In addition to being the fifth-fastest population growth state in the country, North Carolina is home to cities that enjoy some of the strongest economic growth in the nation.

Source: CoStar

Multifamily Starts Continue to Fall – 12/18/24

• Monthly starts came in at 264,000 units, down 24.1% (84,000 units) from the revised (+22,000 units) figure from the previous month.
• The previous month’s starts were revised lower by 2,000 units to 295,000
• Compared to the year-earlier level, multifamily housing starts in buildings with 5 or more units were down 28.8 percent. The reported starts figure was 23.9 percent lower than the trailing 12-month average.
• What It Means: It typically takes about 2 years to complete a new multifamily project, so as new starts continue to decline it will create dramatically less available housing supply in 2026-2027. Less supply helps current owners raise rents.

Monthly Multifamily Completions Fall – 12/18/24

• Monthly completions came in at 544,000 units on a seasonally adjusted, annualized basis, down 11.1% (68,000 units) month-over-month. The previous month was also revised down 3,000 units.
• Compared to the trailing 12-month average, completions were down 5.3 percent.
• The total number of units under construction (780,000 on a seasonally adjusted basis) continued its downward trend. This is down 45,000 units from the previous month and 20.9% lower than the number of units under construction a year earlier.
• What It Means: While the number of completions (new supply) continues to be high, we are approaching the moment of “peak new supply” which will crest, descend rapidly, and stay low through 2026. We can see this based on the starts data discussed above.

Federal Reserve Rate Decision & Press Conference – 12/18/24

• The Fed cut interest rates 25 basis points, as expected
• While the statement and press conference were more hawkish than expected, things can change dramatically as we get more economic data in the weeks and months ahead. Last year at this time the Fed was projecting 0.75% in rate cuts. They ended up cutting 1.00%.
• When asked if the Fed would consider hiking rates, Powell said, “That doesn’t appear to be a likely outcome.”
• Powell noted that core PCE falling to 2.5% next year would be considered meaningful progress (meaning even though it’s still above their 2.0% target, they would still consider themselves on track)
• If the Fed raised the core PCE forecast to 2.5% with 2 cuts, they have actually lowered the bar for more than 2 cuts
• Powell stressed that labor is not creating inflationary impulses
• Powell: “We think the labor market is cooling in a significant way.” He stressed the want to avoid further deterioration in the labor market.

From Yardi’s National Multifamily Report in December:

• After two years of rapid increases, multifamily expense growth is beginning to moderate. Through October, expenses in U.S. market-rate properties rose an average 4.0% year-to-date, down from 9.0% in 2023 and 7.1% in 2022.
• Property insurance increases have leveled off in 2024, as the higher premiums have helped insurers get back on solid footing.
• Growth in other expense categories such as labor and maintenance have also moderated and should remain muted unless driven up again by an exogenous event.
• Net operating income growth continues to be positive as revenue streams remain positive. Income growth of 2.6% year-to-date has produced a 1.9% increase in NOI. Affordable properties have recorded 6.0% revenue growth year-to-date through October, producing a 7.1% increase in NOI over that time.

From Zillow’s Rental Market Report in December:

• Zillow forecasts multifamily rents to grow 2.8% in 2025, up from the current pace of 2.4%
• Zillow forecasts single-family rents to grow 4.1% in 2025, down from 4.4% year-over-year growth as of November

From Zillow’s Home Value & Sales Forecast in December:

• Zillow expects home values to grow 2.4% over the next 12 months, and by 2.2% in the calendar year 2025.
• Higher-than-expected mortgage rates are likely to reduce demand for home purchases, shifting it towards rentals.

Indeed is showing a sharp decline in the strength of the jobs market:

• What Is Indeed?: job matching and hiring platform
• New job postings on Indeed fell 38% year-over-year last week and now stand at the lowest level since August 2020.
• Job postings have dropped for nearly 3 years straight and are now down 49% since the February 2022 peak.
• As a result, new available vacancies are 5% below pre-pandemic levels.
• Data provided by Indeed is more current than the government data
• What It Means: If the jobs market is weakening more than expected under the surface, it will make the Fed more likely to cut aggressively in the months ahead as this data begins to show up in the government’s employment data

Federal Reserve Rate Decision & Press Conference – 12/18/24

• The Fed cut rates 25 basis points, as expected, but the good news ended there

• They reduced the number of cuts they expect next year from 4 (-1.00%) down to 2 (-0.50%)
• Powell: “We expect to slow the pace of cuts”
• Historically the 10-year treasury average is about 1.50% above the Fed Funds rate (to compensate for the risk in holding bonds longer in duration). That means the 10-year treasury should be at 5.75% today and should end up at about 5.00% at the end of 2028 based on their current projections:

• The Fed continues to raise estimates of where the neutral Fed Funds rate needs to be (where it does not stimulate the economy or cause it to slow it down). If it lands at the higher end of estimates, they are almost done cutting.

