Location Strategy Chartbook 08.29.2026

Federal Reserve Chairman Kevin Warsh signaled the central bank may not be done fighting inflation with higher interest rates.

The remarks were his most substantive since he took over this spring, and investors took them as a sign the Fed is more likely to raise rates. Warsh said he saw little sign that borrowing and lending conditions were restraining the economy, and that better inflation readings this summer hadn’t convinced him the underlying trend was improving.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he said Friday in his first speech as Fed chairman, a highly anticipated debut at the Kansas City Fed’s annual symposium in Wyoming.

Traders raised the odds of a rate increase next month to around 60% from 35% on Thursday. Warsh himself stopped short of that, offering no hint about the Fed’s next move, in keeping with his approach to how the central bank should communicate less. “I stand here today committed to a discipline, not to a decision,” he said.

Resurgent debt worries were the backdrop to Treasury Secretary Scott Bessent’s unusual bond market intervention last week. But his firepower to buy back long-term bonds is inherently limited by the huge federal deficit.

To appreciate why, it helps to understand how markets looked past the huge deficits that followed the 2008 financial crisis. These reached nearly 10% of gross domestic product in the government’s 2009 fiscal year, and stayed above 4% of GDP—relatively high by historical standards—through 2013.
 
During this time, the Fed kept short-term rates at zero, bought bonds to bring down long-term rates and signaled clearly to markets that these arrangements were for an extended period. All this helped to bring the yield on 10-year Treasurys down and stay remarkably low—below 2% for much of this period.
 
Even when the Fed began raising rates in late 2015, it used forward guidance to signal a cautious tightening path, keeping bond markets calm.
 
How are things different now? For one, the fiscal picture is objectively worse. The size of deficits relative to the economy was even bigger during the Covid crisis than in the Great Recession, and they have stayed bigger since. Five years after the deficit peaked in 2009, it came in at just 2.8% of GDP in fiscal 2014. At a similar point today, it stands at nearly 6%.
 
Second, the Fed has been much less reassuring. Late in former Chair Jerome Powell’s term, the outlook for rates became unclear. This is even more the case under Warsh, who has eschewed forward guidance. Worse, there was a disconnect at Warsh’s last press conference between his strident rhetoric on achieving price stability and the lack of explanation for why he wasn’t already raising rates.

Real disposable income has effectively flatlined for well over a year in level terms and is well below the pre-pandemic trend.

Americans are dining out again, according to Bank of America card data. Restaurant spending and transaction growth have both improved meaningfully in 2026. Some consumer food spend also appears to be shifting from grocery stores to restaurants,
helped by easing restaurant inflation, trade-offs in the grocery space, and faster after-tax wage growth than a year ago.

The restaurant recovery is being led by younger and lower-income consumers, supported by improving wage growth, according to BofA internal data. Lower-income households are now posting the fastest restaurant spending growth among
income groups, while Gen Z leads all generations by a wide margin.

Consumers are favoring local restaurants over large chains. Despite accelerating restaurant spending, some national chains are not fully participating in the rebound. Spending growth appears strongest at independent restaurants, regional operators and other non-chain establishments.

Americans are spending more money on looking better, feeling better and living longer as part of what’s been dubbed the “vanity economy.” Shopping center owners are cashing in. Spending on beauty, wellness and specialty fitness services rose from $86 billion in 2020 to $132 billion in 2025, helping to drive that vanity economy, as CBRE calls it.

Demand for specialty fitness and beauty services is getting a lift from a combination of social media, a growing focus on wellness and the potential influence of GLP-1 weight-loss drugs, according to real estate professionals. That includes boutique gyms, namely small fitness studios offering limited-size classes or personal training, with upscale decor and — often — premium prices.

“As U.S. consumers prioritize wellness — 84% according to McKinsey — and direct their spending toward products and services that improve quality of life, fitness studios can no longer limit themselves to exercise alone,” Anjee Solanki, national director of retail services for Colliers, wrote in April. “A new wave of centers now emphasizes sleep, nutrition, and more personalized forms of movement. ... Underlying this evolution is a growing recognition that health is not one-size-fits-all.”

