The Small Balance Intersection Update - October 13, 2024
Michael Boggiano, CPA CPM
Experienced CRE Finance Professional | AI & Data Analytics Enthusiast | Championing Small Balance Commercial Lending
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Assessment Avenue
Understanding State Property Tax Caps: Limits and Loopholes
The Kiplinger article delves into how various U.S. states regulate property tax increases through tax caps, designed to prevent large spikes in homeowners’ tax bills. These caps come in different forms, including limits on property value assessments, tax rates, or total tax levies. For instance, California enforces a 1% tax rate cap, while Florida restricts how much a home’s assessed value can increase annually for primary residences. Despite these protections, homeowners in high-value states like Connecticut and California can still face substantial tax bills due to rising property values.
In some states, local governments can override tax caps with voter approval, creating potential for higher taxes during certain periods. States like Texas and Illinois place caps on how much total property tax revenue can increase, further limiting government ability to raise funds through property taxes. In other states without such restrictions, homeowners face higher volatility in their property tax bills, particularly when real estate markets surge. Some states offer tax credits or exemptions to seniors or long-time residents, providing additional relief from rising tax costs. Moreover, tax caps can lead to tighter municipal budgets, as local governments face constraints in their ability to raise revenues for public services. In turn, these budget constraints may drive municipalities to seek alternative revenue sources, such as sales taxes or special assessments.
Absorption Alley
Multifamily Rents Hold Steady Amid Supply Surge and Seasonal Adjustments
In September 2024, the multifamily rental market saw a slight decrease in advertised rents, as detailed in the Matrix Multifamily National Report. The national average asking rent declined by $3 to $1,750, holding steady at a year-over-year growth rate of 0.9% for the third month in a row. This shift is influenced by seasonal patterns and an influx of new supply, particularly affecting Sun Belt markets like Austin, which reported a 4.9% year-over-year drop, and Raleigh with a 3.1% decrease. In contrast, markets with constrained supply such as New York City (5.4% YoY) and Kansas City (4.2% YoY) experienced stronger rent growth. Despite the new supply pressures, the national occupancy rate remained stable at 94.8%. Demand has been supported by continued economic strength, including a Q2 GDP revision to 3.0% and ongoing job growth. This has helped boost market sentiment, even as inflation trends downward, encouraging potential rate cuts from the Federal Reserve.
Furthermore, the multifamily sector's absorption rate has been notable, with more than 1.7 million units absorbed since the pandemic began, driven by migration and employment opportunities in regions like the Sun Belt. Markets with substantial new supply, however, like Austin and Phoenix, continue to face downward pressure on rents. The outlook for rent growth remains cautious as the winter season approaches, typically a slower period for leasing activity, and with new construction projects extending into 2025. While rents for high-end "Lifestyle" properties softened more notably, demand for "Renter-by-Necessity" units held firmer in many regions, reflecting ongoing needs for affordable housing options. The dynamics of rent adjustments, supply absorption, and regional variations underline the complexity of the multifamily market as it adapts to economic conditions. For further details, access the full Matrix Multifamily National Report here .
Expansion Zone Ahead
Optimism Prevails: 80% of U.S. Business Owners Anticipate Growth in 2024
A new Bank of America study highlights that nearly 80% of U.S. business owners expect revenue growth in 2024, signaling a strong optimism despite economic challenges. Minority entrepreneurs lead this trend, with 82% of Hispanic-Latino, 84% of Black/African American, and 83% of AAPI business owners forecasting growth. While inflation and labor shortages remain primary concerns, 65% of all respondents plan to expand their businesses, and 61% aim to hire more staff. Notably, women business owners are equally optimistic, with 57% planning growth initiatives. The study also shows a shift towards sustainability, as 53% of businesses are adopting eco-friendly practices. This increased confidence stems from improved business strategies and investments in technology. Additionally, many are focusing on digital marketing and enhancing customer experiences to sustain growth. Challenges remain, but the overall sentiment suggests strong momentum heading into 2024. These findings underscore the resilience and adaptability of U.S. entrepreneurs.
For more information, read the full B of A report here .
Uncertainty Boulevard
Small Business Optimism Inches Up as Uncertainty Hits Record Levels
The NFIB Small Business Optimism Index rose slightly to 91.5 in September 2024, marking the 33rd month below the 50-year average of 98. Despite the modest gain, uncertainty among small business owners reached an all-time high, with the Uncertainty Index climbing 11 points to 103. Capital outlays dropped to 51%, a five-point decline, and inventory gains fell to a net negative 13%, the lowest since June 2020. Owners continue to face challenges from rising loan costs, with short-term loan rates averaging 10.1%, and a drop in job openings reported by 34% of businesses, the lowest level since January 2021. While inflation remains a top concern for 23% of respondents, its impact has softened slightly. Business owners also reported the lowest compensation increase since April 2021, with a seasonally adjusted 32% raising wages. The report highlights ongoing struggles with labor shortages, as 90% of hiring employers report a lack of qualified applicants. Optimism remains tempered as weak sales, higher input costs, and economic uncertainty continue to weigh on small businesses’ outlook for the months ahead.