• They raised the longer run Fed Funds rate to 3.0%, up from 2.50% a year ago

• The odds of the next rate cut currently do not exceed 50% until the June 2025 meeting
• They raised their 2025 PCE inflation forecast from 2.1% to 2.5%
• Powell when asked why he didn’t use the word “recalibration,” said, “We’re not renaming the phase yet, but we may get around to that. We are in a new phase of the process. We are significantly closer to neutral and it’s appropriate to proceed cautiously.”
• Powell mentioned that some FOMC members attempted to project Trump’s (inflationary) policies into their models.

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Multifamily Permits Surge In The December Data Release – 12.18.24

• What It Is: Before starting construction, builders need permission from local authorities. A permit ensures the project follows safety codes and regulations. It’s considered the first step in the process to building new units, so it’s an early indicator of future supply
• Permits were up 22.1% from the previous month at 481,000 on a seasonally adjusted annual basis. They were up 4.8% from their year-earlier level and up 11.1% from the trailing 12-month average.
• What It Means: While permits do not mean a developer will definitely move forward with construction, it’s a worrying sign for current property owners hoping for less new supply to compete against in the coming years

Multifamily Completions/Supply Continues To Surge:

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From Apartment Advisor’s National Rent Report In December:

• Studio Units: -1.5% month-over-month decline
• 1 Bed Units: -3.1% month-over-month decline
• 2 Bed Units: -2% month-over-month decline
• 3 Bed Units: -2.3% month-over-month decline

From Redfin’s Rent Report in December:

• The median U.S. asking rent fell 0.7% year over year in November to $1,595, the lowest level since March 2022.
• Rents were down 1.1% on a month-over-month basis. 
• The asking price per square foot for rental apartments fell 2.2% year over year to the lowest level since December 2021
• Rents dropped across all bedroom counts for the fifth consecutive month.
• The median rent is now 6.2% lower than when it hit an all-time high of $1,700 in August 2022
• Nationally, apartment completions rose 22.6% year over year to the highest level in over 12 years in the second quarter. As a result, the vacancy rate for buildings with five or more units rose to 8% in the third quarter, the highest level since early 2021.

From Yardi’s Multifamily National Report in December:

• Multifamily rents fell .29% month-over-month
• Single family rents fell .32% month-over-month

From Realtor.com’s Rental Report in December:

• It was the sixteenth month of year-over-year rent decline in a row for 0-2 bedroom properties. Asking rents dipped by $19 or -1.1% year-over-year.
• The median asking rent registered at $1,703, down by $17 from last month (-1.0%) and down $57 (-3.24%) from the August 2022 peak. 

From Zillow’s Rental Market Report in December:

• Rents fell 0.3% month-over-month
• The share of rental listings on Zillow offering a concession set a new record at 38.6% in November
• Income needed to afford rent increased by 3.4% year-over-year in November to $79,301
• Since pre-pandemic, the income needed to afford rent has increased by 33%

Weekly Jobless Claims – Data Released 12/12/24

• What It Is: Show how many people filed for unemployment benefits during the past week
• Claims jumped from 225,000 last week to 242,000 this week, much higher than expected
• What It Means: A weaker jobs market could make the Fed more aggressive cutting rates in the months ahead

This Week’s Pensford Letter (12/9/24): If This Month’s Employment Report Focused On The Unemployment Rate, Instead Of The Headline Payrolls Number, Here Is How It Would Read:

