A weekend topic starting with the Dallas Morning News in Texas. “‘A lot of builders are very worried right now,’ said Phil Crone, executive director of the Dallas Builders Association. ‘They pushed all their chips in to try to keep up with demand … and now there’s a whole bunch of inventory being built out there.’ He said builders pushed through supply chain challenges, labor shortages and permitting delays to deliver as many homes as they could when demand was sky high, and now they are stuck with a large amount of inventory. ‘A lot of them said, ‘You know what, forget about it, we just have to power through it and get this thing done, and do whatever it takes,’ Crone said. ‘Now the sentiment’s starting to change.’”
From D Magazine. “Could this be the end of a ten-year run for multifamily investors? Will the massive run-up in equity gains continue to erode in the North Texas multifamily market? Bridge financing effectively poured rocket fuel on the multifamily market, and investors couldn’t get enough as multifamily properties began trading like stocks. Every party has to eventually end at some point, right?”
“In a matter of a few months, all-in interest rates quickly jumped from the 3 percent range to 6 percent range and beyond. Multifamily cap rates and prices also started to increase. In a matter of two months, we were heading into the summer at prices 5-15% below the peak in the first quarter of 2022.”
From NBC Dallas. “‘2021 is a year that we’ll probably never see anything like that again, anytime soon. Maybe in our lifetimes,’ said Jay Parsons, Head of Economics for RealPage. But now, it’s all changing and the market is shifting. The pendulum is finally swinging in favor of renters. ‘2022 is just a very different year. Rent prices have flattened over the last few months across the country and North Texas. Just like you’ve seen in the for-sale housing market, there’s been a significant slowdown in demand for rentals and 2022,’ he said. ‘One thing I’ll tell you is that the rental market moves with the for-sale housing market. And right now demand for for-sale homes is going away and demand for rentals is going away.’”
From Yahoo Finance. “The report found that the national vacancy rose 5.4% at the end of September as the pace of newly delivered units nearly doubled to 120,000 units, signaling a shift in market conditions from just a year ago when demand significantly outpaced supply. ‘This is the fourth quarter in a row in which new supply additions just significantly outpaced the demand. We’re still seeing a lack of cluster demand and the new supply is not getting absorbed. It’s putting upward pressure on the vacancy rate,’ said Jay Lybik, National Director of Multifamily Analytics, CoStar Group. As a result, landlords are ‘really desperate’ to get tenants to occupy their units, he explained, which is leading to rents nationally declining on a nominal basis as more tenants stay in their current apartments.”
From CBS Los Angeles in California. “Lining the sidewalk off of Exposition Boulevard is a row of triplexes, most of which are owned by mom-and-pop landlords. ‘I moved into the area in ’83,’ said Linda Samm. Fifteen years later, Samm decided to become a landlord, purchasing one of the triplexes lining the boulevard in South Los Angeles. She lives in one unit and rents out the other two. It was a way for her to retire until the pandemic hit and one tenant stopped paying rent. Samm says she received back rent from the state’s housing is key program but that only paid her through March. Since then, she is out more than $10,000 in rental income while still having to pay her mortgage. ‘It means having difficult repairing things,’ said Samm. ‘It means not being able to eat decently. It means that now I have to go to the church to get food.’”
“Diane Robertson is one of the founding members of the coalition of small rental property owners, she owns a duplex and four-plex in South L.A. She said many of her members are looking to sell and cut their losses. Landlord Owen Smith owns two triplexes in South L.A. Next to his properties. ‘I am ready to get out of the business,’ he said. He charges $860 for a one-bedroom apartment but with four tenants not paying rent he said he can’t afford to remain a landlord. ‘The government doesn’t realize that with a stroke of the pen they can turn my world upside down,’ he said.”
From SiliconValley.com in California. “Two big Bay Area residential projects engulfed in a real estate fraud case — one in San Jose and one in Fremont — are moving closer to completion, court papers show. The court-appointed receiver has found some evidence that Archarya and Silicon Sage used a Ponzi-style approach to paying some investors in the Bay Area projects.”
“‘The receiver is in the process of analyzing the use of investor funds to determine if funds from later investors were used to make distributions to earlier investors,’ the court papers stated. ‘In an analysis of 14 random transactions in 2021, the receiver determined that three of those investments by new investors were used … to make payments to earlier investors.’”
From Market Watch. “After a 21st-century gold rush created by big tech, downtown San Francisco is going to have to reinvent itself. Again. Now tech companies are joining their workers, scaling down their presence in San Francisco, shedding office floors and keeping a smaller, almost satellite presence in some cases. Sentiment in the city is depressed, as crimes caused by opioids and homelessness have turned many residents, possibly for good. Kelsey Bishop, chief executive of a startup, left San Francisco in 2021. ‘I think San Francisco is going to have a hard time recovering from this,’ she said. ‘What we have seen, whether it is a hybrid model or not, people want to live in beautiful places…Why work in downtown SF? I frequently heard gunshots out there, I remember huddling under my desk because there was an active shooter outside.’”
