The Small Balance Intersection Update - July 14, 2024

Quote Of The Day: "Nonviolence is the answer to the crucial political and moral questions of our time." - Nelson Mandela

The Fact Of The Day: 79 million - The number of jobs currently held by women in the U.S. workforce.

Data Point Of The Day: the average monthly share of rent in total payments is up to 9.1% from 5.9% in 2019.

Did You Know? One-third of U.S. renters have lived in the same apartment for more than five years. One in six, or 16.6%, had lived in one place for 10 years or more in 2022, up from 13.9% in 2012. Another 16.4% had lived in their home for five to nine years

Staying updated with the latest trends and developments is crucial in the ever-changing world of small-balance commercial real estate. In today's edition of our newsletter, we're excited to bring you key insights and updates to help you stay ahead.

Small Business Boulevard

A comprehensive analysis of the current state of small businesses in the U.S

The June 2024 Small Business Checkpoint report by Bank of America reveals a rise in small business optimism in May, though it remains below pre-pandemic levels. The inflow-to-outflow ratio, a proxy for profits, also increased, reaching its highest level since March 2023, but still averages lower than previous years. Rent inflation is a significant challenge, with the average monthly share of rent in total payments up to 9.1% from 5.9% in 2019, particularly impacting businesses in the West. Conversely, easing wage inflation has relieved some pressure on small business payrolls, with nonfarm payroll growth strongest in the South due to population growth.

The proportion of small business owners identifying financing as a top problem has hit its highest share in nearly 14 years, reflecting increased reliance on credit cards. Rent payment growth per small business client rose 12% year-over-year in May, closely tracking nonresidential real estate rent inflation. Cities in the West, such as Las Vegas and San Diego, have higher average rent payment shares, while Southern cities generally see lower averages. Payroll growth, although positive, has slowed since March 2022, with total payroll volume outpacing transaction count, indicating persistent wage inflation. The Fed Beige Book reported moderate wage growth near pre-pandemic levels, with mixed hiring plans across regions.

For more detailed information, you can read the full report on Bank of America.

Work-Life Balance Blvd

Balancing Act: The Dual Burden of Working Women in Today's Economy

Women's workforce participation has reached an all-time high of 77.2%, driven by economic necessity and career aspirations. However, this increase is accompanied by a dual burden, as 60% of women are simultaneously managing full-time jobs and extensive household responsibilities, compared to 40% of men.

The COVID-19 pandemic has exacerbated these challenges, with 47% of women reporting an increase in household duties due to remote work, compared to 30% of men. Women spend an average of 2.5 hours more per day on unpaid labor, including caregiving and household tasks, which can impact their professional advancement and well-being. This situation has led to a call for more supportive workplace policies, such as flexible working hours and childcare support, which only 35% of companies currently offer.

The economic implications are significant; while increased female workforce participation could add an estimated $1 trillion to the global economy, the associated stress and burnout can have negative long-term effects. A survey cited in the article found that 42% of working women have considered reducing their work hours or leaving the workforce entirely due to these pressures. Companies that recognize and address these challenges are likely to benefit from a more engaged and productive workforce.

For a deeper understanding, you can read the full article in The Wall Street Journal.

Delinquency Drive

CMBS Apartment Distress Rates are up 185% in the last 6 Months; Overall Rate Climbs to 8.62% for all CRE

The recent Cred IQ article reports a substantial increase in the distress rates for apartment loans with CMBS financing, which have surged by 185% since the start of the year. The CRED iQ distress rate climbed by 13 basis points in June, reaching 8.62%, marking the fourth consecutive record high. Despite a mostly flat special servicing rate of 8.08%, the delinquency rate increased by 48 basis points to 6.28%. The evaluation involved reviewing payment statuses and special servicing statuses for each loan.

In sector-specific reviews, retail and office sectors had the highest distress rates at 11.7% and 11.5% respectively, each seeing modest increases. The hotel sector showed improvement, with its distress rate decreasing by 130 basis points to 8.1%. The multifamily sector experienced a slight increase, with its distress rate rising by three basis points to 7.4%, a significant rise from 2.6% six months ago. Industrial and self-storage sectors continued to maintain distress rates below 1% for most of the past seven months.

In terms of payment status, only 21.6% of distressed loans are current, a 2.8% decrease from June. The combined metric of current and near-current status saw a 4.3% decrease. Non-Performing Matured loans were the largest category at 37%, showing a 2% increase, followed by 90+ Days Delinquent loans at 14.2% and Performing Matured loans at 13.5%.

CRED iQ’s distress rate is calculated by aggregating the delinquency rate and specially serviced rate, including loans that are 30+ days delinquent or worse, loans with special servicers, and non-performing and performing loans that have not paid off at maturity. The index includes all CMBS properties securitized in conduits and single-borrower large loan deal types, while tracking Freddie Mac, Fannie Mae, Ginnie Mae, and CRE CLO loan metrics separately.

For more detailed information, you can read the full article on Cred IQ.

Short-Term Rentals Avenue

How Short-Term Real Estate Rentals Can Lower Your Tax Exposure

In the recent Kiplinger article, the discussion centers around how short-term real estate rentals can help lower tax exposure for property owners. The article explains the potential tax benefits of short-term rentals and offers strategies to maximize these advantages. By understanding and utilizing these tax benefits, property owners can significantly reduce their overall tax liability. It is advisable to seek advice from your attorney and CPA when making investment decisions.

• Short-term Rental Advantages: Short-term rentals can provide a steady income stream while offering more flexibility than long-term leases.
• Tax Deductions: Owners can deduct various expenses such as maintenance, utilities, and insurance, which are associated with the rental property.
• Depreciation: Property depreciation is a critical aspect that can be deducted annually, helping to offset rental income.
• Active Participation: Actively participating in the management of the rental property can lead to more favorable tax treatment.
• Section 199A Deduction: This provision allows qualified business income from rentals to be deducted, providing an additional tax benefit.
• Material Participation: Meeting the IRS criteria for material participation can open up further tax deduction opportunities.
• Short-term Rental Regulations: Being aware of local regulations and ensuring compliance is essential to avoid potential legal issues.
• Professional Advice: Consulting with a tax advisor or accountant can help navigate the complexities of tax laws and optimize tax savings.
• Record Keeping: Maintaining detailed records of all income and expenses is crucial for accurate tax reporting and maximizing deductions.
• Market Analysis: Regularly analyzing the market can help in adjusting rental rates to stay competitive while ensuring profitability.

For more detailed information, you can read the full article on Kiplinger.