June 2024: Independence Day and Market Insights

Happy belated 4th of July! We hope everybody enjoyed the holiday weekend.

Fun fact about our company. Coming from a brokerage background, Evan and I were never in the habit of taking federal holidays off. So we would always work on MLK day, Presidents' Day, Memorial Day, Labor Day, etc. (I actually remember speaking to a potential buyer for a listing on Christmas in 2015).

The only exception was and remains July 4th. It's a great holiday that still carries its original meaning (does anybody really think about the late 19th and early 20th century labor movements on Labor Day?), and we hope everybody had a great weekend.

Since everybody has a lot of emails to catch up on, we'll keep this short.

MARKET UPDATE

When the May jobs numbers came out, we saw a familiar story. "They beat expectations! 272k vs a forecast of 185k! WOW!" Low and behold, the June numbers came out just slightly above expectations, but the big story is that April and May were revised down by a combined 111k jobs, and the majority of these jobs continue to be in government and health care.

10 of the last 15 months of jobs numbers have been revised down, and it's amazing that this doesn't get more attention. I can't help but think that if the revised jobs numbers were published in the first place, people (including the Fed) would be much more wary about the state of the jobs market. Honestly, given how the headlines start with a strong number and are then revised with a weak one, it kind of feels like Lucy with the football.

Quarterly GDP may present a difficult challenge to that "higher for longer" forecast, with the most recent estimate for 1Q24 showing a 1.4% annualized growth rate, down from 3.4% from 4Q23, and 2Q24 estimates show it falling further to 1.3%. The drop is being driven by a surge in imports and a drop in business inventories, but it was bolstered by business investment.

CPI showed a slight deceleration, as the May inflation numbers came in at 3.3%, versus a 3.4% reading in April. This was immediately followed by the Fed dot plot being released, forecasting one cut for 2024 and a total of four cuts for 2025.

For what it's worth, this is the same Fed that said inflation was transitory and that they didn't think they'd need to raise rates much at all, until that suddenly changed in 4Q 2021...

MARKET INSIGHTS

Last month we covered KKR's prediction for opportunities to buy "high-quality properties below replacement cost, while achieving long-term yields", and fewer than two months after that statement, they announced a $2.1B acquisition of 5,200 units, made up of newly built mid & high-rise apartments, concentrated in coastal and Sunbelt markets. If they see the ability to achieve long-term yields at $404k/unit I feel like that's a positive sign for multifamily as a whole.

They weren't the only ones to signal a positive outlook for CRE, as Brookfield announced a $1.55B value-add acquisition of 7,300 units concentrated in FL & TX from Starwood Capital, Blackstone announced a partnership with M&T to improve agency financing options for BXMT borrowers, and even Amazon got in on the action, committing $1.4B to its Amazon Housing Equity Fund to create 14k new affordable homes. Now that's an exciting basis!

Eldridge Acre Partners also announced plans to invest $3B over the next five years, specifically citing Savannah, Raleigh, Charlotte, and Nashville as target markets (those guys must be really smart to target those markets, am I right?). PGIM is predicting that this is the turning point and an ideal time to deploy capital, as 2025-2027 are predicted to be high return years. Origin also released a report supporting this theory, from the perspective that pension & endowment fund reallocation will benefit multifamily, as dry powder and pent-up acquisition demand comes to fruition.

CoStar reports CRE prices increased in May for the first time in 9 months. Green Street's CPP index increased 0.7% in May, but still shows institutional pricing 21% below its March 2022 peak. Trepp's TPPI composite showed a 0.51% Q/Q increase in 1Q24, still below 2022 levels as well. The industry as a whole seems to have adjusted to the Fed's higher-for-longer strategy and pricing has reacted accordingly.

Development is one of the areas facing the biggest adjustments, as the costs of labor, debt, and equity have all increased dramatically over the past few years. As a result, starts are still down significantly (over 51% Y/Y in May), and permits are down 31% Y/Y. Reinforcing this data, 70% of NHMC survey respondents are reporting construction delays.

Another adjustment to the post-covid reality is the changing work environment, and its impact on housing desirability. CBRE quantifies a belief we've had and shows it has come true. The idea is basically that while urban centers no longer have the demand due to white-collar labor being more work-from-home friendly, there is still a demand to be "near" the city, albeit outside the urban setting. CBRE has defined this as the 'urban-adjacent inner-ring", with shorter commute times versus suburban living, while still catering to lifestyle preferences of walkability and larger living spaces.

Rents went up for the second straight month in May, hitting their highest level since October 2022, a welcome reprieve following 11 straight months of declines. Yardi predicts rent growth for the year will end at 1.7%. Considering that this is one of the biggest delivery years in history (and the pipeline is drying up quickly), that's not a bad number at all.

The chart below is a good way to end this month's letter, showing that despite supply surges occupancy has managed to stay steady. The moniker is "Survive till 25", and as July begins, we're half a year away from achieving that feat, with some new opportunities' forthcoming in an exciting time to be in the market.  

As always, thanks for your support, your commitments, and we hope you enjoy your Fourth of July!

Thank you,

Will Matheson