The Small Balance Intersection Update - June 27, 2024

Optimistic Drive: Small Business Confidence Reaches Post-Pandemic High

Small business owner confidence has soared to its highest level since early 2020, as indicated by the Q2 2024 Small Business Index score of 69.5. This surge is driven by 73% of owners expecting revenue growth and 46% planning to increase investments. Inflation remains a top concern for 54% of businesses, yet optimism about AI is growing, with 71% believing it will save time and 67% expecting cost reductions. This confidence highlights the resilience and strategic foresight of small businesses. Many are preparing for future growth by leveraging technology and enhancing operational efficiency despite potential challenges. The focus on AI and investment indicates a proactive approach to navigating economic uncertainties. The rising confidence is a testament to the adaptability and forward-thinking nature of small business owners, positioning them well for future success. For more details, visit the U.S. Chamber of Commerce report.

Labor Market Lane: Small Businesses' Vital Role in Job Openings

The number of job openings has been gradually declining since 2021 as the Federal Reserve’s interest-rate hikes cooled the labor market, signaling a rebalancing to Fed Chair Jerome Powell. However, this overall slowdown hides a disparity between small private-sector firms and larger businesses. Small employers, with fewer than 50 employees, posted about 50% more job openings in April than they did in 2019, whereas larger firms posted around 14% fewer openings than pre-pandemic levels. This suggests that small businesses, such as restaurants and auto-repair shops, continue to drive labor demand despite higher interest rates. Small businesses, which account for around half of all job openings, are still hiring robustly, possibly due to strong consumer demand offsetting higher borrowing costs. This resilience in hiring among smaller firms indicates that the Fed's rate policies may not be affecting economic activity as much as expected. While the Fed's cautious approach to rate cuts is justified, they must act before the declining trend in job openings among smaller firms worsens. Ensuring that these crucial parts of the labor market remain active is vital for the overall economy. For more details, read the full article on WSJ.

Affordability Avenue: Navigating the Income Gap in Rental Housing

The typical U.S. renter household earns $54,712 annually, which is $11,408 less than the $66,120 needed to afford the median-priced apartment. Only 39% of renters can comfortably pay for their housing. In high-cost areas like New York and Miami, renters earn about 40% less than required for median rent. Despite recent rent stabilization, costs remain high due to resilient demand and a backlog of new units. Cities like Austin and Phoenix offer some affordability, but many renters nationwide struggle with high housing costs. The gap between renter incomes and housing costs highlights the need for strategic measures to bridge this divide. In areas like San Francisco and Los Angeles, renters face substantial financial pressure, exacerbating the need for comprehensive solutions. Meanwhile, in regions like the Midwest and the South, housing remains somewhat more affordable, but rising rents are starting to squeeze budgets there as well. Urban areas like Seattle and Boston also see significant gaps, with renters often needing to spend more than 30% of their income on housing, further stressing financial stability. Coastal cities face the greatest disparity, while inland areas, although better, still show growing affordability issues. Addressing these challenges requires policy and market interventions to ensure housing affordability across all regions. For a detailed analysis, read the full article on Redfin.

Economic Impact Boulevard: Navigating the New Home Market

New home sales fell by 11.3% in May 2024, reaching a 619K-unit pace, the weakest since November 2023. This decline is attributed to high mortgage rates, increased existing home availability, and moderate economic growth. Despite a slight increase in mortgage applications in June, the Federal Reserve is expected to cut rates later this year, potentially lowering mortgage rates and improving affordability. Builder incentives are more common, with 61% of builders offering incentives in June. New home inventories increased by 1.5% in May, sustaining 9.3 months of sales. The median sales price in May was $417.4K, a 0.9% decrease from the previous year. The average 30-year fixed mortgage rate peaked at 7.22% in early May. The moderating labor market might constrain future sales despite the potential for lower mortgage rates. The anticipated easing of inflation might lead the Fed to reduce the fed funds target range by year-end, potentially lowering mortgage rates modestly. For more details, visit the Wells Fargo report.

Climate Cost Corridor: The Impact of Climate Change on CRE Insurance Costs

Climate change is significantly impacting commercial real estate, leading to a projected $183 billion increase in annual insurance premiums by 2040. Rising sea levels, extreme weather events, and regulatory changes are altering risk profiles, making properties in vulnerable areas more expensive to insure. For instance, properties in high-risk flood zones could see premiums rise by 20-50%. Commercial real estate professionals must adapt by incorporating climate risk assessments into their investment strategies and asset management plans. Enhanced building standards and resilient infrastructure investments can mitigate some of these risks, potentially reducing damage costs by up to 40%. The importance of sustainability is growing, with investors prioritizing environmentally friendly properties, which can command a 5-10% premium. Insurers are adjusting premiums and coverage terms to reflect heightened risks, underscoring the need for proactive risk management and strategic planning in the commercial real estate sector. Leveraging data and analytics is crucial for understanding and addressing climate-related risks. For a comprehensive analysis, read the full article on Deloitte Insights.

Tax Savings Lane: Maximizing Real Estate Tax Benefits

A cost segregation study identifies and reclassifies building assets to optimize depreciation deductions, thereby reducing tax liabilities and enhancing cash flow for property owners. The process involves engineers who analyze construction costs and assign assets to shorter-lived categories. This acceleration of deductions provides financial benefits without creating new deductions. The study is ideal for new constructions or acquisitions but can also apply to older properties through retrospective evaluations. Qualified Improvement Property (QIP) benefits from bonus eligibility under current tax laws, enhancing its financial attractiveness. Cost segregation applies to various real estate types, including commercial and residential properties, supporting a range of tax strategies. It maximizes tax savings by shifting assets into more advantageous depreciation schedules. Properly executed, it results in substantial tax deferrals and improved liquidity. This strategy is essential for real estate investors aiming to optimize their financial planning and asset management. For more details, visit the EisnerAmper article.