The Small Balance Intersection Update - December 6, 2024

On This Date:

1865: The 13th Amendment to the U.S. Constitution is ratified, abolishing slavery in the United States.

1933: Prohibition in the U.S. officially ends with the ratification of the 21st Amendment.

1998: Exxon announces a $73.7 billion deal to buy Mobil, creating the largest oil company in the world at the time.

Community Engagement Zone

2024 Report Highlights Small Business Contributions to Communities

Small businesses play an integral role in local communities by creating jobs, fostering economic growth, and engaging in civic activities. According to the National Federation of Independent Business (NFIB) 2024 report, 76% of small business owners volunteered their time over the past year, with larger businesses more likely to engage due to additional resources. Of these, 30% reported being very active, contributing to areas such as education, sports, and religious organizations.

Financial support was the most common form of community involvement, with 90% of owners donating to local causes, including schools and charities. A significant portion (27%) of owners reported donating $5,000 or more annually, showcasing the financial impact of small businesses on their communities. Additionally, 63% contributed in-kind, offering goods, services, or event sponsorships valued at up to $10,000 for some.

Education received the highest support from businesses (72%), followed by sports (66%) and civic initiatives (65%). Importantly, 82% of small business owners believe their community involvement fosters a better business climate, while 95% find it personally fulfilling. Employee participation is notable, with 46% of businesses reporting staff involvement in volunteer activities.

The report also highlights that over one-quarter (28%) of small business owners have initiated new civic organizations or volunteer activities in the past decade. This underscores their commitment to not only supporting existing initiatives but also creating new opportunities for community engagement. Small businesses thus remain essential to the economic and social fabric of their communities.

Read the full report here.

Proceed With Caution

CRE Market Strains: Lessons from the Past, Challenges for Today

A Kansas City Fed analysis examines potential risks to banks stemming from commercial real estate (CRE) market stress, comparing current trends to crises in the 1980s and 1990s. Post-COVID-19 shifts, particularly higher office vacancies due to remote work, could result in losses for property owners and financial institutions, similar to regional downturns that plagued banks in the late 1980s. Back then, rapid CRE portfolio growth and regional economic pressures led to persistently elevated non-performing loan levels, causing significant bank failures.

Economists Padma Sharma and Brendan Laliberte used historical data and a stress-testing approach to assess how exacerbated CRE stress might impact modern bank balance sheets. Their findings suggest that while today’s banks face challenges, they are better positioned than their 1980s counterparts due to improved risk management, stronger capital reserves, and more diversified portfolios. Nonetheless, banks with high concentrations in office space loans or in regions experiencing economic stress may face heightened risks.

The analysis underscores that while CRE-related losses may not peak as they did in previous decades, recovery prospects remain uncertain, particularly as structural shifts, like remote work, reshape the office subsector. This uncertainty calls for vigilance among financial institutions and regulators. Improved stress-testing frameworks and risk-mitigation strategies will be crucial in navigating the ongoing transformation of the CRE market.

Read the full analysis here.

Enrollment Decline Way

Student Housing Sector Faces Demand and Supply Challenges Amid Declining Enrollment

The student housing market, which rebounded after the COVID-19 downturn, is grappling with new challenges as university enrollment continues to decline. Nationwide undergraduate enrollment dropped by 15% from its 2010 peak of 18.1 million to 15.4 million in 2021. Occupancy rates hit a record 96.5% in fall 2022, spurring a surge in construction, with $1.6 billion in new projects initiated in Q2 2022, according to Walker & Dunlop. However, rising interest rates triggered a steep 26.5% decline in construction starts by 2023, while completions rose 24.1%, reflecting earlier commitments.

Looking ahead, the pipeline of new student housing is expected to slow further, with Walker & Dunlop predicting a decline in supply additions by the 2025-2026 school year. This reduction aligns with shrinking demand driven by demographic trends and skepticism about the value of higher education. A Pew Research Center survey noted that 29% of respondents questioned the return on investment of a four-year degree, citing costs that can exceed $350,000 for private universities.

Demographic shifts compound these concerns, as the college-aged population is projected to shrink by 2% by 2030. With fewer students attending college and escalating tuition costs, demand for student housing may erode, challenging the sector’s long-term stability. Capital Economics warns that these trends could lead to oversupply, potentially impacting occupancy rates and profitability.

Stakeholders in the student housing market may need to adapt by diversifying offerings or exploring new markets to offset declining enrollment. Continued analysis of demographic and economic trends will be critical in navigating these shifting dynamics.

Read the full article here.

Rent Dynamics Road

November Rent Trends Reflect Seasonal Norms Amid Regional Variations

In November 2024, U.S. effective asking rents for professionally managed apartments declined by 0.4% month-over-month, consistent with seasonal norms. This reduction brought annual rent growth to a modest 0.4%, according to RealPage Market Analytics. Historically, winter months see rent softening as operators focus on occupancy, and November’s cut was only slightly deeper than the long-term average of 0.3%. National apartment occupancy held steady at 94.8%, aligning with historical trends, while the South recorded the lowest regional occupancy at 93.9% and the Northeast the highest at 96.3%.

Detroit led major markets in annual rent growth at 4.0%, supported by low inventory growth and robust demand. Other Midwestern cities, including Kansas City, Chicago, and Columbus, also saw strong rent growth, bolstered by stable or declining inventory levels. Richmond stood out as an exception, combining above-average rent and inventory growth, driven by demographic tailwinds and its affordability relative to nearby Washington, D.C. In contrast, supply-heavy markets like Austin continued to experience annual rent cuts, though Austin showed signs of stabilization with a less severe annual decline of 7.3% compared to 8.1% in October.

Regionally, the West experienced the steepest monthly rent decline at 0.6% but showed year-over-year stabilization compared to 2023. Coastal cities like San Francisco and Seattle outperformed, benefiting from lower supply levels, while supply-heavy areas like Phoenix and Denver faced deeper cuts. Nationwide, the Midwest and Northeast posted the strongest annual rent growth at 3.0% and 2.5%, respectively, while the South saw a 1.1% annual decline.

As supply pressures and regional disparities persist, the market’s ability to absorb new inventory will remain a key determinant of rent performance into 2025.

Read the full article here.