The Small Balance Intersection Update - August 12, 2024

Stat of The Day:

111%

The increase in investment-banking and securities employment in Texas in the past 20 years, compared to 16% in New York , according to data from the Bureau of Labor Statistics. “Wall Street remains the center of the investment universe, but Y’all Street is gaining rapidly,” said Ray Perryman, president of the economic research and analysis firm the Perryman Group.?

Insurance Row

Life Insurers Navigate CMBS Turbulence with Resilience

Despite concerns about commercial mortgage-backed securities (CMBS) and a spate of ratings downgrades, the US life insurance industry appears relatively insulated from a significant meltdown. As of the end of 2023, life insurers held $151.86 billion in CMBS, representing only 2.8% of their total assets. CMBS impairments for life insurers surged to $299.7 million in 2023, the highest level in a decade, but this still represents a small fraction of their overall exposure. While there have been high-profile losses, such as the impairment of BWAY 2015-1740 bonds tied to a Manhattan office building, the vast majority of insurers' CMBS holdings remain highly rated, with 76.2% rated equivalent to AAA.

A concerning trend is the widening gap between the fair value and carrying value of CMBS holdings, reflecting market unease and rising interest rates. However, Markit data suggests that the current valuations of many CMBS assets held by insurers are actually higher than their reported year-end 2023 values, indicating potential resilience. Furthermore, life insurers' exposure to office and retail properties, which have been particularly volatile, is relatively limited, with mixed-use properties dominating their portfolios. This suggests that while risks remain, the industry is not on the brink of a significant crisis.

For further details, you can access the full report here .

Delinquency Drive

Office and Multifamily Loans Drive CMBS Delinquency Rate Higher in July

Life Insurers Navigate CMBS Turbulence with Resilience In July 2024, the U.S. CMBS delinquency rate increased by 17 basis points to 2.62%, driven primarily by rising office and multifamily loan delinquencies, according to Fitch Ratings. Office loans accounted for the largest share of new delinquencies at $607 million, while multifamily loans contributed $349 million. Maturity defaults made up 64% of the new delinquencies, signaling heightened refinancing risks. However, the overall volume of resolutions decreased to $409 million from $1.02 billion in June, indicating a slowdown in efforts to address delinquent loans.

Special servicing volumes slightly decreased, with notable reductions in office loan servicing, including the return of the significant 280 Park Avenue loan. Despite these challenges, new CMBS issuance remained robust, with ten transactions totaling $6.5 billion in June 2024. Specific loans such as the Selig Portfolio and The Centre multifamily complex emerged as some of the largest new delinquencies. The report also highlighted regional variations, with mixed-use properties and retail malls showing different delinquency trends. As the market continues to navigate these issues, the delinquency rate's upward trajectory suggests that the stress in certain sectors, especially office and multifamily, is far from over.

For further details, you can access the full report here .

Single Family Rental Rise Road

National Single-Family Rental Market Sees Inventory and Price Increases in H1 2024

The National Rental Report H1 2024 from HouseCanary offers a comprehensive analysis of the U.S. single-family rental (SFR) market, reflecting the broader economic pressures and housing trends. The report shows a significant 16.7% year-over-year increase in rental listing inventory, coupled with a 15.4% rise in days on market, indicating a more balanced but still competitive rental environment. National median rent reached $2,444, a 2.3% increase from H1 2023, with continued growth expected despite high interest rates that are deterring home buying.

The report highlights specific market dynamics across 43 states and 153 metropolitan areas. Western states like California, Arizona, Nevada, and Colorado are seeing heightened demand for rentals, driven by factors such as in-migration, job market strength, and favorable climates. At the MSA level, the report identifies areas with the largest increases in days on market, such as Greenville-Anderson-Mauldin, SC, which saw a 145.2% rise, signaling potential oversupply or shifting demand patterns.

Conversely, MSAs like Oklahoma City, OK, experienced the largest decrease in days on market, suggesting growing demand. The report also notes a notable rise in inventory in areas like Cape Coral-Fort Myers, FL, and Savannah, GA, while regions such as San Jose-Sunnyvale-Santa Clara, CA, saw significant decreases in inventory, reflecting shifting market dynamics.

Rental prices are also analyzed, with Anchorage, AK, and Louisville, KY, among the MSAs with the largest annual increases, while Florida saw some of the most significant price declines, indicating regional market corrections. The most expensive rental markets continue to be dominated by Californian MSAs, with San Jose-Sunnyvale-Santa Clara, CA leading the list, while the most affordable markets are found in the Southern and Midwestern regions, with Little Rock-North Little Rock-Conway, AR being the least expensive.

The report concludes that while the SFR market remains robust, continued high interest rates and economic uncertainty are likely to sustain demand for rentals over home purchases for the remainder of 2024.

For more details, you can read the full Mortgage Point article here .

Like-Kind Lane

Maximizing Tax Deferrals with 1031 Exchange Strategies

The 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a key tax-deferral strategy for real estate investors, allowing them to defer capital gains taxes by exchanging one investment property for another of like-kind. This strategy has specific requirements, such as identifying a replacement property within 45 days of selling the original property and completing the purchase within 180 days. To fully benefit from the tax deferral, the new property must be of equal or greater value than the one sold, and all proceeds from the sale must be reinvested.

There are several ways to structure a 1031 exchange, including delayed exchanges, where the sale and purchase do not happen simultaneously, reverse exchanges where the new property is acquired before the original is sold, and build-to-suit exchanges, which allow customization of the new property using the proceeds. It's crucial to work with a qualified intermediary to ensure compliance with the IRS rules, as taking personal control of the proceeds will trigger the capital gains tax liability.

The 1031 exchange does not eliminate taxes but defers them until the property is eventually sold without reinvesting the proceeds. However, a unique advantage is that if the investor passes away, the property receives a stepped-up cost basis, potentially eliminating capital gains taxes for heirs if the property is sold at the stepped-up value. Delaware Statutory Trusts (DSTs) offer another avenue for investors who prefer a hands-off approach, allowing them to invest in fractional ownership of larger properties while still complying with 1031 exchange rules. This strategy can be particularly beneficial for estate planning and long-term investment growth.

For a detailed breakdown of 1031 exchange rules and strategies, read the full article here .