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Demand for Retail Real Estate Space Hits Record High

Plus, Top 10 Most Vulnerable U.S. Housing Markets and 6 more Real Estate Insights

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Macro Trends

Mortgage rates edge up on surprisingly strong jobs report link

  • November's jobs report exceeded expectations with 199,000 nonfarm jobs added, indicating a potential "soft landing" for the economy. This contrasts with October's addition of 150,000 jobs and surpasses economists' prediction of 180,000 for November.

  • The unemployment rate decreased from 3.9% in October to 3.7% in November, but the overall trend shows a rise from 3.4% in April. This suggests a cooling U.S. economy, with a modest increase in the unemployment rate expected in the coming year.

  • The strong jobs report has led to uncertainty about the Federal Reserve cutting interest rates in spring. Mortgage rates, closely tied to bond market trends, saw a slight increase, with 30-year fixed rates rising to 7.09%.

Real Estate Trends

Demand for Retail Space Hits Record High in the US link

  • The US retail space market is experiencing unprecedented demand, with freestanding and local properties leading the surge. This trend indicates a significant shift in the retail landscape, moving away from traditional mall-centric models.

  • Underperforming malls are losing ground rapidly, highlighting a change in consumer preferences and shopping habits. This shift suggests a growing emphasis on convenience and accessibility, as well as a potential reevaluation of large-scale retail spaces.

Property Insurance Rate Increases Are Finally Softening link

  • Recent trends indicate a potential easing of the sharp increases in property insurance rates. Woodruff Sawyer forecasts single-digit hikes in property and casualty insurance rates for the upcoming year, a shift from the more substantial increases seen previously.

  • Ivans Insurance Services reported a slight decrease in the rate of increase for property insurance in November, with a 9.9% rise compared to 10.4% in October. This change suggests a slowing momentum in the rate of insurance cost escalation.

  • Overall, insurance rates have risen this year, but at a slower pace than in the past two years. This trend indicates a possible stabilization in the insurance market, providing some relief to property owners facing escalating costs.

Moody’s 2024: Expect Low Transactions, Wave of Maturity Defaults link

  • The 2024 outlook for commercial real estate (CRE) and commercial mortgage-backed securities (CMBS) appears challenging due to high interest rates. High rates are expected to continue impacting property values across CMBS sectors, particularly in the office segment, although economic growth in the U.S. might offset some risks.

  • The CMBS market has been inefficient and unreliable as a financing source, but it maintains a constant flow of deals and a functioning ecosystem. Transaction volumes have slowed to levels last seen in 2013, with a significant bid-ask spread causing a transaction stalemate.

  • Elevated yields on CMBS bonds are increasing property value risks in almost all asset classes except industrial. The report predicts a rise in CMBS issuance volume in 2024 as banks tighten lending standards, but also anticipates increased maturity default risks, especially in office buildings, over the next 12 to 24 months.

Good News for Home Buyers: FHA and GSE Loan Limits Rise in 2024 link

  • FHA and GSE loan limits have increased for 2024, making home buying more accessible. FHA loans are now available up to $498,257 nationwide and up to $1,149,825 in expensive markets, while GSE loans are available up to $766,550 nationwide and also up to $1,149,825 in costly areas.

  • These loans primarily aid entry-level buyers with low down payments or lower credit scores (FHA loans) and entry-level to move-up buyers with higher credit scores (GSE loans). The increase in loan limits varies by market, with some areas seeing no increase and others up to a $63K rise.

  • The loan limit adjustments are based on home price appreciation from the previous year. Markets with no price appreciation, like Austin, saw no increase in loan limits. This change is expected to positively impact new home sales and closings in 2024, especially in markets with significant limit increases.

Something I found Interesting

Comparing Apartments Across High Rent Suburbs and Low Rent Suburbs link

  • Suburban apartments, making up over 85% of rental housing in the top 50 U.S. markets, are now categorized into high rent and low rent suburbs. Low rent suburbs account for 58% of existing units, while high rent suburbs and urban cores make up about 27% and 14.5% respectively.

  • Historically, new suburban developments skewed towards higher rent areas, with these suburbs delivering about 40% of all suburban construction in the past decade. Urban cores contributed about a quarter of all new supply, despite representing only 15% of existing stock.

  • A significant shift occurred recently, with lower rent suburbs receiving more new developments than higher rent suburbs for the first time in a decade. As of 2023, nearly 50% of market-rate multifamily units were delivered to lower rent suburbs, influenced by factors like land prices and urban sprawl. Rent growth in low rent suburbs has modestly outperformed higher rent suburbs and urban cores in the past 12 months.

One Cool Chart

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A Deep Dive Into the Top 10 Most Vulnerable U.S. Housing Markets 

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  • California, New Jersey, and Illinois have the highest concentrations of at-risk housing markets, according to ATTOM's Q3 2023 Special Housing Risk Report. The report highlights areas like New York City, Chicago, and central California as particularly vulnerable, with 33 of the 50 most at-risk counties located in these states.

  • The top 10 most vulnerable markets are characterized by high percentages of income needed to buy homes, significant proportions of underwater properties, and elevated foreclosure filing rates. For example, Madera, CA, requires 2% of income to buy a home, has 0% underwater properties, but a high 14% rate of properties with foreclosure filings.

  • The report's criteria for vulnerability include the percentage of homes facing possible foreclosure, the portion with mortgage balances exceeding property values, the percentage of local wages needed for homeownership expenses, and local unemployment rates.

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Nowhere to hide from rising office vacancy 

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  • Remote work significantly impacts office demand, particularly in large urban markets like Los Angeles, San Francisco, and Manhattan, where commuting costs are high. These areas have seen pronounced effects due to the shift towards remote work.

  • High-growth Sun Belt markets, despite more manageable commute times, are also experiencing increased office vacancy. This is largely due to a robust supply of new office spaces, with inventory growth of 16% in Austin and over 8% in cities like Salt Lake City, Charlotte, San Jose, and Nashville.

  • Only six office markets tracked by CBRE EA have lower vacancy rates than in 2020. Markets like South Florida, Albany, Las Vegas, and Albuquerque are doing well, attracting businesses and residents, or catering to local tenants who prefer in-person office culture.

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