October 2024
California housing to see stronger sales, rising prices in 2025, REALTORS® forecast
Source: OC Register
California’s beleaguered real estate industry will get some relief next year, with house sales projected to increase 10 percent to 304,400 transactions in 2025, the CALIFORNIA ASSOCIATION OF REALTORS® predicted on Wednesday, Sept. 25.
In the last two years, sales plunged to fewer than 276,000, well below the state’s average of more than 400,000 transactions per year. House prices, meanwhile, are expected to continue rising next year, but at a slightly slower pace than in 2024. C.A.R. economists predicted the median price, or price at the mid-point of all sales, will rise almost 5 percent to a record high of $909,400. If accurate, house prices will have nearly doubled in the past 10 years. C.A.R. also predicted that 30-year mortgage rates will drop to an average of 5.9 percent next year, down from 6.6 percent this year. Lower mortgage rates will encourage many “locked-in” homeowners – reluctant to give up low payments they acquired during the pandemic – to put their properties up for sale.
GDP: U.S. economy grows at 3% annualized pace in second quarter
Source: Yahoo! Finance
The U.S. economy grew at a 3 percent annualized pace in the second quarter, a faster rate than Wall Street had expected. The Bureau of Economic Analysis’s third estimate of second quarter U.S. gross domestic product (GDP) was unchanged from the second estimate which had shown 3 percent annualized growth. Economists had estimated the reading to show annualized growth of 2.9 percent. The third estimate for second quarter GDP confirms that economic growth was higher than the 1.4 percent annualized growth seen in the first quarter.
Separately, data from the U.S. Labor Department released Thursday showed 218,000 unemployment claims were filed in the week ending Sept. 21, below Wall Street’s expectations of 223,000. This marked the lowest level of weekly claims since the middle of May. “The revisions only strengthen our conviction that the U.S. economy will continue to expand at a decent pace over the coming year, which suggests labor market conditions are unlikely to deteriorate markedly from here,” Oxford Economics Deputy Chief Economist Michael Pearce wrote on Thursday.
The Fed sees its inflation fight as a success. Will the public eventually agree?
Source: Associated Press
With its larger-than-usual half-point cut to its interest rate last week, the U.S. Federal Reserve underscored its belief that it’s all but conquered inflation after three long years. The public at large does not seem to agree. Consumer surveys, including one released Friday by the Associated Press-NORC Center for Public Affairs Research, show that most Americans remain unhappy with the economy, still bruised by an inflation rate that hi a four-decade high two years ago as the economy rebounded from the pandemic recession.
Yet in the view of some economists, the shift toward steadily lower borrowing rates could eventually boost consumer sentiment. Inflation has sunk for more than two years and is nearly back down to the Fed’s 2 percent target. That that means overall prices are still rising, they’re doing so much more slowly. The costs of some high-profile consumer goods, from used cars to grocery prices, have actually been falling. Economic history suggests that a low, stable inflation rate, with prices rising only gradually, eventually leads Americans to adapt to higher price levels. One favorable factor is that average incomes are now rising faster than prices, allowing more households to afford necessities.
Newsom signs bill limiting homebuyer sales contracts to 3 months
Source: Marin Independent Journal
California Governor Gavin Newsom signed a bill Tuesday limiting real estate contracts between homebuyers and their agents to three months, imposing a time limit on agreements that became mandatory last month under the National Association of REALTORS® commission lawsuit settlement.
The new law will take effect on Jan. 1, making California one of at least 28 states with laws requiring home shoppers to have a buyer-representation agreement with their agents. The new law requires written consent by both the buyer and the agent for renewing buyer’s representation agreements every three months.
Home builder confidence rises in September amid rate cuts
Source: Yahoo! Finance
The Home Builder Confidence Index rose to 41 in September, up from August’s reading of 39. The latest print from the National Association of Home Builders (NAHB) came in line with expectations as mortgage rates continue to cool to 19-month lows. In this video, anchor Seana Smith breaks down the data and what interest rate cuts from the Federal Reserve could mean for the homebuilder category.
Mortgage refinance boom takes hold, as weekly demand surges 20%
Source: CNBC
A steady decline in mortgage rates to two-year lows has current homeowners rushing to take advantage of potential savings. Applications to refinance a home loan surged 20 percent last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was a stunning 175 percent higher than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $766,650 or less decreased to 6.13 percent form 6.15 percent, with points increasing to 0.57 from 0.56 (including the origination fee) for loans with a 20 percent down payment. The rate was 128 basis points, or 7.41 percent, higher the same week one year ago. “The 30-year fixed rate decreased for the eight straight week to 6.13 percent while the FHA rate decreased to 5.99 percent, breaking the psychologically important 6 percent level,” said Joel Kan, vice president and deputy chief economist at the MBA, in a release. The refinance share of applications rose to 55.7 percent. Applications for a mortgage to purchase a home rose just 1 percent for the week and were 2 percent higher than the same week one year ago, partially because buyers are still facing high home prices and a limited supply of houses for sale.
C.A.R. Releases its 2025 California Housing Market Forecast
A more favorable interest rate environment that will loosen up the “lock-in” effect and improve housing inventory will encourage buyers and sellers to return to the market to boost both home sales and prices next year, according to a housing and economic forecast released last week by C.A.R. during its annual REimagine! Conference & Expo in Long Beach.
