Archives for July 2024

Distress In The Headlines… But What does the Data Say​

Wave Of Distressed Assets Hitting The Market Still Unlikely​

• Despite recent reporting, CMBS delinquency for most property types is well below levels that show widespread distress​
• Many of the assets in CredIQ’s tracker are well performing properties that will reach deals to extend loan terms​

Extend and Pretend Still Playing Out, But Shift Is Occurring​

• Many of the properties currently in negotiation are unlikely to reach market, lenders are shifting strategies​
• Some are using this period to clear off riskier loans, primarily on office assets, but also for low performing properties​

Delinquency Is Low As Rate Cuts in 2024 Seem Certain​

• While rising, overall delinquency rates for non-office properties are well below Financial Crisis or COVID-19 levels​
• As the Fed diminishing rates, lenders are expected to ease standard, further decreasing the likelihood of widespread distress emerging​

*Through June
Sources: Marcus & Millichap Research Services, CredIQ, Trepp​

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• How small increases in unemployment could hit a tipping point
• Has the Federal Reserve held rates too high for too long?
• The opportunities a weakening economy creates

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IS THE FED FINALLY WILLING TO CUT INTEREST RATES?​

Inflation Moving Towards 2% Target​

• New data last week shows CPI and Core CPI continued to trend lower (to 3.0% and 3.3% respectively)​
• Although these levels are still above the target, the Fed wants Core PCE at 2%, the trends remain very positive​

Economic Trends Suggest Pace Of Growth Is Flattening​

• Chairman Powell has noted the softening of the employment market, with the unemployment rate creeping higher​
• Loosening labor markets, flat inflation-adjusted retail sales, and other economic trends suggest economic growth is slowing​

Investor Perspective Beginning To Shift​

• Investor sentiment is beginning to rise as the likely of rate cuts this year increases​
• Elevated rates have created unique opportunities for investors stemming from conflicting economic expectations​
• The consensus forecast still calls for a Soft-Landing​

*Core CPI through June; Core PCE through May​
Sources: Marcus & Millichap Research Services, BLS, BEA​

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WHAT SHIFTING MIGRATION TRENDS MEAN FOR CRE PERFORMANCE​

Population Migration Slowing After Post-Pandemic Bounce​

• The number of monthly movers has fallen to near zero in the summer of 2024 ​
• This is a slowing of record levels of population movement from coastal states to Sunbelt states from 2020-2023​

Developers Assumed Migration Would Continue​

• Development pipelines in Sunbelt areas, that grew the most quickly since 2019, are near record highs for 2024​
• These metros could see vacancy rise in the near-term as new builds come online and inbound migration cools​

Coastal and Midwest Construction Near All-Time Lows​

• As developers looked at demographic shifts, new inventory expected to complete in places like California and the Midwest​
• This creates an opportunity in some of the least discussed metros in the country if investors maintain long-term outlooks​

*Through April ​
Includes New York, Los Angeles, The Bay Area, and Chicago​
Sources: Marcus & Millichap Research Services, Placer.AI​

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WHY TRUE INFLATION MAY BE LOWER THAN THE BLS IS REPORTING​

BLS Housing Data Out Of Alignment With Market Data​

• The BLS uses “Owners Equivalent Rent” to estimate what homeowners would pay in rent in their dwellings ​
• This survey rent data lags the market data observed by Zillow and RealPage by roughly a year​
• This lag means CPI is being calculated with housing rent growth numbers over 5% in May 2024 ​

Market Data Would Show Inflation Closer To 2%​

• If the Zillow data for SFR costs are substituted in the CPI calculation, the inflation rate falls from 3.3% to 3.0%​
• Going one step further, if RealPage traditional rent growth data is used in place of the BLS survey rent numbers as well, CPI would fall further to just 2.6%​

Inflation Poised To Fall Quickly As Data Catches Up​

• As the rent growth time lag plays out in 2024, it is likely inflation readings will approach the Fed target level of 2% quickly​
• If 2% inflation is achieved it is likely the Federal Reserve will begin the process of reducing interest rates this year​

*Through May​
Sources: Marcus & Millichap Research Services, BLS, Zillow, RealPage, Inc.​

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