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 Dose of Real Estate – October 22, 2024

Welcome to today’s edition of the Daily Dose of Real Estate, your comprehensive source for the latest trends, data, and insights shaping the U.S. real estate market. As we navigate through a complex landscape of rising mortgage rates, generational housing challenges, and shifting commercial real estate dynamics, our goal is to provide you with a clear and actionable overview of the market.

Today’s edition highlights the resilience of certain sectors, particularly REITs and multifamily properties, while also addressing the ongoing challenges in affordability and office real estate. We’ll explore how policy changes, from potential Fed rate cuts to manufactured housing reforms, could impact the market in the coming months.

Key Takeaways:

– Mortgage rates have jumped significantly, reaching levels not seen since July

– Gen Z and Millennials face unprecedented challenges in entering the housing market

– Investor sentiment is shifting back to multifamily amid broader CRE decline

– Fed rate cuts are spurring CRE recovery, but office struggles persist

– Healthcare real estate is evolving, with a focus on patient-centric designs

– REITs outperformed broader markets in the third quarter, showing resilience

– Manufactured housing sees potential reforms to increase affordable housing options

Economic Data & News

Recent economic data releases from government agencies and the Federal Reserve provide crucial context for understanding the current real estate landscape:

• Consumer Price Index (CPI): According to the Bureau of Labor Statistics, the CPI for All Urban Consumers rose 0.2% in September on a seasonally adjusted basis, and 2.4%over the last 12 months (not seasonally adjusted). The index for all items less food and energy increased 0.3% in September and 3.3% over the year. This data suggests that inflation pressures are moderating but remain above the Federal Reserve’s 2% target U.S. Bureau of Labor Statistics.

• Industrial Production: The Federal Reserve reported that industrial production decreased 0.3% in September after advancing 0.3% in August. Manufacturing output moved down 0.4%, and mining fell 0.6%, while utilities gained 0.7%. Capacity utilization edged down to 77.5%, which is 2.2 percentage points below its long-run average. This data indicates some softening in the industrial sector Federal Reserve.

• Employment Situation: The Bureau of Labor Statistics reported that total nonfarm payroll employment increased by 254,000 in September, and the unemployment rate remained relatively stable 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.

• International Trade: The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced that the goods and services deficit was $70.4 billion in August, down from $78.9 billion in July. August exports were $256.0 billion, $4.1 billion more than July exports. August imports were $326.3 billion, $4.4 billion less than July imports U.S. Bureau of Economic Analysis.

• Personal Consumption Expenditures (PCE): The Bureau of Economic Analysis reported that PCE increased in all 50 states and the District of Columbia in 2023. The percent change ranged from 8.1% in Florida to 4.7% in Iowa. Nationally, current-dollar PCE increased 6.4% in 2023 after increasing 9.8% in 2022 U.S. Bureau of Economic Analysis.

• GDP Forecast: The Federal Reserve Bank of Atlanta’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 was 3.0% as of October 18, 2024 Federal Reserve Bank of St. Louis.

Residential Real Estate Markets

The residential real estate market continues to face challenges, with affordability and inventory constraints at the forefront. New developments in manufactured housing could provide some relief, but younger generations are particularly impacted by the current market conditions:

• Gen Z and Millennial Housing Struggles: A recent report highlights the significant challenges faced by younger generations in the housing market [Fortune](https://fortune.com/2024/10/19/gen-z-millennials-housing-unaffordable-starter-home/):

• Affordability Crisis: The dream of homeownership is becoming increasingly unattainable for Gen Z and Millennials, with starter homes now out of reach for many.

• Price Increases: The median sales price for starter homes has skyrocketed by 45% since 2019, significantly outpacing wage growth.

• Inventory Shortage: The supply of starter homes has plummeted by 46% since 2019, creating fierce competition among buyers.

• Generational Divide: While older generations benefited from more affordable housing markets, younger buyers face unprecedented challenges in building wealth through homeownership.

• Long-term Implications: The inability to enter the housing market could have lasting effects on wealth accumulation and financial stability for these generations.

• Housing Costs and Inflation: The persistent shortage of affordable housing may lead to continued upward pressure on shelter costs, potentially reigniting inflationary pressures [Yahoo Finance](https://finance.yahoo.com/news/inflation-hasn-t-defeated-yet-174457538.html).

• Rental Market Impact: The rental market is experiencing significant strain, with rents rising at the fastest pace in decades. This trend is particularly concerning for younger generations who are priced out of homeownership [Yahoo Finance](https://finance.yahoo.com/news/inflation-hasn-t-defeated-yet-174457538.html).