The baseline scenario of C.A.R.’s “2025 California Housing Market Forecast” sees an increase in existing single-family home sales of 10.5 percent next year to reach 304,400 units, up from the projected 2024 sales figure of 275,400. The projected 2024 figure is 6.8 percent higher compared with the pace of 257,900 homes sold in 2023.
The California median home price is forecast to rise 4.6 percent to $909,400 in 2025, following a projected 6.8 percent increase to $869,500 in 2024 from $814,000 in 2023. A persistent housing shortage and a competitive housing market will continue to put upward pressure on home prices next year.
Market Update
The housing market continues to adjust to the first rate cut by the Federal Reserve in years, sliding mortgage rates, and an economy that keeps surprising to the upside. Putting all of these factors together, C.A.R. released its forecast for 2025 and expects both home sales and home prices to continue their upward trend. Consumer confidence has slid, reflecting the normalizing labor market and more muted economic growth, but income and spending continue to rise. New home sales have yet to rebound despite the recent rate cut, but demand is already picking up and preliminary indications suggest an unseasonably strong winter in California.
Market Minute
The housing market continues to adjust to the first rate cut by the Federal Reserve in years, sliding mortgage rates, and an economy that keeps surprising to the upside. Putting all of these factors together, C.A.R. released its forecast for 2025 and expects both home sales and home prices to continue their upward trend. Consumer confidence has slid, reflecting the normalizing labor market and more muted economic growth, but income and spending continue to rise. New home sales have yet to rebound despite the recent rate cut, but demand is already picking up and preliminary indications suggest an unseasonably strong winter in California.
August 2024 Sales & Price
A surge in mortgage interest rates and a shortage of homes for sale suppressed California home sales in April, while the statewide median home price climbed above the $800,000 level for the first time in six monthsA surge in mortgage interest rates and a shortage of homes for sale suppressed California home sales in April, while the statewide median home price climbed above the $800,000 level for the first time in six months
The statewide median price continued to grow from last year, but the rate of growth has been moderating. Meanwhile, mortgage payment growth registered its first year-over-year decline since July 2020 and will hopefully continue to moderate from this point. Closed sales in California hit a seven-month low in August as buyers held out despite declining rates, but pending sales suggest a likely bounce back in September.
April 2024
Market Update and Affordability:
We remain in a paradoxical environment where the ongoing strength of the U.S. economy raises concerns for the housing market. Strong jobs numbers last week were followed by equally strong inflation numbers this week, and then retail spending numbers exacerbated concerns that any rate cuts from the Fed would not come until the second half of the year, if at all. As a result, the bond market has sent interest rates climbing as investor demand for treasuries declines. The 10-year note has now surpassed 4.5% for the first time in nearly 6 months and mortgage rates have followed them north of 7% again. The outlook has not changed dramatically, but we expect more speedbumps in the coming months as the markets digest the latest data.
California sees surge in homeowners trying to sell their houses
Source: MSN
The number of homes listed for sale in California is on the rise and last month saw the largest jump in more than a year amid rising home prices in the state, according to data from the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Active listings shot up based on monthly comparisons to last year for the second consecutive month, while new active listings also increased by double digits as the spring season for home sales gets underway.
“It’s a great time to sell a home in California,” Jordan Levine, C.A.R.’s chief economist told Newsweek. “About half the homes are now selling above list price once again and prices themselves are rising.” Sellers are also seeing their homes spend less time on the market, the data showed. It took about 19 days to sell a single-family home last month, compared to 24 days one year ago. Sales were down on a monthly basis by about 8 percent and by 4 percent compared to a year ago, largely due to elevated mortgage rates that are keeping sellers locked into their low home loans. This constricted supply is why prices for homes in the state are high, as competition for available homes has escalated.
Source: San Francisco Chronicle
Starting this summer, 30,000 California policyholders will be told they are being dropped by California’s largest home insurer, State Farm. The decision affects homeowners policies, rental insurance and other property insurance. The company will not send official notices until July, but some customers have been notified by their State Farm agents that they will be among the 30,000. State Farm accounts for 8.7 percent of all home insurance policies in California. The company wrote that it would not renew polices “that present the most substantial wildfire or fire following earthquake hazards, or that are in areas of significant concentration.”
Recent filings with the California Department of Insurance show where these nonrenewals will be concentrated, which is mostly in Sonoma County, Contra Costa County, Los Angeles County and the Santa Cruz Mountains. The link below takes you to an article with a map showing the ZIP codes included. You can enter your address to see if you are likely to be affected. Customers affected by the decision will retain coverage until their current contract is up.
Mortgage rates hit highest level of the year and could still rise
Source: CNBC
The average rate on the popular 30-year fixed mortgage crossed over 7 percent on April 1 and just kept going, according to the Mortgage Bankers Association’s seasonally adjusted index. It now sits at around 7.5 percent, the highest level since mid-November of last year. When rates got that high at the end of last year, home sales ground to a halt until rates fell through mid-January to the mid-6 percent range and held there into February, causing a surge in home sales. A pick-up in inflation reset expectations, putting mortgage rates back on an upward trend.
