Real eState
The coming commercial real estate crash that may never happen
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Only two months ago, SL Green & Co. chief executive Marc Holliday was sounding happy. The head of New York’s biggest commercial landlord firm told Wall Street analysts that traffic to the company’s buildings was picking up, and more than 1 million square feet of space was either recently leased or in negotiations. The company’s debt was down, it had finished the structure for its 1 Madison Avenue tower in Manhattan, and local officials had just completed an extension of commuter rail service from Long Island to Green’s flagship tower near Grand Central Station.
“We are full guns blazing,” Holliday said on the quarterly earnings call, with workers headed back to offices after a pandemic that rocked developers as more people worked from home, raising the question of how much office space companies really need any more. “We can hopefully …continue on a path to what we think will be a pivot year for us in 2023.”
Then Silicon Valley Bank failed, and Wall Street panicked.
Shares of developers, and the banks that lend to them, dropped sharply, and bank shares have stayed low. Analysts raised concerns that developers might default on a big chunk of $3.1 trillion of U.S. commercial real estate loans Goldman Sachs says are outstanding. Almost a quarter of mortgages on office buildings must be refinanced in 2023, according to Mortgage Bankers’ Association data, with higher interest rates than the 3 percent paper that stuffs banks’ portfolios now. Other analysts wondered how landlords could find new tenants as old leases expire this year, with office vacancy rates at record highs.
How much an office crash could hurt the economy
There are reasons to think the road ahead will be rocky for the real estate industry and banks that depend on it. And the stakes, according to Goldman, are high, especially if there is a recession: a credit squeeze equal to as much as half a percentage point of growth in the overall economy. But credit in commercial real estate has performed well until now, and it’s far from clear that U.S. credit issues spreading outward from real estate is likely.
“There’s a lot of headaches about calamity in commercial real estate,” said Kevin Fagan, director of commercial real estate analysis at Moody’s Analytics. “There likely will be issues but it’s more of a typical down cycle.”
The vacancy rate for office buildings rose to a record high 18.2% by late 2022, according to brokerage giant Cushman & Wakefield, topping 20 percent in key markets like Manhattan, Silicon Valley and even Atlanta.
But this year’s refinancing cliff is the real rub, says Scott Rechler, CEO of RXR, a closely-held Manhattan development firm. Loans that come due will have to be financed at higher interest rates, which will mean higher payments even as vacancy rates rise or remain high. Higher vacancies mean some buildings are worth less, so banks are less willing to touch them without tougher terms. That’s especially true for older, so-called Class B buildings that are losing out to newer buildings as tenants renew leases, he said. And the shortage of recent sales makes it hard for banks to decide how much more cash collateral to demand.
“No one knows what is a fair price,” Rechler said. “Buyers and sellers have different views.”
What the Fed has said about commercial real estate
Federal Reserve officials up to and including Chair Jerome Powell have stressed that the collapse of Silicon Valley Bank and Signature Bank were outliers whose failures had nothing to do with real estate – Silicon Valley Bank had barely 1 percent of assets in commercial real estate. Other banks’ exposure to the sector is well under control.
“We’re well aware of the concentrations people have in commercial real estate,” Powell said at a March22 press conference. “I really don’t think it’s comparable to this. The banking system is strong, it is sound, it is resilient, it’s well capitalized.”
The commercial real estate market is a bigger issue than a few banks which mismanaged risk in bond portfolios, and the deterioration in conditions for Class B office space will have wide-reaching economic impacts, including the tax base of municipalities across the country where empty offices remain a significant source of concern.
But there are reasons to believe lending issues in commercial real estate will be contained, Fagan said.
The first is that the office sector is only one part of commercial real estate, albeit a large one, and the others are in unusually good shape.
Vacancy rates in warehouse and industrial space nationally are low, according to Cushman and Wakefield. The national retail vacancy rates, despite the migration of shoppers to online shopping, is only 5.7%. And hotels are garnering record revenue per available room as both occupancy and prices surged post-Covid, according to research firm STR. Banks’ commercial real estate lending also includes apartment complexes, with rental vacancies rates at 5.8 percent in Federal Reserve data.
