The Small Balance Intersection Update - December 13, 2024
Michael Boggiano, CPA CPM
Experienced CRE Finance Professional | AI & Data Analytics Enthusiast | Championing Small Balance Commercial Lending
Friday the 13th Events:
1923 – Hollywood Sign Dedicated On Friday, July 13, 1923, the iconic Hollywood Sign was officially dedicated in Los Angeles, originally reading "Hollywoodland" as an advertisement for a real estate development.
1989 – Black Friday Stock Market Mini-Crash On Friday, October 13, 1989, the Dow Jones Industrial Average fell nearly 7% in a sudden crash, attributed to a breakdown in the leveraged buyout of United Airlines.
2012 – JP Morgan’s $13 Billion Settlement On Friday, September 13, 2012, JP Morgan Chase agreed to a $13 billion settlement over its role in the mortgage crisis, one of the largest penalties in financial history.
Approaching Affordable Housing Zone
New York City’s Office-to-Apartment Conversion Potential Expands with New Legislation
The "City of Yes for Housing Opportunity" proposal, recently approved by New York City's council, is driving fresh analysis of the city’s office inventory for potential residential conversion. PropertyShark’s findings reveal that 15% of NYC's office stock, or 85 million square feet across 754 buildings, qualifies as high-probability conversion candidates, significantly higher than the previous 10% estimate. Unsurprisingly, Manhattan dominates with 79 million square feet of this space, including 13 million in Midtown and 8 million in the Financial District. Murray Hill, a primarily residential Manhattan neighborhood, has 36 convertible buildings accounting for nearly 23% of its office inventory.
Key factors influencing a building's conversion potential include its design, structural attributes, location, and zoning allowances. However, financial feasibility remains paramount. For instance, SL Green Realty Corp.’s planned conversion of 750 Third Ave. into 639 residential units highlights the challenges, with an estimated $800 million project cost or $1.25 million per unit. The high rents required to offset such costs, along with regulatory requirements such as setting aside 25% of units for affordable housing, complicate the economics.
The proposal’s expanded eligibility criteria now include buildings constructed through 1990, compared to the prior cutoff of 1961, significantly enlarging the pool of candidates. Additionally, eliminating the requirement for on-site parking—a costly $67,500 per underground spot—further enhances the financial viability of conversions. As developers weigh these opportunities, financial returns, regulatory incentives, and broader housing market trends will shape the scale and success of such projects.
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Resilience Avenue
Consumers Keep the Holiday Spirit Alive Despite Economic Headwinds
Consumer spending remained resilient in November 2024, with Bank of America credit and debit card data showing a 0.6% year-over-year (YoY) increase per household. Holiday spending during the two weeks around Thanksgiving was a notable highlight, rising 6.1% YoY, driven primarily by middle- and higher-income households. Travel-related expenditures were robust, with a 2% increase in gasoline transactions and 3% more passengers passing through TSA checkpoints during Thanksgiving week compared to 2023. Falling gas prices boosted consumer wallets, contributing to a 4% decline in gas spending despite higher transaction volumes.
Wage growth has remained a significant support for consumer spending, with after-tax wages up 2% YoY for lower- and middle-income households. Retail transaction volumes held steady, but dollar values decreased, reflecting lower prices and consumer cost-consciousness. Online retail spending, excluding gas and groceries, surged by 6.5% YoY during the Thanksgiving period, highlighting a shift toward convenience and bargain hunting. Despite signs of diminished savings and higher credit card utilization, median deposit balances remain above 2019 levels, indicating some remaining financial resilience among consumers.
Looking ahead, consumer spending in early 2025 will hinge on labor market trends and wage growth dynamics. The continued availability of "dry powder" in the form of savings and credit capacity suggests that spending could maintain its momentum into the New Year. However, the narrowing spending growth gap between income cohorts underscores a need for vigilance regarding potential constraints on lower-income households.
Yield to Falling Rents
Asking Rents Fall 0.7% to Lowest Level Since March 2022
In November 2024, the median asking rent in the U.S. fell 0.7% year-over-year (YoY) to $1,595, marking a 1.1% decline month-over-month and the lowest level since March 2022. This drop reflects a 6.2% decrease from the all-time high of $1,700 in August 2022. Median rent per square foot also declined by 2.2% YoY to $1.79, the first dip below $1.80 since late 2021. These reductions were driven by a record 22.6% YoY increase in apartment completions, leading to an 8% vacancy rate for larger buildings, the highest since early 2021.
Rents decreased across all unit sizes, with 0-1 bedroom apartments falling 1.7% YoY to $1,450, while rents for 2-bedroom and 3+ bedroom units declined by 1.1% and 2.3%, respectively. Sun Belt metros like Austin (-12.4%), Tampa (-11.3%), and Raleigh (-8.4%) experienced the largest rent declines, as oversupply from significant construction projects pressured prices. In contrast, Midwest and East Coast cities such as Cleveland (+10.6%) and Louisville (+10.2%) saw rent increases, attributed to lower construction activity.
Economists project rents to remain renter-friendly through 2025, as affordability improves with falling rents and rising wages. However, as construction slows, upward rent pressures may resume, potentially widening the affordability gap between renting and buying. The shift in rental trends highlights the growing influence of regional housing supply on pricing dynamics.
Stability Drive
Self-Storage Market Stabilizes Amid Evolving Demand Trends
Despite ongoing challenges, the self-storage market shows signs of stabilization as the year concludes. Nationally, advertised rates declined by 2.4% YoY in November, marking a smaller drop compared to previous months, with non-climate-controlled units faring better than climate-controlled spaces. Demand for Class A RV and boat storage remains robust, sustaining rents near $6 per square foot annually. Tampa and Orlando outperformed, driven by hurricane-induced demand, while Atlanta saw steep declines of -6.2%. Construction activity is slowing nationally, with the under-construction pipeline now at 3.2% of existing inventory. However, some markets like Nashville and Charlotte face supply pressures due to rising lease-up inventory. REITs reported smaller rate declines than non-REIT operators, reflecting cautious pricing strategies. Overall, nearly all top metros reported reduced YoY rent declines, signaling potential recovery heading into 2025.