The Small Balance Intersection Update - March 2, 2025

Did You Know:

A total of $104.05 billion of CMBS was issued last year. That was a 165% increase from 2023, when only $39.38 billion was issued, and amounted to roughly 20% of the year's total commercial mortgage origination volume.??

Multifamily completions hit a multi-decade high of 588,000 units in 2024, the highest total since 1974, according to Census and HUD estimates.

The U.S. remains underhoused by an estimated 3.7 to 4.5 million homes, with household formation outpacing construction in recent years, driving up home prices and rents.

Central Business District

Office Market Struggles as Valuations Decline and Vacancies Rise

The U.S. office market continued its downward trajectory in 2024, with sale prices falling 11% year-over-year to an average of $174 per square foot, following a 24% decline in 2023. Prime office properties suffered the most, with A and A+ buildings losing 22% of their value and central business district (CBD) offices dropping 28%, contributing to a five-year decline of 60% for CBD assets. Nearly 600 office buildings traded at a discount in 2024, with one extreme case in Manhattan seeing a 97% drop in value. Despite this downturn, certain urban submarkets experienced a 7% increase, indicating a divergence in market performance. National office vacancies stood at 19.7%, up 180 basis points year-over-year, with Florida markets like Miami (15.6%) and Tampa (15.9%) among the lowest due to strong population and job growth. Construction starts fell drastically, with only 9.1 million square feet breaking ground in the past year, a 67% decline from 2023, reflecting financing challenges and falling demand. Office employment also took a hit, shedding 2,000 jobs in January, with professional and business services losing 11,000 positions, partially offset by gains in financial services. While Manhattan saw the steepest price drop of $488 per square foot, it remained the top investment market with $4.9 billion in sales for 2024.

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Yield: Market Adjusting to Demand

U.S. Housing Starts Shift as Multifamily Pulls Back and Single-Family Grows

U.S. housing starts remained strong in 2024 at 1.37 million, continuing an 11-year streak above the 1 million mark. However, the composition is changing, with multifamily (5+ unit) starts declining for the second consecutive year while single-family construction rose 6% to surpass 1 million units. Multifamily completions reached a multi-decade high of 588,000 units, the largest total since 1974, while single-family completions have remained stable since 2022. Rising unsold home inventories could provide opportunities for single-family rental platforms to expand their holdings. The U.S. remains underhoused, with estimates from Zillow and Freddie Mac pointing to a shortfall between 3.7 million and 4.5 million homes, as household formation continues to outpace construction. Capital and construction costs remain elevated, leading to a continued decline in total housing starts from their 2021 peak. Multifamily starts fell sharply, down 36% from their 2022 high to 337,000 units in 2024, signaling a sustained slowdown. Despite mortgage rates and record-high home prices creating affordability challenges, demand for rental housing remains strong, supporting both multifamily and single-family rental strategies.

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Market Growth Blvd.

Housing Market in Flux: Home Prices Rise, but Risks Loom

U.S. home prices grew 3.4% year-over-year in December 2024, with a marginal 0.03% increase from November, signaling steady but slow growth. CoreLogic forecasts a slight 0.2% decline in prices from December 2024 to January 2025, followed by a 4.1% year-over-year increase through December 2025. The median home price hit $390,000 in December, reflecting ongoing affordability concerns despite a rise in housing supply. The Northeast continues to lead price gains, with Connecticut and New Jersey posting annual increases of 7.8% and 7.7%, respectively. Meanwhile, Hawaii and Washington, D.C., saw home prices decline by 1.1% and 0.7%, respectively. Market pressures such as proposed tariffs and recent wildfires in Los Angeles County are expected to increase construction costs, further straining affordability. CoreLogic’s Market Risk Indicator highlights Provo-Orem, UT, and several Arizona and Florida markets as highly vulnerable to price declines. Despite challenging conditions, home prices rose 4.5% in 2024, outpacing the previous year’s 4.1% growth.