• Manufactured Housing Reform: Two significant developments in manufactured housing reform could potentially increase affordable housing options [Niskanen Center](https://www.niskanencenter.org/two-big-developments-in-manufactured-housing-reform-new-rules-new-bill/):

Manufactured Housing Reform and Affordability Act: A bipartisan bill aims to modernize regulations, streamline approvals, enhance consumer protections, and expand financing options.

• Potential Impact: These reforms could make manufactured housing a more viable and attractive option for affordable homeownership, potentially easing some of the pressure on the broader housing market, especially for younger buyers.

• Policy Implications: The ongoing housing challenges and these new reforms highlight the continued focus of policymakers on addressing affordability and supply issues in the housing market [Yahoo Finance](https://finance.yahoo.com/news/inflation-hasn-t-defeated-yet-174457538.html).

Mortgage Markets

The mortgage market has seen significant movement in recent days, with rates reaching levels not seen in months. However, new forecasts suggest potential easing in the future:

Current Rates: As of October 21, 2024, the average rate for a 30-year fixed mortgage has jumped to 6.82%, an increase of 0.14% from the previous day. This marks the highest level since July and represents a significant shift in the mortgage landscape [Mortgage News Daily](https://www.mortgagenewsdaily.com/mortgage-rates/mnd).

Rate Trends: Other loan types have also seen increases:

• 15-year fixed rates are now at 6.19%, up 0.12%

• 30-year FHA loans are at 6.25%, an increase of 0.12%

• 30-year VA loans have risen to 6.25%, up 0.11%

• 7/1 ARM rates have seen the largest jump, increasing by 0.20% to 6.75% [Mortgage News Daily](https://www.mortgagenewsdaily.com/mortgage-rates/mnd).

Freddie Mac Economic Forecast: Despite current high rates, Freddie Mac’s latest forecast paints a picture of continued economic strength and potential easing in the mortgage market [Freddie Mac](https://www.freddiemac.com/research/forecast/20241018-us-economy-remains-strong):

• Economic Growth: The U.S. economy is expected to grow by 2.1% in 2024, with a slight moderation to 1.9% in 2025.

• Inflation Outlook: Inflation is projected to continue its downward trend, reaching 2.5% by the end of 2024 and 2.2% by the end of 2025.

• Labor Market: The unemployment rate is forecast to remain low, averaging 3.8% in 2024 and 4.0% in 2025.

• Mortgage Rate Projection: Freddie Mac anticipates a gradual decline in mortgage rates, with the 30-year fixed-rate mortgage averaging 6.7% in 2024 and further easing to 6.2% in 2025.

• Housing Market Expectations: Home sales are predicted to increase by 6% in 2024 and an additional 11% in 2025, reaching 5.4 million units. House price appreciation is expected to moderate to 2.6% in 2024 and 2.2% in 2025.

• Market Implications: The Freddie Mac forecast suggests a more optimistic outlook for the housing market in the coming years, with potential relief for homebuyers as mortgage rates are expected to ease and home sales increase.

Commercial Real Estate Markets (including Multifamily)

The commercial real estate sector is experiencing significant shifts, with varying performance across different asset classes:

• Multifamily Resurgence: Investor interest is cooling across most commercial real estate sectors, but multifamily properties are regaining appeal [CRE Daily](https://www.credaily.com/briefs/investor-sentiment-shifts-back-to-multifamily-amid-broader-cre-decline/):

• Sentiment Shift: After a period of caution, investors are showing renewed interest in multifamily assets.

• Driving Factors: High mortgage rates and rising single-family home prices are pushing more people towards renting, boosting demand for multifamily properties.

• Market Dynamics: The multifamily sector is seen as more resilient compared to other CRE sectors, particularly office and retail.

Fed Rate Cuts Impact: Federal Reserve rate cuts are expected to spur a commercial real estate recovery, though challenges remain [CRE Daily](https://www.credaily.com/briefs/fed-rate-cuts-spur-cre-recovery-but-office-struggles-persist/):

• Recovery Expectations: As the Fed cuts interest rates, cap rates in real estate are expected to shift, potentially driving investment decisions.

• Sector Variations: Industrial and multifamily sectors are poised for quicker recoveries, while the office sector continues to face significant headwinds.

– Office Sector Struggles: Despite potential rate cuts, the office market remains challenged due to ongoing remote work trends and oversupply in some markets.

