Real eState

Is Work-from-Home Threatening Commercial Real Estate and U.S. Banks?

Published

1 year ago

July 24, 2023

Office buildings are struggling in the wake of a new reality. After the COVID-19 pandemic, the telecommuting culture has taken root, and as a result, downtowns are suffering.

A late 2022 study, heralding a real estate apocalypse in the making, calculated that building values had fallen by an average of 44.8% by the end of that year. At the end of the third quarter of 2023, the U.S. office vacancy rate exceeded 20% for the first time since 2008, according to media reports. In San Francisco, Dallas and Houston, the vacancy rate exceeds 25%.

The Commercial Mortgage Situation in Canada is Bad, but Not as Bad as the U.S.

In Canada, the vacancy rate is lower, but still rising. From an average of 16.9% at the end of 2022, it has risen to 17.7% according to CBRE’s latest report. In urban centers, the average rate is 18.4%.

This figure conceals a two-pronged situation: on the one hand, in category A buildings, the average rate is 15.9%, while in category B buildings, it is 22.7%. On the other hand, some cities have rates as high as those in the U.S., including 32% in Calgary, 25.7% in London, and 23.3% in the Waterloo region.

Certain factors distinguish Canada from the U.S. scene. Canadian real estate “is less competitive,” explains Christopher Tsichlas, Senior Vice President, Credit Ratings, Real Estate and Public Finance at DBRS Morningstar. “Many owners are solid institutions investing for the long term. So we’re less likely to see fire sales. In addition, Canada is probably a little more urbanized than the U.S., which is more conducive to maintaining downtowns.”

More than Half of U.S. Commercial Real Estate Mortgages Might Need to be Refinanced

This real estate distress traces a trajectory destined to collide with that of the banks, especially in the U.S. “More than half of the approximately US$2.9 trillion in commercial real estate mortgages will need to be refinanced over the next 24 months, and regional banks account for 70-80% of these loans,” writes a recent Morgan Stanley analysis.

“Even if current rates remain stable, adds Morgan Stanley, new lending rates will likely be 350 to 450 basis points higher. For building owners themselves, secular headwinds from the adoption of remote/hybrid working options pose additional complications that could accelerate the depreciation of corporate real estate.” Morgan Stanley predicts a drop in commercial real estate value of over 40%, “worse than during the Great Financial Crisis”.

Banks are very weakened by rising interest rates, a fragility that will be compounded by the real estate crisis, according to a recent study by New York University’s Stern School of Business. On the one hand, the study calculates, banks’ assets (loan-backed commercial securities and U.S. Treasuries) have suffered unrealized losses of $780 billion to date as a result of rising rates. On the other hand, the total loan portfolio (commercial and individual loans, and mortgages) of US$17.5 trillion has lost 10% of its value, or US$1.7 trillion.

Relying on these figures produced by his alma mater, economist Nouriel Roubini recently wrote in an article published by Project Syndicate: “In fact, judging by the quality of their capital, most U.S. banks are technically close to insolvency, and hundreds of them are totally insolvent.”

Morningstar Believes U.S. Bank Losses Will Be Manageable

However, the banks’ distress is not universal, points out Eric Compton, stock analyst at Morningstar.

“Among the banks I analyze, I don’t see a major problem, he says. There are going to be losses, but they will be manageable, as the banks I cover have sufficient profits and capital to absorb those losses. I think there are going to be some smaller banks that will take a lot of losses because of the commercial real estate losses, but none of the banks I analyze fall into that lot since the ones I follow all have assets in excess of US$50 billion.”

And it’s far from certain that the full shock will reach banks. Compton lists a number of alternatives available to both banks and owners: sale of buildings by the owner or by the bank in the event of a takeover, restructuring of mortgages, and finally “the owner may find access to other sources of financing”, stresses the analyst.

This is a development also envisaged by Josh Varghese, co-founder of Axia Real Assets. “Alternative lenders could enter the scene and lend at higher interest rates. This could help stem any hemorrhaging.”

Canadian Banks Are Not as Much at Risk

One might suspect that the situation of many U.S. banks is precarious, which is not the case for Canadian banks, according to a National Bank study. According to analyst Gabriel Dechaine, office real estate loans account for an average of 12% of the total commercial real estate loan portfolio of the six major banks, rising to 20% in the case of the Royal Bank.

According to the analyst, Canadian bank profits could suffer declines of up to 20%, although the shock will be more in the order of 8% to 10%. According to Alexandre Brassard, senior economist at CPA Canada, Canadian banks are in a better position than their American neighbors because their commercial real estate loan portfolios represent only 2% of their total assets, compared with 13% in the case of American banks.

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Real eState

Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

Published

3 days ago

November 6, 2024

Anne Joseph

TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

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Homelessness: Tiny home village to open next week in Halifax suburb

Published

2 weeks ago

October 24, 2024

Anne Joseph

HALIFAX – A village of tiny homes is set to open next month in a Halifax suburb, the latest project by the provincial government to address homelessness.

Located in Lower Sackville, N.S., the tiny home community will house up to 34 people when the first 26 units open Nov. 4.

Another 35 people are scheduled to move in when construction on another 29 units should be complete in December, under a partnership between the province, the Halifax Regional Municipality, United Way Halifax, The Shaw Group and Dexter Construction.

The province invested $9.4 million to build the village and will contribute $935,000 annually for operating costs.

Residents have been chosen from a list of people experiencing homelessness maintained by the Affordable Housing Association of Nova Scotia.

They will pay rent that is tied to their income for a unit that is fully furnished with a private bathroom, shower and a kitchen equipped with a cooktop, small fridge and microwave.

The Atlantic Community Shelters Society will also provide support to residents, ranging from counselling and mental health supports to employment and educational services.

This report by The Canadian Press was first published Oct. 24, 2024.

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Here are some facts about British Columbia’s housing market

Published

3 weeks ago

October 17, 2024

Anne Joseph

Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

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