• The labor market deterioration accelerated in November as the economy shed another 355k jobs.  
• The unemployment rate ticked up to 4.2% but benefitted from rounding down. The true print was 4.246%, which gets reported as 4.2%. Had just 6,700 more people reported being unemployed, the headline UR would have been 4.3%. It was 3.3% a year ago.  
• Over 7.1 million Americans are now unemployed, an increase of nearly one million from last year. The number of workers settling for part-time jobs due to weak economic conditions has ballooned to 4.5 million, up from 4.0 million last year.
• Long-term unemployment, a key indicator of structural labor market problems, is up 41% over the past year. 1.7 million workers have now been jobless for over 6 months, up from 1.2 million a year ago.
• The employment-population ratio continues its worrying decline, dropping to just 59.8%. More Americans are simply giving up looking for work, with labor force participation falling to 62.5% – extending a concerning downward trend that began last December.
• The unemployment to employment ratio, which measures the % of unemployed that became employed last month.  Excluding covid, it’s at its lowest level in 10 years.
• The overall hiring rate fell to 3.3%, lowest since June and comparable to 2013 levels.
• Job openings are still down 36.4% from March 2022 peak.
• Full-time jobs fell 111k, part-time down 268k.
• Multiple job holders increased by 275k.
• Permanent layoffs are trending higher, now above 1% of labor force.
• Average monthly job revisions of -36k since December 2022, a level rarely seen outside recessions.

This is why the market’s odds of a Fed rate cut rose to 86% after the jobs report. But what about the 10 Year Treasury? Given the high correlation between oil and rates, it looks ready to fall below 4% in the weeks ahead:

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Global central banks have conducted 62 rate cuts over the last 3 months, the most since the 2020 pandemic. This is the 4th fastest pace of rate cuts this century. To put this into perspective, during the peak of the Financial Crisis in 2009, global central banks implemented 76 rate reductions.

What it means: If rates are falling around the world it makes United States yields, included multifamily cap rates, more attractive to global investors.

City	State	1 Year	6 Month	3 Month	1 Month
Greenville	NC	8.55%	2.30%	1.39%	1.88%
Apex	NC	4.60%	-2.02%	-0.79%	-0.21%
Fayetteville	NC	4.33%	2.46%	-1.31%	-0.50%
Winston-Salem	NC	3.55%	2.06%	-1.22%	-1.47%
Greensboro	NC	1.52%	-0.96%	-1.48%	-0.96%
Burlington	NC	1.48%	-3.61%	-2.84%	-0.45%
Mooresville	NC	1.47%	-0.65%	-1.10%	-0.91%
Columbia	SC	0.95%	-0.17%	-1.43%	-1.09%
North Charleston	SC	0.89%	-2.19%	-2.52%	-1.28%
Charleston	SC	0.68%	-1.16%	-3.80%	-1.93%
Cornelius	NC	0.63%	-4.58%	-4.39%	-3.55%
Asheville	NC	0.21%	-0.75%	-1.15%	-0.48%
Wilmington	NC	-0.08%	-1.88%	-3.18%	-1.42%
Mount Pleasant	SC	-0.29%	-2.66%	-3.79%	-1.93%
Greenville	SC	-0.29%	0.29%	-0.07%	0.37%
Rock Hill	SC	-0.48%	-0.88%	-3.14%	-1.04%
Chapel Hill	NC	-1.04%	-2.67%	-2.40%	-0.63%
Cary	NC	-1.05%	-2.71%	-3.40%	-1.12%
Huntersville	NC	-1.19%	-0.95%	-1.60%	-0.95%
Garner	NC	-1.44%	-1.03%	-1.50%	-1.23%
Matthews	NC	-1.59%	-1.21%	-1.96%	-0.64%
Charlotte	NC	-2.35%	-2.02%	-2.56%	-0.98%
Durham	NC	-2.70%	-3.89%	-4.24%	-1.77%
Raleigh	NC	-3.42%	-3.62%	-3.22%	-1.00%
High Point	NC	-3.59%	-0.18%	-0.90%	-0.36%
Morrisville	NC	-4.04%	-3.49%	-3.49%	-0.71%
Gastonia	NC	-4.75%	-1.23%	-1.79%	-1.39%

Source: Apartment List

ADP Jobs Report – Data Released 12/4/24

• What it is: A monthly report that gives an estimate of how many new jobs were created in the U.S. private sector. It’s published by a company called ADP, which processes payrolls for many businesses.
• 146,000 new private jobs were created in the private sector last month, below the expectations of 166,000.
• The previous month was also revised down to 188,000.
• What it means: A weaker than expected report makes the Fed more likely to cut interest rates

CoStar Reports Multifamily Prices Rising:

• The value-weighted index of multifamily prices rose 1.4 percent month-over-month in October. The index was down 7.1 percent year-over-year.
• Multifamily prices are below their longer-term trend line, which would be positive for prices in the coming years ahead if they begin to mean revert.
• Prices are now down 25.2% from the high reached in July 2022

Freddie Mac: Housing Is Undersupplied By Millions Of Units:

• Despite adding 5.8 million housing units over approximately four years (since our previous estimate), housing demand has increased by almost the same amount, resulting in very little progress in reducing the housing shortage.
• In the aggregate, we estimate that U.S. housing stock is 3.7 million units below what is needed given our current population and assuming inflation-adjusted housing costs returned to historical levels. 

