Marterra Market Monitor

Year To Date Activity

Properties Sold (single and multifamily): 47

Sales Volume: $65,884,087

Properties Leased: 99

Gross Collected Rent: $9,262,287

Brokerage Listings
Property Management Rental Listings

Happy belated New Year! I apologize for the delay in getting this month's market monitors out. For the last few years, we have been trying to spend the new year in a new country. Previously, we have generally been to pretty warm locations, like the United Arab Emirates (Abu Dhabi and Dubai), El Salvador, and Belize. This year, for some reason, we decided to go to Iceland. You read that right—Iceland in the dead of winter. There are approximately 4 hours of sunlight a day, and the temperature dips into the low single digits (Fahrenheit) with windchills in the negatives.

My wife hates the cold and is a huge foodie. Have you ever googled Icelandic Food? You are bound to see a few sheep's head, maybe some puffin or

perhaps a little whale or horse.

Iceland may not have been the most obvious choice. From a relationship standpoint, it was a high-risk, high-reward scenario.

The risk paid off. Iceland may be one of the most beautiful place on the planet, and perhaps most surprising, the food was excellent (no one eats the crazy traditional stuff anymore).

I 100% would recommend you go---just maybe not during the winter.

Single-Family Transactional Market: Since the start of the year, we have seen a big pick-up in buyer inquiries from our lowest-priced listing ($700K, which went into escrow on 1/6) to our highest-priced listing ($7.5M), which has received more calls this last week than it has over the past few months. This is all in the face of very high interest rates. I can't explain it, but I'll take it.

We are about to list two of our projects, and this meme is hitting a little too close to home.

Single-Family Transactional Market: This market continues to defy gravity. Our leasing pace was unusually strong over the holidays - and it appears to be the case across at least the coastal markets in SoCal - below is a tweet from my friend Moses Kagan. His company manages +1,100 apartments in LA County.

Moses has a great real estate blog, you can find it here.

I think much of this might be driven by the fact that much of the new inventory delivered over the last few years has been absorbed. Delivery of new products (units for rent) is few and far between as construction has ground to a halt due to high construction costs and ever-higher construction lending costs.

Mortgage Rates/Market: The Federal Housing Finance Agency (FHFA) has announced an increase in conforming loan limits for 2025, reflecting a 5.2% rise in average U.S. home prices over the past year. In high-cost areas, the new loan ceiling for one-unit properties will be $1,209,750, up from $1,149,825 in 2024.

This change has significant implications for buyers in these regions. With a conforming loan of $1,209,750 and a 20% down payment, buyers can now purchase a home priced up to approximately $1,512,187. This adjustment allows more homebuyers to qualify for conforming loans, which generally offer lower interest rates and more favorable terms compared to jumbo loans.

By aligning loan limits with rising home values, the FHFA aims to enhance accessibility to affordable financing, especially in high-cost regions where home prices continue to climb. This move ensures more borrowers can take advantage of the benefits offered by conforming loans, reducing barriers to homeownership in these markets.

Commercial Real Estate (CRE): In case you missed it, Big Lots and Party City recently announced they are closing the remainder of their stores.

When you look at the closings of Big Lots and Party City along with a few others that recently announced closings, you can see there will be a material impact on the retail landscape. Here it is by the number:

Big Lots:

Number of Stores: Approximately 963 stores are set to close.

Average Store Size: The average Big Lots store measures around 33,000 square feet.

Total Vacant Space: 963 stores × 33,000 square feet = 31,779,000 square feet.

Party City:

Number of Stores: Approximately 700 stores are slated for closure.

Average Store Size: Party City stores typically range from 10,000 to 12,000 square feet.

Total Vacant Space: 700 stores × 11,000 square feet (average) = 7,700,000 square feet.

Walgreens:
Number of Stores: Plans to close over 1,200 locations over the next three years.
Average Store Size: Walgreens stores average around 14,500 square feet.
Total Vacant Space: 1,200 stores × 14,500 square feet = 17,400,000 square feet.

Advance Auto Parts:

Number of Stores: Plans to close over 700 locations.

Average Store Size: Advance Auto Parts stores average around 6,000 square feet.

Total Vacant Space: 700 stores × 6,000 square feet = 4,200,000 square feet.

The combined closures will leave approximately 61,079,000 square feet of retail space vacant nationwide.

These closures reflect broader challenges in the retail sector, including shifting consumer preferences toward online shopping, inflationary pressures, and increased competition from e-commerce giants like Amazon. The exit of these retailers will leave substantial vacancies in shopping centers and strip malls, potentially affecting foot traffic and sales for neighboring businesses. This trend contributes to the ongoing "retail apocalypse," with experts predicting that up to 45,000 brick-and-mortar stores could shut down in the next five years.

