A weekend topic starting with the Los Angeles Times. “While it’s hard to predict what comes next, economists said it’s doubtful rates will fall back to 3% or below anytime soon. That’s in part because such rock-bottom rates were the result of extremely loose monetary policy during the height of the pandemic, something experts said the Federal Reserve isn’t likely to revisit even if the economy falls into recession. ‘Remember, we got to [such low rates] under the most extraordinary of conditions,’ said Keith Gumbinger, vice president of research firm HSH.com.”
From Market Watch. “An era of cheap debt that helped lift prices on hotels, office buildings and other U.S. commercial properties to dizzying new heights has ended. Borrowers thirsty for financing have watched mortgage rates roughly double in 2022 from the 3% lows. ‘You had all these large tech companies signing big new leases, which was getting the market comfortable with the idea that the office sector was going to recover over the longer term,’ said Greg Handler, head of mortgage and consumer credit at Western Asset Management.”
“Now, one of the few brights spots in the near $21 trillion commercial real-estate market has become another headwind, Handler said. ‘It raises real questions about who is going to pick up that extra square feet, and at what price.’ ‘There is an estimated $450 billion of loans that comes due in each of the next four years,’ said Rich Hill, head of real estate strategy and research at Cohen & Steers, a real assets-focused investment manager. ‘The market is having to come to the reality that the days of cheap money are gone.’”
Bisnow Boston in Massachusetts. “Leaders in Boston’s commercial real estate industry are sounding the alarm over the planned increases to the city’s linkage fees, a hike they worry could slow development and push investors away. ‘I understand why they did this, because the lab and the biotech world has really been the golden goose in the last couple years in keeping the commercial market going,’ said Greg Vasil, CEO of the Greater Boston Real Estate Board. ‘I think they missed the market. It’s not like it’s on the way up or plateaued, it’s on the way down.’”
Bisnow San Francisco in California. “Three years of remote work and hybrid offices have taken their toll on the San Francisco office market, making the formerly bustling blocks of downtown feel like another planet compared to what they were like in 2019, when offices were bursting at the seams and developers couldn’t put up new buildings fast enough. Those pre-pandemic days of 2019 seem like eons ago, rather than just three years back when a new unicorn was born seemingly every day.”
“Unicorns — companies valued at $1B or more — didn’t just dominate the real estate market in San Francisco, they set the tone for office markets across the country, setting new high-water marks and new trends for office usage and design. Large tech companies operated in a ‘growth-at-all-cost mentality,’ according to CBRE First Vice President Caroline O’Loughlin Livermore. Livermore also said for the companies that are keen on returning to the office, particularly for smaller tech companies or startups, the office leasing environment has never been better. ‘I think the opportunities for companies, the leverage has never been, frankly, more in a tenant’s favor in San Francisco. I think it’s even more aggressive than the dot-com bubble bust in 2001-2002,’ she said.”
The Palm Springs Post in California. “In October, Jim Ewing, a former Airbnb host with a property in the Coachella Valley, posted a few brief comments on Facebook. He tapped into sentiment being expressed nationwide that even came with its own hashtag — #airbnbust. ‘Has anyone seen a huge decrease in bookings over the last 3 to 4 months?’ he asked a public group for Airbnb hosts. ‘We went from at least 50% occupancy to literally 0% the last two months.’ ‘Not a single booking in September or October,’ said Ryan Babakhani, a host who uses another service. ‘It’s supposed to be the high season in desert. I’m considering cutting my losses and selling the house.’”
“Nationally, vacation rental occupancy is indeed way down, thanks to the explosion of new property listings increasing the supply. ‘The number of bookings is not down. But we have 23% more listings in the U.S. today than we had last year,’ said Jamie Lane, the vice president of research for AirDNA, a short-term rental analytics firm. ‘That means the number of bookings per available listing, or occupancy, is down pretty strongly off 2021 highs.’”
“Katie Kay Mead, the longtime owner of a vacation rental in Palm Desert and a ‘superhost ambassador’ for Airbnb, said when she looks at the short-term rental market, she sees a correction on the horizon, not a bubble about to burst. ‘Honestly, we’re trimming the fat,’ she said.”
“Some over-eager investors who took advantage of low interest rates had an unrealistic idea of how much money they could make, she said. Mead predicted that those investors may become casualties of the vacation rental business leveling out after a huge economic boon. ‘They bought houses, at a premium, in the middle of an unprecedented time for Airbnbs,’ she said, referencing record-high occupancy rates last year. ‘In the fall of last year, we were extremely busy, it was crazy. We’re not there anymore, and new hosts were under the impression it was going to be like that forever.’”
