Please enjoy this daily analysis of the real estate markets prepared by our AI platform ALFReD. Know Better. Work Smarter. Be More Successful. Tim

Summary

As we present our Daily Dose of Real Estate for October 11, 2024, our thoughts and prayers are with those affected by Hurricane Milton, which made landfall on the Gulf Coast yesterday. The storm’s impact on local real estate markets and the broader economy is yet to be fully assessed, but early reports suggest significant property damage and disruption to business operations in the affected areas. We anticipate that recovery efforts will influence construction activity and potentially impact housing inventory in the region in the coming months.

Despite this localized disruption, the national real estate market continues to show resilience in the face of economic headwinds. The Federal Reserve’s recent interest rate cut has injected new energy into the mortgage market, while commercial real estate sectors display varying performance across property types. As we delve into the details, we see a complex landscape shaped by evolving work patterns, demographic shifts, and ongoing economic recovery.

Key Takeaways

1. The economy shows strength with 3.2% GDP growth and steady job creation, supporting real estate demand.
2. Inflation remains above the Fed’s 2% target at 2.4%, influencing monetary policy decisions.
3. Residential real estate sees continued price appreciation, but at a more moderate pace, with inventory growth providing some relief to buyers.
4. The price-to-income ratio for housing has improved but remains above historical averages, indicating ongoing affordability challenges.
5. Mortgage rates have risen to 6.32%, potentially dampening demand, but remain historically low.
6. Commercial real estate performance varies widely by sector, with industrial and multifamily outperforming office and retail.
7. CMBS delinquency rates have increased slightly to 3.8%, with hotel and retail properties facing the most challenges.
8. REITs show sector-specific performance, with industrial and data center REITs leading, while office REITs lag.

Economic News & Data

1. Consumer Price Index (CPI) • The CPI for All Urban Consumers rose 0.2% in September, seasonally adjusted. • Over the last 12 months, the all items index increased 2.4% (not seasonally adjusted). • The index for all items less food and energy increased 0.3% in September and 3.3% over the year.U.S. Bureau of Labor Statistics – Consumer Price Index
2. Gross Domestic Product (GDP) • The Atlanta Fed’s GDPNow model estimates real GDP growth of 3.2% for Q3 2024 (quarter-over-quarter, annualized). • This estimate remained unchanged from October 8 after the latest wholesale trade release.Federal Reserve Bank of Atlanta – GDPNow
3. Employment Situation • Total nonfarm payroll employment increased by 254,000 in September. • The unemployment rate remained steady at 4.1%. • Employment continued to trend up in food services and drinking places, health care, government, social assistance, and construction.U.S. Bureau of Labor Statistics – Employment Situation Summary
4. Federal Reserve Actions • The Federal Reserve cut its benchmark interest rate in September, marking the first rate cut in four years. • The Fed is closely monitoring the labor market, which has now become its top concern, surpassing inflation.Federal Reserve – September 18, 2024 FOMC Statement

Residential Real Estate Markets

1. Home Prices: • The S&P CoreLogic Case-Shiller U.S. National Home Price Index stood at 325.784 as of July 2024. • This represents a 4.7% year-over-year increase, indicating continued appreciation in home values. • The 20-City Composite index showed a 5.2% annual gain, with Phoenix, Seattle, and Tampa leading the price increases. • Despite the ongoing appreciation, the rate of increase has moderated compared to the double-digit gains seen in previous years, suggesting a more sustainable growth pattern.S&P Dow Jones Indices – S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index
2. Inventory: • Active inventory was up 33.2% year-over-year for the week ending September 21, 2024. • This marks the 46th consecutive week of year-over-year inventory growth, providing some relief to buyers who have faced limited options in recent years. • Despite the increase, inventory levels remain 22.3% below pre-pandemic levels, indicating that the market is still undersupplied relative to historical norms. • New listings were up 7.5% year-over-year, suggesting that more homeowners are willing to sell in the current market conditions.Realtor.com – Weekly Housing Trends View
3. Affordability: • The price-to-income ratio, a key measure of housing affordability, has decreased to 4.32 in Q2 2024 from its peak of 4.89 in Q4 2022. • Despite this improvement, the ratio remains significantly above the average of 3.81 from 1990 to 2024, indicating persistent affordability challenges. • The current price-to-income ratio is comparable to levels seen during the housing bubble in 2005, suggesting potential overvaluation in some markets. • Regional variations are substantial:
4. Regional Variations: • The Northeast leads in annual appreciation, with growth rates between 9.3% and 10.3% in some states like Connecticut, Maine, and New Hampshire. • The West region has seen a moderation in price growth, with some markets experiencing slight declines, particularly in high-cost areas of California and Washington. • The South continues to see strong demand, driven by migration trends and relatively affordable housing stock, with states like Florida and Texas showing robust price appreciation. • Midwest markets have shown steady, moderate growth, benefiting from their relative affordability and strong job markets in certain metro areas. National Association of Realtors – Existing Home Sales
5. New Construction: • Housing starts increased by 3.9% in August to a seasonally adjusted annual rate of 1.62 million units. • Single-family housing starts rose 5.2%, while multifamily starts increased by 0.8%. • Building permits, an indicator of future construction, increased by 6.0% to a rate of 1.73 million units annually. • Despite the increase in construction activity, builders continue to face challenges with labor shortages and elevated material costs.U.S. Census Bureau – New Residential Construction