These developments indicate a challenging environment for physical retailers, necessitating strategic adaptations to meet evolving consumer behaviors and economic conditions.

Macro Observations: The 10-year note yield has climbed 100 basis points since the "Fed pivot" began in September. In other words, while the Federal Reserve has reduced rates by 100 basis points, market rates have increased by the same amount.

To be clear, that is not the outcome the Fed was going for.

In my opinion, the drivers behind the increase in 10 yr are likely anticipation of economic growth and raising concerns over inflation re-rearing its ugly head.

Looking ahead - things that could help ease the 10 yr are:

1. Tariffs having less frequency or intensity than anticipated, which is moderately likely.
2. A significant decrease in government spending, which is not likely likely.
3. A collapse of the California property insurance seems more probable every minute the Palisades fire rages on.
4. A meaningful asset price correction, which is moderately likely. *
5. An economic slowdown is moderately likely, especially in the event of an asset price correction. US households' allocation to stocks as a percentage of financial assets rose to 43.4% in Q3 2024, an all-time high. If stocks correct the reversal of

6. A decrease in energy costs, which is I believe is somewhat likely.

7. Nothing: the market (stocks, real estate, and other assets) trade sideways or slightly down while incomes slowly grow and catch up over the next few years - this is my least favorite scenario.

As far as the real estate world goes, life for many of us would get significantly easier if the 10-year came back down to earth.

*The "Magnificent Seven" (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla) have driven nearly two-thirds of the S&P 500's gains in 2023, reflecting their outsized influence on market performance. These seven companies now account for a significant portion of major ETFs like SPY and QQQ, with their combined market cap nearing $13 trillion. However, this concentration creates risks: if any of these companies falter, it could disproportionately impact index performance and broader investor portfolios, making the market more vulnerable to shocks tied to a small group of stocks.

What's the Good Word: Lennar, the🐐(GOAT) of real estate operators and my former employer announced a significant transaction that I thought was worth briefly dissecting.

Lennar is spinning off $5-6B worth of land into a newly formed publicly traded REIT (real estate investment trust). Lennar has the option to repurchase the land for almost $10.5B (see table below). The move is expected to boost Lennar’s operational efficiency, improve return on assets (ROA), and potentially increase its valuation multiples, making it more competitive within the industry. Millrose will officially launch in late January 2025.

Hearing about this transaction gave me flashbacks to when I worked on Lennar's mergers and acquisitions and two eerily similar transactions that Lennar executed before the Global Financial Crisis. Lennar rarely misses on late-cycle strategies.

Two years ago, I wrote a Twitter thread on these deals - it's worth a read if you have time. TL:DR - Lennar sold close to $2B worth of land in 2007 (the peak of the market) and then repurchased it of pennies on the dollar. I'm not sure that I would ever want to be on the other side a land sale from Lennar.

Link to tweet

Project Updates: We have several active projects; here is a quick update on two. We are always looking for more projects, so if you know of any, please reach out. If you have a property that you believe might be a good candidate for a project, we are happy to discuss partnering up on the project.

36th Street, Newport Beach:

During our due diligence process, we had a conversation with the City of Newport Beach that led us to the conclusion that if we simplified our business plan (we were initially thinking about converting the existing duplex to a single-family home and legalizing the unpermitted ADU) to just renovating the existing building and legalizing the ADU, we could have permits in January versus sometime in the summer. The slimmed-down scope of work would save us approximately $500K in construction costs and decrease our project timeline from 9 months (after permits) to about 4 months from the close of escrow.

While the new business plan would sell for a lower purchase price, given the shorter time frame and decreased construction costs/risks, the revised business plan provides a superior risk-adjusted return.

Marigold, Costa Mesa: A huge shout to Michelle Wahler and my wife, Christine, for their work on this project. (They have really handled the entirety of this one.) It's the nicest renovation we have ever done. The ladies went all out on it and the reno and design work is perfect. As we got towards the end of the project, they banned the rest of us from coming by and are insisting that we wait to see the final/fully staged product, and as a result, I don't have a current photo of the house.

We are really proud of it - and would love to invite you to see it if you are in the area. Our first Open Houses is Saturday, January 18th from 1-4 pm.

Thanks again for reading, and I would like to thank our agents and property managers who provide valuable insights from their day-to-day in the field. Without them, this email wouldn't be very useful or interesting.

If there is anything you need: vendors, lenders, or others, please let me know. We have an extensive network of the best and brightest in the industry.

I geek off this stuff; if you want to grab a coffee or chat about anything related to real estate, the market, or investing, please do not hesitate to reach out.