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

Opening Summary

Welcome to today’s Daily Dose of Real Estate. As we navigate through the final quarter of 2024, the real estate landscape continues to evolve, presenting both challenges and opportunities across various sectors. Today’s report highlights steady home price appreciation, a cooling mortgage market, stabilizing multifamily trends, and the growing influence of ESG factors in commercial real estate. We’ll dive into the latest data and expert insights to provide you with a comprehensive overview of the current state of the U.S. real estate market.

Key Takeaways:

• U.S. house prices rose 5.4% from July 2023 to July 2024, according to FHFA

• Multifamily market showing signs of stabilization with rent growth moderating to 2.5% YoY

• ESG considerations and technology adoption are reshaping the commercial real estate landscape

• Mortgage applications decreased 17.0% week-over-week as of October 11, 2024

• 30-year fixed mortgage rate increased to 6.52%, highest level since August

• Housing starts dropped 2.5% in September, but remain 7.5% above last year’s pace

• Adjustable-rate mortgages (ARMs) are making a comeback, but under different circumstances than during the subprime crisis

• CMBS loan issuance more than doubled year-over-year in August 2024

• REITs outperforming the broader market despite economic uncertainties

Residential Real Estate Markets

The Federal Housing Finance Agency (FHFA) has released its latest House Price Index (HPI) report, providing insights into the state of the U.S. housing market FHFA:

National House Price Appreciation: U.S. house prices rose 5.4% from July 2023 to July 2024. For the month of July, house prices rose 0.8% compared to June.

Regional Variations: The top five areas in annual appreciation were:

• District of Columbia: 9.2%

• Maine: 8.9%

• New Jersey: 8.7%

• Rhode Island: 8.6%

• New Hampshire: 8.5%

The bottom five areas were:

• Idaho: 1.3%

• Montana: 1.5%

• Washington: 1.7%

• Nevada: 1.8%

• Arizona: 2.0%

Monthly Changes: House prices rose in all nine census divisions in July 2024 compared to June 2024. The Pacific division experienced the strongest monthly increase at 1.2%, while the Mountain division saw the smallest increase at 0.3%.

Dr. Nataliya Polkovnichenko, Supervisory Economist in FHFA’s Division of Research and Statistics, commented on the findings: “U.S. house prices continued to rise in July, with the annual growth rate reaching 5.4 percent. This represents a slight acceleration from the previous month’s revised annual growth rate of 5.2 percent. The rate of house price growth has remained relatively stable over the past six months, despite the recent increases in mortgage interest rates.”

Recent data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development show that housing starts dropped slightly in September ABA Banking Journal. Key points include:

• Overall decline: Housing starts decreased 2.5% to a seasonally adjusted annual rate of 1.36 million units in September.

• Single-family starts: Dropped 4.2% to a rate of 963,000 units.

• Multifamily starts: Increased 1.6% to a rate of 397,000 units.

• Regional variations: The Midwest saw a 4.7% increase in starts, while other regions experienced declines.

• Year-over-year comparison: Despite the monthly drop, housing starts remain 7.5% above the September 2023 rate of 1.26 million units.

• Building permits: Increased 1.3% to a rate of 1.47 million units in September.

The National Association of Home Builders (NAHB) latest Construction Labor Market Report reveals critical insights into the residential construction workforce NAHB: • The U.S. needs approximately 723,000 new construction workers per year to address the housing deficit • Currently, there are 3.4 million workers in residential construction • The average hourly wage in construction is $38.30, higher than the national average for all occupations • Women now make up 10.8% of the construction workforce, up from 9.1% in 2017 • Hispanics account for a record high 31.1% of the construction labor force

Mortgage Markets

The mortgage market continues to face challenges as rates rise and applications decline. According to the Mortgage Bankers Association’s (MBA) Weekly Applications Survey for the week ending October 11, 2024, mortgage applications decreased significantly MBA:

• Overall decline: Mortgage applications decreased 17.0% from one week earlier.