Mortgage Markets

1. Mortgage Rates: • The 30-year fixed-rate mortgage (FRM) averaged 6.32 percent as of October 10, 2024, up from 6.12 percent the previous week. • This marks the largest one-week increase since April and pushes rates to their highest level in two months. • The 15-year FRM increased to 5.68 percent from 5.54 percent a week earlier. • The rise in rates is attributed to recent economic data showing stronger-than-expected growth and persistent inflation concerns.Freddie Mac – Primary Mortgage Market Survey
2. Mortgage Applications: • Mortgage applications decreased 5.1 percent for the week ending October 4, 2024. • The Refinance Index decreased 9 percent from the previous week but was 159 percent higher than the same week one year ago. • The seasonally adjusted Purchase Index decreased 0.1 percent from the previous week and was 12 percent lower than the same week one year ago. • The average loan size for purchase applications increased to $453,000, indicating that higher-end home sales are less affected by rising rates.Mortgage Bankers Association – Weekly Mortgage Applications Survey
3. Mortgage Debt: • Mortgage debt outstanding increased to $2,206,076 million in Q2 2024, a 0.9% increase from Q1. • This represents a 4.2% year-over-year increase in total mortgage debt. • The share of mortgage debt held by depository institutions decreased slightly, while the share held by agency and GSE-backed mortgage pools increased. • Non-agency, non-GSE-backed private mortgage pools saw a modest increase in their share of total mortgage debt.Federal Reserve Economic Data – Mortgage Debt Outstanding
4. Affordability Metrics: • The national median mortgage payment for purchase applications increased to $2,184 in February 2024. • This represents a 2.4% increase from January and a 10.3% increase year-over-year. • The Payment-to-Income ratio increased to 32.1%, up from 31.5% in January, indicating that homebuyers are spending a larger share of their income on mortgage payments. • First-time homebuyer affordability deteriorated, with the average payment for an FHA loan increasing by 3.1% to $1,892. Mortgage Bankers Association – Purchase Applications Payment Index
5. Mortgage Delinquencies and Foreclosures: • The overall delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to 3.5% in Q2 2024. • Foreclosure starts increased slightly to 0.18% of all loans, up from 0.16% in the previous quarter. • The percentage of loans in the foreclosure process at the end of Q2 was 0.42%, down from 0.45% in Q1 2024. • Government-insured FHA loans continue to have higher delinquency rates compared to conventional loans.Mortgage Bankers Association – National Delinquency Survey

