Trust This. CRE Market Stress – Housing Market Struggles – Growth-focused Hiring Tips

Trust This.

By Joseph E. Seagle, Esq. ● Sep 20, 2024

Smart Brevity^® count: 5 mins…1364 words

👋 Happy Friday! Today is National Pepperoni 🍕 Pizza Day. I know what I’m ordering for dinner tonight!

Situation Awareness: The Eleventh Edition of Land Trusts in Florida is available for Kindle preorders on Amazon now. Paperback and Kindle versions start shipping on October 1. Go to www.landtrustbook.com to order yours today.

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📉 1 big thing: Commercial Real Estate Delinquencies Surge as Loan Growth Slows: A Sign of Market Stress

The U.S. commercial real estate (CRE) market is showing renewed signs of stress as delinquencies on CRE loans rise and loan growth stalls. According to the latest S&P Global Market Intelligence data, CRE delinquencies increased by 16 basis points to 1.40% in Q2 2024, reflecting the growing pressure on borrowers, particularly in the office sector.

Why It Matters: For real estate professionals and investors, this trend signals a need for caution.

• The office market, plagued by high vacancy rates and falling property values, remains a major source of concern.

• Many banks have been forced to increase loan loss reserves, signaling their expectation of more defaults.

• The uncertainty in property values, coupled with reduced transaction volumes, further complicates market dynamics.

Driving the News:

• Higher Interest Costs: Many CRE loans are maturing, and borrowers face significantly higher interest costs, adding to financial strain. However, a potential Federal Reserve rate cut could offer some relief, as economists predict easing monetary policy due to slowing inflation and a softening labor market.

• Office Sector Woes: Office property prices have been slow to recover, with vacancy rates high and price corrections limited. Banks with heavy office exposure, such as M&T Bank and Valley National Bank, are taking a more cautious approach, reducing their CRE loan portfolios.

• Declining Loan Growth: Year-over-year CRE loan growth has slowed —from 12.1% in late 2022 to just 2.2% in Q2 2024—due to stricter lending standards and falling property values. The most significant slowdown is in nonowner-occupied, nonresidential loans.

The Bottom Line: Navigating this landscape requires CRE professionals to adapt to slower loan growth and prepare for continued turbulence, particularly in the office sector. Keep an eye on interest rate changes, which could be a key factor in the months ahead.

2. US Housing Market Stumbles Through Spring as Buyers Wait for Lower Rates

The US housing market experienced its weakest spring in 12 years, as high mortgage rates and limited inventory stifled buyer and seller activity. From April through June 2024, sales fell to levels unseen since 2012, according to Redfin data, with some of the steepest declines in previously hot markets like Florida and Texas.

Why it matters:

• For real estate professionals and investors, this slump signals both challenges and opportunities.

• Homeowners are hesitant to sell, locked into lower-rate mortgages from previous years.

• This “lock-in effect” has stifled the flow of new listings, leaving 1.7 million homes unsold over the past two years.

• Buyers, meanwhile, are biding their time, expecting further rate cuts, which could finally unlock pent-up demand.

What’s next:

• The Mortgage Bankers Association forecasts a modest decline in mortgage rates to 5.9% by the end of 2024, which could rejuvenate sales.

• However, the big question is whether these lower rates will come in response to economic stability or a weakening economy.

• If the latter, consumer confidence might falter, further delaying purchases.

The bottom line:

• For real estate agents and investors, the message is clear: Prepare for a competitive market when rates drop (as they appear to be doing).

• Buyers will be selective, so sellers should ensure properties are well-maintained and updated to meet current tastes.

• Meanwhile, investors should keep an eye on markets like Phoenix, where rising prices are driving a generational divide between cash-rich Boomers and sidelined younger buyers.

• It’s expected the buyers may continue to wait out rates to drop further as the Fed moves closer to its equilibrium rate.

Go deeper: Bloomberg (paywall)

In this week’s Trust This. podcast, an Ask Joe Anything segment, I go deeper in explaining loans to land trusts.

Listen in or watch on your favorite streaming platform.

3. Catch up fast

AI-artist rendering of what it could have looked like during the Fed’s Board of Governor’s meeting where one governor dissented for the first time since 2005. DALL-E

1. In case you’ve been under a rock for the past few days, on Wednesday the Fed voted to reduce its lending rate by 50 basis points (0.5%). The markets had expected this and priced it in already. It’s expected that the Board of Governors will vote at least two more times by the end of the year to reduce rates a total of another 50 to 75 basis points to help the job market stabilize as it continues to stabilize inflation. One Fed BoG member dissented, preferring a smaller 0.25% cut — the first time the vote hasn’t been unanimous since 2005. HousingWire and Bloomberg (gift link works until Monday)

2. Mortgage rates fall to lowest in a year in anticipation of Fed Rate cut. MPA Magazine

3. Stranger obtains title to $4 million Raleigh house without real owner’s knowledge. Florida passed a law to make it easier to unwind problems like this, but NC doesn’t have a similar law … yet. ABC News 11, Raleigh

4. The presidential candidates’ housing proposals: Who can build solutions for Florida? WUSF

5. Should he re-take the White House, Trump allies are working up plans to privatize Fannie Mae and Freddie Mac. Reuters

4. Closing Thought – Hiring the growth mindset

The 11th Edition is available on Amazon for Pre-Order. Shipping starts October 1. Get yours today. Go to www.landtrustbook.com to order yours today.

One of our companies’ core values is to “Be growing” intellectually, emotionally, profitably, and geographically.

• Having a growth mindset is imperative.

• We encourage other businesses to consider hiring for a growth mindset too.

Why it matters: Hiring the right people can make or break a business in the early stages. Growth-minded team members bring innovation, adaptability, and resilience—key traits for any entrepreneur aiming for sustainable success.

The hiring process:

• Look for potential, not just experience: When reviewing candidates, focus on their ability to learn, adapt, and take ownership rather than just their past job titles. Ask questions that assess their willingness to embrace challenges, such as, “Can you tell me about a time when you took on a project outside your comfort zone?”

• Assess their attitude towards failure: Growth-minded individuals view failure as a learning opportunity.

  During interviews, ask how candidates handled mistakes in the past and what they learned from them.

  Ask about an inefficient process they faced in a prior job and what they did about it.

  Look for humility and the ability to pivot. Look for the drive to change, not complain.

• Culture fit and alignment: Ensure their personal values align with your company’s mission. Candidates who resonate with your vision are more likely to stay motivated and engaged.

Inspire and foster growth:

• Invest in development: Provide ongoing training and mentorship.

• Offer resources such as courses or coaching sessions to help your team continually improve.

• Encourage them to attend industry conferences or networking events to broaden their skill sets.

• Create a safe space for experimentation: Foster an environment where employees feel comfortable taking calculated risks without fear of punishment. Encourage them to innovate and try new ideas, even if it means they occasionally fail.

• Feedback and recognition: Regular, constructive feedback is crucial. Recognize efforts, celebrate wins, and provide clear paths for advancement within your organization.

The bottom line: Hiring growth-minded individuals and fostering their development creates a dynamic, adaptive team that can navigate challenges and push your business forward.

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