Daily Dose of Real Estate for October 7

Opening Summary

Welcome to today's edition of the Daily Dose of Real Estate, your comprehensive source for the latest trends and insights in the U.S. real estate market. As we navigate through the final quarter of 2024, the real estate landscape continues to evolve, shaped by economic shifts, policy changes, and market dynamics. Today's newsletter covers a wide range of topics, from the residential sector's resilience to the challenges facing commercial real estate, particularly in the office space. We'll also delve into the latest mortgage market trends and the performance of REITs and CMBS. Let's dive into the key takeaways and detailed analysis that will keep you informed and ahead of the curve in today's dynamic real estate environment.

Key Takeaways

1. Residential Market Strength: Home prices continue to show resilience, with the S&P CoreLogic Case-Shiller Home Price Index posting a 5% annual gain in July 2024, though slowing from earlier peaks.

2. Mortgage Rate Decline: The average 30-year fixed mortgage rate has dropped to 6.12%, its lowest level in two years, potentially boosting homebuyer demand.

3. Commercial Real Estate Challenges: The office sector faces ongoing struggles, with CMBS delinquency rates for office properties expected to rise to 8.1% in 2024.

4. REIT Performance: REITs are showing varied performance across sectors, with industrial and data center REITs outperforming office REITs.

5. Economic Indicators: The labor market remains strong, with private sector employment increasing more than expected in September, potentially influencing Fed policy and mortgage rates.

Economic Data and News

The U.S. economy continues to show resilience in the face of global uncertainties. The labor market, in particular, has demonstrated remarkable strength. According to the ADP National Employment Report, private sector employment increased by 143,000 jobs in September 2024, surpassing analysts' forecasts [ADP National Employment Report](https://mediacenter.adp.com/2024-10-02-ADP-National-Employment-Report-Private-Sector-Employment-Increased-by-143,000-Jobs-in-September-Annual-Pay-was-Up-4-7). This robust job growth suggests that the economy is maintaining its momentum despite concerns about inflation and interest rates.

The Federal Reserve's recent policy decisions have had a significant impact on the real estate market. In mid-September, the Fed cut its benchmark interest rate by 50 basis points, marking the first reduction since March 2020 [CNBC](https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html). This move has already begun to influence mortgage rates, with potential implications for both the residential and commercial real estate sectors.

Inflation, a key factor in Fed policy decisions, has shown signs of moderation. The consumer price index rose 2.5% year-over-year in August, down from 2.9% in July — the lowest index reading since March 2021. This trend in inflation could lead to further rate cuts, potentially benefiting real estate markets by improving affordability and stimulating investment.

Residential Real Estate Markets

The residential real estate market has demonstrated remarkable resilience in 2024, with home prices continuing to rise despite earlier concerns about affordability and higher interest rates. The S&P CoreLogic Case-Shiller Home Price Index, a key indicator of U.S. home prices, posted a 5% annual gain in July 2024 [CoreLogic](https://www.corelogic.com/intelligence/case-shiller-index-july-2024/). This increase, while representing a slight deceleration from the 6.5% annual gain seen in February and March, still indicates a robust housing market.

Several factors are contributing to the strength of the residential market:

1. Limited Inventory: Housing supply remains tight, with the U.S. facing a shortage of approximately 4.5 million homes, according to a recent Zillow analysis. This scarcity continues to put upward pressure on home prices.

2. Millennial Demand: Millennials, now in their prime home-buying years, are driving significant demand in the housing market. Their preference for homeownership is contributing to sustained market activity.

3. Improved Affordability: The recent decline in mortgage rates has improved affordability for many potential homebuyers. With 30-year fixed rates dropping to 6.12%, down from peaks above 7% in 2023, more buyers are entering the market.

The National Association of Realtors (NAR) reports that existing home sales, while still below previous years' levels, are showing signs of improvement. August 2024 saw a slight uptick in sales compared to July, indicating that buyers are adjusting to the new interest rate environment.

Looking ahead, CoreLogic projects that home prices will increase by 4.6% on average in 2024, following a 3.9% increase in 2023. This optimistic outlook is tempered by ongoing concerns about affordability in many markets, particularly for first-time homebuyers.

Mortgage Markets

The mortgage market has seen significant shifts in 2024, largely influenced by the Federal Reserve's monetary policy decisions and changing economic conditions. Here are the key trends and data points:

1. Declining Mortgage Rates: The average 30-year fixed mortgage rate has dropped to 6.12% as of October 3, 2024, according to Freddie Mac data [YCharts](https://ycharts.com/indicators/30_year_mortgage_rate). This represents a significant decline from the peak rates seen in 2023 and is the lowest level in two years.

2. Refinancing Activity: The Mortgage Bankers Association (MBA) reports that refinancing activity has picked up in response to lower rates. The refinance share of mortgage activity increased to 32.6% of total applications in the latest weekly survey.

3. Purchase Applications: Despite lower rates, purchase applications have shown a mixed response. The MBA's latest data indicates a slight decrease in purchase applications, suggesting that factors beyond interest rates, such as home prices and inventory, continue to influence buyer behavior.

4. Mortgage Lender Sentiment: Lenders are becoming more optimistic about the mortgage market. A survey by Fannie Mae found that more lenders expect purchase mortgage demand to increase in the coming months, particularly if rates continue to decline.

5. Non-QM Lending: There's been a resurgence in non-qualified mortgage (non-QM) lending, as lenders seek to cater to borrowers who may not meet traditional lending criteria. This trend is providing additional options for self-employed individuals and those with non-traditional income sources.

6. Forbearance Rates: The MBA reports that the share of mortgage loans in forbearance has decreased to 0.23% in December 2023, indicating improved financial stability for homeowners.