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Development Drive

Multifamily Construction Faces Near-Term Slowdown, Long-Term Stability

Yardi Matrix’s Q1 2025 Multifamily Supply Forecast projects higher completions for 2025 and 2026, increasing by 3.3% and 11.5%, respectively, compared to the previous quarter’s estimates. Despite a decline in the under-construction pipeline, 2025 will still see one of the highest annual supply deliveries since 2008, following a record-breaking 2024. Market-rate and partially affordable properties continue to lose their dominant share, dropping from 84.3% in 2019 to a projected 77.5% by 2027, while affordable and single-family rental (SFR) properties gain traction. The construction pipeline peaked at 1.275 million units in March 2024 but has since declined 7.2% year-over-year, with pre-leased units expected to decrease further in 2025. Higher interest rates and financing constraints have led to a significant slowdown in construction starts, which fell 40% below 2022 and 2023 levels. Long-term supply forecasts assume a “higher-for-longer” monetary policy, limiting new development through 2025 before rebounding in 2026 and beyond. The planned and prospective pipelines remain strong, with 4.411 million units in development at year-end 2024, though long lead times continue to delay completions. Given current trends, new multifamily supply is expected to bottom out in 2027 before gradually recovering.

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Loan Reform Lane

SBA’s 7(a) Loan Program Faces Fee Reinstatement Amid Rising Defaults

The Small Business Administration’s (SBA) 7(a) loan program is under scrutiny as negative cash flow of $274 million in early 2024 raises concerns about long-term stability. During a Senate hearing, lenders signaled that borrower and lender fees—eliminated under the Biden administration—may need to return to restore financial balance. Some experts, like First National Bank West’s Timothy Fitzgibbon, noted that while the data is limited, the current trajectory is alarming. Another lender, Itzel Sims, suggested reintroducing equity injections for newer businesses, a requirement that was dropped in January 2024. The Biden administration’s reforms, including removing upfront guaranty fees, significantly boosted small-dollar loan activity but also contributed to mounting financial risk. Republican lawmakers argue that these policy changes led to unsustainable lending, with early default rates tripling since 2022 to 1%. However, Sen. Ed Markey (D-MA) countered that default rates, currently at 2.76%, are nearly identical to levels seen under the Trump administration in 2019. This raises the question of whether the current financial strain is the result of recent policy changes or part of a broader economic cycle. Some lenders worry that a swift return to higher fees could stifle small business growth, particularly for startups that rely on accessible financing. Meanwhile, Congress remains divided on the best path forward, with bipartisan acknowledgment that the 7(a) program must maintain financial sustainability without restricting credit access.

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Warning: Spending Slowdown Ahead

Consumer Spending Contracts Despite Strong Income Growth in January

January’s personal income and spending report revealed unexpected trends, with income surging 0.9%—more than double the 0.4% forecast—while inflation-adjusted spending fell 0.5%, marking the largest monthly drop in nearly four years. The decline was largely driven by a sharp pullback in goods purchases, particularly motor vehicles & parts, which saw spending plummet by $41.1 billion. Other significant declines occurred in recreational goods, clothing, and food, with gasoline and energy being the only goods category to see gains due to price increases. The income boost was partially fueled by annual Social Security cost-of-living adjustments (+2.8%) and strong asset and proprietors' income. Wage growth remained robust at 0.4%, supporting a 0.6% rise in real disposable income—the fastest pace in a year. Meanwhile, inflation remained sticky, with the Fed’s preferred measure, the PCE deflator, rising 0.3%, bringing the annual rate down to 2.5%. Notably, goods inflation (+0.5%) outpaced services inflation (+0.2%) for the first time in at least six months, reinforcing concerns over pricing pressures. While consumer spending has been a key economic driver, the latest report raises questions about its sustainability, particularly as tariffs and inflationary risks cloud the outlook.

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