Limon Net Lease Group

Research Brief

Delinquency Rates and CRE

by

COMMERCIAL REAL ESTATE MELTDOWN? ​DESPITE THE HEADLINES, RISK METRICS REMAIN LOW​

Media Fear Of CRE Troubles Overblown​

  • Despite media concerns, the U.S. CRE sector is well positioned to navigate a downcycle; CRE performance generally remains healthy​
  • A CRE driven banking collapse remains improbable​

Delinquencies Are Far Below Prior Peaks​

  • This is especially true for apartment and industrial assets, where the delinquency rates are well below the long-term trend​
  • Retail and lodging delinquency, though more common, is not facing disproportionate risk. Occupancy and yield trends for these assets remain healthy​
  • Even in the hardest hit CRE segment, office, the level of loan delinquency is far below 2010 or 2020 levels​

Boosted Outlook For CRE Assets​

  • While some risk does exist, the evidence is not showing up in the property fundamentals or delinquency metrics​
  • With space demand across property types generally trending positive, the outlook for 2024 is steadily gaining ground​

*Sources: Marcus & Millichap Research Services, Trepp​

Watch Video Below:

What Inflation Means for Investors

by

New CPI Data Comes In Higher Than Expected; Takeaways For CRE​

Inflation Still Cooling Annually, But Monthly Figure Climbs

  • CPI fell 30 basis points annually, but rose 40 basis points from December to January, sending a mixed message to markets
  • This shifted Wall Street’s expectations for Fed rate cuts, likely pushing the first cut farther into 2024

Federal Reserve Expected To Slow Play Rate Cuts

  • At the start of the year Wall Street expected the Fed Funds Rate to fall roughly 125-150 basis points before year-end
  • Now the projections suggest the overnight rate will drop just 75-100 basis points this year

Profitable Opportunities Available At The Property Level

  • Although the expectation gap has begun to narrow as property prices have dropped, the market is still in a recalibration process
  • Today’s opportunities are best seen when looking to the future, consider the best positioning over a longer time horizon

*Sources: Marcus & Millichap Research Services, BLS

Watch Video Below:

Employment Market and the FED

by

WHAT DO NEW LABOR MARKET TRENDS MEAN FOR CRE INVESTORS?​

Labor Markets Strength Continues Despite Elevated Rates​

  • Warehousing employment has skyrocketed since 2019, growing over 35% from the prior peak and aiding industrial absorption​
  • Professional and Business Services job totals have also exceeded prior peaks, helping office absorption return to positive territory at the close of 2023​

Economic Growth Both a Headwind and Tailwind for CRE​

  • Strong employment growth is bolstering economic activity and boosting space demand across asset type​
  • At the same time, a strong labor market may cause the Fed to be more cautious when cutting rates throughout the year​

Inflation Headed Towards Federal Reserve Target of 2%​

  • Inflation is on the downward trajectory, and is below the Fed target level when looking at 3-month and 6-month annualized rates​
  • If the Fed can get inflation under control while labor markets continue to grow, the central bank is unlikely to cuts rate quickly

*Sources: Marcus & Millichap Research Services, BLS​

​Watch the Video Below

 

Insights From the NMHC Conference

by

WHY INVESTORS EXPECT CRE TRANSACTIONS TO REVIVE IN 2024​

The Federal Reserve Kept Rates Flat​

  • The Fed kept the overnight rate in the 5.25% – 5.5% range, but they left door open to cuts later this year; Rate cuts would signal reduced inflation and increasing economic stability​
  • Multiple rate cuts in 2024 could cause lenders to reduce their lending spreads, in turn reducing the cost of CRE debt capital​

Lenders Could Begin to Loosen Standards and Increase LTV’s​

  • As lender confidence in the downward trajectory of interest rates gains momentum, they may begin to loosen their standards​
  • Lenders have tightened their standards for 6 straight quarters​
  • Loosening lending standards could facilitate increased investor leverage​

Investors Plan to Get Active Sooner, Rather Than Later​

  • Lower interest rates would help unlock the near record level of dry powder waiting to transact in commercial real estate​
  • Many large private investors may try to move forward before the institutional capital fully engages​

*Through 4Q 2023​
Sources: Marcus & Millichap Research Services, Senior Loan Officer Opinion Survey​

​Watch the Video Below

 

New Supply Outlook and the Impact on CRE

by

HOW MUCH OF AN IMPACT WILL NEW SUPPLY HAVE IN 2024?​

New Supply Pressure Decreasing For Most Asset Types​

  • Retail, Industrial and Office pipelines all show a reduction in new development when compared to 2023​
  • Apartment construction is slated to rise, but given the housing shortage nationally, expectations are for strong 2024 absorption​

Surging Construction Costs Making Development Less Feasible​

  • Construction materials and labor costs have all risen more than 20% since the end of 2019​
  • Construction financing costs have risen 300 to 500 basis points since 2019, reaching between 8% and 10% entering 2024​
  • Developers are facing an increase in overall costs between 25% and 50% since the onset of the pandemic​

Long-Term Pipeline Showing Effects of Higher Costs​

  • Looking forward to 2025 and beyond, the construction pipeline will thin sharply across asset types​

*Through 4Q; ​
Sources: Marcus & Millichap Research Services, Senior Loan Officer Opinion Survey​

​Watch the Video Below

 

What Retail Sales Trends Mean for CRE

by

WHAT NEW RETAIL SALES DATA SIGNALS FOR CRE INVESTORS IN 2024​

U.S. Consumers Increase Real Retail Buying By 3% Annually​

  • December inflation-adjusted core retail sales climbed above $520B for the first time on record​
  • Positive movement in many of the retail subcategories is reversing yearlong downward spending trends​

Consumer Spending Drives Retail Space Demand​

  • Heightened spending supports retailers, with restaurants, bars, and personal health retailers recording the sharpest gains to close ‘23​
  • Strong spending has helped keep retail vacancy near record lows entering the new year​

Online Retail Continues To Grow Its Market Share​

  • Online spending also expanded over 6% annually, boosting industrial space demand entering 2024​
  • Since the pandemic, the non-store segment of retail has grown 61.7%, expanding E-commerce from 15% to 21% of core sales​

*Retail sales through December​
Core retail sales excludes auto and gasoline sales ​
Adjusted for inflation using Core PCE, November 2023 dollars​
Sources: Marcus & Millichap Research Services, U.S. Census Bureau​

​Watch the Video Below