The Small Balance Intersection Update - October 24, 2024

On this date in 1929:

• The Birth of the Great Depression: October 24, 1929, known as Black Thursday, marked the beginning of a catastrophic stock market crash that led to the Great Depression. This day saw a record trading volume of 12.9 million shares, with the market opening 11% lower than the previous day, triggering widespread panic among investors
• Impact on Consumer Behavior: The crash not only devastated the stock market but also significantly undermined consumer confidence. Following Black Thursday, spending on credit dropped sharply, particularly for durable goods like automobiles. This decline in consumer spending contributed to a broader economic contraction
• Historical Trading Volume Records: The trading volume on Black Thursday was unprecedented at the time, exceeding previous records by nearly 4 million shares. This frantic selling was fueled by fears of further declines, leading to a cascading effect that resulted in even more panic selling in subsequent days, notably on Black Monday and Black Tuesday

Did You Know?The events of Black Thursday and the subsequent days serve as a cautionary tale about the dangers of speculative trading and overreliance on borrowed funds in financial markets.

High Rents Ahead

National Chains Dominate as Rent Increases Squeeze Out Local Shops

The surge in demand for retail space is driving up rents, displacing small businesses unable to compete with national chains, as landlords prioritize tenants with stronger credit profiles and deeper financial resources. In markets like Phoenix, rents increased 7.4% year-over-year in Q2 2024, reflecting a broader trend where limited retail availability gives landlords leverage in negotiations. For small retailers such as Alex Macias of Del Sol Furniture, this environment is untenable; when his rent doubled, he had to close one of his stores, and his former space was taken over by the national discount chain Five Below. Similarly, Sarah Bingham of Antique Sugar faces limited options, as her landlord’s buyout offer leaves her without affordable alternatives in a competitive market. A survey by Alignable highlights the extent of this issue, showing that nearly 60% of small businesses have faced recent rent hikes, while over half struggled to pay rent in full in September.

Even though landlords value the community appeal and differentiation that independent shops bring, the higher rents offered by national chains are often too attractive to resist, with companies like Kimco filling 81% of their portfolios with regional and national tenants. Kimco’s CEO, Conor Flynn, acknowledges the challenge but continues to seek ways to support local retailers, including investments in the fintech platform Bonside to fund brick-and-mortar businesses through percentage-of-sales repayment models. Some small business owners, like Ken Giddon of Rothmans, have managed to renegotiate leases post-pandemic and secure more favorable terms, demonstrating that strategic negotiation can sometimes pay off. However, most smaller shops face a perfect storm of rising rents, increased labor and supply costs, and diminished savings, making survival difficult. This dynamic reflects a broader shift in commercial real estate, where the profitability of leasing to creditworthy national tenants is increasingly outweighing the community value of local businesses.

Read the full article here.

Renovation Revival Drive

Home Renovation Market Poised for a Comeback Amid Lower Interest Rates

Falling interest rates are setting the stage for a resurgence in home renovation spending in the U.S., as analysts anticipate a recovery in the sector by next summer. Harvard University’s Joint Center for Housing Studies predicts that by 2025, annual renovation spending could reach $477 billion, nearly returning to the record $487 billion annual rate seen before high borrowing costs slowed the market. With the Federal Reserve easing interest rates, homeowners can more affordably tap into the $35 trillion in accumulated home equity, which has grown by 81% since 2019. Recent data from John Burns Research & Consulting shows that many homeowners, particularly those in their 30s, are planning significant remodels as rates decline, with younger owners eyeing projects costing around $60,000 and older owners targeting updates closer to $30,000.

The uptick in cash-out refinancings—50% higher in September compared to a year earlier—illustrates a shift as homeowners access equity to fund renovations without losing their low-rate primary mortgages. Companies like Pool Corp. and Trex, which saw stock price declines of 10% and 24%, respectively, during the slowdown, could benefit as remodeling activity picks up. However, some analysts caution that if rates fluctuate, homeowners might delay projects further, impacting demand for building products. Sawmills and companies in the building supply chain, already impacted by recent bankruptcies like that of True Value, remain vulnerable to these rate dynamics. Despite these uncertainties, Brennan O'Connell of Optimal Blue highlights the growing trend of layering second loans, as millions of homeowners prefer maintaining their historically low mortgages while using home equity for expansions or upgrades. The sustained growth of home equity, combined with pent-up demand, indicates strong potential for a remodeling market recovery, though rate sensitivity remains a critical factor.

Read the full article here.

Payroll Parkway

State Labor Markets Show Mixed Signals Despite Widespread Hiring

In September, state-level employment trends showed resilience, with payroll gains across 41 states—the most since May. Texas led job growth with 29.2K new positions, followed by New Jersey's 19.2K, the state’s highest in a year. Conversely, eight states saw payroll declines, with Iowa and Wisconsin each shedding over 4K jobs. Despite widespread payroll growth, unemployment rates rose in 34 states, signaling potential recession risks as higher state-level joblessness has historically been a warning sign. Notably, South Carolina and Utah faced the highest unemployment increases at 20 basis points each, while Washington, D.C., and Nevada had the highest overall rates, with Nevada reaching 5.6%. In contrast, South Dakota, Vermont, and North Dakota maintained the lowest jobless rates. State-specific data reveals diverse sector growth, with California’s healthcare and professional services seeing upticks, while Florida's manufacturing sector declined despite overall job gains. Texas rebounded significantly after summer disruptions, adding nearly 30K jobs primarily in healthcare and construction .

Read the full report here.

Delinquency Rise Drive

Commercial Mortgage Delinquency Rates Increase Amid Office Market Weakness

The Mortgage Bankers Association's (MBA) latest report reveals a slight increase in delinquency rates for commercial mortgages in Q3 2024, with office properties seeing the most significant rise. Overall, 96.8% of loan balances were current or under 30 days late, a decrease from 97.0% in the previous quarter, while loans 90+ days delinquent rose from 2.5% to 2.7%. The data highlights a 7.8% delinquency rate for office properties, up from 7.1%, while lodging and retail properties experienced a decline, with lodging delinquencies dropping to 5.6% from 5.8% and retail decreasing to 3.8% from 4.5%. Industrial loans improved, with delinquencies down to 0.6%, while multifamily loans saw a marginal increase to 1.2%. CMBS loans maintained a high 4.8% delinquency rate, but other capital sources showed more stability, including FHA multifamily loans at 0.9% and GSE loans slightly up at 0.5%. MBA’s survey covered $2.6 trillion in loans, representing 56% of the total $4.7 trillion commercial and multifamily mortgage debt outstanding. These findings underscore the varying impact of economic conditions on different property types and capital sources.

Read the full report here.