The Small Balance Intersection Update - November 24, 2024
Michael Boggiano, CPA CPM
Experienced CRE Finance Professional | AI & Data Analytics Enthusiast | Championing Small Balance Commercial Lending
Did You Know That on This Date:
In 1832, the first streetcar railway in the U.S. began operations in New York City? It marked the start of modern public transportation.
In 1934, the NFL’s Detroit Lions played their first-ever Thanksgiving Day game, beginning a beloved American tradition.
In 1992, the world's first smartphone, IBM’s Simon, was announced. It combined mobile phone and PDA functions, laying the groundwork for today’s devices.
Detour: Shifting Sales Patterns
Commercial Property Sales Decline Despite Lending Surge
While commercial mortgage lending has risen recently, property sales activity has surprisingly declined, largely due to refinancing of maturing loans rather than new acquisitions. During Q3 2024, 9,467 properties were sold across the U.S. for a total of $40.1 billion, according to Altus Group, marking a 10% year-over-year decline in volume from $44.4 billion in Q3 2023. This is also slightly down from the $43 billion in sales during Q2 2024. Despite this, office property sales showed a surprising uptick, with 1,524 office transactions totaling $8 billion—a 16% increase in dollar volume compared to the $6.9 billion from Q3 2023.
In contrast, multifamily property sales, though still dominant by dollar volume, declined sharply. Transactions fell to 2,082 properties valued at $12.2 billion, compared to 2,349 properties worth $15.5 billion a year ago. The average size of deals in office properties grew, with transactions averaging $5.25 million, a significant increase of over one-third from last year.
Altus Group's analysis of regional turnover ratios highlights notable liquidity in markets like Philadelphia, where hotels led with a 4.5% turnover ratio, and Atlanta, which showed strong activity across asset classes, including multifamily (2.6%), industrial (3.3%), and office (2.9%). The insights underline the nuanced dynamics of property types and regional markets amid shifting economic conditions.
Stability Street
Rental Payment Trends Steady Despite Dips in Full-Payment Rates
In November 2024, on-time rental payments in independently operated units remained stable at 85.5%, representing a slight decline of three basis points (bps) from October. This figure is down 70 bps from a year ago and 279 bps from the post-pandemic peak of 88.2% in April 2023, reflecting modest performance deterioration. However, consistency has returned in recent months, with on-time payment rates fluctuating within a narrow range of 85.3%-85.7% since June.
The forecast full-payment rate, which accounts for on-time and late payments as well as expected late payments, fell 110 bps to 94.6% in November, erasing gains from October's brief improvement. Performance by property type revealed slight variations: single-family rentals and 2–4-unit properties led with on-time payment rates of 85.7%, while multifamily units trailed slightly at 85.1%.
Geographically, the Western U.S. continues to lead in on-time payments, with Alaska (93.7%), Nevada (91.9%), and Utah (91.4%) at the forefront. Wisconsin (88.6%) was the first non-Western state on the list, ranking eleventh, while New Hampshire (88.6%) was the top East Coast state.
The report, based on a sample of 97,863 units using RentRedi data, offers insights into the financial performance of independent landlords across property types and states. As rental markets stabilize post-pandemic, the consistent payment trends and geographic performance gradients provide valuable benchmarks for investors, policymakers, and property managers.
Rising Optimism Ahead
Small Multifamily Market Poised for Growth as Rates Ease in Q4 2024
Small Multifamily Sector Stabilizes as Interest Rates Decline The small multifamily real estate sector showed signs of recovery in Q3 2024, supported by the Federal Reserve’s first interest rate cuts in four years. Cap rates for the sector averaged 6.0%, down slightly from the previous quarter but up 31 basis points from a year ago, improving returns for investors. Lending volume is on pace to reach $46.3 billion for 2024, a modest 4.2% increase over 2023, indicating stabilization despite higher financing costs earlier in the year. Occupancy rates improved to 97.5%, reflecting robust rental demand, while expense ratios rose to 46.1%, driven by climbing insurance costs in climate-affected areas. Asset valuations declined 5.2% year-over-year but grew marginally quarter-over-quarter, aided by resilient rent growth and easing credit conditions. Debt yields fell for the first time in two years, signaling an increase in borrower confidence as financing terms improved. Structural demand for affordable housing and easing rate pressures are forecast to drive further growth in the subsector through year-end 2024. Experts anticipate increased transaction volumes as buyers and sellers adapt to improving market conditions and falling capital costs.
CoreLogic Lane
Slowing Momentum: Rent Growth Hits a Four-Year Low
CoreLogic's latest Single-Family Rent Index reveals that U.S. rent growth has decelerated to its slowest pace in over four years, reflecting a significant cooling from the pandemic-era boom. Annual single-family rent growth was just 2% in September 2024, down from an average of 3.5% annually in the decade before the pandemic. High-end rentals saw a 2.6% increase, slightly outpacing low-end gains, as higher wages—up 40% year-over-year—allow some renters to move upmarket. However, despite the slowdown, rents remain 32% higher than they were in 2020, underscoring ongoing affordability challenges.