Houston's downtown office market is struggling with one problem above all others: too many old buildings and too few tenants willing to occupy them.

Vacancy in the CBD reached 26.3% as of the third quarter of 2026, leaving roughly 13.1 million square feet of available space. Newer and renovated office buildings continue to attract tenants, while much of Downtown's aging inventory faces declining demand and mounting leasing challenges.

The contrast is stark. Buildings completed since 2016 are approximately 95% leased, while properties built before 1990 are only about 70% occupied. More telling, roughly 90% of all available office space in the central business district is in buildings constructed before 1990.

Tenants increasingly prioritize modern amenities, energy efficiency, flexible floor plans and high-quality common areas. Many older downtown buildings were designed decades before those preferences emerged and now struggle to compete against both newer central business district towers and suburban alternatives.

Texas Tower, constructed in 2021, is approximately 99% leased, while Bank of America Tower and several recently renovated properties have also maintained strong occupancy. Renovated properties such as 5 Houston Center and GreenStreet have performed well, demonstrating that tenants remain willing to lease downtown space when the product meets modern expectations.

The market absorbed several large move-outs over the past year, including NRG's departure from more than 700,000 square feet at 910 Louisiana St. While leasing activity continues, most transactions are relatively small, typically ranging from 20,000 to 25,000 square feet, making it difficult to backfill large blocks of vacant space.

Through July 2026, group demand at luxury hotels has only marginally exceeded demand levels from 2019. Meanwhile, group demand for upper upscale hotels that sit one tier below the luxury segment, offering high-end comfort at a lower average price point, remains well below pre-pandemic levels.

However, the lackluster demand from groups hasn't stopped upper-end hotels from raising room rates. The average daily rate, or ADR, for groups seeking upper-upscale rooms has increased by more than 20% over its 2019 level, while the ADR for groups at luxury-level hotels has skyrocketed by nearly 40% over the same period. The changes in pricing underscore hotel operators’ ability to generate revenue despite only modest gains in room demand.

In 2019, hotels in the upper upscale scale sold around 66.6 million group rooms. For the 12 months ended in July 2026, the total number of rooms sold had declined to 61.4 million. In contrast, luxury hotels sold 28.9 million group rooms in the 12 months ended in July this year, slightly above the 28.3 million rooms sold in 2019.

The lack of growth in demand for group rooms after the pandemic reflects several changes in corporate travel and meetings. Remote collaboration tools have improved and reduced the need for some in-person gatherings that previously required travel. Industry participants comment that corporations are shifting more internal meetings online or holding smaller, more targeted meetings rather than large regional or national events. At the same time, businesses continue to scrutinize travel budgets, which may also limit the frequency or size of group events.

Pricing power for luxury group rooms is evident not only in absolute ADR levels but also in the growing rate premium over upper-scale group rooms. Luxury group ADR increased from approximately $253 in 2019 to $354 through July 2026, while upper-upscale group ADR increased from approximately $187 to $231 during the same period. The group ADR premium expanded from around $66 in 2019 to more than $120 through July 2026. The widening premium suggests upper-upscale hotels have not priced group rooms as aggressively because group room demand has not grown.

Elevated mortgage rates have weighed on affordability and dampened housing demand. After dropping below 6% in late February for the first time in more than three years, the average 30-year fixed mortgage rate climbed steadily through the spring and summer as long-term Treasury yields rose amid persistent inflation concerns and fiscal uncertainty. The current rate sits at 6.7%, according to Freddie Mac.

Demographic trends may be contributing to the market's malaise. U.S. population growth averaged roughly 0.7% to 0.9% annually during much of the mid-2010s before slowing near the end of that decade. After a temporary increase in 2022 and 2023, driven largely by immigration, the Congressional Budget Office estimates population growth slowed to 0.2% in 2025 and projects roughly 0.3% annual growth through the remainder of this decade. Slower population growth implies slower household formation and a more modest pace of housing demand growth over time.

Housing starts fell 13.5% from a year earlier in July, while single-family starts were down 15.7%. Completions also remained below year-ago levels. However, building permits increased during the month, suggesting builders continue to position themselves for future demand. Housing starts fell 12.4% from June on a seasonally adjusted annual rate.