October 2024: Jobs Market Wobbles, Rate Cut Debate, and Investor Activity Heats Up

Sorry for being so late to send this one out. I'd say it was because of the election or something along those lines, but the honest answer is that we've been unexpectedly busy.

On top of that, the market has been so volatile these past few weeks that it's been hard to keep up.

So let's dive on in.

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MARKET INSIGHTS‍

A few statistics that we pulled from the Pensford newsletter (which I highly recommend) are summarized below:

- Net Farm Payrolls: 12k vs 100k expected

- Unemployment Rate: 4.1%

- Core PCE (M/M): 0.3% vs 0.3%

- Core PCS (Y/Y): 2.7% vs 2.6%

To put it mildly, I am very concerned about the jobs market.  

12k jobs is the worst jobs number since 2009 (not counting COVID). Of the 12k, government and healthcare made up 90k, so the rest of the labor market lost $78k jobs. Just look at how much they've fallen off in the past four years.

While rates were going up but inflation wasn't going down, we heard over and over again that the impact of rate hikes would take 12 to 18 months to really be felt. Here we are, over a year since the last rate increase, and the economy is starting to show stress. (We're approaching Sahm Rule territory, which is another one of these economic statistics that would benefit from a larger sample size).

But yet, inflation numbers are a little higher than they were hoping for (which is likely due to the base effect), and now people are starting to think that the Fed should stop cutting. The market odds are hovering around 60% for a 25bp cut in December, with the alternative being no cuts at all (and this percentage changes by the hour, so please excuse me if I'm now wrong).

I think it would be a bit ironic to warn "this is going to take a while" on the way up, but then stall on the way down because you're worried that things are getting too hot. I think this could be a classic case of the Fed not cutting more aggressively until the recession starts, which tends to be the norm.

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INDUSTRY INSIGHTS

Real estate sentiment ranged from cautious to optimistic, with rate cuts seen as a strong industry tailwind. Goldman Sachs responded to the cut by lowering its recession odds from 20-25% to 15% in the next year.

Evaluating the impact of bloated new supply versus the dearth of forward-looking supply continues to be the see-saw balancing act for investors. New multifamily permits were down again, 16.8% Y/Y, despite being up M/M, while completions hit a new 50-year high of 740k annualized units. Rents favored the forward-looking side in September, rising 0.6% Y/Y in September to $1,634 according to Redfin. One of the big reasons completion data hasn't had a harder impact on the industry is demand has picked up, and is closing the gap behind supply, according to RealPage.

CP Capital head Jay Remillard cited this response to "generationally high supply" as a reason for optimism, calling CRE a buyer's market heading into 2025. Moody's head of CRE Analysis Kevin Fagan called it a "normalization period" after drastic supply/demand shifts, changing pricing, and population migration.

Apollo and Blackstone both took a cautious response to the rate cut rally, with Apollo CEO Mark Rowan saying he didn't see a reason for more rate cuts. This was echoed by Blackstone President Jonathan Gray, who argued that cuts weren't a quick fix for post-covid acquisitions that were underwater.

An Altus survey showed 69% of investors expect multifamily to outperform the broader CRE market, despite transaction volume being down 35% and GSE agency lending falling in the first half of 2024.

Surveys and PR statements are great, but we put a lot more stake in the actions of large firms than we do in their public statements. This month was big, as several groups made large commitments to the CRE space.

- Two Sigma, the quant hedge fund, is raising external cash to launch a Real Estate Opportunity Fund, capitalizing on the firm's data science expertise to target multifamily and industrial investments.

- Elliot Management, an activist hedge fund, is purchasing a city block in Miami to convert office space to condos, paying $450MM to Nuveen for the opportunity.

- Deer Park Road, a structured credit hedge fund, is raising a $500MM CMBS fund to target deeply discounted office debt, with valuations down 60-80%.

- Harrison Street, a seasoned alternative real estate investor, just closed its ninth real estate fund, a $2.5B raise, and has already committed 70% of its capital towards 70 properties across 7 sectors, including student, senior, and data centers.

- Ares Management announced the acquisition of GLP Capital Partners international portfolio, excluding China, for $3.7B, which will make it the 3rd largest industrial landlord. The deal will nearly double AUM to $96B.

OTHER THOUGHTS

Fun fact - The average age of US homebuyers jumped up to 56 in 2024, up from 49 years old in 2023.

Looking towards the future as that number grows, can a senior's future social security benefits be used to satisfy the debt-to-income ratios required for a 30-year mortgage? Is that good lending practice? It might not matter, as I bet a large amount of these homes are purchased without mortgages.

The average age of first-time homebuyers also jumped, from 35 to 38, with just 24% of home sales being first-time buyers. We believe this reflects the broader shift to renter culture, or at least renting for longer, due to the desire for flexibility, less financial liability, and a higher hurdle to make the jump to homeownership.

We are well-positioned to capitalize on this trend, and we will continue to pursue markets where this younger demographic of renter is looking to live.

As always, thanks for your support.

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Thank you,

Will Matheson