Morgan Stanley analysts think commercial real estate is heading for something ‘worse than in the Great Financial Crisis’—here’s what Goldman Sachs and UBS have to say | Canada News Media
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Morgan Stanley analysts think commercial real estate is heading for something ‘worse than in the Great Financial Crisis’—here’s what Goldman Sachs and UBS have to say

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Following the failures of both Silicon Valley Bank and Signature Bank, all eyes have been on commercial real estate (CRE), with some sounding the alarm, claiming it’s the next shoe to drop. As Fortune has previously reported, commercial real estate lending standards were already tightening up over the past year as the Federal Reserve flipped into inflation-fighting mode. The ongoing bank troubles, however, will only exacerbate that tightening.

Even before the banks went under, experts within the sector knew it would be a challenging time for commercial real estate, particularly for office properties with rising vacancy rates and falling property values, amid the shift to remote work. Not to mention, the entire sector faces a wave of loan maturities—meaning they’ll need to refinance to higher interest rates.

Those commercial real estate headwinds—which are particularly strong in the office space sector—will increase the risk of defaults, distress, and delinquencies, as the industry is largely built on debt.

Last week, Allianz’s chief economic advisor, Mohamed El-Erian, told Insider that “the moment of truth will play out” for the commercial real estate market once those loans mature and the sector is forced to adjust to the current economic climate. “This is part of a larger set of activities that, while they made sense when interest rates were rock-bottom and liquidity was abundant, make a lot less sense today,” he told Insider.

Billionaire investor Howard Marks, cofounder of Oaktree Capital Management, also expressed concern over the sector’s health, writing in a memo that “notable defaults on office building mortgages and other CRE loans are highly likely to occur.” As for banking giants, they’ve presented their outlooks for the sector, ranging from almost apocalyptic to manageable losses.

But what do big banks think about all this?

To better understand, let’s take a look at the commercial real estate landscape from Morgan Stanley, UBS, and Goldman Sachs from this month—all of which touch on various, but sometimes similar, aspects of what’s to be expected.

Morgan Stanley’s wealth management chief investment officer, Lisa Shalett, wrote in a recent report, “More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points.”

Even before the bank failures, office properties were already facing “secular headwinds,” and are expected to face more challenging times ahead, Shalett wrote, with vacancy rates close to 20-year highs.

Therefore, Morgan Stanley’s “analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.” The distress, following the number of loans set to mature, and the likelihood of defaults and delinquencies as a result, will trickle down and affect more than banks and landlords—and no sector would be “immune” to the effect of that, Shalett wrote.

UBS, the Zurich-based multinational investment bank that recently acquired Credit Suisse, employed a less dire tone, arguing that commercial real estate “headlines are worse than reality.”

Despite the fact that “rising interest rates, a slowing economy, and increasing vacancy rates in office buildings have weighed on the sector in the last couple of years,” UBS said, a “repeat of the 2008 liquidity crisis” is unlikely— even if credit tightens further.

UBS expects around $1.2 trillion of the outstanding $5.4 trillion in commercial real estate debt, aside from multifamily, will “mature” and be up for refinancing. That will likely happen amid higher interest rates, which, UBS said, will “only add to existing challenges around servicing debt—especially in areas like office and certain segments of retail where cash flows have become challenged due to post-pandemic behavior.” Like others, UBS suggested defaults will occur as a result.

However, those defaults don’t necessarily mean the sector as a whole is at risk, particularly as beleaguered sectors, like office properties, account for only 15% of commercial real estate. And the circumstances, the bank said, are much different than those of the Great Financial Crisis, which is why it argued that a repeat is unlikely.

“The health of the overall banking system and market liquidity conditions are substantially better than they were during the GFC,” UBS said. But that’s not to say things can’t necessarily get worse from here. If the economy entered into a recession, commercial real estate losses that UBS expressed as manageable over the long term could result in “meaningful deterioration in CRE to pressure banks’ shares due to both earnings/profitability risk.”

Goldman Sachs says the real risk is in the office sector, writing that it has been the “subject of high investor focus in recent months, and rightly so, in our view.” But most of its fundamental troubles “preceded last year’s back-up in policy rates.” Nonetheless, Goldman Sachs pointed to three particular risks awaiting commercial real estate.

First, commercial real estate borrowers are exposed to higher interest rates, Goldman Sachs said, which translates into higher funding costs and increased exposure to floating (or variable) rate liabilities. That risk leads to the second, in that refinancing will be painful for some commercial real estate borrowers. Goldman Sachs estimates that $1.07 trillion worth of mortgage loans will mature before year-end 2024. And borrowers’ ability and willingness to do so amid higher rates will be limited. As for the third risk, Goldman Sachs points to tighter lending standards ahead, and the effect of that on both banks and those within commercial real estate.

“The potential for disruptions to U.S. commercial real estate activity from a pullback in small bank credit availability is substantial, unaided by the fact that the segments most dependent on bank financing—offices and retail properties—are also facing the strongest risk of functional obsolescence.”

The three risks outlined above, Goldman Sachs says, could put more pressure on net operating income and increasing vacancy, along with an increase in delinquencies—particularly for office properties.

 

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

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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.

The Canadian Press. All rights reserved.

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

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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.

The Canadian Press. All rights reserved.

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Here are some facts about British Columbia’s housing market

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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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