Apartments Remain The Favorite Asset Class Among Real Estate Investors:

• Apartments accounted for 37% of all commercial real estate sales in 2024’s 3rd quarter, and they are back in line with pre-pandemic standards
• Sales during the quarter totaled $35.8 billion, a 9% year-over-year increase, which marked the second consecutive quarter of year-over-year growth
• Sales over the past two quarters averaged $38.3 billion, aligning with the pre-pandemic norm from 2015 through 2019

2024 Migration Trends: National Association Of Realtors:

• The Carolinas rank third and fourth for the largest net migration in 2023:

The discount to rent vs. buying remains at the highest levels in decades.:

The December BLS Jobs Report – Data Released 12/6/24

• What it is: A summary of the total jobs gained or lost in the previous month, the unemployment rate, wages and work hours
• 227,000 new jobs were created this month, beating expectations of 214,000
• The previous two months were revised higher by an additional 56,000 jobs
• The unemployment rate rose slightly to 4.2%
• Hourly earnings rose .4% month-over-month, beating expectations of .3%
• What is means: A stronger jobs report with higher-than-expected wage growth makes the Fed less likely to aggressively cut interest rates

Atlanta Fed GDP Now Forecast – Data Released 12/2/24

• What it is: “The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.”
• The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 is 3.2% on Dec 2, up from 2.7% on Nov 27.
• What it means: If GDP growth is accelerating, it will make the Fed less likely to cut interest rates

JOLTs Report (Job Openings & Labor Turnover Survey) – Data Released 12/3/24

• The number of jobs openings came in at 7.74 million (higher than the 7.48 million expected)
• More job openings indicate that employers are actively seeking to hire and signals a tighter labor market where employers struggle to fill positions
• Increased competition for jobs can lead to higher wages as companies offer higher compensation to attract employees
• The number of quits also rose, indicating more confidence among workers about finding another job
• What it means: The stronger than expected JOLTs data makes the Fed less likely to cut interest rates

Jerome Powell’s Interview At The Dealbook Summit – 12/4/24

• Powell again emphasized that there’s little urgency for the Fed to lower interest rates quickly, given the uncertainty in the inflation outlook and a solid current economic backdrop.
• “The economy is strong, and it’s stronger than we thought it was going to be in September,” Powell said. “The downside risks appear to be less in the labor market, growth is definitely stronger than we thought, and inflation is coming a little higher. So the good news is that we can afford to be a little more cautious as we try to find neutral.”
• What it means: The strength in the labor market and sticky inflation may slow the Fed down with interest rate cuts in the months ahead

The Beige Book – Data Released 12/4/24

• What it is: A report that gives a snapshot of the U.S. economy. It’s like a collection of stories and observations from different regions of the country about how businesses are doing.
• Though growth in economic activity was generally small, expectations for growth rose moderately across most geographies and sectors.
• The Fed’s districts reported that inflation was rising only modestly, and companies had more trouble passing on higher costs as consumers grew more discerning about pricing.
• Hiring was seen as subdued with low worker turnover, while layoffs were also limited. Business contacts said they expected steady to modest growth in employment.
• What it means: Relative to recent months that had a more negative tone (which Jerome Powell commented on after their first 50 basis point cut), this report reflects stronger growth and makes the Fed less likely to cut interest rates.

Multifamily CMBS Delinquency Rate Rose Sharply This Month:

• Multifamily delinquency rose 94 basis points to 4.18% this month. One year ago, it was at 2.46%

Apartment List December Rent Report:

• The national median rent dipped by 0.8% in November, as we get further into the slow season for the rental market. Nationwide rent fell $12 to $1,382, and we’re likely to see that number dip one more time before the year ends.
• Since the second half of 2022, the seasonal declines in rent prices that take place during the fall and winter have been steeper than usual and seasonal increases of the spring and summer have been milder. As a result, apartments are on average slightly cheaper today than they were one year ago. Year-over-year rent growth nationally currently stands at -0.6 percent and has now been in negative territory for nearly a year and a half.
• On the supply side of the rental market, our national vacancy index continues trending up slowly and sits at 6.8 percent, the highest reading since the onset of the pandemic.