“The city’s downtown Financial District and South of Market have some of the lowest office attendance rates in the U.S., and San Francisco’s commercial office vacancy rate was 23% in the third quarter, according to Cushman & Wakefield Research, the same level it reached in 2003 amid the fallout of the dot-com bust. ‘San Francisco has a Frankenstein tax system,’ said Jennifer Stojkovic, executive director of a tech trade association, adding that all the recent tax measures voted on by the city were during boom times. ‘It was all based on the longest bull market in 100 years. We said we cannot keep adding all these taxes.’”
Bisnow Chicago in Illinois. “Millbrook Properties Executive Director Jen Sweeney sums up the doldrums of Chicagoland’s office market in an anecdote involving blue gift bags filled with candy bars, pens and other goodies meant to welcome tenants back to the office in June 2020. The bags were left in conference rooms in suburban Chicago and across the Midwest a few months after the pandemic hit in a gesture of solidarity and hopefulness the business world would soon return to rights. ‘Now here we are two years later, and we still have a whole bunch of those blue bags left and we’ve had to throw away those candy bars. They’ve gone stale,’ Sweeney said.”
“For now, though, panelists advised the CRE community to pick its shots carefully amid rising interest rates, foundering interest in the Chicago market and a potential wave of distress as loans on troubled properties come due and banks hike loan-to-value ratios. ‘Some of those owners are going to just hand back the keys,’ Sweeney said. In the past month alone, two LaSalle Street office properties saw their loans transferred to special servicers in a sign they are in danger of defaulting on their loans. ‘The distress [Sweeney] was talking about is real and it hasn’t even really started,’ said North Wells Capital CEO James Fox. ‘I think you’re gonna see plenty of distress. And I believe that for the next couple of years, there’s going to be some good things if you really pick through all of it. But by and large, it hasn’t gotten beat down enough for it to really be that big macro opportunity.’”
From Bisnow New York. “About 50 office blocks have been converted or are in the process of being redeveloped into multifamily since the pandemic set in, The Wall Street Journal reported, citing CBRE data. For conversions to ramp up significantly, the value of office buildings needs to come down further than it already has. The value of the residential property needs to be around 50% more than an office for it to be worthwhile, Olivier Elamine, the CEO of Alstria, a European office real estate investment trust, told the WSJ.”
“‘I think the value destruction of an office is going to be really severe,’ said PGIM Real Estate Global Chief Operating Officer Cathy Marcus. ‘I think that will ultimately lead to interesting opportunities. I don’t know that we’re there at present.’”
The Real Deal. “As interest-rate hikes slow the housing market, one developer believes the real estate industry could be in for years of pain. Peebles Corporation CEO Don Peebles expressed doubts over the Federal Reserve’s ability to execute a ‘soft landing’ for the economy. ‘My concern is we’re in for a crash landing,’ Peebles said, predicting that rate hikes will bring down home prices across the country as more buyers are priced out of the market, particularly in areas that saw rapid appreciation during the pandemic. The developer singled out Los Angeles, where he said he ‘wouldn’t be surprised’ to see home prices fall 15 to 20 percent in the next 18 months.”
“Peebles said he expects multifamily projects to present more lucrative opportunities for residential developers, pointing to ‘unsustainable’ rent hikes in markets like Miami. ‘For-sale projects that would get delivered in the next two to three years will be problematic,’ he said. Peebles went on to criticize the Fed for not acting sooner to address inflation. ‘Interest rates were too low for a long time,’ he said. ‘The Fed should have moved interest rates a couple years ago, slowly. All these buyers were looking at it as free money, because it was.’”
The Evening News. “Demand has slowed in Indiana’s housing market compared to last year. Lisa Batts, a realtor in Lebanon, said she is noticing a trend of price reduction as homes stay on the market for a longer period of time. ‘It used to be you didn’t see a realtor having an an open house because the houses weren’t on the market long enough — they were snatched up — but now they’re sitting there a bit longer, and I see that they’re having a lot more open houses and marketing for homes,’ Batts said. One of Batts’ concerns is ‘buyer’s remorse’ and buyers paying too much for a home as its value was driven up by limited supply. ‘People were desperate to buy a house, and so they were paying things they didn’t necessarily want to pay — it was almost like a board game,’ Batts said.”
“Overvaluing of rental properties is another issue Barb Anderson, executive director of Haven House Services in Jeffersonville, said sees in her community, including aging apartment complexes going at the same rates of newer buildings. ‘If it’s 25 years old, why should you be able to charge at the same rents as a brand-new apartment complex,’ she said. ‘You need to take in consideration its age, because the wear on the unit is probably going to be pretty fierce, and what are the utilities, because they probably weren’t building for energy efficiency 35 years ago.’”