“Market conditions are fine today, but what develops over the next two to three years could be pretty challenging for some properties,” said Ken Leon, who follows REITs for CFRA Research.
Still, most debt coming due in the next two years looks like it can be refinanced, Fagan said.
That’s one of the reasons Rechler has been drawing attention to the issues. It shouldn’t sneak up on the market or economy, and it should be manageable with the loans spread out across their own maturity ladder.
About three-fourths of commercial real estate debt generates enough income to pass banks’ recent refinancing standards without major changes, Fagan said. Banks have been extending credit using a rule of thumb that a property’s operating income will be at least 8% of the loan every year, though other experts claim a 10% test is being applied to some newer loans.
To date, banks have had virtually no losses on commercial real estate, and companies are showing little need to default either on loans to banks or rent payments to office building owners. Even as companies lay off workers, the concentration of job losses among big tech employers, in Manhattan, at least, means that tenants have no trouble paying their rent, S.L. Green said.
Bank commercial mortgage books
Take Pittsburgh-based PNC Financial, or Cincinnati-based Fifth Third, two of the biggest regional banks.
At PNC, the $36 billion in commercial mortgages on the books of the bank is a small fraction of its $557 billion in total assets, including $321.9 billion in loans. Only about $9 billion of loans are secured by office buildings. At Fifth Third, commercial real estate represents $10.3 billion of $207.5 billion in assets, including $119.3 billion in loans.
And those loans are being paid as agreed. Only 0.6% of PNC’s loans are past due, with delinquencies lower among commercial loans. The proportion of delinquent loans fell by almost a third during 2022, the bank said in federal filings. At Fifth Third, only $10 million of commercial real estate loans were delinquent at year-end.
Or take Wells Fargo, the nation’s largest commercial real estate lender, where credit metrics are excellent. Last year, Wells Fargo’s chargeoffs for commercial loans were .01 of 1 percent of the bank’s portfolio, according to the bank’s annual report. Writeoffs on consumer loans were 39 times higher. The bank’s internal assessment of each commercial mortgage’s loan’s quality improved in 2022, with the amount of debt classified as “criticized,” or with a higher-than-average risk of default even if borrowers haven’t missed payments, dropping by $1.8 billion to $11.3 billion
“Delinquencies are still lower than pre-pandemic,” said Alexander Yokum, banking analyst at CFRA Research. “Any credit metric is still stronger than pre-pandemic.”
Wall Street is worried
The riposte from Wall Street is that the good news on loan performance can’t last – especially if there is a broader recession.
In a March 24 report, JPMorganChase bank analyst Kabir Caprihan warned that 21% of office loans are destined to go bad, with lenders losing an average of 41% of the loan principal on the failures. That produces potential writedowns of 8.6%, Caprihan said, with banks losing $38 billion on office mortgages. But it is far from certain that so many projects would fail, or why value declines would be so steep.
RXR’s Rechler says that market softness is showing in refinancings already, in ways banks’ public reports don’t yet reveal. The real damage is showing up less in late loans than in the declining value of bonds backed by commercial mortgages, he said.
One sign of the tightening: RXR itself, which is financially strong, has advanced $1 billion to other developers whose banks are making them post more collateral as part of refinancing applications. Rechler dismissed rating agencies’ relatively sanguine view of commercial mortgage backed securities, arguing that markets for new CMBS issues have locked up in recent weeks and ratings agencies missed early signs of housing-market problems before 2008’s financial crisis.
The commercial mortgage-backed bond market is relatively small, so its short-term issues are not major drivers of the economy. Issuance of new bonds is down sharply – but that began last year, when fourth-quarter deal volume fell 88 percent, without causing a recession.
