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Billionaire Barry Sternlicht on the ‘category 5 hurricane’ hitting office buildings: Some will become parkland, ‘Maybe fields of grain or something. It’ll be very pretty’ – Fortune

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2 months ago

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Surging interest rates and the rise of remote work have combined to create a nightmare scenario for commercial real estate investors. Just ask Barry Sternlicht, co-founder, chairman, and CEO of Starwood Capital Group, a real estate investment firm with $115 billion in assets under management.

“There’s a hurricane over real estate right now,” the billionaire investor told ​​David Rubenstein, co-founder of the private equity firm The Carlyle Group, in an interview for Bloomberg Wealth taped June 28. “We’re in a category 5 hurricane, and it’s sort of a black cloud hovering over the entire industry until we get some relief or some understanding of what the Fed is going to do over the long term.”

Sternlicht, known for criticizing the Federal Reserve’s aggressive interest rate hikes over the past year, said he believes his industry is a victim of central banks’ efforts to tame inflation. He had some thoughts about how much damage the hurricane could do, and it’s not clear if he was joking.

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Rising rates, the prospect of an economic downturn, and the historic collapses of several regional banks March have combined to make financing commercial real estate transactions either extremely expensive or nearly impossible, according to the industry veteran, who gave the example of Starwood reaching out to 33 banks for a loan on a small property and getting only two offers.

Starwood is one of the world’s biggest players in residential and commercial real estate, and over the past year it’s been under pressure, facing redemption requests from investors in some non-public funds and even defaulting on a $212.5 million mortgage for an Atlanta office tower earlier this month.  

Sternlicht warned that his firm isn’t alone when it comes to these issues, noting that office real estate owners, in particular, are suffering amid high vacancy rates. Two of Starwood’s biggest corporate landlord peers, Blackstone and Brookfield Asset Management, have stopped making payments on some offices with high vacancy rates amid the work-from-home trend, Bloomberg reported.

Sternlicht argued this is evidence the office sector will be split into haves and have-nots in the coming years—and many have-nots may go out of business.

“The nice buildings will stay rented and my guess is at pretty good rates. And the B and C stuff is going to be — maybe fields of grain or something. It’ll be very pretty. We’ll have all these little mid-block parks in New York City because there won’t be anything else to do with those buildings,” he said.

It’s not just Sternlicht who is worried about commercial real estate and the future of offices. Morgan Stanley has warned that the ongoing CRE crash could be worse for the sector than what was seen during the Global Financial Crisis of 2008. And Capital Economics thinks the CRE nightmare is going to be so dark that office values won’t recover until 2040.

To their point, the amount of distressed office real estate assets shot up 36% in the second quarter to $24.8 billion, according to MSCI Real Assets—the first time since 2018 that hotels or retail didn’t take the top spot for most distressed. And with an estimated $1.4 trillion in commercial real estate debt coming due by the end of 2024, some CRE execs have warned an “apocalyptical” downturn is coming as borrowers are forced to refinance amid higher interest rates.

Another banking nightmare?

If the commercial real estate sector does continue to crack, Sternlicht warned that, coupled with rising interest rates, it could spark another round of regional bank failures like was seen in March with Silicon Valley Bank and Signature Bank.

As Fortune previously reported, some experts fear a “doom loop” could develop between regional banks and the ailing commercial real estate sector, exacerbating the ongoing downturn for both. 

If consumers fear that their deposits aren’t safe at regional banks who have exposure to commercial real estate, they’re likely to head to a larger, safer bank. That, in turn, could force smaller banks to stop making CRE loans and call in their current loans in order to bolster their balance sheets. This would force CRE borrowers to sell their properties into a weak market, accelerating the ongoing downturn. And the resulting instability from all of this could lead to even more deposits being pulled from banks—and more bank failures.

In this doom loop scenario: “You could see 400 or 500 banks that could fail,” Sternlicht warned.

But when life gives you lemons…

You have to make lemonade. And Barry Sternlicht is no stranger to making lemonade.