Even with rates higher, however, mortgage applications to purchase a home rose 5 percent last week compared with the previous week. Demand was still 10 percent lower than the same week one year ago. Some borrowers may have decided to act in case rates continued to rise, said Joel Kan, MBA’s chief economist.
Source: Los Angeles Times
Southern California home prices hit a record in March amid sky-high mortgage interest rates. The average for the six-county region reached $869,082 in March, according to Zillow. That’s up 9 percent from a year earlier and 1 percent higher than the previous all-time high in June 2022.
With rates hovering in the upper 6 percent range, the mortgage payment on the average home now tops $5,500 – and that’s with 20 percent down. The lack of existing homes for sale has fueled higher prices. Buyers who can pay all in cash don’t have to worry about interest rates, and others who are selling their old home are benefiting from their considerable equity in order to put down hefty down payments well over 20 percent. Professionals such as architects and Hollywood types who have saved, liquidated stock portfolios, built up equity or received help from family are placing down payments of at least 30 percent with the intention of living in the home. In all, 23 percent of L.A. County homes sold in February were bought with all cash, up from 16 percent in 2021, according to Redfin.
Source: Associated Press
Consumer inflation remained persistently high last month, boosted by gas, rents, auto insurance and other items, the government said Wednesday in a report that will likely give pause to the U.S. Federal Reserve as it considers when to cut interest rates this year. Prices outside the volatile food and energy categories rose 0.4 percent from February to March, the same accelerated pace as in the prior month. Compared to one year ago, prices are up 3.8 percent, the same rise as February 2023.
The March figures, the third straight month of inflation readings well above the Fed’s 2 percent target, threaten the prospect of multiple rate cuts this year. Fed officials have made clear that with the economy showing a healthy job market, a near-record-high stock market and inflation’s decline from its peak, they are in no rush to cut their benchmark rate despite earlier projections that they would do so three times this year.
It could still make sense to borrow now and refinance later
Housing affordability for white/non-Hispanic households fell from 25 percent in 2022 to 21 percent in 2023. Nine percent of Black and Hispanic/Latino households could afford the same median-priced home in 2023, down from 11 percent for both ethnic groups. Housing affordability was better for Asian residents, at 28 percent, but also declined from the prior year’s 32 percent. The affordability gap between Black residents and the overall population in California improved from 9.7 percentage points in 2022 to 8.5 percentage points in 2023, and the gap for Hispanics/Latinos improved from 9.6 percentage points in 2022 to 8.9 percentage points in 2023.
U.S. inflation up, likely delaying Fed rate cuts
Source: InvestorsObserver
Housing affordability continued to deteriorate for all ethnic home-buying groups last year as interest rates rose higher and the typical mortgage payment for a median-priced home climbed from a year ago, according to the CALIFORNIA ASSOCIATION OF REALTORS®’ Housing Affordability Index. Eighteen percent of all Californians earned the minimum income needed to purchase a home in 2023, down from 21 percent in 2022.
Source: NBC
After two years of scarce listings, the market is finally loosening up. Sales of existing homes rose 9.5 percent nationwide in February – the largest monthly increase in a year – and 16.4 percent in the western U.S., even though mortgage rates remain between 6 and 7 percent and prices remain fairly high.
This video explains that homeowners who may have held onto super-low mortgage interest rates for the last couple of years are likely responding to recently softened rates as well as life changes that require moving, such as changes in jobs or family status. Housing demand has been on a steady rise due to population and job growth, though the timing of home purchases is largely determined by prevailing mortgage rates and wider inventory choices.
New home sales fell in February; median new home prices lowest in 2.5 years
Source: Yahoo Finance
Sales of newly built single-family homes in the U.S. unexpectedly fell in February after mortgage rates increased during the month, but the underlying buying trend remained strong despite a chronic shortage of previously owned homes on the market.
The report from the U.S. Commerce Department also showed that the median new house price last month was the lowest in 2.5 years, while supply was the highest since November 2022. Builders are ramping up construction, while offering price cuts and other incentives as well as reducing floor size to make housing more affordable.
65.2% of California homes are single-family, 6th lowest in U.S.
NAR SETTLEMENT-How does this impact you?
NAR Reaches Agreement in Claims Brought by Home Sellers
The National Association of REALTORS® (NAR) recently announced an agreement that would end litigation of claims brought on behalf of home sellers related to broker commissions. The agreement would resolve claims against NAR, over one million NAR members, all state/territorial and local REALTOR® associations, all association-owned MLSs, and all brokerages with an NAR member as principal that had a residential transaction volume in 2022 of $2 billion or below.
The settlement, which is subject to court approval, makes clear that NAR continues to deny any wrongdoing in connection with the Multiple Listing Service (MLS) cooperative compensation model rule (MLS Model Rule) that was introduced in the 1990s in response to calls from consumer protection advocates for buyer representation. Under the terms of the agreement, NAR would pay $418 million over approximately four years.
So, what happened regarding the settlement?
Well, to understand that, let us briefly explain how the home sales process works: in majority of the cases, a seller will list their home with a real estate agent for an agreed-upon commission percentage. This commission gets split between the listing agent and the buyer’s agent. To submit a listing into the MLS, a listing agent would have to indicate the buyer’s agent commission, so the terms were immediately clear to all parties.
