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Commercial real estate faces its biggest crash since 2008

Plus, Immigration to account for 67% of U.S. population growth in the next 10 years and more

Welcome to Zero Flux - A daily real estate newsletter of 5-10 market trends handpicked from > 100 sources, including paywalled articles.

No opinions, just data and facts.

Let’s begin

Macro Trends

Immigration Stokes US Population Growth link

  • Immigration is set to be the primary driver of U.S. population growth in the next decade, with significant impacts on local housing markets, particularly in California, Florida, Texas, Nevada, and the Northeast. This trend is expected to increase the demand for rental housing, as new immigrants typically rent homes, and necessitate more family-oriented and multigenerational homes with additional bedrooms and affordable prices.

  • The U.S. population is projected to grow by over 1.8 million annually through 2033, which is 400,000 more per year than recent Census projections. This growth is attributed to an expected increase in immigration, resembling the levels of 2014-2017 rather than the lower levels of 2019-2021, which were influenced by the pandemic and restrictive government policies.

  • Net immigration will account for 67% of U.S. population growth in the next 10 years, a significant increase from 54% since 2013. This shift is due to lower fertility rates, an aging population, and a tight job market attracting foreign workers, with low unemployment rates and a slower-growing working-age population drawing more foreign workers into the U.S.

Mortgage rates continue trending down before Christmas link

  • Mortgage rates have fallen below 7% for the second consecutive week, marking a significant drop after a prolonged period of high rates. This week's average 30-year fixed mortgage rate is 6.67%, down from last week's 6.95% and a notable decrease from the 17-week streak of rates above 7%.

  • The decline in mortgage rates is reviving interest among potential homebuyers and positively impacting the housing market. Homebuilder confidence is increasing, and new home construction has reached its highest level since May, responding to the heightened demand in a market with low current inventory.

  • Despite the positive trend in mortgage rates, challenges such as limited housing inventory persist. The scarcity of available homes continues to keep prices high, affecting first-time homebuyers who often face delays and increased competition in their home-buying plans.

Real Estate Trends

November 2023 Existing-Home Sales Rise After Five Months of Declines link

  • November 2023 saw a slight increase in existing-home sales by 0.8% from October, reaching a seasonally adjusted annual rate of 3.80 million. However, this figure represents a 7.3% decrease from November 2022.

  • The national median existing-home price rose to $387,600, marking a 4.0% increase from the previous year. All four regions in the U.S. experienced price growth, with the West leading at a 5.3% increase.

  • Inventory challenges persist, with unsold listings down 1.7% from the previous month and only a 0.9% increase from November 2022. The current inventory level would take 2.8 months to deplete at the current sales pace, significantly below the desired 6-month pace.

16% of Home Listings Were Affordable for the Typical Household in 2023, Likely the Bottom for Housing Affordability link

  • In 2023, only 16% of home listings were affordable for the typical U.S. household, a significant drop from 21% in 2022 and over 40% before the pandemic. This marks the lowest share on record, with the decline attributed to high mortgage rates and elevated home prices.

  • Racial disparities in housing affordability were stark, with only 6.9% of homes affordable for the typical Black household, compared to 21.6% for white households. The affordability gap was evident across various U.S. metropolitan areas, highlighting the impact of income disparities and historical discrimination.

  • Positive trends are emerging for 2024, as housing affordability is expected to improve with falling mortgage rates and an increase in home listings. This improvement is driven by slowing home price growth, lower mortgage rates, and overall cooling inflation, potentially leading to a surge in home purchases.

Risks

US banks could get slammed with another $160 billion in losses as commercial real estate faces its biggest crash since 2008 link

  • The commercial real estate sector is on the brink of its most significant crash since 2008, potentially leading to $160 billion in losses for US banks. This situation arises from the Federal Reserve's rate hikes in 2022, which have negatively impacted assets like stocks, bonds, and commercial real estate.

  • Researchers estimate that 14% of all loans and 44% of office loans are currently in negative equity, with property values being lower than outstanding loan balances. Consequently, 10%-20% of all commercial real estate loans might default, a rate comparable to the Great Financial Crisis.

  • The study warns of a potential banking crisis, with 31 to 67 smaller regional banks facing insolvency if half of uninsured depositors withdraw their funds. This scenario is exacerbated by the 2022 monetary tightening, which has significantly reduced banks' ability to withstand adverse credit events.

Something I found Interesting

Prospects for Spain in 2024 link

  • Spain's economy is outperforming the eurozone, with a forecasted GDP growth of 2.4% in 2023, compared to just 0.5% for the eurozone. This growth is driven by a resilient labor market and a strong recovery in tourism, although a moderation to 1.25% is expected in 2024.

  • The real estate market in Spain is attracting investors despite uncertainties and high interest rates, particularly in the living and hotel sectors. Notable transactions include the acquisition of the Mandarin Oriental in Barcelona and a 17-hotel Spanish portfolio by the Abu Dhabi Investment Authority.

  • Madrid and Barcelona remain attractive investment destinations, with Madrid ranked as the third most attractive city in Europe for investment. The imbalance between supply and demand in Spain's main cities offers opportunities in coliving, student housing, senior living, and urban logistics, with alternative sectors like data centers also gaining interest.

Pro Member Only Content

Top 10 U.S. Counties With Highest Wages Needed to Buy A Home in Q4 2023 

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  • In Q4 2023, median-priced homes remain less affordable compared to historical averages in 99% of counties analyzed. This trend, dating back to 2021, shows homeownership requiring historically large portions of wages across the U.S.

  • Major expenses on median-priced homes consume 33.7% of the average national wage, surpassing the affordability threshold set by lending standards. Over 57% of counties require annual wages above $75,000 for median-priced homes, yet only 11% of these counties have average wages at this level.

  • The highest annual wages needed are in coastal counties, with San Mateo County, CA, leading at $392,418. In contrast, the lowest wages required are in counties like Cambria County, PA, at $19,978, highlighting significant regional disparities in home affordability.

  • link

The Nation’s Most Affordable Apartment Markets 

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  • The most affordable major apartment markets in the U.S. are predominantly in the South and Midwest. Greensboro/Winston-Salem leads with an average rent of $1,209, which is nearly $600 less than the national average.

  • Despite their affordability, the top three markets in the South region have some of the nation's weakest occupancy rates. San Antonio, Memphis, and Greensboro/Winston-Salem have occupancy rates as low as 91.2%.

  • Midwest markets also feature prominently among the most affordable, with rents ranging from $1,257 in Cleveland to $1,310 in Columbus. In contrast, New York stands at the other end with the highest rents at $4,501 and the tightest occupancy rate of 97%.

  • link

The top 10 Zillow search terms of 2023

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  • link

  • In 2023, Zillow analyzed 250 billion search requests, revealing Americans' diverse home preferences.

  • Climate-control systems were a top-three search term in 22 out of 30 cities, with central heating being particularly popular in southern cities. This trend may indicate a response to changing climate patterns and recent extreme weather events.

  • Architectural styles and specific features varied by city, reflecting local preferences and lifestyles. Contemporary and Ranch styles were popular overall, while cities like New York, Philadelphia, and Chicago favored historical homes. Miami, Chicago, and Dallas showed a growing trend for loft-style homes.

  • Here are the top terms in order

    1. Garage:

    2. Backyard: 

    3. Fireplace: 

    4. Walk-in closet: 

    5. Patio: 

    6. Open floor plan:

    7. Pool: 

    8. Family room:

    9. Basement:

    10. Granite counters:

That's all, folks. If you enjoyed today's issue, please reply (it helps with deliverability)

Cheers,

Vidit

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