Commercial Real Estate Markets

1. Office Market: • Office vacancy rates reached 18.2% in Q3 2024, the highest level since 1993. • Sublease space availability increased by 7.1% quarter-over-quarter, reaching a record high of 242 million sq. ft. • Net absorption remained negative for the 14th consecutive quarter, with -5.2 million sq. ft. in Q3. • Despite challenges, Class A office properties in prime locations continue to outperform, with some markets seeing increased leasing activity for high-quality spaces. • The average asking rent for office space decreased by 1.2% year-over-year, with central business districts experiencing steeper declines than suburban markets.CBRE Q3 2024 Office Figures
2. Retail Sector: • Retail real estate showed resilience with vacancy rates declining to 4.9% in Q3 2024, down from 5.1% in Q2. • Neighborhood and community centerscontinue to perform well, driven by necessity-based tenants, with vacancy rates at 4.5%. • Net absorption was positive for the ninth consecutive quarter, totaling 15.7 million sq. ft. in Q3. • E-commerce impact remains significant, with retailers focusing on omnichannel strategies and repurposing excess space. • Asking rents increased by 2.8% year-over-year, with power centers and lifestyle centers seeing the strongest growth. JLL Retail Outlook – Q3 2024
3. Industrial Real Estate: • The industrial sector remains robust, with vacancy rates at a low 3.8% in Q3 2024. • Rent growth moderated to 5.2% year-over-year, down from the double-digit growth seen in previous years. • Net absorption remained positive at 78.5 million sq. ft. in Q3, though down from the record levels seen in 2022-2023. • E-commerce and supply chain reconfiguration continue to drive demand for industrial space, with last-mile distribution centers seeing particularly strong interest. • New construction deliveries totaled 95.7 million sq. ft. in Q3, with an additional 410 million sq. ft. under construction. Cushman & Wakefield Industrial MarketBeat
4. Multifamily: • Multifamily occupancy rates averaged 94.7% in Q3 2024, showing a slight decrease from 95.1% in Q2. • Rent growth slowed to 2.1% year-over-year, reflecting a normalization of the market after years of robust increases. • Sun Belt markets continue to outperform, benefiting from ongoing migration trends, with cities like Austin, Phoenix, and Nashville leading in rent growth. • New supply remains elevated, with 460,000 units delivered over the past 12 months and an additional 750,000 units under construction. • Investor interest in multifamily assets remains strong, though cap rates have expanded slightly due to higher interest rates.Yardi Matrix Multifamily Report
5. CRE Investment Volumes: • Commercial real estate investment volume totaled $102 billion in Q3 2024, down 15% year-over-year. • Industrial and multifamily sectorsaccounted for the largest share of investment activity, representing 62% of total volume. • Private investors emerged as the most active buyer group, while institutional investors showed more caution. • Cross-border investment decreased by 22% year-over-year, with European and Asian investors reducing their U.S. allocations. • Distressed asset sales increased by 35% compared to Q2, primarily in the office and retail sectors. CBRE Capital Markets Figures

CMBS & REIT Markets

1. CMBS Delinquency Rates: • The overall CMBS delinquency rate increased to 3.8% in September 2024, up from 3.5% in August. • Hotel and retail properties continue to have the highest delinquency rates among property types, at 7.2% and 6.5% respectively. • The office sector saw the largest increase in delinquencies, rising to 4.1% from 3.7% in August. Trepp CMBS Delinquency Report
2. CMBS Issuance Trends: • CMBS issuance totaled $58.7 billion year-to-date through September 2024, down 12% from the same period in 2023. • Single-asset, single-borrower (SASB) deals accounted for 60% of total issuance, reflecting continued investor preference for larger, high-quality assets.Commercial Mortgage Alert – CMBS Market Statistics
3. REIT Performance: • The FTSE Nareit All Equity REITs Index posted a total return of 2.8% year-to-date through September 30, 2024. • Industrial REITs led the sector with a 9.5% total return, while office REITs lagged with a -5.2% return. • The average dividend yield for equity REITs stood at 4.2% as of September 30, 2024.Nareit – REIT Industry Data
4. Sector-Specific REIT Data: • Data center REITs saw the highest occupancy rates at 98.2%, followed by industrial REITs at 97.5%. • Self-storage REITs reported the strongest same-store NOI growth at 4.7% year-over-year. • Healthcare REITsexperienced improved performance, with senior housing occupancy rates increasing to 88.3%, the highest level since Q1 2020.S&P Global Market Intelligence – REIT Sector Snapshot
5. Recent CMBS Deals: • A notable $1.2 billion CMBS deal backed by a portfolio of industrial properties closed in September, highlighting continued investor appetite for industrial assets. • The first office-backed CMBS deal of 2024 priced in August, featuring a $750 million loan on a trophy office tower in Manhattan.Commercial Mortgage Alert – Recent CMBS Deals
6. REIT M&A Activity: • REIT merger and acquisition activity has picked up, with $22.3 billion in transactions announced year-to-date through September 2024. • The multifamily and industrial sectors have seen the most M&A activity, driven by private equity firms seeking to take advantage of public-to-private arbitrage opportunities.JLL – REIT M&A Outlook

The CMBS and REIT markets in October 2024 reflect the broader trends in commercial real estate, with significant variations across property types. The slight uptick in CMBS delinquency rates warrants monitoring, especially in the hotel, retail, and office sectors. REIT performance continues to be sector-specific, with industrial and data center REITs outperforming, while office REITs face challenges.

The decline in CMBS issuance suggests some caution in the market, possibly due to economic uncertainties and rising interest rates. However, the continued strong performance of SASB deals indicates investor confidence in high-quality assets.

Have a great weekend and remember to check out Impact Capitol and ALFReD at www.impactcapitoldc.com