Healthcare Real Estate Evolution: The healthcare real estate industry is undergoing significant changes, with a growing focus on patient-centric designs [RE Journals](https://rejournals.com/as-the-healthcare-real-estate-industry-evolves-medical-providers-need-to-take-care-of-their-patients-too/):

• Patient-Centric Approach: Healthcare providers are increasingly prioritizing patient comfort and experience in their real estate decisions.

• Design Trends: New healthcare facilities are incorporating elements like natural light, outdoor spaces, and calming interiors to enhance patient well-being.

• Technology Integration: Modern healthcare real estate is being designed to accommodate advanced medical technologies and telemedicine capabilities.

• Flexibility and Adaptability: Healthcare facilities are being built with flexibility in mind, allowing for easier reconfiguration as medical needs and technologies evolve.

• Sustainability Focus: There’s a growing emphasis on sustainable design and energy efficiency in healthcare real estate, aligning with broader ESG trends in commercial real estate.

• Office Market Challenges: The office sector remains under pressure, with high vacancy rates and uncertain demand due to ongoing remote work trends. The potential Fed rate cuts may provide some relief, but structural challenges persist.

• Industrial Strength: The industrial sector, particularly warehousing and logistics facilities, continues to show resilience, driven by e-commerce growth and supply chain reconfiguration.

• Retail Transformation: Retail properties are undergoing significant transformation, with a focus on experiential offerings and mixed-use developments to attract foot traffic and maintain relevance.

CMBS/REIT Markets

The CMBS and REIT markets reflect the varied performance across different real estate sectors, with REITs showing particular strength in recent months:

REIT Outperformance: REITs demonstrated strong performance in the third quarter of 2024, outpacing the broader equity markets [REIT.com](https://www.reit.com/news/blog/market-commentary/reits-outperformed-broader-markets-third-quarter):

• Total Returns: The FTSE Nareit All Equity REITs Index posted a total return of 4.37% for Q3 2024, significantly outperforming the S&P 500’s 1.71% return.

• Year-to-Date Performance: REITs have shown impressive results year-to-date, with a total return of 9.56% compared to the S&P 500’s 6.93%.

Sector Variations:

• Top Performers: Self-storage REITs led the pack with a 12.56% total return in Q3, followed by industrial REITs at 9.96%.

• Strong Showings: Residential REITs (**7.67%**), retail REITs (**6.91%**), and healthcare REITs (**5.97%**) all posted solid gains.

• Challenges: Office REITs continued to face headwinds, with a -4.97% return in Q3.

• Dividend Yields: REITs offered attractive dividend yields, with the FTSE Nareit All Equity REITs Index yielding 4.11% at quarter-end, compared to the S&P 500’s 1.69%.

• Valuation Metrics: Despite strong performance, REITs still trade at discounts to their estimated net asset values (NAV), suggesting potential upside.

• CMBS Performance: CMBS delinquency rates continue to be closely monitored, with particular attention to office and retail properties. The anticipated Fed rate cuts could potentially ease refinancing pressures for some properties.

Sector Divergence: The REIT performance data reinforces the trends seen in the broader commercial real estate market:

• Industrial and residential REITs continue to benefit from strong fundamentals in their respective sectors.

• Office REITs face ongoing challenges, mirroring the struggles in the physical office market.

• Retail REITs have shown resilience, possibly reflecting the sector’s ongoing transformation and adaptation.

Capital Markets Activity: The strong REIT performance may attract more capital to the sector, particularly for property types showing the strongest fundamentals. The potential for Fed rate cuts could further stimulate investment activity across both REITs and direct real estate investments.

Outlook: The outperformance of REITs in Q3 and year-to-date suggests that investors see value in real estate despite broader economic uncertainties. However, the significant variations between sectors underscore the importance of selective investment strategies.

In conclusion, the U.S. real estate market is navigating a complex landscape of challenges and opportunities. While residential markets grapple with affordability issues and generational divides, potential reforms and economic forecasts offer glimmers of hope. The commercial real estate sector shows diverging trends, with multifamily and industrial properties demonstrating resilience while office spaces continue to struggle. REITs have emerged as a bright spot, outperforming broader markets and potentially signaling continued investor confidence in real estate as an asset class.

As we move forward, market participants should stay attuned to potential Fed rate cuts, policy changes in manufactured housing, and evolving trends in healthcare real estate. The ability to adapt to these shifting dynamics will be crucial for success in the coming months and years.

Stay tuned for our next Daily Dose of Real Estate for more updates and insights on the ever-evolving U.S. real estate landscape. And please visit www.impactcapitoldc.com to learn more about ALFReD and how it can make your entire company more successful.