The Small Balance Intersection Update - September 7, 2024

Opportunity Zone Ahead

NCTBs: A New Solution for Affordable Housing and Urban Blight

The article "Rethinking How TIFs Work: Innovative Financing Tool Addresses Blight to Boost Affordable Housing" from Urban Land explores how Noncontiguous TIF Bonds (NCTBs) could transform urban redevelopment, especially in cities like Baltimore, which struggles with thousands of vacant homes and lots contributing to blight. Traditional tax increment financing (TIF) models, typically used for large, contiguous areas, are impractical for addressing scattered-site redevelopments like Baltimore’s. NCTBs allow individual vacant properties to be bundled into one scalable financial solution. This approach could generate up to $150 million for Baltimore, enabling affordable housing for households earning up to 115% of the area median income. A key challenge is the appraisal gap, where renovating a home costs $300,000, but its post-renovation market value is only $250,000. NCTBs bridge this gap by focusing on properties with unpaid taxes and issuing bonds after homes are renovated and sold, reducing construction and sales risks. This financing model is also scalable and repeatable, making it appealing for other cities facing similar issues. By pairing NCTBs with federal money, grants, or philanthropic capital, cities can unlock significant funding for redevelopment. Ultimately, as highlighted by Urban Land, NCTBs offer a flexible, innovative solution for addressing blight and affordable housing shortages, attracting developers and social impact investors alike.

Read the full article here.

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Investor Avenue

Multifamily Property Price Declines Outpace Market Fundamentals

Multifamily property prices have dropped 16.1% since their 2022 peak, following a sharp 27.3% rise during 2020-2022 amid low interest rates and surging housing demand. Higher interest rates, which have raised borrowing costs, combined with slower rent growth and increased operating expenses, are primary contributors to the current price decline. A notable rise in vacancy rates, driven by the delivery of new multifamily units, has further suppressed rent growth, which had boosted net operating incomes (NOI) during the pandemic. From 2020 to 2021, multifamily prices grew more than expected based on fundamentals, as investor optimism pushed valuations beyond what rent growth and vacancy rates justified.

Since 2022, prices have fallen 5% more than the fundamentals alone would suggest, indicating that investor sentiment has turned pessimistic. This sentiment may stem from concerns about prolonged declines in cash flow and rising costs, such as insurance premiums and maintenance expenses. Multifamily real estate, with a market capitalization of $4.6 trillion, also supports over $2 trillion in outstanding debt, making these price movements critical to both investors and financial markets. With more than 40% of all commercial real estate loans maturing by 2025, the continued downturn in prices could have broader financial implications. However, if the pessimism is an overcorrection, prices could stabilize and recover, aligning with improving market fundamentals. Whether prices rebound or continue to fall will depend largely on investor confidence and broader economic conditions, including interest rate trends and housing demand.

Source: Kansas City Federal Reserve

Service Sector Boulevard

ISM Services Index Hits Three-Month High Amid Mixed Labor Data

The ISM Services Index rose to a three-month high of 51.5 in August, reflecting modest growth in the services sector despite challenges from a slowing labor market. Demand remains strong, with new orders increasing to 53.0, and eight industries reporting higher activity. However, business activity slightly pulled back, still indicating expansion at 53.3. Select industry respondents expressed mixed sentiments, citing stable or improving business, while others pointed to high borrowing costs as a drag on performance. The employment component of the ISM services index dipped to 50.2, suggesting flat job growth, with layoffs and attrition offsetting new hires. This aligns with recent weak labor data, which has raised doubts about a soft landing for the economy. Inflation concerns persist, as the ISM services prices paid metric rose to 57.3, its highest level in three months. With the Federal Reserve meeting approaching, the August jobs report will be critical in determining the scale of potential rate cuts, especially if job growth continues to weaken.

This summary is based on data from Wells Fargo Economics and the Institute for Supply Management. For further details, read more here.

Approaching Bad Actors

SMB Lending Fraud Rises by 13.6%

The 2024 Small Business Lending Fraud Study by LexisNexis? Risk Solutions reveals a concerning rise in SMB lending fraud, with a 13.6% increase year-over-year. A significant 64% of surveyed lenders anticipate further growth in fraud within the next 12 months. Digital channels, such as online and mobile transactions, are experiencing the largest surge in fraudulent activity, with 70% of lenders adapting their fraud prevention strategies accordingly. Despite these adjustments, only 27% of fraud cases were detected at account origination in 2023, down from 32% in 2022, reflecting the challenges of early-stage detection. In response, 72% of respondents plan to increase investments in advanced fraud prevention technologies, such as behavioral biometrics, geolocation, and real-time transaction scoring. The most prevalent fraud types involve stolen business and consumer identities, making detection more complex and resource-intensive. A multi-layered approach to fraud prevention, combining enhanced identity proofing, cybersecurity measures, and consortium-based intelligence sharing, is gaining traction across the industry. Lenders expect fraud-related losses to impact revenues by 6% to 10%, underscoring the financial significance of this growing threat. As a result, early detection and minimizing customer friction remain critical focal points for reducing fraud risk while maintaining customer satisfaction.

Read the full study here.