The Small Balance Intersection Update - September 6, 2024

Rental Lane

Multifamily Rents Flat in August as Economic Shifts Loom

Multifamily rents remained flat in August, signaling potential shifts as the market anticipates economic changes such as likely interest rate cuts later this month. The national average rent dipped by $1 to $1,741, with a year-over-year growth rate holding steady at 0.8%. Interest rate relief is expected to unlock asset sales and refinancing options, especially for properties underwater on their mortgages. However, this relief coincides with economic slowing, as job gains have been downgraded by 800,000 over the past year. Demand remains strong, keeping national occupancy rates stable at 94.7%. Gateway cities like New York (4.8% growth) and secondary markets like Kansas City (4.1%) led rent increases, while Sun Belt metros such as Austin (-5.5%) and Phoenix (-2.9%) saw declines. With strong supply growth expected through 2025, absorption remains critical for market balance. In the single-family rental market, rents dropped $7 to $2,164, particularly in luxury segments, signaling affordability challenges. As rate cuts loom, optimism for increased multifamily transactions grows, but economic headwinds persist.

This data is sourced from Yardi Matrix. For further details, read more here.

Builders' Avenue

Single-Family Construction Surges Amid Multifamily Slowdown

Single-family home construction saw substantial growth across all regions in Q2 2024, despite the ongoing challenges of elevated mortgage rates. This rise was fueled by pent-up demand and a shortage of resale homes, as detailed in the NAHB Home Building Geography Index (HBGI). Large metro core counties, primarily suburban, led the growth with a 17.6% increase in single-family permits, highlighting the continued influence of telework and the shift toward more affordable living areas. Conversely, multifamily construction struggled, with all regions experiencing declines due to tight financing conditions and nearly 900,000 units of existing inventory limiting the need for new projects. The NAHB Multifamily Production Index reflected this slowdown, posting a score of 44, down 12 points from the previous year.

Over the past decade, second-home markets have experienced robust growth, with 17.5% of single-family and 8.6% of multifamily construction now concentrated in these areas. This marks a significant increase from 2014, when second-home areas represented only 12.9% of single-family construction. Urban and suburban areas with fewer second homes continue to dominate overall housing construction, but the growth in second-home markets reflects changing housing demand. Multifamily permits in second-home regions have also nearly doubled over the last decade, rising from 4.6% in 2014 to 8.6% in 2024. The report underscores a broader shift in housing preferences, driven by affordability concerns and new remote work trends, which continue to influence construction patterns.

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Credit Crunch Boulevard

CRE Loan Delinquencies Rise Amid Slowing Loan Growth

Commercial real estate (CRE) loan delinquencies in the US have risen by 16 basis points in the second quarter to 1.40%, signaling escalating stress in the sector, particularly within office properties. Borrowers across property types are contending with higher interest costs as loans mature, despite potential relief from anticipated Federal Reserve rate cuts. Office vacancies have soared, and property values have plummeted, prompting banks with significant office portfolios to increase loss reserves from already high levels. Transaction volumes remain low, adding uncertainty to property value trajectories.

Year-over-year CRE loan growth slowed to 2.2% in Q2 from 2.9% in Q1, a sharp decline from the 12.1% peak in Q3 2022, reflecting tougher loan standards and falling property values. Nonowner-occupied, nonresidential property loans grew just 1.2% year over year, while construction and development loans increased by 2.0%, down from 16.4% in Q4 2022. The number of banks exceeding regulatory guidance for CRE concentration dropped for the fifth consecutive quarter to 482, indicating a tightening in lending practices. Among the top 20 banks with the largest CRE portfolios, loans fell by a median of 2.1% year over year, with 12 banks reporting declines.

The outlook for CRE remains cautious due to low transaction volumes and ongoing uncertainties in property values. Borrowers may find some relief if interest rates decline, but the sector's recovery is closely tied to broader economic conditions. Banks are adjusting their portfolios and reserve levels in response to these challenges, signaling a more conservative approach to CRE lending. The combination of rising delinquencies and slowing loan growth underscores the need for vigilance among investors and lenders in the CRE market.

Source: S&P Global Market Intelligence

Condo Market Boulevard

Condo Inventory Surges in Florida and Texas Amid Price Drops

Condo inventory is surging in major Florida and Texas metros, including Miami, Jacksonville, Austin, and San Antonio, while pending sales are declining, causing prices to drop. High HOA fees, rising insurance costs, and concerns over natural disasters are deterring buyers, especially in waterfront properties. For example, in Tampa, condo inventory soared 57.2% in July compared to a year ago, while pending sales fell 18.9%, leading to a 4.9% drop in median sale prices. Houston saw a similar trend, with a 35.9% rise in inventory and a 6.5% price decline. Nationwide, condo inventory rose 27.1%, though the price decline has been more pronounced in Florida and Texas due to these local challenges. The aftermath of the Surfside condo collapse has led to stricter maintenance requirements and contributed to higher HOA fees, further suppressing demand. Natural disasters, particularly in Florida, have caused insurance premiums to soar, leading some condo owners to offload properties. Additionally, investors have pulled back from condo purchases, adding to the inventory glut as new construction continues. Single-family homes are faring better, with rising prices in most regions, but condos remain a tough sell, especially in coastal areas.

This summary is based on Redfin's analysis. For further details, read more here.