The Small Balance Intersection Update - September 19, 2024

Builders Boulevard

Residential Construction Outlook: Lower Mortgage Rates Brighten Builder Sentiment Amid Multifamily Slowdown"

The outlook for residential construction has improved due to lower mortgage rates and anticipation of substantial Federal Reserve easing. Housing starts rose 9.6% in August, driven entirely by a surge in single-family construction, marking the first year-over-year improvement since April. Single-family permits also saw a sequential increase for the second consecutive month, signaling a potential turnaround in this sector. The Federal Reserve's easing policy has led to a drop in mortgage rates, with the 30-year fixed rate averaging 6.2% in mid-September, the lowest in 19 months. Despite this positive shift, challenges remain, including historically elevated mortgage rates, high new home supply, and potential labor market deterioration, which could limit a full residential rebound.

In contrast, the multifamily market continues to face softness, with starts dipping 4.2% in August and down over 30% on a year-to-date basis. Although multifamily completions reached their highest level since 1985, substantial supply under construction and a slow receding of new project starts indicate an overall weak outlook. Lower financing costs and firming apartment demand could drive more multifamily building over the next few years, but the current construction pipeline is likely to cap new development growth. Builders' optimism, reflected in the recent rise of the NAHB Housing Market index, suggests that lower mortgage rates may revitalize buyer interest.

Read the full Wells Fargo article

Capital Crossing

Who's Still Lending and How

Borrowers in the commercial real estate (CRE) market face a challenging financing environment marked by higher interest rates and reduced bank lending . However, capital is still available through non-traditional lenders such as debt funds, insurance companies, and bridge lenders stepping in where banks have pulled back . Lenders are offering alternative financing options like bridge loans and C-PACE (Commercial Property Assessed Clean Energy), providing borrowers with flexibility, especially for sustainability-focused projects or those requiring immediate market adjustments . From the lender's perspective, preferred equity is currently scarce and expensive, prompting them to ask borrowers to bring more cash to the table, shifting debt/equity ratios . Government-sponsored entities (GSEs) like Freddie Mac and Fannie Mae remain reliable sources of capital but focus primarily on stabilized, cash-flowing properties .

Lenders are increasingly scrutinizing sponsors' financial strength, creditworthiness, and portfolio health . They prefer borrowers with solid track records, realistic business plans, and a clear strategy for adding value to the property . While some lenders remain optimistic about potential Federal Reserve rate cuts in 2024-2025, they caution that lending terms will remain stringent, and they continue to monitor market conditions closely . Deals might still face delays until the market stabilizes, making it essential for borrowers to have their finances in order and a compelling business case when seeking funding .

Read the full Connectcre article

Labor Balancing Ahead

Small Business Checkpoint: A Labor Market Balancing Act

Recent data from Bank of America Institute indicates a growing divergence in confidence between small and large businesses, especially regarding hiring trends. Small businesses (with fewer than 250 employees) have been slowing down their hiring since the beginning of the year, suggesting a decline in optimism about the economy. However, despite a decline in Bank of America small business payments to hiring firms in Q1, this trend has shown signs of stabilizing in the second half of the year, indicating a balanced labor market rather than an outright downturn. The NFIB Small Business Optimism Index also fell in August, highlighting growing concerns, particularly in labor and earnings, although capital expenditure expectations rose. In contrast, the CEO Business Confidence Survey for larger firms has remained stable, revealing a potential divide due to factors like higher capital costs for small businesses and the exhaustion of Covid-related financial support. Bank of America's data reveals that small business payroll growth is easing to pre-pandemic levels, showing a 2% year-over-year increase in August, down from 3.3% in July. Notably, the South continues to drive payroll gains, while the Midwest shows the highest regional increase since last year, likely influenced by domestic migration trends. Meanwhile, the Northeast has experienced the most significant slowdown in growth. Service-related industries, such as leisure, health, and educational services, continue to expand their payrolls, supporting the notion of an ongoing post-pandemic recovery. Interestingly, manufacturing has seen a notable resurgence, with year-over-year growth of 6.5% in August, possibly hinting at future sector strength. Overall, while small business activities have decelerated, the data suggests a balanced labor market with a cautiously optimistic outlook for future hiring.

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Innovation Ave

AI’s Game-Changing Impact on Small Business Competitiveness

Artificial intelligence (AI) is rapidly transforming small business operations, with more than half (54%) of small businesses citing AI as a key factor in their growth, according to an article from the U.S. Chamber of Commerce. As this technology evolves, business owners are finding innovative uses for AI beyond common tasks like content creation, marketing automation, and customer service. One unexpected change is the ability for service-based entrepreneurs, such as consultants and coaches, to "clone" themselves through AI chatbots. Software like Coachvox and SiteSpeak AI allows these business owners to train chatbots to interact with clients 24/7, providing personalized responses using uploaded content like course instructions and blog posts.

AI is also reshaping employee training by streamlining the creation of standard operating procedures and offering interactive learning management systems (LMS). Tools such as 360Learning, iSpring Learn, and Schoox use personalized modules, quizzes, and progress tracking to enhance employee engagement while reducing training costs. Additionally, AI tools help small businesses compete with larger industry players by offering advanced competitor analysis. Platforms like Semrush, Sprout Social, and Similarweb provide insights into competitors' SEO strategies, social media activities, and product benchmarks, helping businesses identify areas for growth and differentiation.

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