Sternlicht, now 62, built his multibillion-dollar empire on top of a single risky bet after the savings and loan (S&L) crisis took out hundreds of banks nationwide during the ‘80s. In 1991, he started Starwood Capital Group to buy apartment buildings from the Resolution Trust Corporation, an entity made by the federal government to liquidate the assets of the failed banks from the S&L crisis. 

Just 18 months later, apartment values shot up, and Sternlicht sold the portfolio to the now late billionaire Sam Zell’s Equity Residential for a 20% stake in the company.

Now, Sternlicht believes that if more banks fail, there could be a “second RTC,” which means he may be able to wind back the clock to when he was just 31, starting Starwood, and buy up some distressed assets on sale. “They [the failed banks] will have to sell,” he said, calling it “a great opportunity.”

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Class action against commissions in real estate clears another hurdle

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1 day ago

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September 28, 2023

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A sold sign outside a Toronto home.
A sold sign outside a Toronto home. PHOTO BY PETER J. THOMPSON/FINANCIAL POST

After two years of deliberations, the Federal Court has granted approval for a class-action lawsuit alleging price-fixing and anti-competitive practices to proceed against the real estate industry in the Greater Toronto Area (GTA).

The lawsuit, filed in April 2021 on behalf Toronto resident Mark Sunderland and anyone who sold a home in the GTA after 2010, alleges misconduct by several of the nation’s leading brokerages, including Century 21, Remax and IproRealty Ltd. The Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB) are also named in the lawsuit.

On Sept. 25, Chief Justice Paul Crampton permitted the case to proceed, positing that there exists a plausible argument that rules put illicit restrictions on the pricing of buyer brokerage services. The respondents had petitioned the court to dismiss the claim, citing a lack of merit. 

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The lawsuit contends that the brokerages engaged in an agreement to artificially increase buyer brokerage commissions, which were shouldered by home sellers in the GTA. It is also alleged that CREA and TRREB facilitated and contributed to the execution of this arrangement.

Commission structures for real estate agents and their brokerages differ nationwide, usually involving a percentage-based commission derived from a home’s sale price. In Alberta and British Columbia, the commission structure is typically seven per cent on the initial $100,000 and three per cent on the remaining balance. Conversely, in Toronto, commission is five per cent on the entire amount of the sale.

Although the seller is responsible for paying the entire commission, it is divided between the brokerage representing them and the one representing the buyer.

According to Garth Myers, a partner at Kalloghlian Myers LLP — the law firm responsible for filing Sunderland’s lawsuit — the agreement to split the commission obstructs market competition by forcing sellers to shoulder costs that would typically not be incurred in the absence of such an arrangement, consequently restricting the ability to negotiate prices and leading to inflated brokerage commissions. 

 

“What we’re hoping to achieve in this case, is to eliminate these rules, which will result in cost savings to real estate sellers and buyers in the Toronto market,” Myers said. “We think there’s massive public benefit if we are successful. And so far, the court has agreed with us.”

 

Kalloghlian Myers is pursuing compensation not just for Sunderland, but also for those who have sold residential real estate dating back to 2010.

 

“We won’t stop until we can get compensation for sellers who have been impacted by this,” stated Myers.

In an email, the Canadian Real Estate Association said, “we continue to believe the claims against TRREB, CREA and other defendants are without merit, and we will continue to defend our members in this case.”

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This $2 million Toronto home underwent a huge makeover and now looks better than ever

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2 days ago

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September 27, 2023

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Back in 2014, we featured 325 Perth Ave. as the house of the week, boasting how great of a catch it was with its open concept layout, basement apartment, and deep backyard.

Nine years later, it’s had a massive glow-up and is now better than ever.

Listed for $1,899,000, 325 Perth Ave. underwent the renovation of a lifetime back in 2021.

325 Perth Avenue Toronto

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The living room with custom built-ins.

“The owners bought this house in 2014 against 32 other offers and for 133 per cent over asking price, and the media debated heavily at the time if it was a smart decision,” realtor Maggie Lind told blogTO.

But they really made the best of their decision and in 2020, they began a renovation to add a 16-foot addition, build a laneway suite and gut the main floor.

325 Perth Avenue Toronto

The primary bedroom ensuite bathroom.

But then the pandemic hit.

325 Perth Avenue Toronto

One of three bedrooms in the main house.