According to the lawsuit, this long-standing practice is unfair to sellers who aren’t given the choice and opportunity to whether to pay for the buyer’s agent commission or not. In this new real estate reality could potentially dictate, a buyer’s agent commission in the MLS will be prohibited. Also, a seller will no longer have to pay a buyer’s commission unless they choose to do so.
On the buying side of the transaction, the commission a buyer’s agent receives will be set when the buyer enters into a Buyer Broker Agreement, by basically hiring that agent to help them find their home of any type of property. This Buyer Broker Agreement specifies a specific commission percentage the buyer agrees and is willing to pay the agent once they purchase the home or property. The seller could potentially pay some or all of this commission, but that will become a negotiated term between the buyer and seller.
Let’s say the seller says, “Sure, I would like and agree to pay the buyer’s agent commission.”
Then the home sale transactions continues on as previous normal and it did previously, with this commission taken from the seller’s net proceeds from the transaction.
Let’s say the seller says, “No, I do not agree to pay the entire commissions for both agents.”
Then the buyer must pay the agreed commission for their agent.
What does this mean for you when you are buying, selling … your property?
We think the dust on that question will take time to settle, and we have a long process to understand, digest and determine the best course of action for any real estate transaction which commissions negotiations will become a major part of the initial process. Some sellers are going to think, “that is awesome, I don’t have to pay the buyer’s agent any more.”
Many buyers will either not have funds (especially true for first-time buyers) or more likely, choose not to pay their agent separately regardless of the Buyer Broker Agreement, as it’s simply no longer the normal operating procedure. It most probably limit some buyers to only look at houses where the seller will pay the buyer agent’s commission, regardless of how much they like the property.
This will take some time, but choosing the right Realtor is the key to any real estate transaction and of course compromise. Just like negotiating any successful deal, this is just another negotiation point that will take place during the course of a transaction.
For a long time in real estate, sellers have built commissions into their pricing by asking for “Seller’s Closing Statements” in advance. The sellers will now need to be educated that there’s a new way to sell, and this education will be critical to the success of the transaction for everyone.
What it comes down to, really, is strengthening the relationship between the agent and their seller, and the agent and their buyer. Sellers must work with an agent who fully understands the implications of the new business model, a professional who can provide clarity and collaboration throughout every step of the transaction. Buyers must trust their agent completely, as an advisor and confidant who will guide them to the best home possible.
For Realtors, it is critical to change, and become more versatile. We’ve all weathered every kind of market change in the past few years, every interest rate fluctuation, every economic cycle, inventory challenges, Covid and ………..Adapting to this new normal can be good. This could be challenging as this is not the first time nor will it be the last time in an ever-changing industry predicated on the idea that if we don’t change, we will become obsolete.
Jan 22, 2024
Ozempic Could Be The Next Big Curveball For Commercial Real Estate
What does the widespread consumption of a juggernaut drug have to do with commercial real estate?
More than meets the eye, and the industry should start preparing for a potential upheaval in the not-too-distant future, a growing number of real estate professionals say.
Diabetes drugs being prescribed for weight loss, like Ozempic and Mounjaro, are already altering consumer purchasing habits. In the short term, the retail sector is in line to adjust first. But widespread adoption of the drugs, known as GLP-1s, could have far-reaching and surprising implications for asset classes from housing to healthcare and beyond.
Nearly 24 million people, or roughly 7% of the population, are slated to be taking appetite suppressants by 2035. That has prompted longtime industry insiders like Roy Oppenheim to brace for what they believe could be the biggest disruption to real estate since the pandemic, on par with emerging and revolutionary technologies like artificial intelligence.
“After Covid, this will be the next big impact,” said Oppenheim, a real estate lawyer, partner and co-founder of Oppenheim Law in South Florida who has taken a keen interest in the relationship between the adoption of GLP-1s and commercial real estate.
A heightened focus on health and wellness brought on by the widespread use of semaglutide and tirzepatide, the active ingredients in the Type 2 diabetes drugs often prescribed for weight management, could alter both the tenant mix and configuration of retail developments, according to Anton Pil, global head of alternatives for J.P. Morgan & Co.
And developers, landlords and brokers should pay close attention to who their target audience is and how their preferences might shift as a result, he said at a Jan. 11 state of retail event held by Texas-based firm Weitzman.
“Over the next five to 10 years, the spending patterns of that cohort will change dramatically … alcohol sales will probably be struggling, fast food sales are going to have to morph,” Pil said.
“If 10% of this country goes on these drugs, sales of a lot of major companies are going to decline and they’re going to decline pretty dramatically.”
Walmart executives have already noticed a link between Ozempic and a decline in food sales. Other major food manufacturers are devising plans to respond to dietary changes caused by the drugs, with food giant Conagra, manufacturer of brands such as Duncan Hines and Marie Callender’s, creating an internal crack team to respond to changing behavior.
In the CRE sphere, grocery stores may become smaller as sugary items are pulled from the shelves, Oppenheim said. Athleisure stores like Lululemon and Nike could become even more prevalent, and fast food chains like McDonald’s might be replaced with healthier, fast-casual options.
