September 2024 Update

We finally got it!

As September went on, the looming Fed rate cut was obvious, the only part remaining to be seen was whether it would be 25bp or 50bp. The odds reflected nearly a coin flip, as uncertainty amongst economists, traders, and market watchers led right up until the 2pm announcement, when Jerome Powell announced the cut would be 50bp.

For the first time since 2005, a rate cut decision by the Federal Reserve Board of Governors wasn't unanimous, as Michelle Bowman dissented, citing inflation concerns as her reasoning for preferring a 25bp cut. (side note, if they want to get lower inflation results, getting rid of the ridiculous owner equivalent rent question would do wonders)

Like the dog that caught the car, as soon as Powell announced the 50bp cut, the market shifted towards asking now what? Dovish or hawkish? 50bp again in November? (Current odds are leaning towards 25bp)

JUST CLOSED - THE GROVE AT MOUNDVILLE

We are thrilled to announce the successful acquisition of The Grove at Moundville, a 66-unit BTR community located in Tuscaloosa, Alabama, which we acquired at the phenomenal basis of just $215k per unit. 

This property marked our second acquisition, our fastest acquisition (36 days from contract to close), and our first deal in Alabama!

MARKET INSIGHTS

As we stated above, the rate cuts being a foregone conclusion meant that the data that came out wasn't going to sway the data-dependent Fed, but the numbers continued to support their case, as:

- Core-PCE for July rose 2.6%, below analyst expectations for 2.7%

- August Jobs report showed a +142k figure, as June & July were revised lower

- August CPI came in at 2.5%, below 2.6% forecasts (non-seasonally adjusted Y/y)

(And yes, we are aware of the latest jobs numbers. 245k is strong, but we've been revising down an average of 68k over the last year. Additionally, we the monthly average was 465k two years ago, so I still think there is a lot of weakness here.)

Since the September cut, Core-PCE for August was released at 2.7%, so up slightly more M/M.

The other impact of a sure-thing Fed cut? Wall Street doesn't actually need to wait for the announcement to respond, as banks, lenders, traders, and credit rating firms began to beef up their CRE originations & issuances teams in anticipation of higher volumes.

Some firms aren't as quick to flip the switch, as Wells Fargo says that one cut can cause CRE to rebound, but the lending side may be slower, and Jamie Dimon of JPM says he remains cautious despite the cut, given geopolitical risk and economic uncertainty. Moody's has also dampened the rate cut energy by warning the US credit rating (currently AAA) may be downgraded after the election as a result of the growing budget deficit.

INDUSTRY INSIGHTS

We've been monitoring supply & demand dynamics in multifamily since the covid lockdowns, and forward-looking data still gives us comfort. 2Q24 sentiment and permits were both down according to the NAHB Multifamily Production Index. In addition, July multifamily starts were down 22% Y/Y, and down 41% from April-22 peak levels, to the lowest level of the past decade according to CoStar. Completions in 2025 are expected to fall by nearly 50% versus 2024, and fall slightly more in 2026, indicating increased rental pricing power for landlords in the medium-term. CBRE has seen this trend start already, as occupancy in markets with significant new supply have stabilized. The shift also is reflected in pricing, with Green Street's CPPI showing CRE prices rose 1.6% from July to August. 

As has become an ongoing part of this newsletter, several large firms are saying it's the time to get back into real estate. JLL is reporting institutional equity is more active and bullish, Brookfield is stepping back in after a 2-year near transactions freeze, and DWS is saying the worst of the real estate downturn has passed. Waterton announced a close of $1.73B for a US value-add multifamily focused fund. 

OTHER THOUGHTS

Population growth and productivity rates are two keys that can lead to outperformance of a real estate market. The Durham-Chapel Hill metro has a productivity rate 1.5x the national average and was recently ranked 2nd by Altus on expected return of multifamily investments above benchmark (alpha), with an expected outperformance of 4.7% annually!

South and North Carolina were recently ranked #1 and #2 respectively by Realtor.com for new construction activity and affordability as the Southeast continues to shine and attract new residents! (FL, TN, GA, and TX also placed Top 10) 

America's (and Matheson Capital's) favorite gas station, Buc-ee's, recently announced their first ever North Carolina location, in Mebane, NC, right between Greensboro and Durham. We're very excited at the prospect of a second Buc-ee's stop on the drive from our Charleston offices to site visits throughout North Carolina.

As always, thanks for your support.

Thank you,

Will Matheson