“Because of COVID the laneway house was completed first, and the owners, and their two boys (both under 6) moved into it, even though it was only 350 square feet. Each night they went back to the construction to sleep in the two bedrooms on the second floor,” added Lind.

325 Perth Avenue Toronto

The kitchen.

The sacrifice was worth it, though, as the renovated home is gorgeous.

325 Perth Avenue Toronto

The dining room.

The main floor, with an open-concept floor plan, wide plank white oak flooring, and custom built-ins, is beautiful.

325 Perth Avenue Toronto

The hidden powder room beside the dining room.

There’s also a cheeky hidden powder room on the main floor and the custom kitchen is sleek and modern with quartz counters.

325 Perth Avenue Toronto

The family room.

The 16-foot addition at the back of the house is now a cozy family room that walks to the back garden and is filled with natural light.

325 Perth Avenue Toronto

What was formerly the primary bedroom is now another bedroom upstairs.

Upstairs, there are three bedrooms, including a completely new primary suite.

325 Perth Avenue Toronto

The new primary bedroom.

It has soaring ceilings, double closets, and an ensuite bathroom with a deep soaker tub, walk-in shower, and double vanity.

325 Perth Avenue Toronto

The lower level unit.

The basement has a separate entrance and could be used as an income-generating space as it has a kitchen, bedroom and bathroom.

325 Perth Avenue Toronto

The bedroom in the basement.

And if one income-generating space wasn’t enough, there’s also the laneway house at the back of the property.

325 Perth Avenue Toronto

The laneway house with a garage.

The laneway home is similar in design to the main house – modern, bright, and airy.

325 Perth Avenue Toronto

The kitchen in the laneway house.

It’s a studio apartment with about 400 square feet of living space, as well as parking and a storage room. It also has its own laundry, making it ideal for tenants and guests alike.

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The backyard with storage.

Currently, the laneway house is tenanted for $1,700 a month.

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The back of the house with two decks.

This home really went from a snack to the full meal deal.

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New to Canada? Here’s how to purchase or rent a home

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2 days ago

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September 27, 2023

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As a new immigrant, navigating the Canadian real estate market can feel daunting, especially if it differs significantly from that of your home country.

Whether you’re contemplating buying or renting a home, this brief guide will help you get a better lay of the land so you know what to expect.

I’ll outline some of the most common property types while explaining the documentation you need to rent or purchase a home, and the key expenses you should budget for.

Can non-Canadians purchase real estate in Canada?

Before jumping in, I’d like to address the Prohibition on the Purchase of Residential Property by Non-Canadians Act and how it could affect new immigrants searching for housing. The act was passed by Parliament(opens in a new tab) in June 2022 and came into effect in January 2023.

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The temporary foreign homebuyers ban(opens in a new tab) was passed in an effort to reduce pressure on the real estate market and make housing more affordable. The ban will remain in effect for two years before expiring and effectively prevents non-Canadians and foreign corporations from purchasing a home.

Canada has been going through an affordable housing crisis(opens in a new tab) characterized by strong demand and a lack of affordable homes. The current shortage has been one of the leading drivers of inflated home prices and rental rates(opens in a new tab), experts say.

New data from the Canada Mortgage and Housing Corporation (CMHC) shows that 3.5 million more housing units(opens in a new tab) will need to be constructed in order to restore affordability by 2030, in addition to homes that are already being built.

While the foreign homebuyers ban remains in place today, immigrants who have obtained permanent residency status or citizenship are exempt. Some other exemptions include(opens in a new tab):

  •  International students(opens in a new tab) who meet certain requirements, including having spent most of the last five years in Canada
  •  Foreign nationals with temporary resident status, such as refugees and those fleeing international crises
  •  Consulate staff members and diplomats
  •  Foreign work permit holders with at least three years of filed tax returns

Types of properties you can rent or buy

Now that we’ve discussed the elephant in the room, here’s a quick look at the most common types of property you can rent or buy in Canada:

  •  Detached house: A single-family home that stands alone on its own property, separated from other homes by open space.
  •  Semi-detached house: A house that shares one common wall with another home, but is not attached to any other structure.
  •  Townhouse: A multi-level home that shares one or more walls with adjacent homes, usually in a complex.
  •  Condominium: Condos are individually owned units within a larger building or complex. Owners have exclusive rights to their units but share common areas such as hallways and building amenities.
  •  Apartment: A rented living space within a larger building. Apartments are similar to condos, but require a monthly lease agreement and can’t be purchased outright.

