The Small Balance Intersection Update - September 26, 2024

Multifamily Collection Avenue

On-Time Rental Payments Fall Again For Independent Landlords, but Stabilization Signs Emerge

In September 2024, on-time rental payments in independently operated units fell for the fourth straight month, reaching 84.9%, marking a continued decline in collection performance. This figure is down by 19 basis points (bps) from the prior month, 148 bps compared to the same time last year, and 334 bps from the post-pandemic peak. Despite the downturn, the full-payment rate, which includes both on-time and late payments, improved to 94.5%, up 21 bps from August. However, the full-payment rate remains 275 bps below its post-COVID high of 97.2%, indicating that rent collection is still under pressure. Single-family and 2-4 family rentals performed slightly better, with an on-time payment rate of 85.1%, while multifamily properties trailed at 84.5%.

Geographically, Western states outperformed the rest of the U.S., with Utah leading at 93.8%, followed by Idaho at 92.0% and Colorado at 91.2%. Non-Western states like New Hampshire didn’t appear on the top-performing list until ninth place. Though rent collection has weakened since the boom years of 2021 and 2022, there are signs of stabilization, especially with late payments improving the overall collection rate. The report, based on data from 94,250 rental units tracked by RentRedi, provides valuable insights into how independent landlords are faring amid challenging market conditions. This trend suggests that while the market is softening, some resilience remains.

Read the full Chandan Economics report here.

Equity Heights Avenue

Cooling U.S. Housing Market as Mortgage Rates Weigh on Home Prices

In July 2024, the U.S. housing market experienced a significant deceleration in home price growth, as reported by the CoreLogic S&P Case-Shiller Index. Home prices nationally rose by 5% year-over-year, marking the fourth consecutive month of slowing price gains, largely attributed to elevated mortgage rates that surged earlier in the year. This cooling contrasts with the peak of 6.5% recorded in February and March. Buyers were increasingly hesitant, and 2024 home sales activity slowed to levels not seen since the Great Financial Crisis. Despite this, the Federal Reserve's rate cuts have begun to revive demand, and August pending home sales showed steady gains, which could carry momentum into the rest of the year.

On a monthly basis, home prices rose by just 0.11% from June to July, a stark difference from the 0.5% average July increase recorded between 2015 and 2019. In fact, 18 out of 20 major metro areas saw slower price growth compared to the previous month, with San Francisco, Los Angeles, and Denver showing the largest monthly declines. However, cities like New York, Las Vegas, and Cleveland continued to lead in annual price growth, with New York recording an 8.8% rise, followed by Las Vegas (8.2%) and Los Angeles (7.2%). The overall U.S. market is now 20% higher than its 2006 peak when adjusted for inflation, reflecting the housing market's resilience despite volatility in mortgage rates.

For further details, please refer to the full report on the CoreLogic S&P Case-Shiller Index for July 2024.

Bankers' Blvd

CRE Market Struggles Amid Interest Rate and Remote Work Pressures

Between 2012 and 2024, the amount of outstanding commercial real estate (CRE) loans held by banks doubled from $1.4 trillion to $3 trillion. This growth in CRE loans, which are used to acquire or improve properties like offices and retail spaces, coincides with rising concerns about the sector's financial health. Since 2022, factors like remote work, higher interest rates, and declining property prices have worsened repayment issues for many borrowers, leading to an uptick in delinquency rates. While CRE delinquency rates remain lower than during the 2007–2009 financial crisis, they have steadily increased, with office properties in central business districts seeing the biggest price drops. In March 2024, New York Community Bancorp required a $1 billion cash infusion to offset severe losses in its CRE portfolio, raising alarms about broader systemic risk. Smaller and mid-sized banks, which hold a significant portion of CRE loans, are particularly vulnerable to these shifts, as they often have higher concentrations of CRE debt. Banking regulators, including the FDIC and Federal Reserve, have ramped up oversight of institutions with heavy exposure to CRE, designating it as an area of concern for financial stability. Despite ongoing risks, regulators deem the current situation manageable, but emphasize the need for vigilant monitoring, particularly as an estimated $1.2 trillion in CRE loans is set to mature by 2025. The Federal Reserve's 2024 stress test showed large banks could withstand major CRE losses, but smaller banks remain more exposed to market pressures. The evolving CRE market and banks' responses will continue to shape financial stability in the coming years.

Source Government Accounting Office - Commercial Real Estate: Trends, Risks, and Federal Monitoring Effects

Recovery Road

CRE Market Poised for Recovery as Fed Eases Monetary Policy

The Federal Reserve's 50 basis point (bps) rate cut in September 2024 marks a pivotal shift for the commercial real estate (CRE) sector, which has endured its worst downturn since the Global Financial Crisis. With inflation stabilizing and labor market conditions softening, the Fed is expected to follow with further rate cuts through mid-2025, aiming to support continued economic expansion. While lower interest rates are not a cure-all for CRE challenges, they are already easing upward pressure on capitalization (cap) rates and helping to slow the decline in property values. Investor confidence is beginning to return, as the expectation of an economic soft-landing is spurring capital off the sidelines. However, the office market remains a major hurdle, with high vacancy rates and declining rents, though reduced interest rates may help contain distress. Property valuations, which had seen significant declines, are showing early signs of stabilization, especially in industrial properties, which have rebounded while office properties continue to struggle. A looming debt maturity wall, with $1.9 trillion of CRE loans maturing by 2026, is a significant risk, but lenders have been accommodating by extending loan maturities and limiting distressed sales. Overall, banks are cautiously loosening lending standards, and while challenges remain, the tide appears to be turning for the CRE market, aided by the Federal Reserve’s monetary easing efforts.

Read the Full Report Source Wells Fargo Economics