Ultra-processed foods are on the way out,” Oppenheim said. “You’ll see more Whole Foods, more salad places … and [developers will] have to consider giving people more walking opportunities.”
Along those lines, malls could get a much-needed boost in foot traffic, said Emilie Paulson, vice president at Weitzman.
“When people lose weight, they want to show off their success,” she said. “If enough people lose weight, I think you will absolutely see an uptick.”
Weight-loss drugs can reduce daily calorie intake by as much as 30%, according to a Morgan Stanley survey of more than 300 patients. As more Americans take obesity drugs, overall consumption of carbonated soft drinks, baked goods and salty snacks could fall by as much as 3% by 2035, the survey found.
“You lose 15% to 20% of your weight, and it changes your buying patterns and your consumer patterns,” Pil said, noting that his own analysis of anonymized spending data from 95 million Chase customers had already revealed a shift away from fast food, snacks, soda and alcohol.
Further down the road, behavioral changes may also impact the housing market, Oppenheim said. A renewed commitment to health could lead people to prioritize access to the outdoors or exercise facilities when choosing where to live.
Those same individuals may feel more comfortable socializing and prefer more communal types of living, which could provide a boost to the apartment industry if owners are savvy, he added.
“You’ll see that people are going to want to live in different types of areas,” he said. “Not as close to a couch but closer to a park or an outdoor activity.”
By the same token, the drugs could lead to a reduction in demand for medical facilities, he said.
Ozempic and other weight-loss drugs are still inaccessible to the majority of Americans. The drugs require a prescription and are administered by needle, which is a deterrent for many, Oppenheim said.
But perhaps the biggest obstacle is out-of-pocket cost, with Wegovy, Ozempic and Mounjaro priced between $215 to $700 per month, according to an analysis by The New York Times. More recently, The Wall Street Journal noted costs for the drug had shot up 3.5% to nearly $970 for a month’s supply.
Barriers to access should keep weight-loss drugs from making a noticeable impact on retail real estate in the very near future, Paulson said. And offerings by existing tenants will likely change before the tenant mix itself, she added.
“If insurance companies start covering this and it becomes something that’s over the counter, then we will see a shift,” Paulson said. “But because of the accessibility issues with the expense, there’s just no way for it to affect spending on a grand scale.”
Oppenheim and Pil disagree. They believe the drug will soon become widely accessible, and that insurance companies will realize it is more cost-effective to pay for weight-loss drugs than it is to treat diabetes and other obesity-related illnesses.
“Insurance companies will very quickly do the math,” Oppenheim said.
Jan 15, 2024
Tishman Speyer and Mitsui Fudosan America acquired a 31.9-acre, fully entitled industrial development site in Irvine for $149.5M. The partners announced plans to build four industrial buildings totaling 600K SF at the property.
The site is just off the 5 Freeway near Bake Parkway in the southern part of Irvine’s Great Park Neighborhoods master plan area. The master plan calls for a mix of uses in the areas it covers, including industrial.
“Great Park Neighborhoods is a perfect example of the type of ground-up development that we envisioned when we created our industrial platform with Mitsui Fudosan America,” Tishman Speyer Managing Director and Head of Industrial Andy Burke said in a release announcing the acquisition. “Utilizing our long-established local team, we were able to source a rare opportunity to create a well-located industrial facility that offers modern specifications within a severely supply-constrained and high-barrier urban center.”
The release says that in this part of Orange County especially, the industrial stock is often 30 or 40 years old and no new developments have come online in quite some time. The JV will build structures ranging from 73K to 203K SF.
Orange County’s total vacancy was just 2.8% in the fourth quarter, giving it the distinction of having Southern California’s lowest vacancy in the period, according to a JLL report.
This project is the second acquisition for the Tishman-MFA venture, which is focused on logistics properties. The JV began with a $500M funding commitment from MFA, plus “co-investment capital” of an undisclosed amount from Tishman Speyer. The partnership was created in 2022 to pursue ground-up development projects as well as repositioning and redevelopment of value-add industrial sites, a release from Tishman says.
Trophy Office Space Is Hot. What Will It Take To Build More?
The shiny office towers that developers have built in U.S. downtowns in recent years have increasingly drawn tenants away from older buildings, but the demand shift toward top-tier space hasn’t been followed by new supply.
New year-end data has shown high demand for top-quality space and shrinking vacancy in the trophy and Class-A segments across major U.S. markets like Miami, D.C., New York and Chicago. But experts in those cities tell Bisnow they anticipate the headwinds facing the overall office sector will continue to restrict new supply and make the market for trophy tenants even tighter.
Lenders seeking to reduce their overall exposure to office are either unwilling to finance new projects or are requiring a higher level of pre-leasing commitments, developers and brokers said. In some markets, potential tenants aren’t able to plan ahead enough to sign the deals necessary to move projects forward.
Nationally, the office construction pipeline at the end of the fourth quarter was less than half of its 2020 peak and is predicted to continue to slow, according to Cushman & Wakefield’s year-end U.S. market report. This has made it hard in some markets where tenants are looking for large blocks of space in trophy and Class-A buildings.
