Limon Net Lease Group

Archives for October 2024

Will Elevated Debt Threaten the Economy

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Consumer Strength Eases Household Debt Concerns for CRE ​

Household Debt Is Elevated, But Remains Manageable ​

  • Total household debt reached an all-time high as of 2Q 2024 ​
  • Over 70% of the debt is housing-related, placing less of a financial burden on most households, as much of that debt takes the form of low-interest rate mortgages and home equity lines of credit ​
  • Non-housing debt, including auto loans, student loans and credit card debt, is also at a high, impacting some households more than others ​

Job Growth And Wage Gains Are Sustaining Economic Growth ​

  • U.S. employment is at a record level, with over 2 million jobs added in the past year ​
  • Wage growth outpaced inflation over the past 12 months ​
  • Strong employment and wage growth are offsetting rising debt levels ​

Consumers Remain Healthy, Supporting CRE Space Demand ​

  • Household debt service payment levels are below historical norms ​
  • Financially-strong consumers are supporting demand for apartments and self-storage, as well as retail and industrial space ​
  • Healthy household balance sheets should also translate to optimism regarding leisure travel, strengthening demand for hotel rooms ​

*Through 2Q​
Sources: Marcus & Millichap Research Services, Federal Reserve​

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Why CRE Insurance Costs are Poised to Surge

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Natural Disasters and Rising Insurance Costs: Impact on CRE

Natural Disasters Are Increasing In Frequency And Cost ​

  • Natural disasters with total damage costs exceeding $1 billion have steadily risen since the 1980s ​
  • The U.S. now averages almost 22 natural disasters per year, up from about 13 in the 2010s ​
  • Over 21 natural disasters with at least $1 billion in associated damages have already occurred in 2024 ​

Insurance Costs Have Surged Due To Increased Risk ​

  • Apartment insurance rates doubled from 2019 to 2024, with a peak growth pace of 35% from 2023 into early 2024 ​
  • High-risk states like Florida and California have seen outsized insurance rate hikes ​
  • Rate increases spread throughout the U.S. due to insurance providers’ risk diversification models​

Rising Costs And Risk Impact Investor Decision-Making ​

  • Insurance costs are 8-10% of total expenses, influencing underwriting ​
  • Rising rates affect migration, with some homeowners leaving high-risk states like Florida ​
  • CRE sectors like self-storage, industrial and retail could see shifts in space demand as people move ​

*Through 3Q ​
Sources: Marcus & Millichap Research Services, RealPage, Inc.​

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Will September Job Surge Put Rate Cuts on Hold

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September’s Strong Jobs Report Alters the Economic Outlook​

Job Growth Stronger Than Expected in September ​

  • 254,000 jobs added in September, surpassing expectations​
  • Revisions added 72,000 more jobs to the July and August total ​
  • Unemployment rate ticked down to 4.1% ​
  • Wage growth hit a four-month high ​

Jobs Report Likely Impacts Federal Reserve Policy ​

  • The jobs report has weakened the case for a 50-basis-point interest rate cut in November ​
  • The Fed may now consider pausing rate cuts to assess economic conditions​
  • Overnight rate still expected to lower by 100bps by June 2025 ​

Commercial Real Estate Outlook Remains Positive ​

  • Job creation drives housing needs and consumption, the latter of which flows into space demand for retail and industrial properties ​
  • Continued job growth could aid office utilization over time​​

​Sources: Marcus & Millichap Research Services, BLS​

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Will Black Swan Events Derail the FED & CRE Outlook

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The Impact of Recent Events on the U.S. Economy ​

Recent Global Events Are Creating Economic Pressures ​

  • Hurricane Helene struck the southeastern U.S. in late September, and may become one of the costliest disasters in history ​
  • Military escalations in the Middle East are lifting oil prices, leading to inflation concerns ​
  • Elevated oil prices historically precede economic downturns ​

The ILA Port Strike Disrupts U.S. Supply Chains​

  • U.S. East Coast and Gulf Coast dockworkers began a strike on October 1st, halting inbound and outbound shipping at 36 ports ​
  • Weekly economic losses are estimated between $4 billion and $7 billion, impacting various industries ​
  • The strike affects U.S. imports and exports, risking domestic food and manufacturing supply chains ​

Port Strike Could Complicate Fed Decisions And Impact CRE ​

  • The Fed may face a tough choice between lowering rates to prevent a recession or holding them steady to keep inflation under control ​
  • A prolonged dockworker strike could shift container traffic to the West Coast, boosting industrial space demand in certain regions ​

GDP as of April 2024; Export value as of 2023
Sources: Marcus & Millichap Research Services, World Population Review, IMF, CIA ​

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