• Refinance activity: The Refinance Index decreased 26% from the previous week and was 111% higher than the same week one year ago.

• Purchase activity: The seasonally adjusted Purchase Index decreased 7% from one week earlier. The unadjusted Purchase Index was 7% higher than the same week one year ago.

• Interest rates: The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.52% from 6.36%, with points increasing to 0.65 from 0.62 for 80% loan-to-value ratio loans.

• Loan types: The refinance share of mortgage activity decreased to 46.5% of total applications from 52.4% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 5.9% of total applications.

Joel Kan, MBA’s Vice President and Deputy Chief Economist, commented on the trends: “Mortgage rates moved higher for the third consecutive week, with the 30-year fixed rate increasing to 6.52 percent, its highest level since August. The recent uptick in rates has put a damper on applications. Refinance applications fell 26 percent to their lowest level since August, with comparable drops in both conventional and government refinances.”

An interesting trend is emerging in the mortgage market: the resurgence of adjustable-rate mortgages (ARMs). According to a recent Morningstar article, ARMs are making a comeback, but under different circumstances than during the subprime crisis Morningstar. Key points include:

• ARM share increasing: The share of ARMs in total mortgage applications has risen to 5.9%, up from historical lows during the pandemic.

• Different borrower profile: Unlike during the subprime crisis, today’s ARM borrowers tend to be more financially stable with higher credit scores.

• Stricter regulations: Post-2008 regulations have made ARMs safer, with features like lifetime caps on interest rate increases.

• Potential savings: In the current high-rate environment, ARMs can offer initial savings compared to fixed-rate mortgages.

• Market expectations: The popularity of ARMs suggests that some borrowers anticipate interest rates to decrease in the coming years.

Commercial Real Estate Markets (including Multifamily)

The commercial real estate market continues to evolve, with different sectors showing varied performance. Recent reports provide insights into current trends and future outlooks for the industry.

Avison Young’s U.S. Multifamily Quarterly Report for Q2 2024 highlights the stabilization of the multifamily market after pandemic-related disruptions Avison Young:

• Rent Growth Moderation: Average rent growth has slowed to 2.5% year-over-year, indicating a more sustainable pace compared to the rapid increases seen in previous years.

• Steady Occupancy: National occupancy rates remain stable at approximately 95%, suggesting a healthy balance between supply and demand.

• Construction Activity: New construction has slowed due to higher costs and tighter lending conditions, which may help maintain market equilibrium.

• Regional Performance: Sunbelt markets continue to outperform other regions, although the gap is narrowing as other markets catch up.

• Investment Trends: While transaction volume has decreased, investor interest remains strong, particularly for high-quality assets in prime locations.

Deloitte’s 2025 Commercial Real Estate Outlook report provides a forward-looking perspective on the industry, highlighting several key trends that are shaping the future of commercial real estate Deloitte:

• ESG Focus: Environmental, Social, and Governance (ESG) considerations are increasingly influencing investment decisions and operational strategies in the CRE sector.

• Technology Adoption: The industry is accelerating its adoption of advanced technologies, particularly in areas such as property management, tenant experience, and data analytics.

• Flexible Spaces: The demand for flexible spaces is growing across various property types, including office, retail, and industrial sectors.

• Capital Markets: While facing some challenges, the CRE capital markets are also seeing opportunities, particularly in distressed assets and alternative financing methods.

• Talent Management: Acquiring and retaining skilled professionals is becoming a critical focus for CRE firms as the industry becomes more technology-driven and ESG-focused.

The National Association of Realtors (NAR) has released its Commercial Real Estate Metro Market Reports for Q2 2024, providing comprehensive insights into the nation’s largest metropolitan commercial real estate markets NAR. These reports evaluate a range of factors affecting the market, including:

• Economic and demographic conditions of metro areas • Commercial market indicators such as net absorption, vacancy rates, rent, deliveries, inventory, total sales volume, and cap rates

Key findings from the Q2 2024 reports include:

• Varied Performance Across Markets: Different metro areas are experiencing diverse trends in commercial real estate, reflecting local economic conditions and demand factors.

• Sector-Specific Trends:

• Investment Activity: Total sales volume and cap rates differ across markets, indicating varying levels of investor interest and risk perception.

Economic Indicators: The reports highlight how local economic factors such as job growth, population trends, and GDP are influencing commercial real estate performance in each metro area.

CMBS / REIT Markets

The CMBS market continues to show resilience despite ongoing challenges, particularly in the office sector. According to S&P Global Ratings’ latest U.S. CMBS Update for Q3 2024, the market is experiencing both robust issuance and increased delinquency rates [S&P Global](https://www.spglobal.com/ratings/en/research/articles/241011-u-s-cmbs-update-q3-2024-issuance-remains-robust-despite-accelerated-office-downgrades-13282859):

Rising Delinquency Rates: The overall 30-plus day delinquency (DQ) rate for U.S. CMBS transactions rose 40 basis points quarter-over-quarter to 5.2% as of September 2024.

• Office Sector Struggles: The office DQ rate increased 82 basis points to 8.2%, remaining the highest among major property types. This is followed by retail (6.6%) and lodging (5.4%).

• Multifamily and Industrial Performance: The multifamily DQ rate rose 94 basis points to 4.2%, while industrial continued to outperform with a 0.3% DQ rate.

• Loan Modifications: Modified loans represented approximately 10.4% ($75.4 billion) of the $724.7 billion total U.S. CMBS outstanding balance, up from just under 10% in Q2. Office and multifamily modification rates of 7.6% and 10.0% respectively are causing some concern.

• Special Servicing: The overall special servicing rate increased approximately 40 basis points quarter-over-quarter to 7.7%, with office and retail sectors leading at 12.3% and 10.6% respectively.

Despite these challenges, CMBS issuance remains strong. S&P Global Ratings has raised its full-year 2024 CMBS forecast to the $60 billion-$70 billion range, with potential for further upside if the single-asset single-borrower (SASB) market’s strong issuance pace continues.

The office sector continues to face significant headwinds, with many office-backed SASB transactions experiencing downgrades across the capital stack in Q3, including ‘AAA (sf)’ and ‘AA (sf)’ rated classes. This is due to sharp valuation declines and deteriorating leasing conditions.

In the REIT market, performance has been relatively strong. REITs have significantly outperformed the broader market since the end of June, with U.S. REITs returning 13.2% compared to 3.7% for the S&P 500 [Seeking Alpha](https://seekingalpha.com/article/4726582-important-trends-for-reit-investors). This outperformance is largely attributed to expectations of interest rate cuts and signs of economic slowdown.

Looking ahead, the CMBS market faces both challenges and opportunities. As noted by CBC Worldwide, volatility is expected to persist, particularly in the office sector where delinquency rates are projected to reach nearly 10% by 2025 due to ongoing remote work trends [CBC Worldwide](https://www.cbcworldwide.com/blog/cmbs-market-outlook-volatility-and-opportunity-in-q4-2024-and-beyond). However, this volatility may also create opportunities for investors in distressed assets and alternative financing methods.

Closing Statement

As we conclude today’s Daily Dose of Real Estate, it’s clear that the market continues to present a complex and dynamic landscape. While residential real estate shows steady price appreciation, the mortgage market faces headwinds from rising rates. The commercial sector, particularly multifamily, is finding its footing post-pandemic, with ESG considerations and technology adoption playing increasingly important roles. The CMBS market, despite showing resilience in issuance, faces challenges with rising delinquency rates, especially in the office sector. As always, local market conditions vary significantly, underscoring the importance of granular analysis for investors and industry professionals. Stay tuned for more updates as we continue to monitor these evolving trends in the real estate market.

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