The subleasing market is also seeing a bump in activity from tenants looking for trophy space. In Q4, trophy subleases represented 27.6% of all sublease activity nationally, a 26% increase from 2020, according to Avison Young’s year-end U.S. market report. Combined with Class-A space, the two segments made up 71.8% of total sublease activity in the quarter.
Restaurant Brands International has struck a deal to buy Carrols Restaurant Group, the largest Burger King franchisee in the U.S. with about 1,000 locations, for about $1B. The all-cash sale is set to close in the second quarter.
The acquisition of Carrols would vastly increase the number of Burger King-branded restaurants RBI owns directly. RBI counts about 75 locations among its holdings. But the company doesn’t plan to keep the enlarged portfolio indefinitely.
“We are going to rapidly remodel these restaurants … and put them back into the hands of motivated, local franchisees,” Tom Curtis, president of Burger King U.S. and Canada, said in a statement.
The refranchising is expected to take five to seven years, according to Curtis, although the company also says it will retain “a couple of hundred restaurants” for training and operator development purposes.
RBI plans to spend about $500M, funded by Carrols’ operating cash flow, to remodel about 600 of the acquired restaurants that “are not currently considered modern image.”
The deal comes as Burger King continues its efforts to boost sales, which it kicked off in September 2022 and has taken the form of remodels, enhanced marketing and upgraded tech.
The company reported in November that same-store sales were up 6.6% in Q3, but it also said it had closed about 200 locations during last year, Restaurant Business reported.
There are about 19,000 Burger King locations in more then 100 countries. The chain is the seventh largest in U.S. sales, according to the most recent Technomic report, just ahead of Subway but behind its two main burger rivals, Mcdonald’s and Wendy’s.
Under the terms of the transaction, RBI will acquire Carrols for $9.55 per share, which the buyer says represents a premium of 23% over Carrols stock’s average price over the month ending Jan. 12. Carrols stock closed at $8.42 that day.
In New York, there has been a shrinking availability of newer space, with buildings developed in 2010 and later seeing just over 9% vacancy compared to the citywide rate of 15.6%. The Big Apple has 15M SF of new construction expected to deliver in the next five years, a 66% drop from the five years ending in 2023, according to JLL.
“The new construction is definitely two different buckets. The bigger buildings, that are 1M SF buildings, it’s hard to kick those off without an anchor tenant,” JLL Vice Chairman Cynthia Wasserberger, based in New York, told Bisnow. “The boutique market, we are seeing some speculative building coming online … I think the reins are loosening on that for sure.”
In Miami-Dade County, 3.2M SF of office was under construction at the end of Q4, according to Colliers’ Q4 2023 report. Positive net absorption totaled 147K SF in Q4, and the county saw rental rates rise 1.8%.
Gale said rents have even doubled in some submarkets like Brickell because of the lack of supply and the demand from outside companies that are migrating south. But it has still been difficult to obtain financing for new office construction.
Special servicer Rialto Capital Advisors has moved to foreclose on 681 Fifth Ave., the building that long held Tommy Hilfiger’s flagship store before the designer shuttered in 2019. Rialto, on behalf of a CMBS trust, filed a pre-foreclosure complaint in New York County Supreme Court on Wednesday.
Metropole Realty Advisors has owned the 12-story, 1913-built property since 2005, when the Robert Siegel-led firm paid $86M for it, then spent several years renovating before drawing in high-profile fashion tenants like Tommy Hilfiger and Vera Bradley.
Metropole took out a $215M CMBS mortgage on the property in 2016, refinancing a $125M loan from Ladder Capital. The new debt, which was split into six notes, valued the building at $440M, according to the Morningstar Credit database. The building was 91% occupied at the time.
But 681 Fifth started to have difficulties in 2019 when Tommy Hilfiger vacated its lease. The fashion house occupied 27% of the property, Crain’s New York Business previously reported, but accounted for 78% of the building’s base rent.
The fashion house kept paying rent until May 2023, when its lease expired. Another tenant, Apex Bulk Carriers, left the property in March. Metropole has since spent approximately $350K on renovations to attract new tenants.
The building’s occupancy was less than 52% as of September, according to Morningstar Credit.
The drop in occupancy, which was 91% when the loan was issued, has led to Metropole not being able to make payments on the loan, according to Rialto’s complaint, filed Wednesday.
The borrower missed its monthly payment, roughly $773K, for the first time in July. The property’s debt was placed on a watchlist and downgraded in August, and Rialto was appointed special servicer in September. Rialto sent Metropole and Siegel, who is a personal guarantor on the loan, a letter of default Oct. 2, according to court filings.
Rialto and Metropole have executed a pre-negotiation letter and were in discussions as of Dec. 11, according to special servicer commentary.
But Rialto accelerated the loan and demanded full payment of the $215M outstanding principal, plus the unpaid interest and late fees, in a Dec. 15 letter that was filed alongside the foreclosure complaint. Metropole hasn’t made an interest payment since July, Rialto said, adding up to more than $4.6M in unpaid interest.
In the letter, Rialto said Metropole’s license to collect rents has been terminated and demanded that the landlord turn over rent collection to the special servicer.
NEW YORK, DECEMBER 26, 2023: S&P Dow Jones Indices (S&P DJI) today released the latest results for the S&P CoreLogic Case-Shiller Indices, the leading measure of U.S. home prices. Data released today for October 2023 show that 11of the 20 major metro markets reported month-over-month price increases.
