July 2024: Higher Rate Fatigue and Multifamily Resilience
In July 2024, signs of rate fatigue are becoming more apparent. Though the Fed held steady this month, markets anticipate the first rate cut as early as September - possibly by 50bps. Unemployment rose and job growth missed expectations, stoking confidence in a policy shift. Meanwhile, CRE outlook remains cautious but hopeful, as multifamily fundamentals show renewed strength.
As we enter the dog days of summer, we're seeing real signs we're also entering the dog days of higher rates.
While the July Fed meeting did not result in a rate cut, it that it is likely to make the first cut in September, and it could even be as high as 50 bps.
Today, with both jobs and unemployment rate disappointing (114k v. 175k est. and 4.3% up from 4.1%), Powell has gone from warning of the risks of keeping rates too high for too long, to many saying we're resigned to that outcome, in just a few weeks.
(Rant: I also want to point out how crazy headline bias for this is, since July wasn't even the worst month. April was worse at only 108k jobs. But, since the initial headline said 175k jobs and the revision said 108k, nobody paid any attention. Which is especially irritating since the jobs report is revised down pretty much every month. I bet there won't even be a reaction when April's numbers are revised (probably down). End of rant.)
As CRE is one of the most exposed to risk from high rates, the Fed's Beige Book reported in July that growth was flat to moderate and weakening. Cushman & Wakefield expects real estate investment sales to surge after rate cuts, so expect to see a flurry of activity as we approach end of year.
MARKET UPDATE
Strangely enough, second quarter GDP growth doubled from the first quarter, ending at 2.8% versus consensus of 2.0%. Growth for the first half of the year is still below 2023, 2.1% vs. 3.1%, but that is still an impressive jump from Q1 to Q2. That does provide some hope for a soft landing.
June CPI increased 3%, below last month's 3.3% growth, with slowing led by consumer staples and energy.
After jobs and unemployment both missed expectations, odds of a 50bp rate cut rose to 67%, with odds of a 25bp cut at 33%. I'm not a math major (though I did take multivariable calculus for fun!), but 67% plus 33% looks like a 100% chance of a rate cut in September, leaving the forecast for Fed Funds to end of year in the low 4% range after 4-5 cuts.
MARKET INSIGHTS
As macro tailwinds start to coalesce, there continue to be positive signs for multifamily. We ended 1H24 with 257k units absorbed, just short of the all-time high set in 1H21, and just short of catching up to record supply & delivery. June effective rent was up again, up 0.4% M/M to $1,838.
It appears the aggregate view of many CRE executives surveyed by Bisnow of, "Hold on for Dear Life", and hope for rates and demand to move in the right direction, may have been the right strategy. The real test will be whether all of the "sellers" with unrealistic price expectations are now going to increase their price expectations because equity is reentering the arena.
The supply/demand piece may also be working to self-correct, as apartment construction permits are down 30% since the pandemic, representing new housing for just 13 out of every 10,000 Americans. We've seen this first hand as well, as underwritten numerous newly built communities listed below their replacement cost.
Millennials, as we start families, are turning out to be just as normal and boring as the generations before us (but we thought we were so special!) and have begun to move to the suburbs in meaningful numbers, especially in the South. Leading destination markets include Raleigh, Atlanta, and Charlotte. As a firm run by Millennials living in suburbs in the South (and we know we're boring), we will continue to embrace and invest in this trend.
Apartment size grew in 2023, reversing a 10-year trend of deliveries being smaller. The average apartment size for 2023 was 916 sqft, up from 887 sqft in 2022.
A Fannie Mae survey shows that 80% of renters believe it's a bad time to buy a home. The figure has been rising since mid-2020 and is near its all-time high.
The New York Common Retirement Fund committed $1.4B to real estate funds, with the large majority of it to European market, as NYC office owners throw up their hands amidst distressed sales at 97.5% discounts (ouch).
As always, thanks for your support.
Thank you,
Will Matheson