The Small Balance Intersection Update - December 22, 2024

Did You Know:

• The Origin of "Xmas": The "X" in Xmas comes from the Greek letter Chi, which is the first letter of the Greek word Christos, meaning Christ. It's not a modern abbreviation but has been in use since the 16th century.
• Santa’s Outfit: The modern red-suited Santa Claus was popularized by Coca-Cola’s Christmas advertisements in the 1930s, but the character's depiction in red predates this by decades.
• The Rockefeller Tree: The iconic Christmas tree tradition at Rockefeller Center began in 1931 when workers decorated a small tree during the Great Depression.
• 2025 Multifamily Market: Balancing Growth and Uncertainty

Multifamily Overlook

2025 Multifamily Market: Balancing Growth and Uncertainty

The U.S. multifamily market enters 2025 with moderate growth expectations despite potential political and economic headwinds. National rents are projected to rise 1.5%, driven by strong demand in Northeast and Midwest metros, while the Sun Belt faces pressure from significant new deliveries. Construction activity remains robust, with 508,000 units expected to be delivered in 2025, though a sharp drop in starts foreshadows supply challenges by 2026. Political developments, including deregulation and potential tariff implementations, could influence costs, development, and demand, with notable risks stemming from immigration policies.

Capital markets face continued uncertainty due to fluctuating interest rates; multifamily lending is forecast to rise 20% to $390 billion in 2025, yet elevated rates hinder broader transaction activity. The shortage of skilled construction labor and affordability issues persist, although government-backed funding for affordable housing and single-family rental projects shows promise. Regional performance will diverge, with Northeast and Midwest metros leading rent growth, while oversupply challenges Sun Belt markets like Austin and Phoenix. Investors remain cautiously optimistic, favoring stability in multifamily assets despite near-term risks.

The Trump administration’s policies on taxes, regulations, and energy could influence multifamily’s trajectory, though immigration restrictions and material costs present challenges. As affordability concerns mount, niche segments such as affordable housing and build-to-rent gain prominence. The multifamily sector navigates 2025 amid evolving economic dynamics, preparing for a rebound post-2026 as supply constraints ease.

Read the full report here.

Investor Influence Lane

Mom-and-Pop Investors Dominate a Shifting Housing Market

Contrary to common perceptions, mom-and-pop investors, owning three to ten properties, represent 60% of all U.S. housing market investor activity, while institutional investors account for less than 5%. Investor share in the housing market dropped to 23% in mid-2024, later rebounding slightly to 25% by Q3, but this remains below its January peak of nearly 30%. The total number of investor purchases has also declined sharply, averaging 85,000 monthly in Q3 2024, compared to 120,000 and 140,000 monthly in the same period of 2022 and 2021, respectively. Elevated mortgage rates, high housing prices, and economic uncertainty have reduced the appeal of property investments, particularly among smaller investors.

Despite the decline, smaller investors continue to focus on lower-priced homes, intensifying competition with first-time homebuyers. Regional variations reveal investor concentration in high-demand areas like Dallas, Houston, Atlanta, and Los Angeles, with the latter standing out for its high investor activity despite lower transaction levels. While South Dakota, Oregon, and D.C. saw gains in investor share, states like Idaho, Montana, and Maryland recorded declines exceeding 5%. Emerging rental demand, especially in suburban hubs, highlights the significant role mom-and-pop investors play in stabilizing local markets and addressing supply shortages.

The seasonal patterns of investor activity are less pronounced this year, suggesting a slower winter recovery. As larger players remain limited, understanding the nuanced impacts of smaller-scale investors is vital for framing housing market challenges, including affordability and inventory pressures. With rental demand projected to remain high amid stagnant mortgage rates, these investors will likely continue shaping key market dynamics.

?? Read the full report

Transition Avenue

Office Market Faces Continued Transition Amidst Pandemic-Induced Shifts

The U.S. office sector continued its transformation in 2024, driven by pandemic-induced changes, declining sale prices, reduced development, and the rise of coworking spaces. Average office sale prices dropped to $179 per square foot year-to-date, reflecting a 9% decline from 2023 and a cumulative 33% drop from 2022. Construction activity slowed significantly, with only 9.1 million square feet breaking ground by November, as demand weakened and vacancy rates climbed. The life sciences sector, a previous driver of office development, faced oversupply issues, with just 948,000 square feet of lab space initiated this year.