CMBS issuance
| Loan type | Q1 2022 | Q1 2023 |
|---|---|---|
| Conduit | $7.9B | $2.3B |
| SASB | $19.1B | $2.7B |
| Large loan | $442.6M | $13.1M |
| CRE CLO | $15.3B | $1.5B |
| Total | $42.8B | $6.5B |
“The statistics don’t reflect where it’s going to come out as regulators take a harder look,” Rechler said. “You’re going to have to rebalance loans on even good properties.”
Wells Fargo has tightened standards, saying it is demanding that payments on refinanced loans take up a smaller percentage of a building’s projected rent and that only “limited” exceptions will be made to the bank’s credit standards on new loans.
Without a deep recession, though, it’s not clear how banks’ and insurance companies’ relatively diversified loan portfolios get into serious trouble.
The primary way real estate could cause problems for the economy is if an extended decline in the value of commercial mortgages made deposits flow out of banks, forcing them to crimp lending not just to developers but to all customers. In extreme cases, that could threaten the banks themselves. But if developers continue to pay their loans on time and manage refinancing risk, MBS owners and banks will simply get paid as loans mature.
Markets are split on whether any version of this will happen. The S&P United State REIT Index, which dropped almost 11% in the two weeks after Silicon Valley Bank failed, has recovered most of its losses, down 2% over the past month and remains barely positive for the year. But the KBW Regional Banking Index is down 14% in the last month, even though deposit loss has slowed to a trickle.
The solution will lie in a combination of factors. The amount of loans that come up for refinancing drops sharply after this year, and new construction is already slowing as it does in most real estate downturns, and loan to value ratios in the industry are lower than in 2006 or 2007, before the last recession.
“We feel like there’s going to be pain in the next year,” Fagan said. “2025 is where we see our pivot toward a [recovery] for office.”
Real eState
Developer Sam Mizrahi files lawsuit against Edward Rogers and his real estate fund, alleges $30-million loss – The Globe and Mail
A condominium at 128 HazeltonAve. in Toronto’s Yorkville neighbourhood. The property was developed by Sam Mizrahi.Fred Lum/The Globe and Mail
Real estate developer Sam Mizrahi has filed a lawsuit against Edward Rogers and Constantine Enterprises Inc., the real estate fund Mr. Rogers owns, escalating a battle between the businessmen amid an alleged $30-million loss on their flagship condo project.
In a lawsuit filed this month in Ontario Superior Court, Mr. Mizrahi alleges Mr. Rogers and his business partner Robert Hiscox, who co-own Constantine, blocked multiple attempts made by Mr. Mizrahi to salvage more value from the two real estate ventures they were jointly developing. After Mr. Mizrahi’s efforts were denied, Constantine requested court-appointed receivers for both projects.
Mr. Mizrahi is suing Mr. Rogers, Mr. Hiscox and Constantine for breach of contract, negligence, and breach of fiduciary duty, among other allegations, and is seeking $100-million in damages.
Mr. Mizrahi alleges his 20-unit luxury condo project developed with Constantine, known as 128 Hazelton in Toronto’s Yorkville neighbourhood, has incurred losses totalling more than $30-million, and that Constantine wants him to share 50 per cent of this loss. Because Mr. Mizrahi has refused, he alleges Constantine blocked his attempts to sell undeveloped land at their other project, known as 180 Steeles or 180 SAW, and also blocked other financing initiatives he put together.
“The defendants refused to realize the profit to be garnered on the 180 SAW project based upon offers Sam solicited, because Sam asserted his legal rights and could not be coerced to agree to indemnify Constantine 50 per cent of its losses on the 128 Hazelton project as a condition of accepting the offers on the 180 SAW project,” the lawsuit alleges.
In an e-mail to The Globe and Mail, Constantine’s Mr. Hiscox disputed Mr. Mizrahi’s narrative, claiming that “in December 2021, Sam, through one of his entities, had agreed, as a 50-per-cent partner in Hazelton, to share equally in the losses of that project. This was documented in the ‘contribution agreement.’”
