The Small Balance Intersection Update - July 18, 2024

The latest financial data from the WSJ at the close of business yesterday indicates mixed trends in major stock indexes and minor changes for long-term U.S. Treasury yields. The Dow Jones Industrial Average (DJIA) increased by 243.60 points (0.59%) to 41,198.08. The Nasdaq Composite dropped by 512.42 points (2.77%) to 17,996.92, and the S&P 500 decreased by 78.93 points (1.39%) to 5,588.27. The Russell 2000 fell by 24.00 points (1.06%) to 2,239.67. The CBOE Volatility Index (VIX) saw an increase of 1.29 points (9.78%) to 14.48, indicating higher market volatility.

In the U.S. Treasuries market, the 30-Year Bond's yield rose by 0.001 basis points to 4.376%, while the 10-Year Note's yield remained unchanged at 4.161%. The yields for the 7-Year, 5-Year, 3-Year, and 2-Year Notes also saw minor changes, with slight increases observed across shorter-term bills.

Data Points Of The Day

• 30%: How much asking rents for houses and apartments rose nationally in the four years spanning 2020 to 2023, according to the Zillow Observed Rent Index.
• 5.35%: The delinquency rate for securitized commercial real estate loans in June, according to Trepp. Unpaid loans are on the rise this year.
• -4.9%: The decline in self-storage asking rent during the last year, says Yardi. This market boomed during the pandemic years.
• +29.1%: The increase in New York City office leasing activity in the second quarter, according to Colliers.?

Chart Of The Day:

The universe of commercial mortgages increased by $231.0 billion year-over-year, or 4.1% from Q1 2023, to $5.90 trillion in Q1 2024. Banks and thrifts, which make up just over 50% of total outstanding CRE debt across all lenders, saw the largest quarter-over-quarter and year-over-year dollar amount increases in total CRE debt on their books, increasing $23.7 billion from Q4 2023 and increasing $106.6 billion from Q1 2023.

Click here to read Trepp Inc.'s analysis https://hubs.li/Q02GWG6s0

Housing Starts Turn Up in June

Gain Owed to Volatile Multifamily Segment, Single Family Continues to Pull Back

High interest rates are heavily impacting residential construction, with total housing starts rising by 3.0% to a 1.35-million-unit pace in June, driven largely by a surge in multifamily starts. Despite this gain, multifamily starts have declined significantly over the past year due to weaker apartment market fundamentals and tighter credit conditions. Single-family starts and permits decreased again in June, with builders scaling back production amid slowing new home sales and rising inventory levels. The National Association of Home Builders (NAHB) Housing Market Index declined for the third consecutive month in July, reflecting these challenges.

Single-family housing starts dropped for the fourth consecutive month in June, decreasing by 2.2% to a 980K-unit pace, aligning with a five-month downturn in single-family permits. Builders are using incentives to improve affordability, but new home sales have weakened, indicating high mortgage rates are deterring buyers. Multifamily starts saw a significant increase in June, jumping by 19.6% to a 373K-unit pace, while multifamily permits increased by 15.6%. Despite this, the overall trend shows weakening activity, with multifamily permits down 22.9% year-to-date in June. For more detailed analysis, visit Wells Fargo Economics.

Commercial Avenue

Real-Estate Meltdown Strains Even the Safest Office Bonds

The commercial real estate mortgage bond market is experiencing a surge in defaults, leading to significant concerns among investors. In recent months, the number of defaulted commercial mortgage-backed securities (CMBS) has increased, largely due to rising interest rates and economic uncertainty. Office buildings and retail spaces are particularly affected, as remote work and online shopping reduce demand for these properties. Investors are increasingly cautious, demanding higher yields to compensate for the heightened risk. This shift has caused a notable drop in the prices of these securities, impacting the broader financial market. Analysts predict that the trend may continue as more loans reach their maturity dates without sufficient refinancing options. The Federal Reserve's interest rate hikes have exacerbated the situation, making borrowing costs more expensive for property owners. Consequently, this environment is forcing many property owners to consider selling assets or restructuring their debt. For more detailed insights, read the full article in the Wall Street Journal here.

Regulatory Crossroads

Balancing Act: Small Businesses Navigate Regulatory Challenges

The National Federation of Independent Business (NFIB) highlights two critical legislative developments impacting small businesses. The first is the opposition to the Warehouse Worker Protection Act. Small business owners argue that the act imposes stringent regulations on warehouse operations, increasing operational costs and complicating compliance. They believe the act’s requirements for safety measures and workload management are excessive and could hinder business efficiency.

The second legislative update is the introduction of a U.S. House Bill aimed at shielding small businesses from burdensome regulations. This bill seeks to provide regulatory relief by streamlining existing rules and preventing the introduction of overly restrictive new regulations. Proponents of the bill argue that it would foster a more favorable business environment, allowing small businesses to thrive without the constant pressure of adapting to new regulatory demands.

Together, these legislative updates underscore the ongoing debate over the balance between worker protection and business viability. Small business owners are advocating for regulatory frameworks that safeguard employees while ensuring that compliance requirements do not stifle business growth.

Read more about the opposition to the Warehouse Worker Protection Act here and the U.S. House Bill protecting small businesses here.

Storage Trends Avenue

Navigating the Latest Trends in the Self-Storage Market: July 2024 Insights

The July 2024 National Self Storage Report by Yardi Matrix highlights several key trends in the self-storage market. Despite a return to normal seasonal patterns, storage demand remains below previous years, with a muted transaction volume due to high interest rates and cap rates ranging from 5.5% to over 7%. The national average for advertised rates dropped to $16.45 per square foot, a 4.9% decrease from $17.41 in June 2023. All major markets experienced year-over-year declines in advertised rates, with the smallest drop in New York at -1.5% and the largest in Atlanta at -10.5%. The report tracks 3,370 properties in development, with 858 under construction, and a total of 31,451 completed facilities. Despite month-over-month increases in advertised rates, growth remains muted, with a national rise of just 0.2% from May to June. Urban metros including Boston, New York, Washington, D.C., Chicago, and San Jose saw the highest month-over-month increases in advertised street rates for main unit types and sizes combined in June. These five markets also saw some of the strongest growth in multifamily advertised asking rents year-over-year. Nationally, new supply delivery over the past three years equates to 8.5% of starting inventory, with Las Vegas leading in lease-up supply. For more details, visit Yardi Matrix Publications.