Most common living arrangements

Whether you plan on renting or buying a home, these are the most common agreements you can choose from.

1. Standard lease

A standard lease is a fixed-term rental agreement(opens in a new tab) that can be as long as both parties want. Typically, apartments offer lease terms that range from three months to a year in length, or even longer. This legal agreement outlines monthly rent payments, utility responsibilities, and other rights, rules and responsibilities that both parties have agreed to.

Remember that each province and territory has specific laws and regulations regarding landlord and tenant obligations. It’s always a good idea to research some of the key regulations in your province or territory so that you know your rights as well as what’s expected of you.

Signing a longer-term lease or renewing an existing one can lock you into a lower rental rate, versus terminating your current tenancy and looking for a new rental property on the market. In many provinces and territories, landlords are allowed to increase rent(opens in a new tab) once a year for existing tenants, and several governments have set limits on how much landlords can raise rates.

Meanwhile, in several provinces such as Ontario, there are no limits on how much a landlord can ask from a new renter. Also keep in mind that breaking a lease early can result in penalties.

2. Month-to-month lease

Many landlords offer month-to-month rental agreements for those who are uncomfortable with a long-term commitment. Most provinces and territories require tenants to provide a minimum of either one month(opens in a new tab) or 60 days’ notice(opens in a new tab) if they plan on leaving, regardless of whether they have a long-term or monthly lease.

However, in provinces such as Nova Scotia(opens in a new tab) and New Brunswick(opens in a new tab), tenants with monthly leases have more flexibility. Those who rent on a monthly basis must give at least one month’s notice before moving out, while those on a year-to-year lease must provide at least three months’ notice.

The downside of month-to-month leases is that rental rates are generally higher, as landlords assume more risk. Once you move out, it could take them time to find another tenant, and they may need to invest money in cleaning or preparing the unit for the next occupant.

3. Purchasing a home

Buying a home involves securing a mortgage with a bank or other financial institution, and making an initial down payment. You own the property and are responsible for all mortgage payments, property taxes, insurance and maintenance. It’s a long-term financial commitment that may involve a lengthy approval process.

4. Rent-to-own

With today’s high mortgage and interest rates(opens in a new tab), some buyers are considering rent-to-own agreements(opens in a new tab), which offer a compromise between renting and purchasing.

In a rent-to-own arrangement, tenants rent a property for a specific period of time with the option to purchase the home at the end of their rental term, often at a predetermined price. Additionally, a portion of the rent payments may go towards the home’s down payment.

The downside is that rent-to-own arrangements typically involve higher monthly payments. Your payments will be broken down into two parts(opens in a new tab) – your monthly rent and the money you put towards a down payment or home equity.

Renting: The basics

A landlord is defined as an individual, company, or entity that owns a property and leases it to a tenant in exchange for rent payments.

When you apply to rent a property, landlords typically ask you to complete an application form with your personal details. Although documentation requirements may vary depending on the landlord, most rental agreements require prospective tenants to provide the following documentation:

  •  Passport, visa, or immigration documents for identification
  •  Proof of income, such as bank statements, pay stubs, or an employment letter
  •  References from previous landlords (if applicable)

Many landlords may also request approval for credit and background checks. Your landlord may require a higher security deposit if you’re new to Canada and have little or no credit history. A security deposit generally can’t be higher than one month’s rent(opens in a new tab), but those with good credit and rental history may be offered a lower security deposit.

The fees you’ll need to budget for include:

  •  A security deposit: While this fee can vary according to province or territory(opens in a new tab), it is usually equal to one month’s rent and is paid at the start of the tenancy. You should receive this amount back at the end of your lease agreement, along with any accumulated interest, provided you leave the unit in good condition and don’t violate any terms. Landlords in provinces such as Ontario often use this money as payment for the last month of rent.
  •  Common area maintenance (CAM) fees: Often referred to as “CAM fees” or simply “maintenance fees,” this is paid in addition to your monthly rent to help maintain the property’s shared spaces. Fees may cover services such as landscaping, pest control and trash service.