YEAR-OVER-YEAR
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 4.8% annual change in October, up from a 4% change in the previous month. The 10-City Composite showed an increase of 5.7%, up from a 4.8% increase in the previous month. The 20-City Composite posted a year-over-year increase of 4.9%, up from a 3.9% increase in the previous month. Detroit reported the highest year-over-year gain among the 20 cities with an 8.1% increase in October, followed again by San Diego with a 7.2% increase. Portland fell 0.6% and remained the only city reporting lower prices in October versus a year ago.
The chart on the following page compares year-over-year returns of different housing price ranges (tiers) for San Diego.
MONTH-OVER-MONTH
Before seasonal adjustment, the U.S. National Index and10-City Composite, posted 0.2% month-over-month increases in October, while the 20-City composite posted 0.1% increase.
After seasonal adjustment, the U.S. National Index, the 10-City and 20-City Composites each posted month-over-month increases of 0.6%.
ANALYSIS
“U.S. home prices accelerated at their fastest annual rate of the year in October”, says Brian D. Luke, Head of Commodities, Real & Digital assets at S&P DJI. Our National Composite rose by 0.2% in October, marking nine consecutive monthly gains and the strongest national growth rate since 2022.”
“Detroit kept pace as the fastest growing market for the second month in a row, registering an 8.1% annual gain. San Diego maintained the second spot with 7.2% annual gains, following by New York with a 7.1% gain. We are experiencing broad based home price appreciation across the country, with steady gains seen in nineteen of twenty cities. This month’s report reflects trendline growth compared to historical returns and little disparity among cities and regions.”
“Each of our 10-city, 20-city and National Index, remain at all-time highs, with 8 of 20 cities registering all-time highs (Miami, Atlanta, Chicago, Boston, Detroit, Charlotte, New York and Cleveland). While Portland remains slightly down compared to last year’s gains, Phoenix and Las Vegas have flipped to year over year gains. The Midwest and the Northeast region are fastest growing markets, while the Southwest and West regions have lagged other regions for over a year. A solid, if unspectacular report, this month’s index reflects a rising tide across nearly all markets.”
“Home prices leaned into the highest mortgage rates recorded in this market cycle and continued to push higher. With mortgage rates easing and the Federal Reserve guiding toward a slightly more accommodative stance, homeowners may be poised to see more appreciation.”
Fed Tightening Looks Done
What happened last week?
The S&P 500 rose 5.85%
The Dow Jones gained 5.07%
The Nasdaq advanced 6.61%%
The 10-year Treasury yield dropped a whopping 30 basis points to 4.52%. Markets celebrated that it looks as though the Fed’s tightening campaign has run its course.
This week investors will digest 3Q earnings reports from 55 of the S&P 500’s constituents. The results from the 408 companies that have already reported show that a three-quarters long profits recession has ended.
Markets recoveries don’t begin from a perfect economy. Our view has been that we’re operating in an environment where some economic sectors, such as manufacturing, have rolled into recession, are now stabilizing, and are likely to roll out before other sectors enter their own downturns.
While there is no way to be certain that this is THE turning point for financial markets, we believe fixed income offers compelling opportunities at this time and that equity conditions are looking increasingly sound for 2024–25.
3 Things to Know:
Evolving Macro Environment Suggests Equity Broadening
The rolling recessions suffered in 2023 across many industries will not be repeated in 2024.
In fact, they will likely “roll out” in the year to come. That is just one reason we believe investors should consider adding to equity allocations.
Excluding the “Magnificent 7” US tech shares, the MSCI World Equity Market Total Return index is down 12% since end 2021.
At its recent low, the S&P 500 price lost 14% over the same period. Compared to the roughly 50% losses of the 2008/2009 Global Financial Crisis period and the unwinding of the great tech bubble from 2000–2002, the drop in equities since 2021 has not been catastrophic — but it has slowly eroded investor confidence.
More recently, from July 31 to October 27, US equities dropped 10%. But there has also been a far broader correction in world equities than the S&P 500 and Nasdaq 100 might suggest. Just 15% of stock markets globally are trading above their 200-day moving average.
For nearly three years, the GIC has maintained an overweight in cyber-security software firms given their critical role in protecting governments and firms from the dangers of cyber-crime and the misuse of AI. Equity performance has been strong, but earnings have delivered more than share prices, making valuations more attractive these days.
US Fixed Income Offers Compelling Returns
The gains for the bond market accelerated after Fed Chairman Powell appeared to set a fairly high bar for further interest rate hikes. He said that if there was a reversal of the easing in labor market conditions or if it appeared that the slowdown in inflation were stalling, it would call for additional policy tightening.
We believe fixed income offers compelling returns at this time with four-year duration US Investment grade corporate bonds yield near 6.25%.
We have a high level of confidence that core inflation measures will slow in the coming year. Lagging components of the CPI are only beginning to moderate.
If labor demand does slow markedly as we expect, the Fed will not want restrictive monetary policy to drive the economy into a full stall. This is why Fed forecasts and market estimates both embed rate cuts before 2024 ends.
