Location Strategy Chartbook 12.14.24

If you missed this question last week, heading in 2025, are you finding value in this economic and real estate news round up? If you are please reply back and let us know your thoughts.

We may entirely sunset this newsletter, run it monthly, or replace it with more in depth analysis with case studies and featuring real industry trends, opportunities, misses.

For example, I have been calling multifamily properties to gain insights into a market as the market data is largely absent. Repeatedly I have seen the trend of missing middle housing as an opportunity that isn’t being capitalized upon. Some apartment communities with private parking garages have long wait lists for garages. Renters today have active lifestyles, have families, have holiday decor and need places to store it. One apartment community has lower vacancy than its competition and also noted having a large number of corporate contracts.

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As the global economy closes out a year of resilient growth in the face of elevated interest rates and continuing geopolitical tensions, it can look forward to a “steady if unspectacular” expansion in 2025, according to Bloomberg Economics.

The team, led by Tom Orlik, has a baseline of 3.1% world GDP growth for next year, matching the outturn for 2024 — still sluggish relative to the pre-pandemic trend. But “risks are to the downside,” Bloomberg Economics warned in its new projections, published Tuesday.

While inflation globally will keep subsiding, hitting 2.2% for advanced economies as a group, price gains will be “uncomfortably above target” in the US, as well as the UK. The Federal Reserve is expected to lower rates further, but its “still restrictive” stance means a dampening of “post-election animal spirits,” the economists concluded.

Treasury yields, a crucial driver of borrowing costs across the economy, typically fluctuate with traders’ bets on short-term interest rates set by the Federal Reserve. But their biggest moves lately have been sparked by election results and President-elect Donald Trump’s pick of Scott Bessent as Treasury secretary.

According to the BLS household survey, the number of employed people has fallen in six of the past 12 months, while there have not been net job losses in the establishment survey in any month during that period. 

There are 7.1 million unemployed people in the United States, an increase of 883,000 since a year ago and the highest total in all but one month since October 2021.

Furthermore, the duration of unemployment appears to be increasing. The total of long-term unemployed, defined as 27 weeks or longer, increased to 1.7 million, up 53,000 in November and the highest total since January 2022. This data suggests that those with jobs may feel secure as layoffs have not risen much, but those who do lose their jobs have a harder time finding a replacement.

The national delinquency rate for mortgages fell 3 basis points to 3.45% in October, down -0.8% for the month, but up 6% year over year ‒ the fifth consecutive month of year-over-year increases

• Serious delinquencies (loans 90+ days past due but not in active foreclosure) rose 3.6K (+0.8%), continuing their slow rise, and were up 7.3% year over year

• The number of borrowers a single payment past due decreased -11K, and 60-day delinquencies were down -4K, but both remained elevated from the prior year

• Foreclosure activity remains muted due in part to ~70% of serious delinquencies still being protected from foreclosure by loss mitigation; only 145K loans are at near-term risk of foreclosure, on par with the four-year average

Bridge Loan Pricing insights from Brandon Roth of Institutional Property Advisors

Spreads for bridge loans from debt funds have declined significantly over the past few months due to improvements in the bank market. Remember, most bridge lenders are both lenders and borrowers.

• As banks start to receive more loan payoffs, they need to fund new loans to grow their portfolio. However, there are limited direct financing opportunities at the moment, so they're getting more aggressive when providing financing to bridge lenders.

• They're providing sponsors a high leverage "whole loan" at a certain interest rate (e.g. 75% LTV at SOFR + 3.20%) and then borrow 75-80% of that capital from another lender at a lower cost to create a higher levered return for themselves. This is typically referred to as a warehouse line, repo line, loan-on-loan, etc. ​

• The example in the table below highlights the importance of this back-leverage. Lender 2 is able to reduce pricing 45 basis points and still earn the same return as Lender 1 because their warehouse line is 35 basis points lower and is providing an 80% advance rate instead of a 75% advance rate. ​

• This is exactly what has happened over the past 6 months. ​ Banks have lowered their spreads 35 basis points for these facilities and increased their advance rate 5 percentage points. With more attractive back-leverage options, many bridge lenders have lowered spreads from low-to-mid 300s to mid-to-high 200s for the lower risk asset classes like multifamily, industrial, grocery-anchored retail, etc. ​

• On top of spreads compressing, SOFR is down 70 basis points over the past six months, which means all-in interest rates for bridge loans are approximately a full percentage point lower (e.g. 7.25% instead of 8.25%).

Despite ATX being a standout in home price declines and supply, more new housing is getting built on the peripheral.

In Spicewood, 30 minutes northwest of ATX, 3500 homes are getting built over the next 10-15 years in a master planned community developed by Areté Collective and partner Wasatch Group

The 2,200-acre Thomas Ranch will feature single-family homes, townhouses and apartments, according to the developers. The first residences are expected to be ready for occupancy in the fourth quarter of 2025. D.A. Davidson’s Development Finance Group provided the $100M+ funding.

The development's downtown will consist of 465,000 square feet of shops, restaurants, offices and other businesses, the developers said. More than 40 miles of trails, 1,200 acres of preserved open space, two schools, grocery stores, an 18-hole golf course and a boutique hotel also are part of the project.

Why are Sun Belt and Mountain West markets seeing a faster return to pre-pandemic inventory levels than many Midwest and Northeast markets?

• One factor is that some pockets of the Sun Belt and Mountain West experienced even greater home price growth during the Pandemic Housing Boom, which stretched fundamentals too far beyond local incomes

• Once pandemic-fueled migration slowed, and rates spiked, it became an issue in places like Colorado Springs and Austin

• Unlike many Sun Belt housing markets, many Northeast and Midwest markets have lower levels of homebuilding

• As new supply becomes available in Southwest and Southeast markets, and builders use affordability adjustments like buydowns to move it, it has created a cooling effect in the resale market

• The Northeast and Midwest don’t have that same level of new supply, so resale/existing homes are pretty much the only game in town.

The pace of leasing gains has slowed considerably as retailers face an increasingly challenging environment shaped by choppy sales, increased operational and occupancy costs and limited available supply.

The third quarter saw the second-lowest gains in demand of any quarter since the height of pandemic-era lockdowns. An uptick in store closures and a reduction in move-ins resulted in a 45% decline in net absorption, the net change in occupancy, to just 32 million square feet.

Despite initial demand shocks, urban rental apartments have not just weathered the storm — they’ve come back even stronger. Major U.S. cities, including Denver, Chicago, Houston and Phoenix have added thousands of apartment units within high-density neighborhoods. Downtown Denver alone saw more than 15,900 new apartments completed, adding a remarkable 33% to the city's existing apartment inventory.

Suburban and exurban neighborhoods, long the presumed winners of the pandemic-era reshuffle, also saw robust growth. Areas such as Frisco/Prosper in metropolitan Dallas-Fort Worth and Tampa’s Pasco County also added many rental units. Still, when examining the top 15 submarkets by absolute unit growth, urban and downtown areas make up nearly 50% — a testament to the enduring allure of city living.

Notably, Sun Belt cities dominate multifamily development, underscoring their status as population-growth powerhouses. For instance, Northwest Houston added a staggering 14,300 units, which equates to a 170% increase in the neighborhood's total number of apartments.

Analyzed by the percentage increase in apartment inventory, smaller exurban markets still dominate. Georgetown-Leander, a suburb of Austin, Texas, saw a 166% spike in the number of units added, reflecting the Lone Star State’s booming population growth.