“Some new hosts put in the minimum amount of effort and still expect a huge return on investment, she said. ‘This is not passive income. This is not real estate investing. This is hospitality,’ she said. ‘The people who bought a house for cheap and filled it with IKEA furniture and called it a day? They’re going to be in trouble.’”
From WKBN. “According to RedFin Corporation, 60,000 home purchase agreements fell through in October in the U.S. That’s the highest amount since the real estate brokerage started tracking it in 2013. Cliff Freeman is a real estate agent in Texas but coaches agents all over the country. He says cold feet and buyer’s remorse can come from people letting their emotions override logic when buying a house. ‘We had many people as they got under contract, I guess they sobered up, so to speak and said, ‘Hey, I’m overpaying by this house, and I don’t think this is the right thing to do right now,’ Freeman said.”
The South China Morning Post. “With Beijing unveiling a liquidity package, dubbed as ‘three arrows,’ that offers a glimmer of hope for the bruised sector, it is unlikely that every single developer will enjoy the benefits. Some high-profile names will fall behind and some will eventually fade away. ‘Not everyone will survive, some will just die,’ said Carol Lye, associate portfolio manager with Philadelphia-headquartered Brandywine Global Investment Management. ‘Maybe 5 to 10 per cent, or more [will fold]. It really depends on how much financing they can get, particularly how much the banks are willing to lend them. It’s tough.’”
“Once developers complete offshore debt restructuring, it will be easier for them to tap onshore financing, but that may take at least one to two years, or even longer, according to Ron Thompson, managing director of global turnaround firm Alvarez & Marsal. ‘If a company is in default to its offshore creditors and is not even trying to find a solution, why would a domestic bank lend any money to this company?’ asked Thompson.”
The Globe and Mail. “Canadians have good reason to be upset with Tiff Macklem. Even Tiff Macklem says so. At the start of the year, the Bank of Canada expected inflation would be close to 2 per cent by the end of 2022. It’s roughly 7 per cent. ‘That’s a very big forecast error,’ the central bank Governor said in a year-end interview with The Globe and Mail. ‘So, yes, we have some explaining to do.’ Outside the Bank of Canada’s Ottawa headquarters, a snowstorm raged, a fitting metaphor for the kind of year the 61-year-old has had.”
“When the year began, the bank maintained a record-low policy interest rate of 0.25 per cent, and an explicit pledge to keep it there until the pandemic-battered Canadian economy had returned to full speed. It ends the year with a policy rate of 4.25 per cent, a 15-year high. In between, Mr. Macklem and his colleagues have raised interest rates seven times, as they race to cool an overheated economy in an effort to tamp down the highest inflation rate in nearly 40 years.”
“Housing values have slumped; mortgage costs have surged. Grocery prices are up 11 per cent year over year. Many households are stretched to their financial limits. The central bank has itself acknowledged that rate increases could tip the economy into recession.”
“All of this made Mr. Macklem the leading economic newsmaker of the year – and, to hear some people talk, a leading public enemy. Critics at both ends of the political spectrum have questioned Mr. Macklem’s motives and competence. He has faced accusations of acting too slowly on inflation, of irresponsibly fuelling inflation through the bank’s expansion of the money supply, of making workers and households pay the price for his mistakes with a devastating succession of rate increases.”
“Mr. Macklem isn’t alone. Central bankers around the world have faced a reckoning over how they misread the rise of inflation. And their tough response – one of the most rapid and globally synchronized monetary-policy tightening episodes on record – has drawn howls from investors and politicians alike. The question dogging Mr. Macklem and other central bankers who oversaw the runup of inflation in 2021 and 2022 is not whether their models failed, but whether their judgment did. When asked if this was the case, Mr. Macklem answered haltingly. ‘The course of history will have to decide,’ he said. ‘We’re not through this yet.’”
“Mervyn King, the former head of the Bank of England, is less charitable in his assessment of what central bankers around the world got wrong. Because QE didn’t spark inflation when central banks used it during the 2008-2009 global financial crisis, central bankers became convinced that they could control inflation simply by pledging to defend 2-per-cent inflation targets. ‘But the decisions made during the pandemic undermined that position,’ he said. ‘Why would economic agents trust central-bank forecasts that inflation will shortly return to the 2-per-cent target when it has risen to 10 per cent?’”