Therefore, Citi believes current yields on high quality bonds provide a compelling potential opportunity to lock-in durable portfolio income for many years.
The Citi View: Don’t Time the Market
Historical data analysis has gotten much faster, but this does not explain why there are many striking values available to investors.
While we see undeniable valuation discrepancies and potential growth opportunities, others claim to be able to predict the “perfect moments” to enter and exit investments.
The history of equity market timing continues to show a bleak record.
Growth is normal. Since World War II, the US economy has expanded in 87% of all months. While volatile month to month, US equity returns have been positive in 78% of all years over the same period.
With fear of recession and fear or loss driving investors to the sidelines as we end 2023, we remind investors that betting against equity market progress has historically been unprofitable.
As mentioned, there is no way to be certain this is THE turning point for markets.
However, we are seeing data that suggests our view for the direction of markets in 2024–25 is sound.
Almost a Third of Homes for Sale Are New Construction—the Highest Share of Any Third Quarter on Record
October 31, 2023 by Lily Katz
New builds are taking up a growing share of the pie as builders attract buyers with concessions, and surging mortgage rates prevent existing homeowners from selling.
Nationwide, 30.6% of U.S. single-family homes for sale in the third quarter were new construction—the highest share of any third quarter on record. That’s up from 28.9% one year earlier and 25% two years earlier.
Newly built homes have taken up a growing share of for-sale housing inventory partly because homebuilding has increased and partly because the number of existing homeowners putting their houses up for sale has decreased as mortgage rates have surged to a 23-year high of roughly 8%.
High mortgage rates have pushed a lot of buyers to the sidelines, but many of the buyers who are in the market are opting for new construction homes because builders are handing out concessions like mortgage rate buydowns in order to attract bidders and offload inventory. Purchases of new single-family homes jumped 12.3% last month—the fastest pace since early 2022. It’s worth noting that the latest run up in mortgage rates could slow new-home construction.
“Sellers are facing tough competition from homebuilders, who are sometimes offering buyers up to $30,000 worth of concessions,” said Kim Lotz, a Redfin Premier real estate agent in Phoenix. “With that kind of money, a buyer can cover closing costs, home upgrades, and buy down their mortgage rate. In some cases, people who purchased a house from a builder a year ago are selling and competing against that same builder for buyers.”
Retail strip centers have declined by -7.4% while office buildings are down by -8.9%. Industrial has been the best-performing sector with prices only down -2.3%. These value declines are likely the first in a series of drops that will occur over the next several years as the recession worsens and the debt crisis intensifies. We’re already seeing landlords begin to walk away from this maturing debt. Brookfield Corporation, one of the world’s largest investment management companies (think of them as the Canadian version of Blackrock), just defaulted on a $161 million mortgage collateralized by office buildings in Washington DC.
The default was prompted by a double whammy of 1) tenants moving out of the building in a post-pandemic world and 2) the interest cost on the mortgage more than doubling over the last year due to Fed Rate hikes. Among the dozen buildings in the Brookfield portfolio with the $161.4 million debt, occupancy rates averaged 52% in 2022, down from 79% in 2018 when the debt was underwritten, according to the report. Monthly payments on the mortgage’s floating-rate debt jumped to about $880,000 in April from just over $300,000 a year earlier as the Federal Reserve raised interest rates.
Meanwhile, Westfield Group, the shopping center company, just stopped making interest payments on a downtown San Francisco mall collateralized by a $550 million mortgage. They are handing it back to their lender.
The issue for these lenders on the Washington DC office buildings and San Francisco mall is that they will have to significantly write down the asset value of the properties on their books. And potentially by a lot (e.g., lenders on a St. Louis office building lost 95% of their investment when it sold at foreclosure in 2022).
Writing down the asset value will force lenders, particularly banks, to recognize losses on their income statement and balance sheet, which will constrain their ability to issue new loans. It might also trigger concern among their depositors that the bank is not financially sound and it could trigger bank runs.
This is especially true for small banks, who hold $1.9 trillion in commercial real estate loans in 2023, which is more than two times the number of large banks. Even more concerning, small banks have been increasing their exposure to commercial real estate loans over the last five years. Small and regional banks have so much exposure to these commercial real estate loans that they comprise 37% of their customer deposits. By comparison, commercial loans only account for 8% of the deposits at large banks. Small banks have $5.2 trillion in deposits on their books right now, down about 4% from since the Silicon Valley Bank Crisis hit in March 2023. Meanwhile, they have $1.9 trillion in commercial real estate loans, accounting for 37% of their deposits. Such high deposit exposure to commercial loans means that there could be big issues for these small banks as landlords continue to default on mortgages (don’t be surprised if there’s more bank runs in the second half of 2023 and 2024 as a result). Commercial Real Estate is more exposed to this debt crisis than Residential because of how commercial real estate loans are issued, particularly the length of their terms.
Residential mortgages in America are typically 30-years and have low “refinance risk” as a result. Comparatively, commercial loans are usually issued for 5 or 10-year terms. Meaning that they come due more quickly.
So now all these commercial real estate loans issued during the ultra-low interest rate period of the 2010s and the pandemic are needing to be refinanced in an environment where interest rates have surged, with the 1-year US Treasury up to its highest level in two decades at 5.4%.