Looking ahead, mortgage market experts are cautiously optimistic. The Mortgage Bankers Association predicts that mortgage rates will continue to decline gradually, potentially reaching an average of 6.2% for 30-year fixed-rate mortgages by the end of 2024.

Commercial Real Estate Markets

The commercial real estate sector in 2024 presents a mixed picture, with significant variations across different property types and geographic markets. Here's an overview of the key trends:

1. Office Sector Challenges: The office market continues to face headwinds due to the ongoing shift towards remote and hybrid work models. Fitch forecasts U.S. CMBS office loan delinquencies to jump to 8.1% in 2024 and 9.9% in 2025 [Fitch Ratings](https://www.fitchratings.com/research/insurance/us-commercial-real-estate-deterioration-to-increase-in-2024-led-by-office-21-12-2023). This trend reflects the difficulties many office property owners are facing in maintaining occupancy and cash flow.

2. Industrial Strength: In contrast to the office sector, industrial properties continue to perform well. The average occupancy rate for industrial REITs stood at 94.59% in Q2 2024, demonstrating the sustained demand for logistics and distribution spaces.

3. Multifamily Resilience: The multifamily sector has shown resilience, with an average occupancy rate of 92.85% in Q2 2024. However, there are signs of moderating rent growth in some markets as new supply comes online.

4. Retail Recovery: Retail properties have seen improvements, with an average occupancy rate of 94.49% in Q2 2024. This recovery is driven by the adaptation of retailers to omnichannel strategies and the repurposing of some retail spaces.

5. Hotel Sector Rebound: The hotel sector has shown strong signs of recovery, with occupancy rates improving to 79.53% in Q2 2024. This rebound is fueled by the resurgence of both leisure and business travel.

6. Capital Markets: Commercial real estate transaction volume has been impacted by higher interest rates and economic uncertainty. The Mortgage Bankers Association estimates that total commercial real estate mortgage borrowing and lending totaled $429 billion in 2023, a 47% decrease from 2022.

7. Distressed Assets: There's an increasing focus on distressed assets, particularly in the office sector. Some investors are positioning themselves to acquire properties at discounted prices, anticipating potential forced sales due to maturing loans and refinancing challenges.

Looking ahead, the commercial real estate market is expected to remain bifurcated, with strong performance in sectors like industrial and multifamily contrasting with ongoing challenges in the office sector. The potential for further interest rate cuts by the Federal Reserve could provide some relief to the market, potentially stimulating transaction activity and easing refinancing pressures.

CMBS / REIT Markets

The Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets have experienced significant developments in 2024, reflecting broader trends in the commercial real estate sector:

CMBS Market:

1. Delinquency Rates: The overall Trepp CMBS Delinquency Rate inched up to 5.44% in August 2024 [Commercial Property Executive](https://www.commercialsearch.com/news/2024-cmbs-delinquency-rates/). The office sector, while still facing challenges, was not the primary driver of this increase in August.

2. Sector-Specific Trends: The multifamily delinquency rate rose 67 basis points in August, reaching 3.30%, the highest level in more than three years. This increase was largely driven by a single large portfolio loan.

3. Maturity Wall: The CMBS market is facing a significant maturity wall, with a substantial portion of outstanding commercial mortgage debt maturing in 2024. This presents both challenges and opportunities for refinancing and potential distressed asset acquisitions.

4. Special Servicing: The Trepp special servicing rate for CMBS office properties has risen significantly, indicating increased stress in the office sector.

REIT Market:

1. Performance Variation: REITs have shown varied performance across different sectors. Data center REITs and industrial REITs have been among the top performers, while office REITs continue to face challenges.

2. Dividend Yields: REIT dividend yields have remained attractive compared to other fixed-income investments, with variations across sectors.

3. Occupancy Rates: Average REIT occupancy rates by sector for Q2 2024 show strength in industrial (94.59%), retail (94.49%), and data centers (93.50%), while office (89.54%) and hotels (79.53%) lag behind.

4. Capital Raising: REITs have been active in capital markets, with some taking advantage of improved market conditions to raise equity and debt capital for acquisitions and refinancing.

5. M&A Activity: There has been an uptick in mergers and acquisitions within the REIT sector, as companies seek to consolidate and strengthen their market positions.

Looking forward, both the CMBS and REIT markets are likely to be influenced by broader economic trends, including interest rate movements and the performance of underlying real estate assets. The potential for further Fed rate cuts could provide support to these markets, potentially easing refinancing pressures and improving investor sentiment.

In conclusion, the U.S. real estate market in October 2024 presents a complex landscape with diverging trends across different sectors. The residential market shows resilience with continued price appreciation and improved affordability due to lower mortgage rates. The commercial sector faces challenges, particularly in the office space, while industrial and multifamily properties demonstrate strength. The CMBS and REIT markets reflect these broader trends, with opportunities and risks varying significantly across property types. As we move forward, market participants will need to closely monitor economic indicators, Fed policy decisions, and sector-specific developments to navigate this dynamic environment successfully.

Please check out Impact Capitol and ALFReD for yourself at www.impactcaptitoldc.com

Impact Capitol DC SitusAMC Mortgage Bankers Association The Mortgage Collaborative Mortgage Professional America National MI National Mortgage News National Association of REALTORS? National Association of Home Builders National Reverse Mortgage Lenders Association (NRMLA) Federal Reserve Board Federal Reserve Bank of New York Federal Reserve Bank of San Francisco Federal Reserve Bank of Minneapolis Federal Reserve Bank of Kansas City Federal Housing Finance Agency Federal Housing Administration and HUD Office of Housing Fannie Mae Freddie Mac The White House