U.S. banks highlight office real estate as next big worry
By Matt Tracy and Saeed Azhar
(Reuters) – Some of the largest U.S. banks singled out office commercial real estate on Friday as an area of growing concern, with property values falling and more borrowers defaulting on their loans amid rising interest rates and a slowing economy.
Faced with questions from analysts about their exposure to commercial real estate (CRE) and potential of losses, executives at Wells Fargo & Co, Citigroup Inc and JPMorgan Chase & Co said conditions were getting worse for the sector.
“Weakness continues to develop in commercial real estate office,” Wells Fargo Chief Executive Charlie Scharf said on a call with analysts. The bank set aside an additional $643 million in the first quarter for credit losses, mainly driven by expectations of higher CRE loan losses.
Stress in the commercial real estate sector could have broad implications for banks and the economy, as losses emanating there can tighten credit availability and exacerbate a downturn.
JPMorgan Chief Executive Jamie Dimon said he expected tighter lending conditions, most of it around “certain real estate things” and that “increases the odds of a recession.”
Banks represent 54% of the overall $5.7 trillion CRE market, with the small lenders holding 70% of CRE loans, according to Citigroup analysts. More than $1.4 trillion in U.S. CRE loans will mature by 2027, with some $270 billion coming due this year, according to real estate data provider Trepp.
Loans backed by offices make up the biggest share of the maturing debt load, followed by multifamily and retail properties. The question now facing many borrowers is whether they can refinance or restructure loans to avoid default, bankers and analysts said. Older properties with high vacancies face the greatest refinancing challenge, they said.
“Office properties are currently facing the greatest refinancing risks” as companies reassess their needs, said John Guarnera, an analyst at RBC BlueBay Asset Management.
Bankers and analysts said the greatest stress in the office sector is likely to be felt in major cities such as San Francisco, Los Angeles, New York and Seattle.
“The regions with the highest level of office stress are located in the Northeast and tech-heavy West Coast,” while southern cities have a lower share of risky loans, said Stephen Buschbom, research director at Trepp.
As the epicenter for the technology industry downturn, California’s CRE market has been hit hard. San Francisco and Los Angeles had an average office vacancy rate of 21.6% in the first quarter, according to data from Cushman & Wakefield. Loans for San Francisco offices now face the highest risk of default of all U.S. metro areas, according to Trepp.
A subsidiary of asset manager Brookfield Corp, for example, defaulted in February on $783 million in loans linked to two Los Angeles buildings, a filing showed. Citigroup and Wells Fargo were among the initial lenders.
Citigroup and Wells Fargo declined to comment for this article. Brookfield did not respond to a request for comment.
On an analyst call, Wells Fargo Chief Financial Officer Mike Santomassimo said the office market was showing “signs of weakness due to lower demand, higher financing costs and challenging capital market conditions.”
“While we haven’t seen this translate to meaningful loss content yet, we expect to see more stress over time,” he said.
PNC Financial Services Group Inc Chief Financial Officer Robert Reilly said its team was reviewing each asset in its office portfolio.
The lender was stress testing property performance to “set realistic expectations” and had “significantly discounted” income levels and property values “across the entire office book,” he said.
(Reporting by Matt Tracy and Saeed Azhar; Editing by Lananh Nguyen, Paritosh Bansal and Aurora Ellis)
Recreational homes: What to know about inheriting a cottage – CTV News
With a high number of Canadians expected to retire over the next few years, the trend of younger generations inheriting their family cottages will contribute to “major shifts” in the ownership of recreational homes, according to new research from Re/Max.
But amid rising concerns around the cost of housing, some may be wondering whether they can afford to keep their recreational home in the family.
In its 2023 Cottage Trends Report released April 27, Re/Max says Generation X is already driving the recreational housing market, partly due to the high volume of intergenerational wealth transfers. Additionally, data released by TD Bank Group earlier this year shows nearly 900,000 baby boomers are set to retire within the next three years.
According to Christopher Alexander, president of Re/Max Canada, many more families are likely to pass their cottages down to loved ones in the years to come.
“The torch has kind of been passed from baby boomers to gen-Xers, who are driving market activity right now,” Alexander told CTVNews.ca in a telephone interview on Wednesday. “[Gen Xers] are also buying cottages with the intention to pass it on to their children [and] have it as a family heirloom.”
A Leger survey commissioned on behalf of Re/Max as part of its trends report shows 56 per cent of Canadians either plan to or have already put their recreational property in their beneficiary’s name. Additionally, 74 per cent of those who own recreational properties say they feel confident they will be able to pass down their property to relatives with the proper planning.
While many Canadians appear confident in their ability to do this, a key factor to take into consideration is whether their children can afford to keep the home, said Jamie Golombek, managing director of tax and estate planning with CIBC in Toronto.
