πŸ“Š Investors Hit Pause in 4Q23 per Burns + CRE Daily Fear and Greed Index. See the full report here.

Federal Reserve’s Beige Book Reveals Nationwide CRE Slowdown

Plus, an analysis from Trepp has uncovered that $351.8 billion in multifamily bank loans are due to mature within the period of 2023 to 2027.

Federal Reserve's Beige Book Reveals Nationwide CRE Slowdown

Plus, an analysis from Trepp has uncovered that $351.8 billion in multifamily bank loans are due to mature within the period of 2023 to 2027.

Together with

Good morning. Recent reports indicate a slowing U.S. economy, as highlighted by the Federal Reserve's Beige Book. Plus, an analysis from Trepp has uncovered that $351.8 billion in multifamily bank loans are due to mature within the period of 2023 to 2027.

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MIXED SIGNALS

Federal Reserve's Beige Book Reveals Nationwide CRE Slowdown, Office and Multifamily Hit Hard

The Federal Reserve's Beige Book, a comprehensive review of the nation's economic status, signals a slowdown in the U.S. economy, casting shadows on the prospects of commercial real estate recovery.

Impact on CRE: The Beige Book reports a deceleration in economic activities, adversely impacting nearly every segment of commercial real estate. Retail sales show mixed results, and a decline in transportation demand contributes to significant weaknesses in office and multifamily properties. With a downturn in residential sales and an uptick in home inventories, the forecast for the next 6 to 12 months appears increasingly challenging.

Regional trends: Here are some specifics from different Fed branches.

  • In Boston, CRE activities, particularly in office properties, have slowed modestly, yet the overall economic mood remains cautiously optimistic.

  • New York's CRE sector is experiencing downturns, with both office and industrial spaces suffering from rising vacancy rates and falling rents, particularly acute in Upstate New York and New York City.

  • Philadelphia's CRE loan market is stagnant, with high interest rates hindering transactions and new construction, leading to reduced leasing activities.

  • Cleveland observes a slowdown in nonresidential construction, with weakened demand for CRE, notably in older office spaces, though future improvements are anticipated.

  • Richmond's CRE market activity has slowed, with the industrial and retail sectors remaining stable. The office sector has seen lower effective rental rates due to substantial concessions, while multifamily rents have either stagnated or decreased.

  • In Atlanta, there is a noticeable decline across the CRE sector, encompassing office, high-end multifamily, and industrial real estate, exacerbated by financing challenges and stricter lending practices.

  • Chicago's CRE sector reports a slight decline, characterized by falling vacancy rates and rents, alongside a modest reduction in business loan demand and ongoing struggles in the CRE market.

  • St. Louis has experienced a significant slowdown in commercial construction, especially in warehouse and industrial sectors, with a reduced demand for future projects.

  • Minneapolis's CRE market modestly declined, facing difficulties in office space and an increase in multifamily vacancy rates. Speculative industrial development also shows signs of slowing.

  • Kansas City is witnessing potential deterioration in loan quality, especially in CRE, though there is stability in raw material costs and improved availability of subcontractors.

  • Dallas's CRE activities have softened, marked by slow apartment leasing, minimal office leasing, and an imbalance in supply and demand for industrial spaces.

  • San Francisco presents a mixed CRE market, with subdued office leasing but strong demand in sectors less amenable to remote work. Elevated costs are impacting construction projects.

βž₯ THE TAKEAWAYΒ 

Zoom out: The Federal Reserve's Beige Book underlines a pervasive slowdown in commercial real estate nationwide, particularly in the office and multifamily sectors. This trend, characterized by rising vacancy rates, declining rents, and financial challenges, paints a subdued picture for the real estate industry's recovery across various U.S. regions.

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IMPENDING MATURITY

Trepp Forecasts $352 Billion in Apartment Loans Maturing by 2027

A recent analysis by Trepp reveals that a significant volume of multifamily bank loans, totaling $351.8 billion, is set to mature between 2023 and 2027.

Methodology: Trepp's analysis uses a rating system from one to nine to assess the risk of loan defaults, with higher numbers indicating greater risk. Most notably, markets like New York City, San Francisco, and Seattle have seen a decrease in high-risk ("criticized") loans, while seven out of the ten largest markets have witnessed an increase in such loans.

Market trends: Certain markets, especially those that struggled during COVID-19, such as New York City, San Francisco, and Seattle, are now witnessing rent growth. Conversely, markets that flourished during the pandemic are now facing issues due to a mix of supply-demand imbalances, rising expenses, higher interest rates, and looming economic recession concerns.

Sun Belt pressures: In Sun Belt markets, notably Houston, an influx of new supply is pressuring rents and potentially stressing bank notes. Houston, with the highest share of criticized loans at 38%, is grappling with weak absorption rates and declining rental growth, compounded by high construction rates and increased insurance and maintenance costs due to its coastal location.

Phoenix we have a problem: Known for its fluctuating market dynamics, Phoenix is experiencing a surge in new property deliveries. Despite a current 0.0% delinquency rate in bank-held multifamily loans, the high rate of loans on the servicer watchlist and over-supply concerns, coupled with fears of a recession, signal a rising perceived risk in the region.

βž₯ THE TAKEAWAYΒ 

Why it matters: The impending maturity of a massive $351.8 billion in multifamily bank loans by 2027, as identified by Trepp, puts major pressure on the sector. While cities like New York, San Francisco, and Seattle show a positive trend with decreasing 'criticized' loans, most other major markets are facing an upward trend in such high-risk loans, marking a potentially turbulent phase ahead for lenders and investors.

CHART OF THE DAY

The chart, created by TS Lombard's Dario Perkins using IMF data, illustrates the forthcoming maturities of commercial real estate debt. Additionally, as reported by mainFT, the amount of delinquent CRE loans at banks has reached its highest point in ten years.

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