August 2024 Update
Somewhere outside of DC last week, in a nondescript government office building, a U.S. Bureau of Labor Statistics employee was walking into work, listening to Simon & Garfunkel's 1968 hit "Fakin It", and they got a news alert, the headline - "Jobs report revision: US added 818,000 fewer jobs than believed".
Oh no, we're caught! Fake it till you make it fails once again! The BLS employee continued into work, not a care in the world. His job is perfectly safe no matter what. He walked through the door to get a head start on boosting the August jobs numbers, at the crack of 10:22am. First in again!
This drastic downward adjustment is something our newsletter readers shouldn't be surprised by, as we've highlighted the consistent downward revisions throughout the past year. I included a rant about it diminishing the quality of the data just last month!?
The Fed has essentially locked in a rate cut at the September meeting, with Powell declaring victory over inflation in his Jackson Hole speech, saying “My confidence has grown that inflation is on a sustainable path back to 2%”, as it hit 2.9% last month.?
WSJ called the Fed "Behind the Curve", early in the month, calling for 50bp cuts. Bloomberg ensured even a pick-up in inflation wouldn't derail cuts.
As August wrapped up, consumer spending, confidence, PCE, and July jobs all curbed talks of a 50bp cut, with current odds for September at about 2-1 for 25bp v. 50bp cuts. As of today, Fed Funds is expected to end the year at 4.25-4.50%, 100bp below current levels.?
MARKET INSIGHTS
The theme for this month is opportunity. The opportunity is to invest in a more certain medium-term outlook than we had 6 months ago, before pricing starts to reflect that more confident outlook. First, how are rate cuts creating opportunity. Then I'll highlight some early indications of larger players acting on this opportunity. Finally, I will cover the supply and demand sides of the equation.
1. How are Rate Cuts Creating Opportunity
As rate cuts are cemented, medium term debt yields are headed down, presenting new multifamily opportunities. Berkadia highlighted how a 50bp movement down in the 10Y Treasury allows for LTV to increase from 55% to 65% on average. This new opportunity is reflected in CRE investor sentiment, as 91% predicted 2H24 growth.
2. Larger Players Making Moves
We've continued to see larger, institutional firms signal they're seeing a bottoming out in CRE, some very literally saying "now bottoming out", as Goldman Sachs Asset Management's Global Head of Real Estate said recently. CBRE's institutional investor survey suggests US cap rates have peaked, and Green Street reported that commercial property values increased 1.5% in 2Q24, with half of that growth in June, indicating the low point for this cycle was December 2023.
Some more firms taking action this month that point to a positive outlook were:
Not only is macro data indicating an opportunity, but demand is also showing signs of long-term stability, as the renter population is growing 3x as quickly as homeowners. This multifamily demand is likely to persist, as the spread between rental and homeownership remains large ($1,114 according to Newmark?and $1,067 according to Realtor.com). Demand is being reflected in pricing, as rent growth nationally was up 0.8% Y/y in July, or 2.2% YTD.?
Oversupplied markets may also face some relief on the supply side. The supply demand gap continues to close, and signs point to that trend continuing, as multifamily developer confidence dropped in 2Q24, and apartment starts were down 21.8% Y/y.
Survive till '25 may be more than just a clever moniker after all!
OTHER THOUGHTS
One theme I will never pass up the opportunity to talk about is the generational move to the Southeast. WSJ recently reported that highly educated "20-somethings"?(their words not mine), are moving, you guessed it, Southeast, with 3 of the 5 top destinations as MathCap target markets; Raleigh-Durham, Austin, Baltimore, Atlanta, and Charlotte. The piece is based on an ADP report weighing wages, affordability, and hiring rate. If you click just 1 link, make it one of these 2.
The US housing market is expected to cross $50 Trillion in total value before the end of the year. It's currently at $49.6T, more than double its $22.5T cap just 10 years ago. Eight metros are each over $1T, and Charleston grew 4th fastest at 11.8% this year.?
Single-family rental (SFR) / Build-to-Rent (BTR) rent growth has outpaced traditional multifamily, rising 2.9% Y/y. It's expected to continue to outpace multifamily, with forecasts for 4% rent growth for SFR/BTR in 2025, and 5% in 2026. It's a somewhat niche product, growing more prevalent in the Southeast where there is more suburban land to develop nearby major metros and preferable zoning rules.
As always, thanks for your support.
Thank you,
Will Matheson