领英推荐
Holiday Shopping Shift: Online Sales Continue to Overtake Malls
Bank of America's October 2024 report shows a clear shift in consumer spending patterns, with online retail continuing to gain traction, particularly among lower-income households. In August, online spending reached 26% of total retail card spending, growing 1.5 percentage points in the last two years, largely driven by those earning less than $50K. For the 2024 holiday season, this trend is expected to continue as consumers increasingly shop earlier and online, with Cyber Monday taking a larger share of spending compared to brick-and-mortar (B&M) holidays like Black Friday. Lower-income consumers have cut back significantly on mall shopping, down 20% since 2021, while higher-income earners have only reduced mall spending by 4%, highlighting stability in luxury-focused retail. B&M spending for Black Friday and the two weeks leading up to Christmas Eve has declined by nearly 5% compared to 2019, while Cyber Monday's share of holiday sales grew by 2%. This year, online spending in the holiday season is already up 4% year-over-year, compared to just 1% last year. The trend signals continued pressure on traditional shopping malls and a rise in value-seeking online shopping among lower-income households.
Optimism Ahead
Housing Sentiment Rises Amid Rate Optimism
Fannie Mae’s Home Purchase Sentiment Index (HPSI) rose to 73.9 in September 2024, a 30-month high, driven by record optimism about falling mortgage rates. A record 42% of consumers expect mortgage rates to decline over the next 12 months, up from 24% in June. However, concerns about rising home prices persist, with 39% of respondents expecting prices to increase. Homebuying sentiment remains low, with only 19% believing it’s a good time to buy. Conversely, 65% of consumers think it's a good time to sell.
Renters’ confidence has also improved, with 30% expecting rates to fall, up from 16% three months ago. Additionally, the share of renters thinking it's a good time to buy has increased from 13% to 20%. Consumers’ expectations regarding household income have also become more positive, with 18% reporting a significant increase in income compared to a year ago. Despite this optimism around rates and income, existing home sales are still projected to reach their lowest annual total since 1995. High home prices remain a major barrier to increased homebuying activity, even as consumers become more optimistic about the rate environment.
Read more here .
Hospitality Way
Hotel Owners Eye Refinancing
Hotel owners are increasingly exploring refinancing options following recent interest rate cuts by the Federal Reserve, but large-scale refinancing is not expected until 2025. The recent 50-basis-point reduction has generated more inquiries, especially around fixed-rate loans, which have become more attractive compared to floating-rate options. Lenders like PMZ Realty Capital are reporting an uptick in activity, though many hotel owners are waiting for further cuts before making major refinancing decisions. Debt maturities, property improvement plans, and financial uncertainties are key concerns for owners as they assess their refinancing strategies.
Although there’s growing interest in fixed-rate loans, floating-rate loans are still in play for owners whose properties are in recovery or undergoing renovations. Hotel owners are also weighing alternative financing structures, such as mezzanine and preferred equity, to strengthen their capital stack. The ongoing economic environment, including the upcoming U.S. presidential election, adds to the uncertainty, causing many owners to delay decisions until clearer market conditions emerge. Michael Lipson of Access Point Financial suggests that most refinancing activity will kick off in early 2025 when the Fed's actions and economic factors become clearer.
Read more CoStar here .
Discount Office Drive
U.S. Office Market Signals a Floor Amid Discounted Property Sale
The U.S. office real estate market shows signs of stabilizing, following a steep decline driven by high interest rates and persistent vacancies. Office property prices dropped by 12.4% year-over-year in Q2, setting the stage for distressed property sales at steep discounts, which have established new pricing benchmarks. Analysts suggest that market bottoming may be near, with an uptick in sales of distressed properties, including significant discounts, like the 97% markdown on a Midtown Manhattan office. Pre-pandemic quarterly office sales averaged $35 billion, but have since fallen to $13.4 billion. Even with rate cuts, challenges persist as property owners face the need for significant equity to refinance loans. Moody’s predicts that about 72% of maturing loans may struggle to secure refinancing, and a third of loans maturing in 2024 are at risk of default. While the Federal Reserve’s recent 50 basis point rate cut offers some relief, experts estimate that a 300-400 basis point reduction is needed to meaningfully revive the market.
Logistics Lane
U.S. Warehouse Construction Falls Amid Rising Vacancy Rates
The U.S. warehousing sector is facing a significant downturn, with industrial real estate construction falling by 43% year-over-year in Q3 2024, marking the steepest drop since 2008. According to Cushman & Wakefield, only 309 million square feet were under construction, reflecting developers' pullback amid rising vacancy rates and higher borrowing costs. The vacancy rate for industrial real estate reached 6.4% in Q3, up from 4.6% a year earlier, signaling a softening demand across the sector. Additionally, the Bureau of Labor Statistics reported that warehouse operators shed 11,000 jobs in September, contributing to a decline of 171,600 jobs since the sector's May 2022 peak. The shift away from pandemic-driven demand for e-commerce has led to this cooling, as consumers now prioritize services over goods. Meanwhile, industrial real estate developers are increasingly focusing on building data centers to meet the growing demand for AI-driven operations. Cushman analysts predict a market inflection point next year as the current construction pipeline nears completion.