The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had.
Transactions fell 68 per cent in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics.
The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors.
“The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.”
Industrial Strength
Second-quarter sales plunged 70 per cent for apartments, 71 per cent for offices, 73 per cent for retail and 91 per cent for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50 per cent in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions.
For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.
Dry Powder
Whether investors will come off the sidelines any time soon remains to be seen. Private real estate funds had about US$273 billion for property purchases at the end of June, little changed from the record US$281 billion six months earlier, according to Preqin Ltd.
Blackstone Abandons US$20 Million Deposit on Scrapped Office Deal
With the economic fallout from the pandemic mounting, deals have fallen apart or are being reworked. The buyer of the iconic Transamerica pyramid in San Francisco is going forward with its deal — but at a 10 per cent price cut from what it negotiated at the beginning of the year, according to people familiar with the matter who asked not to be identified discussing private talks.
More than US$32 billion of hotel and retail real estate was newly distressed in the first half of 2020, as rent delinquencies soared and borrowers missed payments, according to RCA.
Buying Time
Approximately US$90 billion more of commercial real estate is “potentially troubled,” RCA reported, meaning it’s in a forbearance plan, suffering rent collection problems or early-stage delinquencies. That includes US$14.5 billion for offices and US$20 billion for apartments.
Still, delinquent borrowers don’t face pressure to sell yet. Lenders are focused on ways to buy time, delaying distressed property from coming to market, according to Lisa Pendergast, executive director of the CRE Finance Council, a commercial real estate trade group.
“It’s becoming clearer, especially with the resurgence in cases across the country, that a three-month forbearance is not really going to satisfy the situation,” she said. “So there are other things that can be done. A lot of that has to do with loan modifications.”
Cheap Money
Prices have also been propped up by low interest rates. Low borrowing costs mean investors can expect higher returns on real estate than Treasury bonds, even if vacancy rates rise or tenant delinquencies increase, according to Michael Fascitelli, former chief executive officer of Vornado Realty Trust.
“The cost of money is one of the biggest costs of an asset for real estate,” Fascitelli said recently.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
