” Another in the same boat wrote: “Will be 6 cruises of our 15 total between Nov 23 and Nov 24. We are baby boomers mid-60s. Just disembarked from Virgin Voyages for 2nd time. Alaska last month. Norway/Iceland last fall. Fall color cruise New England in September and another Virgin in October. Can see the younger demos much more so on Virgin. Really depends on the itinerary and cruise line.”

See you next time!

That's it for today on We Study Markets!

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