Amid a cost-of-living crisis, home affordability remains a concern for many. Canada has the highest level of household debt in the G7, a volume that has been growing “inexorably” because of rising home prices, according to the Canada Mortgage and Housing Corporation.
It’s not uncommon for families to sell a cottage to absolve themselves of ownership, Alexander said. More often than not, this isn’t because relatives have lost interest in owning the home, but because of the hurdles they confront while trying to keep it, said Peter Lillico, a lawyer with Lillico Bazuk Galloway Halka based in Peterborough, Ont.
“Parents make assumptions like, ‘the kids love the cottage and they get along, therefore there’s a cottage succession plan,’ and it’s just not,” he told CTVNews.ca in a telephone interview Thursday. “One of the main reasons that those cottages go up for sale after decades is you’ve got three kids and one of them says, ‘I can’t afford it.’”
Looking specifically at the recreational housing market, average prices remain above pre-pandemic levels today, Alexander said. Combined with elevated interest rates, “the ability to carry two properties has been more challenging in the last year,” he said.
ARE THERE TAXES INVOLVED IN INHERITING A COTTAGE?
In addition to keeping up with property taxes and mortgage costs, families will need to factor in a capital gains tax when transferring ownership of their cottage, said Lillico.
Whether parents are selling their recreational home to their children or giving it as a gift, the transfer is still considered a “disposition” by the Canada Revenue Agency, or a sale at fair market value, Lillico said. This will trigger a capital gains tax, which is a federal levy that accounts for the increase in a home’s value since it was last purchased.
In Canada, 50 per cent of the capital gain from a sale must be added to the seller’s total taxable income. The amount they will pay is based on their tax bracket. If the homeowners die before transferring ownership, this tax can be paid using money from their estate, Lillico said.
A principal residence tax exemption can allow homeowners to avoid paying a capital gains tax on profits made from selling a property if it’s their main residence. But any profit generated up until the home is designated a principal residence is still taxable, said Lillico, who has more than 44 years of experience in cottage succession planning.
“The cottage may qualify as their principal residence from that point forward, but it doesn’t wipe out capital gains [from previous years],” he told CTVNews.ca. “Sometimes that will catch people by surprise.”
One way to temporarily avoid paying capital gains taxes is to place the home in a “sprinkling” cottage trust, Lillico said, a type of asset protection trust. This will allow the next generation to transfer the recreational property to their children without paying a capital gains tax for up to 21 years. Placing the property in this kind of trust will also protect the owners from third-party claims if someone were to get divorced or go bankrupt.
Being mindful of insurance fees and other costs involved in maintaining the home will help families make an informed decision on whether the next generation can afford to keep the property, or if they should sell it, Alexander said.
Golombek also recommends speaking with financial advisers to determine the tax consequences of inheriting a family cottage, as well as whether a person’s income and expenses will allow them to afford to keep it.
FAMILY DYNAMICS ANOTHER IMPORTANT CONSIDERATION: EXPERTS
In addition to finances, it’s important that parents speak with their children about whether they want to inherit the recreational home in the first place, said Golombek.
“Especially if there’s multiple kids … it’s very important to have that discussion,” he told CTVNews.ca in a telephone interview Thursday. “If they don’t all want it, then you can create a lot of issues there by leaving it to them equally.”
Lillico recommends creating a legally enforceable cottage sharing agreement for those who will inherit the property before it is passed down. In writing, family members should lay out terms around access to the property, the sharing of expenses and any restrictions on transferring the home to those outside the family. He also suggests setting money aside, if possible, to cover repair costs down the road.
THE STATE OF CANADA’S RECREATIONAL REAL ESTATE MARKET
Most of Canada has seen a rise in the supply of recreational homes, aside from some outliers in Ontario and British Columbia, where prices are “exorbitant,” Alexander said.
Areas such as Muskoka and Prince Edward County in Ontario have seen property values go through the roof over the last few years, leading many recreational homeowners in these regions to see high capital gains over time, he said. As these markets remain hot, peripheral regions such as those further north in the province have become more attractive as cheaper alternatives.
“Within three hours of a major city, as long as the demand is there … you’re going to see property values increase and then you’ll have higher capital gains,” Alexander said.
CTVNews.ca has put together a list of recreational properties currently on the market across Canada.
(Hayden Simon, Century 21 Creekside Realty)
Location: Harrison Hot Springs, B.C.
Year Built: 2002
Property Size: 189.52 sq. m
Lot Size: 0.33 hectares
Situated on the shores of Harrison Lake, this leasehold property is a two-hour drive from Vancouver. With nearly 190 square metres of living space, it includes five bedrooms and two bathrooms. The home also features a wood stove in the living area and a wood-burning hot tub in the backyard.
(Ryan Sagert, 1.m.A Media / Cathren Dorchester, Royal LePage Parkland Agencies)
Location: Rural Wetaskiwin County, Alta.
