CRE Lending Down Whopping 53 Percent YoY

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Job Gains Slow Sharply in Major Metros link

• Data from the Bureau of Labor Statistics reveals that nine out of the top 10 metros saw a dip in their annual job gains for July compared to June. This resulted in a reduction of 198,000 jobs over the 12 months ending in July, marking a 17.7% decline.

• New York, despite leading in annual gains, recorded less than 200,000 jobs with 188,700 new positions for the year-ending July. This is a decrease of 16,200 from the previous month and a significant drop of 243,800 compared to the same period last year. Dallas, holding the second spot, reported an annual gain of 128,000 jobs, which is 20,000 less than the previous month and 59,400 less than the previous year's total.

• The top 10 employment markets in July collectively added fewer than one million jobs. This is only the second instance of such a phenomenon since the recovery from the pandemic began. Among these markets, only seven from the previous month's top 10 made a return, with significant reshuffling in their rankings.

Overall Real Estate Market

Permits for 5-plus units plummet 32% link

• Stagnant Starts: Starts for buildings with five or more units were almost the same as the previous year, with a slight increase of 0.4%. However, the completion rate for these projects saw a significant drop of 23%.

• Permit Decline: Building permit numbers for buildings with five or more units experienced a sharp decline of 32% year-over-year in July. This decline is in contrast to the overall housing starts, which saw a rise of 5.9% year-over-year.

• Higher Interest Rates Impact: The reluctance in starting new, large projects is attributed to the rise in interest rates, which has subsequently increased borrowing costs for developers. Even well-established REITs are reconsidering their project starts for the year 2023.

New Construction Makes Up Record Share of Inventory link

• Newly built single-family properties now represent a record share of homes on the market, accounting for nearly one-third of housing inventory nationwide. This is a significant increase, as new-home sales typically constitute about 10% of the market.

• The National Association of REALTORS® forecasts that new-home sales will surge by 12.3% this year and 13.9% in 2024. This growth is attributed to builders intensifying construction efforts and offering more incentives to lure buyers. With the supply of existing homes at an all-time low, more buyers are gravitating towards the new-home market for a wider range of options.

• Builders are employing various incentives to boost sales, with 55% of them resorting to such strategies. These incentives range from offering mortgage rate reductions to providing complimentary home upgrades. Interestingly, about a quarter of these builders have slashed their prices, with the average price drop being around 6%.

Weekly Active Inventory Down 7% YoY; New Listings Down 6% YoY link

• Consistent Decline in Active Inventory: Active inventory has seen a decline for the 9th consecutive week, lagging behind last year's levels by 7.2%. Despite this, the gap has slightly narrowed from the previous week's -8.6%. The consistent pace of existing home sales suggests that high rates and prices are influencing decisions of both sellers and buyers.

• New Listings Down: New listings, indicating homes being put up for sale, have decreased by 5.7% compared to the same time last year. This marks 59 weeks of fewer new listings. However, the gap is shrinking, showing a 2.4 percentage point improvement from the previous week. Even though more new listings might appear this fall, inventory will remain constrained, still being over 20% below pre-pandemic levels.

• Inventory Overview: The year-over-year inventory has decreased by 7.2% for the ninth consecutive week. This follows 58 weeks of a YoY increase in inventory. While inventory has risen from the record lows of late 2021 and early 2022, it's unlikely to see new record lows this year.

Home sales will bottom out in 2023, analysts forecast link

• Mortgage Rates and Home Sales: Home sales are anticipated to hit their lowest point this year. However, the potential for a 2024 recovery largely depends on the trajectory of mortgage rates in the coming year. Differing predictions emerge from Fannie Mae and the Mortgage Bankers Association regarding the future of these rates and their impact on home sales.

• Economic Predictions and Their Impact: While Fannie Mae economists anticipate a mild recession in early 2024, they highlight a greater concern: the resurgence of inflation. This could prompt the Federal Reserve to reintroduce interest rate hikes. The overarching economic health, whether it's a mild recession or a soft landing, might not significantly alter home sales. However, if inflation rises again, it could necessitate further action from the Federal Reserve.

• Housing Market Dynamics: Current projections from Fannie Mae suggest a 14% decrease in home sales this year, dropping to 4.9 million. New home sales are expected to increase by 7%, but this won't compensate for the predicted 16% decline in existing home sales. The forecast for the next year remains consistent, with a less than 1% rise in existing home sales and new home sales remaining stable.

Americans are applying for mortgages at the lowest rate in 28 years link

• US mortgage applications for home purchases have plummeted, reaching their lowest point in 28 years. The Mortgage Bankers Association data reveals a significant decline, with refinancing also dropping by 35% compared to the same week in the previous year.