Among the top 20 metropolitan areas tracked by CoreLogic, Detroit posted the highest annual rent increase at 5.2%, followed by Seattle at 5%. In contrast, Austin (-2.9%) and San Diego (-0.7%) experienced notable declines. Median rents exceeded $3,000 in seven major markets. The report also highlights a broad trend of cooling rental growth across markets, with more metros reporting declines compared to the previous report. This deceleration may bring relief to renters but still reflects elevated costs from the pandemic surge.
CoreLogic’s next report, covering October 2024, will be released on December 19. For more insights and detailed analysis, visit the CoreLogic Intelligence Blog .
Consumer Preference Boulevard
Casual Dining Faces Tough Choices in a Changing Market
The casual dining industry is facing significant challenges as consumer spending tightens, with declining traffic and closures of legacy chains such as Denny's, TGI Fridays, and Red Lobster. While overall sales for the top 500 chain restaurants grew 4.7% in 2023, this was driven by higher menu prices, as customer traffic fell by 1.6%. Major closures, including Denny’s reduction of 150 locations and menu cuts, reflect the inability of these brands to adapt to evolving dining preferences.
Consumers now favor fast-casual options like Chipotle, which offer convenience and customizable meals, or unique dining experiences. The rise of delivery services and changing expectations has further shifted the market away from traditional casual dining formats. Brands like Texas Roadhouse and Olive Garden, which focus on in-person experiences without relying heavily on delivery or discounts, are performing better.
The closures are also impacting commercial real estate (CRE), particularly suburban retail centers where casual dining chains are often anchor tenants. Vacancies created by restaurant closures leave landlords with costly renovations and a need to rethink leasing strategies. Neighborhood centers, which house a large share of these struggling chains, are especially vulnerable.
Successful restaurants are increasingly those that provide a distinct experience or leverage modern technology to enhance convenience. As consumer preferences continue to evolve, both restaurateurs and CRE professionals must adapt to these shifting trends to remain competitive.
Affordability Avenue
Q3 2024: Migration Trends Show Consumers Trading Down for Lower Rents
Q3 2024: Rent Increases and Migration Trends Reveal Push Toward Affordability
Bank of America’s Q3 2024 report shows continued migration from high-cost metros in the Northeast and West to more affordable areas in the South and Midwest, such as Indianapolis, Columbus, Cleveland, and Austin. Rent payments have risen 3.7% year-over-year, lower than the 5% CPI inflation rate for rents, as many renters opt for cheaper housing. Notably, more movers are staying within the same metropolitan statistical area (MSA), reflecting economic caution and labor market uncertainties. Moves within the same MSA made up 58% of relocations in Q3, up from 55% in 2021, with "trading down" to more affordable units becoming a common strategy.
Higher-income renters in the Northeast are driving some of this trend, with their new rents decreasing 6% year-over-year when staying within their current metro areas. By contrast, those moving between MSAs experienced a 7% rise in rents. Migration patterns reveal mixed results across regions: cities like Miami and Orlando saw declines in net population, while Austin, San Antonio, and Denver experienced modest growth. In the West, Las Vegas and Phoenix attracted new residents due to comparatively affordable housing.
The report highlights that consumers are increasingly resistant to rising rents, especially in expensive metros. If the labor market weakens further, these trends could intensify, with more renters opting for smaller or less costly accommodations both within and across metro areas. This behavior, combined with regional migration, is expected to continue shaping the rental market in 2024.
Approaching Holiday Spending Zone
Retail Sales Strengthen with Holiday Season Momentum in October
October’s retail sales exceeded expectations, with an overall gain buoyed by upward revisions to September data. September's retail sales growth was revised to 0.8%, double the initial estimate, while control group sales, key to GDP calculations, surged 1.2%, marking the strongest monthly increase since January 2023. October saw a modest 0.1% dip in control group sales, but the data still sets up a robust finish to Q4, with Wells Fargo forecasting 2.0% consumer spending growth for the quarter. Gains were widespread, with 8 out of 13 retail categories seeing higher sales. Electronics and appliances led with a 2.3% monthly increase, followed by autos and parts. Despite Prime Day, e-commerce posted only a 0.3% rise but remains the year’s strongest category, up 9.4% annually.
Restaurant and bar spending increased by 0.7% in October, outpacing inflation, which has moderated to a 3.8% annual gain for food away from home, its slowest pace since spring 2021. Grocery prices saw little change, rising just 0.1% after sharper increases earlier in the year, stabilizing spending in that category. October’s report lays the groundwork for the holiday shopping season, with retail sales (excluding autos, gas, and restaurants) up 2.8% year-to-date. Wells Fargo projects holiday sales growth of 3.3%, the slowest pace in five years, as retailers face modest momentum. Nonetheless, lower inflation and resilient consumer spending provide optimism for a decent season, albeit with caution for the broader 2025 outlook.