Year Built: 1980
Property Size: 78.42 sq. m
Lot Size: 0.08 hectares
This lakefront home has four bedrooms and two bathrooms, in addition to a kitchen, living room and fully finished basement. The lower level comes with heated floors and offers outdoor access. In the backyard is a fire pit, along with a stone walkway that leads to Pigeon Lake.
(Big Bay Media / Erin Monett, Chestnut Park Real Estate)
Location: Muskoka, Ont.
Year Built: 1976
Property Size: 165.55 sq. m
Lot Size: 1.31 hectares
Two separate docks lead the way to this four-bedroom, two-bathroom home in Muskoka, Ont. The property includes nearly 314 metres of shoreline along Green Bay, and 1.31 hectares of land. Large windows in the dining area provide a clear view of the waterfront. In addition to the cottage, a seasonal log cabin is also situated on the property.
(Carol Love, Century 21 Lanthorn Real Estate)
Location: Prince Edward County, Ont.
Year Built: 1981
Property Size: 130.06 sq. m
Lot Size: 1.09 hectares
Located in Prince Edward County, Ont., this waterfront bungalow offers views of Consecon Lake. Inside the home are four bedrooms, two bathrooms, a living room, kitchen and recreation room. In the backyard is a screened porch and deck facing the water, which can be accessed via a private boardwalk. This recreational home is located near Millennium Trail as well as shops, wineries and more.
(Christopher Green / Joel Flewelling, Royal LePage Atlantic)
Location: Annapolis County, N.S.
Year Built: 1882
Property Size: 118.73 sq. m
Lot Size: 0.25 hectares
This two-storey home has two bedrooms, two bathrooms and nearly 120 square metres of living space. On the main floor is a combined living and dining area with a wood-burning stove, as well as a sunroom. On the upper floor, both bedrooms share a full bathroom, which includes a shower.
PRINCE EDWARD ISLAND
(Odyssey Virtual / Jodi Bernard, Century 21 Northumberland Realty)
Location: Queens County, P.E.I.
Year Built: 2019
Property Size: 142.7 sq. m
Lot Size: 0.4 to 1.2 hectares
Situated on top of a hill, this cottage in central P.E.I. offers panoramic views stretching from Sea View to Park Corner. It features two bedrooms and two bathrooms, along with a kitchen and combined living and dining area. At the back of the home is a covered deck that is partially screened-in.
NEWFOUNDLAND AND LABRADOR
(Krista Trask, Century 21 Seller’s Choice)
Location: Whitbourne, N.L.
Year Built: 2020
Property Size: 228.91 sq. m
Lot Size: under 0.4 hectares
Modern finishes can be found throughout this home in Whitbourne, N.L. The open-concept layout of the main floor includes vaulted ceilings and chalet windows. Also on the main level is a gourmet kitchen with an island that can seat three people. The main bedroom has a private patio door with access to the front deck, as well as three-piece ensuite.
Victoria real estate sales up and prices down year-over-year – Times Colonist
Real estate prices picked up slightly in May from April, but remain below levels seen a year ago in the capital region.
The number of properties that changed hands climbed by 22 per cent in May from the previous month, indicating increased consumer confidence, Victoria Real Estate Board chair Graden Sol said Thursday, when monthly data was released.
May saw the highest number of sales since April of last year, he said.
While sale numbers lag below what would typically be expected in a spring market, May was the fourth consecutive month with sales higher than the previous month’s.
A total of 775 properties, valued at $774.9 million, sold through the board last month.
That represents an increase of 1.8 per cent from May 2022 and 21.7 per cent from April of this year, the board said.
The benchmark price for a single-family house in Victoria’s core was $1.297 million last month, a drop from $1.4 million in the same month a year ago.
Last month’s benchmark price was $1.295.8 million.
The benchmark price for condominiums in Victoria’s core slid to $569,300 in May from $619,500 a year earlier, although it was up slightly from April, when it was $564,000.
A total of 2,189 properties were for sale at the end of May, up 7.1 per cent from April, and up 23.3 per cent from the end of May last year.
Calgary home sales reach new May record, new listings down: real estate board – The Globe and Mail
The Calgary Real Estate Board says the market hit a new May record for sales as the number of properties that changed hands reached 3,120 last month.
The Albertan board says the sales amount to an almost two per cent increase from last May, when sales totalled 3,063.
Despite the record, year-to-date sales are still almost 30 per cent behind where they were last May and the board says the market has still not shifted completely away from the declines seen at the start of the year.
The board says it continues to see fewer new listings than last year, with the number of properties listed on the market last month dropping 15 per cent to 3,652.
The market’s benchmark price was up almost three per cent at $557,000, while the average price pushed up roughly six per cent to $551,853.
The board’s chief economist says the numbers reflect a higher interest rate environment and recent rental rate gains, which are driving more people to seek apartment and condo units.
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