• Mortgage rates have surged, with the week ending August 18 witnessing a rate of 7.31%, the highest in 23 years. This escalation in rates has made many potential homebuyers hesitant, leading to a six-week consecutive drop in mortgage applications for homes.

• The current housing market is notably less affordable than it was during the peak leading up to the 2008 financial crisis. The Atlanta Fed's Home Ownership Affordability Monitor indicates a decline in affordability, and data from the National Association of Realtors shows a significant decrease in existing home sales.

Atlanta May Become the Most Attractive Market for Multifamily Acquisitions link

• Elevated Refinance Risk in Atlanta: Due to the significant rise in interest rates over the past two years, many multifamily properties are at risk of refinancing. AI-driven analysis by Keyway indicates that among Sun Belt markets, Atlanta faces the highest refinance risk. This is attributed to a large proportion of properties that might not get refinanced, making Atlanta a potential hotspot for acquisitions.

• Debt Maturities and Property Units: Over the next two years, debt maturities exceeding $1 trillion will pressurize commercial real estate owners, especially in the small multifamily properties sector. The analysis reveals that 23.7% of Atlanta’s 540,000 multifamily units and 26.7% of the outstanding debt are in properties with loans maturing from now until December 2025.

• Comparative Analysis with Other Markets: While Atlanta leads in refinance risk, Austin follows with 17% of its 330,000 units having loans due in the next 18 months. Nashville stands at 14.7% of its 150,000 units, and Dallas-Fort Worth, despite being the healthiest market, poses a risk in an economic downturn due to the sheer size of its 840,000 units.

Housing market dynamics may bode well for neighborhood retail, multifamily link

• The housing market is currently navigating unfamiliar waters. Affordability has plummeted, now being even worse than during the peak of the mid-2000s housing frenzy. Additionally, the inventory of homes available for sale has reached its lowest point in several decades.

• A significant factor contributing to these affordability challenges is the surge in mortgage rates, which have now reached 20-year highs. On the other hand, the limited supply can be attributed to a drastic reduction in new construction since the Global Financial Crisis. This has led to a situation where selling an existing home often means settling for a valuation much lower than recent market rates.

• From a commercial real estate perspective, this scenario presents opportunities. The growth of suburban areas supports neighborhood and community retail centers, especially since there has been minimal new development in this sector over the past decade. Furthermore, the lack of homes available for sale combined with mortgage affordability issues suggests a positive outlook for multifamily properties, as fewer individuals might consider moving out to buy their own homes.

CRE Lending Down 53 Percent YoY link

• Significant Decline in Lending: The second quarter 2023 U.S. capital markets report from Newmark revealed a 52% year-over-year drop in CRE debt origination volumes. Additionally, the current market has 32% fewer lenders than the previous year. This decline has been observed across all CRE asset types, with banks, debt funds, and commercial mortgage-backed securities all pulling back.

• Private Equity's Potential Impact: Despite the downturn, private equity has amassed a record $219 billion of dry powder. However, this might not be sufficient to counteract the impending $625 billion in CRE debt set to mature in the next three years. The private equity sector could potentially mitigate some office defaults in the upcoming months and boost sectors like multifamily and industrial.

• Challenges Ahead: Newmark identified approximately $1.2 trillion of outstanding CRE as "potentially troubled." Over the next three years, more than $626 billion of CRE debt is set to mature, with multifamily and office sectors being the primary areas of concern. U.S. banks are expected to bear the brunt of this potentially troubled debt, accounting for 51% of CRE maturing between 2023 and 2025.

Opportunities

ADUs Surge in California, Gain Momentum Nationwide link

• Rising Popularity of ADUs: Accessory Dwelling Units (ADUs) are witnessing a significant surge, particularly with the increasing trend of working from home. Historically known by various names like granny flats or casitas, ADUs serve as secondary units to primary homes, offering independent living spaces. They are typically compact, self-sufficient structures, often less than 1,000 square feet.

• California's ADU Boom: Addressing the housing crisis, California introduced zoning changes in 2017, simplifying the process of adding ADUs to single-family lots. The impact was immediate: ADU construction jumped from 1,100 in 2016 to a whopping 23,600 in 2021. In total, about 68,000 ADUs were constructed in California between 2017 and 2021, providing a partial solution to the housing demand-supply gap.

• Nationwide Trend & Challenges: As ADUs gain traction in California, the trend is spreading to other states. While they present a solution to housing shortages, challenges like NIMBY-ism, construction costs, and concerns about neighborhood dynamics persist. However, the potential benefits, such as rental income for homeowners and innovative housing solutions, make ADUs a promising strategy for the future.