Mr. Hiscox also wrote: “We are about to enter the 10th year of what Mizrahi represented would be a three-year project,” adding that the project has exceeded Mr. Mizrahi’s original budget by more than $50-million, or almost double the original estimate.
Mr. Mizrahi filed his lawsuit after two major developments. In January, the senior lender to 128 Hazelton, Duca Financial Services Credit Union Ltd., alleged default and requested a receiver for the project.
A month later, Constantine bought out Duca’s debt, then filed its own request for court-appointed receivers for both 128 Hazelton and 180 Steeles, with the hope that a third party would complete sales for each. In an interview with The Globe at the time, Mr. Mizrahi referred to the action as “predatorial” behaviour.
As of January, Constantine and Mr. Mizrahi owned eight units in 128 Hazelton, and in its receivership application Constantine alleged Mr. Mizrahi’s company “failed or neglected to provide its share of the required additional funds necessary to complete and sell the remaining Hazelton project units.”
As for the 180 Steeles project, Constantine alleged it was owed $29-million by Mr. Mizrahi, but had lost confidence in his ability to repay the debt. Constantine was also concerned that Mr. Mizrahi’s company “will continue to fail or neglect to make its required capital contributions to the partnership.” 180 Steeles is located on Toronto’s northern border but is in the preconstruction phase and was put up for sale a year ago.
As the legal battle escalates, both sides have alleged the other has acted in bad faith. In February, for instance, Mr. Mizrahi told The Globe he tried to arrange financing from Third Eye Capital, or TEC, a private lender, to buy out Duca’s loan and sought Constantine’s approval, but later learned Constantine had struck a private deal to do the same itself. “They didn’t tell me, they weren’t transparent,” he said.
In his e-mail Wednesday, Mr. Hiscox wrote, “There were a number of issues with that financing proposal, not the least of which was the cost of the TEC debt being much higher than the existing Duca debt.”
Mr. Mizrahi also brought in Hyundai Asset Management, a South Korean entity, as a potential buyer for the 180 Steeles project, but Constantine would not agree to the transaction, he alleged in his lawsuit.
Mr. Hiscox wrote in his e-mail that the potential buyer “walked from the deal because of the current status of the zoning approval.”
While Mr. Mizrahi battles Constantine in court, another of his Yorkville condo projects, known as The One, is operating under a receiver. The 85-storey project was put into receivership last fall because it owed $1.6-billion to its lenders, is years behind schedule and faces multiple lawsuits. Mr. Mizrahi was recently replaced by Skygrid Construction Inc. as the project manager.
Real eState
Final Offer Launches in Canada Bringing Transparency to the Canadian Real Estate Market – Canada NewsWire
TORONTO, April 25, 2024 /CNW/ – Final Offer, a new online platform for real estate brokerages, agents, home sellers and buyers to leverage the negotiation and offer process, has officially launched in Canada. In partnership with Royal LePage Signature Realty, Royal LePage Your Community Realty and Royal LePage Connect Realty, Final Offer empowers licensed real estate agents to provide a more transparent offer and negotiation experience for the consumer.
For decades, Canadians looking to buy or sell a home have looked for greater transparency during the process. With the implementation of the Trust in Real Estate Services Act, 2002 (TRESA), Final Offer aligns itself well to disclose to the public exactly what sellers want for their home, including the price and terms. Potential buyers and their real estate agents receive real-time notifications of any action on the property, including when offers are made. Every buyer gets a fair shot at purchasing the property for its true market value. Sellers are confident they got the best outcome and achieved their goal.
“The way homes have been bought and sold hasn’t evolved in 100 years, until now,” says Nathan Dart, Senior Vice President of Final Offer. “We set out to enhance the way agents, sellers and buyers collaborate in the offer process by ensuring transparency and visibility. This is particularly important during a time of high housing costs in Canada. We’re thrilled to partner with such well respected market leaders in the GTA that are elevating the home buying and selling experience for all parties.”
