The Small Balance Intersection Update - December 16, 2024

Did You Know:

SBA Loan Uptick: The U.S. Small Business Administration (SBA) reported a 15% increase in 7(a) loan approvals in 2024, reflecting small businesses' eagerness to expand amid improving economic conditions.

Remote Work Evolution: A study found that 68% of companies now offer fully remote or hybrid work options, with tools like virtual reality and advanced video conferencing replacing traditional office environments.

Real Estate Investment: Investors are increasingly turning to small-balance commercial properties as a hedge against economic uncertainty, with transaction volumes in this sector growing by 18% year-over-year.

Momentum Avenue

CBRE’s 2025 U.S. Real Estate Outlook Highlights Investment Momentum Amid Elevated Interest Rates

CBRE projects U.S. economic growth of 2%-2.5% in 2025, underpinned by strong consumer spending and stable unemployment rates. Interest rates are expected to remain high, with the 10-year Treasury yield staying above 4%, while inflation is forecasted to remain stable between 2%-2.4%. Commercial real estate investment activity could grow by up to 10%, driven by increased economic confidence and favorable property returns despite the high cost of debt capital. The multifamily sector is poised for recovery, with vacancy rates declining to 4.9% and rents increasing by 2.6% amid robust demand and slowing construction.

Industrial and logistics markets will benefit from increased trade near the U.S.-Mexico border and along key transport corridors, though overall construction activity is set to decline by over 50% from 2024. Data centers will see record demand driven by the AI boom, with preleasing reaching 90% and vacancy rates hitting a historic low of 2.8%. Retail rents are projected to rise as availability remains constrained, particularly in growth markets like Austin and Dallas. Office leasing volumes may improve by 5% as vacancies stabilize at 19%, with premium office spaces experiencing strong demand.

Risks to this optimistic outlook include a volatile bond market due to the U.S. fiscal deficit, a fragile Chinese economy, and the potential for slower Federal Reserve rate cuts. Nonetheless, CBRE underscores a rare "soft landing" for the U.S. economy, positioning 2025 as a year of opportunity across real estate sectors.

🔗 Read the full CBRE 2025 U.S. Real Estate Market Outlook

Transition Zone

Affordable Housing at a Crossroads: Key Trends for Winter 2024/2025

The Arbor Realty Trust Affordable Housing Trends Report outlines a pivotal moment for affordable housing, with policy shifts and market dynamics shaping the sector. The production of affordable housing units, projected to peak at 70,590 in 2025, may decline sharply in subsequent years, creating a potential bottleneck in housing supply. Nearly half of U.S. rental households allocate over 30% of their income to housing, underscoring the need for expanded affordable options. Federal programs like the Low-Income Housing Tax Credit (LIHTC) and Housing Choice Voucher (HCV) remain central, but the incoming administration signals a shift toward market-based policies.

LIHTC programs continue to drive affordable housing development, with rehabilitation tax credits gaining traction due to increased financial viability. The Housing Choice Voucher program, which supports over 2.8 million units, may see expanded funding in the new administration’s 2025 budget proposal. Zoning reforms, particularly up-zoning, have gained momentum but face uncertain federal support under the incoming administration. Naturally Occurring Affordable Housing (NOAH) plays a critical role, comprising 77% of multifamily originations for units affordable at 80% of the area median income.

Rent control remains divisive, with California voters rejecting a statewide rent control ballot measure in November 2024. The federal government has tempered its stance, limiting rental increases for LIHTC-supported properties. As Republican leadership assumes control, policies favoring deregulation and market incentives may dominate, potentially reducing HUD’s role in affordable housing. However, bipartisan collaboration could arise given voters’ strong concern for affordability issues.

🔗 Read the full Affordable Housing Trends Report

Profit Margin Lane

Home Flipping Slows in Q3 2024, Profit Margins Shrink Amid Economic Challenges

The U.S. home-flipping rate fell to 7.2% of all home sales in Q3 2024, down from 7.6% in the previous quarter, as reported by ATTOM. Gross flipping profits dropped to $70,000, and return on investment (ROI) declined to 28.7%, a marked decrease from the 31.2% seen in Q2 2024. This figure represents a sharp contrast to the mid-50% peak ROI reached in 2016, illustrating the ongoing challenges faced by flippers in an environment of high interest rates and rising renovation costs.

Metro areas such as Warner Robins, GA (22.7% flipping rate), Macon, GA (16.8%), and Atlanta, GA (13.6%) saw the highest flipping activity, while major cities like Seattle, WA (3.5%) and Des Moines, IA (3.7%) experienced the lowest. Flipping profitability was concentrated in lower-cost markets like Ocala, FL (141.5% ROI), while high-end areas like San Francisco, CA led in raw profits with a $234,000 median gain. Conversely, Austin, TX and Honolulu, HI saw some of the lowest flipping returns at just 4.5% and 5.9%, respectively.

All-cash purchases accounted for 64.1% of home flips, up slightly from Q2, signaling a preference for cash transactions amid tighter financing conditions. The average time to flip dropped by a week, reaching 159 days, reflecting efficiencies despite economic pressures. Notably, properties sold to buyers using FHA loans comprised 10.4% of flips, appealing to first-time buyers.

Flippers face continued uncertainty as profit margins remain slim, and rising costs test the sustainability of this real estate strategy. The next quarters will be pivotal in determining whether tighter conditions will dampen investor activity further.

🔗 Read the full ATTOM report

Innovation Boulevard

Small Businesses Bet Big on AI for Growth in 2025

Small businesses are increasingly adopting generative AI to enhance operations, with notable growth in usage among very small firms. According to a Census Bureau analysis, companies with one to four employees experienced a rise in AI adoption from 4.6% in September 2023 to 5.8% by late 2024, second only to large corporations with 250+ employees, which saw an increase from 5.2% to 7.8%. A separate survey from American Express highlighted that millennial and Gen Z small business owners are more likely to use AI (68%) compared to their Gen X and boomer counterparts (45%). These AI adopters are prioritizing innovation, citing goals such as upgrading technology, increasing market share, and launching new products or services in the coming year.

Interestingly, half of small businesses using AI expect to expand their workforce, compared to only 36% of those avoiding AI. During the last holiday season, small businesses leveraged AI for cost-effective solutions like social media management, marketing, and temporary hiring. Looking ahead, these firms anticipate a stable economic environment in 2025, enabling them to focus on innovation and digital transformation. Anna Marrs, president of global commercial services at AmEx, emphasized the role of AI and social media in future-proofing small businesses. This trend underscores the growing importance of AI not just as a tool for efficiency but as a driver of competitive growth for small enterprises.

For more insights, read the full article here.