Your monthly rent payments are typically made in one of four ways:

  •  Cash
  •  Cheque
  •  Electronic bank transfer
  •  Credit or debit card

Each landlord may have their own system for collecting rent payments. For example, larger commercial properties often won’t accept cash due to security risks and may require a cheque, money order, or electronic payment.

In most provinces and territories, landlords aren’t allowed to increase rent more than once every calendar year and must adhere to laws governing rental increases. Landlords must also give you between one and three months’ notice of plans to increase rent, depending on the length of the agreement. Once your lease is up, you can renew it or move out.

Buying a home: The basics

The application process to buy a home is typically far more demanding than renting. Unlike signing a lease agreement, buying a home requires you to obtain a mortgage.

A mortgage is a loan from a bank or financial institution to finance your home purchase. You’ll pay regular installments over a fixed period of time. Along with contributing to your home equity, a portion of your payments will go towards interest fees charged by the lender.

There are two types of mortgages you may encounter:

  •  Fixed-rate mortgage: These have a constant interest rate throughout the term, ensuring predictable monthly payments. Borrowers are shielded from interest rate fluctuations in the market.
  •  Variable-rate mortgage: The interest rate can change based on market conditions, potentially affecting monthly payments. Borrowers might benefit from lower rates but also face the risk of rate hikes.

In addition to documents and references that show proof of residency, most lenders want to see several years of financial history to ensure you’ll be able to keep up with the long-term commitment of a mortgage. This can include proof of income and employment history.

Your credit report and score(opens in a new tab), which determine your creditworthiness, are also major factors that lenders will consider before approving you for a mortgage.

Traditional mortgages usually require a down payment of at least 20 per cent of the home’s value. CMHC-backed mortgages may only require a five per cent down payment(opens in a new tab), but will involve a lengthier approval process and the purchase of additional mortgage insurance.

Here’s a quick breakdown of the fees associated with buying a home:

  •  Down payment: This is a percentage of the home’s purchase price that is paid prior to moving in. Providing a down payment allows you to secure your mortgage. Some lenders may ask for an even larger down payment based on your individual financial situation.
  •  Mortgage payment: This is the monthly amount you pay for your home loan.
  •  Mortgage insurance: A monthly insurance payment that provides coverage in the event that you default on your loan. This is usually optional for traditional mortgages but is always required for CMHC-backed loans.
  •  Homeowners insurance: This insurance covers you from unexpected damage to your home, such as hail, flooding, and natural disasters. This coverage can be obtained through insurance providers.
  •  Property taxes: These are annual taxes paid by property owners to the municipal government.
  •  Closing costs: These are additional expenses, aside from the cost of purchasing your home, that must be paid to complete a real estate transaction. They can include a land transfer tax(opens in a new tab), inspection fees, and other legal or administrative costs.
  •  Homeowners Association (HOA) fees: Homes in some neighbourhoods require monthly HOA fees, which go towards maintaining and improving common areas and shared structures within the community.

All of these fees can add up and contribute to a higher upfront cost than you may have expected. When determining your budget, take some time to look into the average prices of these fees based on where you’re located and the value of the property you’re looking at.

Once you’ve completed the mortgage financing process and paid your closing fees, you will have officially purchased a home.

Is it better to rent or buy in Canada?

If you’re new to Canada and have limited income and credit history, you may find it difficult to obtain a mortgage and purchase a home outright.

Before buying a house, you should put together a budget detailing your projected monthly expenses and research the average home prices in your area to better understand how much of a mortgage you can afford(opens in a new tab).

If you’re serious about buying a home, it’s worth getting in touch with a real estate agent. They will be able to show you your options based on your budget and can help you navigate the complexities of applying for a mortgage.

If you’re unable to get approved for a mortgage, it may be best to start by renting your home or enrolling in a rent-to-own agreement with your landlord. Both of these options provide flexibility while you take time to build your credit and income history.

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