The Number Of Cost-Burdened Renter Households Hits All-Time High

• Broadly accepted financial wisdom dictates that a household should spend no more than 30 percent of its gross monthly income on housing costs.
• More than half spend above that level, qualifying them as “cost-burdened.”
• More than one-in-four renter households spend over 50 percent of their income on rent, making them “severely cost-burdened.”
• The cost burden rate could even be underestimating the degree to which housing affordability has worsened. A lack of affordability has deterred new household formation in recent years, as Americans are increasingly doubling up with family or roommates to save on housing costs. These individuals are struggling with housing affordability, but because they don’t represent their own households, they are not captured in cost burden statistics.
• Additionally, as the affordability of for-sale housing has eroded even more rapidly than that of rentals, more prospective homebuyers are continuing to rent. This subset of renters who have been sidelined from the for-sale market tend to be higher-income, and their presence in the denominator of the renter cost-burden rate could be depressing that rate slightly.

Scheduled Apartment Supply Peaks By Market (12/2/24)

Texas and the Carolinas are really going to test the depth of demand in the coming few quarters when their supply peaks in the first half of 2025. There may be a slower return to normal revenue growth levels due to sheer volume, and supply’s impact is cumulative over a multiple-year period.

CRE Investors Evaluate Distress Signals:

• Apartments have been a top investment target for many years, but tighter margins combined with economic headwinds have led to more investor jeopardy, especially for value-add multifamily product. There are some signals that suggest a wave of distress is incoming.
• “I believe the canary in the coalmine is property liens,” says Kidder Mathews SVP Nathan Thinnes. “Vendors are usually the first to not get paid, and we’re seeing a big uptick in accrued liens, specifically in the multifamily space.”
• “Any hopes borrowers have of a lower cap rate environment to aide in their workout solution is quickly fading.”

Visualizing the decline in property values based on a rise in cap rates and assuming NOI stays equal. This, of course, works in the opposite direction if cap rates fall (property values rise).

In this example using a $1,000,000 NOI, a class B property that traded at $22.2 MM (4.50% cap rate) at the market peak in 2022, would trade at $17.3 MM today using a 5.75% cap rate and the same NOI (the blue line scenario below):

Source: James Eng

From this week’s Pensford Letter (11/25/24):

• When the Fed Funds interest rate is higher than the inflation rate, we have positive real interest rates. That, in turn, applies the brakes on the economy. With Fed Funds at 4.5% – 4.7% and Core PCE at 2.7%, we have positive real rates of 2%, aka braking action.
• This is why Powell continues to stress that rates are restrictive. CPI has fallen from 9.1% to 2.6%. Monthly job gains have dropped from 550k to 150k.

• The neutral rate is a hypothetical rate where the Fed is neither encouraging or discouraging growth, then you add inflation.
• Every other meeting the Fed provides forward guidance through the blue dots seen below. It’s where they think the Fed Funds rate will be at that point in time.
• When you read a headline that the Fed’s expectation for long term neutral is 2.8%, it’s really the median blue dot of these projections. Here’s September’s projections:

• If the 3.75% dot is accurate, we are just 0.75% away from neutral. If the 2.25% dot is accurate, we are still 2.25% away from neutral. The range is 2.3% – 3.75%. That’s a huge range, which signals uncertainty and a widening difference of opinions.
• But every single one of them is below the current level of 4.5% – 4.75%, which is why it’s reasonable to conclude they will keep cutting. It’s also why Chicago Fed President Austan Goolsbee said, “I still think we’re far from what anybody thinks is neutral. We still got a ways to come down.”

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Collier’s Quarterly Market Snapshot:

• For the second consecutive quarter, the multifamily market has posted year-over-year sales gains. The number of properties traded has settled, indicating that the market is finding an equilibrium.
• Volume over the past two quarters is in line with quarterly averages from 2015-2017. While it doesn’t match the levels seen during the booming days of 2021 and 2022, it still reflects a time of healthy market activity and liquidity. Given the sector’s continued tailwinds, multifamily looks to remain the most traded asset class for the foreseeable future.
• Market fundamentals are nearing an inflection point. New deliveries, which are at multi-decade highs, have been met with near-record demand. Occupancies have slipped, but not to the extent expected given the supply-side pressure.
• As this construction cycle abates, and limited groundbreakings follow, occupancies are projected to improve, supporting future rent growth in the quarters, and years ahead. This trend should bring additional capital off the sidelines as investors gain confidence in a near-term market rebound.

New starts are down 74% since mid 2022: