The Small Balance Intersection Update - December 2, 2024

On This Date:

2020: The UK approved the Pfizer-BioNTech COVID-19 vaccine, becoming the first country to do so.

2001: Enron Corporation filed for bankruptcy, marking one of the largest corporate scandals in U.S. history.

1972: The Miami Dolphins completed their perfect regular season, finishing 14–0.

Warning: Office Sector Slowdown

Commercial Real Estate Delinquencies on the Rise

The Trepp CMBS Delinquency Rate rose 28 basis points in October 2024 to 5.98%, continuing its upward trajectory. The office sector was the primary driver of this increase, with its delinquency rate climbing 101 basis points to 9.37%, marking the first time since 2013 it has exceeded 9%. Office properties accounted for more than 60% of newly delinquent loans, reflecting a growing strain in this segment. In contrast, other property types saw improvements: retail delinquencies fell by 25 basis points to 6.82%, lodging by 14 basis points to 6.09%, and multifamily by nine basis points to 3.24%. The industrial sector remained stable at 0.32%, continuing its trend of low delinquency rates. If loans past their maturity date but current on interest were included, the delinquency rate would jump to 7.73%. Overall, the total dollar amount of delinquent loans rose by $1 billion net, with $3 billion in new delinquencies partially offset by $2 billion in loans paid off or resolved. Year-over-year, the overall CMBS delinquency rate has increased by 135 basis points, highlighting persistent challenges in the commercial real estate market.

Livability Lane

Navigating the Road to America's Most Livable Cities

The AARP Livability Index? for 2024 highlights the most livable cities in the United States, emphasizing factors such as housing, transportation, neighborhood quality, health, environment, social engagement, and economic opportunity. Great Neck Plaza, New York, secured the top position, followed by cities in California, Virginia, and New Jersey. Clusters of high-ranking communities include the Boston area (e.g., Cambridge, Somerville, Brookline) and Northern Virginia (e.g., Falls Church, Fairfax County, Arlington County, Alexandria). Notably, ski towns like Aspen and Gunnison in Colorado, as well as Montpelier, Vermont, are among the most livable small communities. The index underscores the importance of affordable housing, quality healthcare, and accessible transportation in enhancing residents' quality of life. As urban populations grow and challenges like climate change and social isolation intensify, the focus on livability becomes crucial for sustainable and resilient communities. The study serves as a guide for cities aiming to improve amenities and services that directly impact residents' well-being.

Kiplinger

Industrial Avenue

Cooling Demand Reshapes Industrial Leasing Trends

National industrial lease rates continue to rise, but cooling demand in Southern California signals a shift in market dynamics. In October, national in-place industrial rents averaged $8.22 per square foot, up six cents from September and 6.8% year-over-year. Miami led rent growth with an 11.0% annual increase, spurred by over 15 million square feet of new, high-quality industrial space delivered since 2022. While Southern markets like Atlanta (+9.0%) and Nashville (+8.7%) also saw strong rent hikes, Southern California's historically leading growth rates have tapered off.

Vacancy rates climbed to 7.2% nationally in October, marking a 20 basis-point increase as supply outpaces demand. New leases signed over the past year averaged $10.30 per square foot, $2.08 higher than in-place rents, highlighting premium pricing for new properties. Miami had the largest gap, with new leases costing $5.25 more than existing ones. In Southern California, the spread between new and in-place rents narrowed significantly from $9.32 to $3.17 in the Inland Empire and from $6.99 to $2.59 in Los Angeles, underscoring cooling demand in the region.

This data reflects a recalibration in the industrial market as record-high supply meets tempered demand. For further details, access the full report here.

Merge Lanes: Human + AI

From Prompts to Possibilities: Training for AI-Driven Innovation

Generative AI (gen AI) offers more than task automation—it can inspire creative breakthroughs with the right mindset, argues Brian Solis in Harvard Business Review. While many users employ gen AI to enhance productivity and streamline workflows, leveraging its full potential requires rethinking how prompts are crafted. By shifting from linear, problem-solving queries to exploratory, open-ended questions, users can engage AI as a collaborative partner in innovation. This "mindshift" transforms AI from a tool into a co-creator capable of delivering surprising and transformative results.

The article outlines 12 exercises for training the brain to think more creatively with AI. These include framing prompts as "what if" scenarios, chaining responses iteratively, and experimenting with metaphorical or role-play approaches. For instance, asking AI to take on the perspectives of a scientist or artist can unlock unconventional solutions. Solis emphasizes that moving beyond predictable inputs enables AI to generate insights that users might never consider independently. Keeping a journal of successful prompts can further refine this creative practice.

Organizations that adopt this mindset shift can empower teams to redefine industry norms, foster innovation, and tackle previously unimaginable challenges. Leaders who embrace AI as a co-creator and nurture "exponential curiosity" within their teams will position themselves to thrive in an AI-first future. To explore these ideas in-depth, read the full article here.