The Motley Fool. “The past two years have been downright awful for mortgage real estate investment trusts (REITs). First, the COVID-19 pandemic caused the mortgage-backed securities market to freeze, triggering a wave of margin calls. The margin calls caused every mortgage REIT to sell parts of its portfolio at fire-sale prices to raise capital. Every mortgage REIT either cut or suspended its dividend. Finally, the interest rate hikes and potential sale of the Fed’s mortgage-backed securities portfolio has caused mortgages to underperform Treasuries.”
“Once the Fed is done with its tightening cycle, the outlook for the sector should improve vastly. So income investors should keep an eye on the sector, and if the Fed signals it is pausing rate hikes (which the Fed Funds futures imply would be the end of the year), then the sector might be investible again. At the moment, the REITs are a falling knife.”
The London Free Press in Canada. “A stalled north London development is going to the auction block, and may finally get built. Construction of the Applewood project, an ambitious north-end residential and commercial development, shut down this summer when its London builder was placed in receivership because it owed its lender, MarshallZehr, more than $60 million, according to court documents. The project, on two one-hectare parcels of land has a residential apartment development about 75 per cent complete and adjacent vacant land. There also are more than $11-million in liens owed on both properties. Applewood has not made a payment to MarshallZehr since April. In all, more than six phases of building are proposed that would eventually add about 1,500 homes plus commercial and office space.”
The Telegraph. “A bout of volatility in the UK government debt market in recent weeks forced the Bank of England into a multi-billion pound intervention to prevent a crisis that could have spiralled out of control and threatened the entire economy. ‘Yes there’s stress, yes it’s going to get worse, and yes there’s going to be failure,’ is the frank assessment of the state of the financial sector from Keith Skeoch, former chief executive of investment giant Standard Life Aberdeen. ‘If you go back and look at previous crises, you see the first signs of stress and it’s quite a slow fuse. This stuff can take months or even years and we are in the early days.’”
“Warning lights are flashing in three corners of the financial markets, Skeoch says: pension funds, property funds, and large financial institutions. Many property funds have been forced to put limits on how much people can withdraw in recent months as investors try to cash out. A rush to the exit could spark a fire sale of property assets and push prices down across the sector. That would ultimately lead to losses for those invested in the sector.”
“Most property funds invest in commercial assets, such as offices and shopping centres, but a snarl-up in the mortgage market is also threatening the housing market. Mortgage deals have been pulled at record rates. Former Prime Minister Gordon Brown issued a public warning last week when he said there would be ‘grave’ difficulties for companies as interest rates rise. He singled out the ‘shadow banking’ sector as the one most likely to trigger a meltdown. Shadow banks now account for almost 50pc of the global financial sector, according to the UN, up from 42pc in 2008. These lenders controlled $226.6 trillion of global financial assets out of a total of just over $468.7 trillion by 2021.”
“Non-banks wrote two-thirds of all US mortgages in 2020 and made almost as many loans to businesses as mainstream banks. Gary Greenwood, a banking analyst at London stockbroker Shore Capital, says: ‘The risk has basically moved from the banking system to the shadow banking system, so all these other deep pots of money just sitting in asset managers’ and private equity funds are carrying a lot of the risk now. That’s where I would expect the bombs to go off now.’ Greenwood says: ‘There is massive complexity within the financial system, so you can think you’re not exposed to something, but then it gets you by the back door.’”
The Business Post. “Any fall in the price of new-build homes will make their construction unviable, one of the biggest developers in Ireland has warned. Michael Kelleher, group operations director at O’Flynn Group, said any decline in new home prices would have a drastic effect on the delivery of housing in Ireland. ‘The reality is that [new-build homes] are at an economic price. If there was a sense that they were to drop they wouldn’t be built, because they’re not economically viable. They’re just at margin at the minute, with all the cost increases, so now the purchaser, unfortunately, has to pay more for the mortgage,’ Kelleher told the Construction Industry Federation’s annual conference in Dublin last week.”
“Kelleher estimated that 40 per cent of planned homes in Ireland are not viable because they are unsellable apartment schemes. ‘What we’re seeing now is 40 per cent of what’s planned for in the system, in the planning developments, will not be built because it’s not viable,’ he said. ‘We need to look at other ways, new housing typologies, that will still get quality homes but actually do it in a different way. We have to deal with house typology because apartments are too expensive. The average price of an apartment is probably up around €450,000 now, so for developers to sell that, it’s €550,000.’”
“Fiona Cormican, new business director at Clúid Housing, the social housing body which is one of the biggest developers of housing in Ireland, said planning authorities didn’t consider the economics of actually delivering housing when approving permission. ‘Building apartments or insisting on apartments in schemes that are outside the city don’t work,’ Cormican said. ‘The only people who are buying them are us because we have a need for them.’”