Despite return-to-office initiatives from major companies like Amazon and Meta, office utilization rates remained relatively stagnant, according to Kastle Systems and Kisi data. In contrast, coworking spaces expanded by 7% in number and 4% in total square footage between Q2 and Q3, signaling a shift toward flexible workplace solutions. The national vacancy rate rose to 19.4% in November, with significant increases in Austin and Dallas, while the average listing rate climbed 3.7% to $32.85 per square foot. Boston led office construction with 9.2 million square feet underway, although this marked a 37% year-to-date decline.

Employment in office-using sectors grew modestly, adding 43,000 jobs in November, with six of eight metros showing growth located in the Sun Belt, including Miami. Year-to-date office sales reached $32.6 billion, with Manhattan dominating at $3.8 billion, driven by high-profile transactions like JP Morgan Chase's $320 million purchase of 250 Park Ave.

For a comprehensive analysis: Yardi Matrix Office National Report - December 2024.

Optimism Drive

Small Businesses Enter 2025 with Confidence Despite Inflation Pressures

Small business confidence surged to 101.7 in November 2024, surpassing the 50-year average for the first time since 2021, yet profitability remains stable rather than exceptional. Bank of America data indicates small business profits improved in 2024 compared to last year but remain below pre-pandemic levels, highlighting a disconnect between optimism and financial outcomes. Rising debt levels amid high interest rates present challenges; however, increasing capital expenditures and improved credit availability signal expansion intentions. Small businesses' credit card balances rose by 16%-20% relative to 2019 levels, with larger firms driving growth through investment rather than financial strain.

The labor market remains a bright spot, with payroll growth steady and hiring levels 16% above 2019, particularly in services sectors like lodging and construction. Inflation continues to pose the most significant risk for small businesses in 2025, as operating expenses are accelerating faster than payroll costs, especially with persistent shelter-related pressures. Nonetheless, elevated consumer spending in services and leisure sectors supports small business revenues, keeping optimism alive heading into the new year. Overall, while headwinds such as inflation and debt persist, improving credit conditions and investment trends reflect a resilient small business landscape with potential for modest growth.

Read the full report here.

Stability Drive

CRE Market Gains Traction Amid Economic Resilience

The commercial real estate (CRE) market is wrapping up 2024 on an optimistic note, as key indicators suggest improving fundamentals despite elevated financing costs. Real GDP grew at an annualized rate of 2.8% in Q3, supported by strong consumer spending, which has underpinned broader economic resilience. Lending activity surged, with CRE loan originations up 44% year-over-year, reaching levels 59% higher than the prior year, as reported by the Mortgage Bankers Association. This growth has been broad-based, with banks, private credit, life insurance companies, and CMBS issuers all increasing lending volumes. Multifamily vacancy rates stabilized at 7.9% in Q3, halting a three-year rise, while retail and industrial markets saw steady demand alongside constrained new supply, maintaining equilibrium in these segments.

Office vacancy rates, although still elevated at 13.9%, are showing signs of leveling off as companies reassess office space needs amid a shrinking supply of premium "trophy" properties. Inflation remains a headwind, with November’s core CPI rising 3.3% year-over-year, above the Federal Reserve's 2% target. The Federal Open Market Committee (FOMC) is expected to cut rates cautiously in 2025, with a projected federal funds rate target of 3.50%-3.75% by September. Property values are beginning to stabilize; the RCA CPPI National All-Property Index fell just 0.1% in October, and annual declines have moderated to 1.5%, signaling firming market conditions. However, uncertainties around regulatory changes, tariffs, and labor constraints in construction could weigh on the CRE sector in the near term, offset by potential long-term benefits from lower taxes and more business-friendly policies.

For further details, please refer to the original report: Wells Fargo CRE Report