Final Offer has attracted the attention of top real estate leaders in Canada looking to maximize the value of their sellers’ homes, while also giving their buyers transparency into what it will take to make an offer that will be accepted. Agents submit offers for their buyers on finaloffer.com and an interested buyer can have their real estate agent submit their “final offer” at any time and immediately put the home under contract.
“As an owner and operator of a real estate brokerage, I’ve seen the disappointment of our agents’ clients who lost out on their dream home for only a few thousand dollars or sellers who question if they got as much for their home as they possibly could,” says Chris Slightham, Owner and President of Royal LePage Signature Realty. “The ability to see offers in real time and to set and make a ‘final offer’ creates greater transparency and puts all parties in control. After introducing this platform to our realtors, they are seeing the confidence it gives their clients when making purchasing decisions. I believe Final Offer is going to change how real estate is transacted in Canada and beyond.”
Licensed real estate agents, sellers and buyers can all sign up for an account on finaloffer.com. There is no cost for sellers, buyers, and real estate agents making offers for their clients. Agents representing sellers can subscribe for a monthly fee.
“Realtors play a monumental role when advising clients throughout the home sale and purchasing process,” says Vivian Risi, President and Broker of Record of Royal LePage Your Community Realty. “The expectations clients have of their agent have never been higher. Partnering with Final Offer empowers our agents with the latest technology and data to set a strategy with clients to achieve the outcome they desire.”
Final Offer is currently available in Ontario, with further regions to come. Final Offer’s mission is to bring transparency, fairness and efficiency to the Canadian real estate market by empowering all parties involved to make informed decisions during the complex real estate transaction process.
“Canadians are looking for transparency in their real estate negotiations and Final Offer delivers,” says Michelle Risi, Broker of Record of Royal LePage Connect Realty. “There is no better tool available that our agents can use to deliver clear information and real time offer alerts that buyers and sellers demand.”
About Final Offer:
Final Offer is the sole consumer-centric platform, driven by agents, dedicated to managing and negotiating offers for residential real estate. The platform champions transparency throughout the buying and selling process and includes real-time offer alerts, promoting fairness and equity for all parties involved. For more information, visit finaloffer.com.
SOURCE Final Offer
For further information: Media Contact: Samantha Jen, [email protected]
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Luxury home prices have been rising at a steady pace, and so far this year, values have hit a fresh record high. According to a new Q1 report by the real estate site Redfin, the cost of luxury residential properties—those estimated to be in the top 5 percent of their respective metro area—rose by 9 percent compared to last year and increased twice as fast as non-luxury homes. At the same time, high-end abodes sold for a median price of $1.22 million in the first quarter, a new benchmark from the $1.17 million set in the fourth quarter of 2023.
“People with the means to buy high-end homes are jumping in now because they feel confident prices will continue to rise,” explained David Palmer, a Redfin Premier agent in the Seattle metro area, where the median sale price for luxury homes is a whopping $2.7 million. “They’re ready to buy with more optimism and less apprehension. It’s a similar sentiment on the selling side: prices continue to increase for high-end homes, so homeowners feel it’s a good time to cash in on their equity.”
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To that point, the number of sales of luxury homes saw a 2.1 percent uptick from the year prior. In January, luxury sales began seeing consistent, year-over-year increases for the first time since August 2021. Another notable trend is that buyers are shelling out all-cash offers. Per the report, 46.8 percent of high-end residences purchased between January and March 2024 were paid for in cash, a staggering 44.1 percent gain from last year and the highest percentage in a decade.
Redfin found that Providence, Rhode Island, had the biggest jump in luxury prices in Q1, with values rising to $1.4 million, a steep 16.2 percent gain. Next was New Brunswick, New Jersey, where the median sale price bounced up 15 percent to $1.9 million. On the flip side, there were eight metros where luxury home prices dipped. Leading that pack was New York City, where prices dropped 9.9 percent to $3.25 million, followed by Austin, Texas, with a 6.9 percent decline.
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