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Wall Street braces for commercial real estate time bomb – The Hill

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Wall Street braces for commercial real estate time bomb | The Hill









Remarks last week by Federal Reserve Chair Jerome Powell about a spate of coming bank failures related to the faltering commercial real estate sector have sent shockwaves through the financial world, leading some investors to run for cover and others to look for opportunities. 

With the typical U.S. commercial lease ranging from three to five years, the clock is ticking for office and retail property owners and their creditors in the financial sector as remote work has taken off and prompted changes in urban land use.

Office vacancy rates have climbed sharply in the wake of the pandemic after falling steadily in the decade before, reaching a record 13.1 percent last year, according to data from the Treasury Department’s Financial Stability Oversight Council (FSOC), citing analytics firm CoStar.

“At the midpoint of the third quarter of 2023, the national office vacancy rate hit a record high of 13.2 percent, a full 370 basis points higher than at the end of 2019,” CoStar analyst Phil Mobley wrote in a third-quarter analysis.

“The recent reset in office demand has rocked U.S. markets,” he added.

Private equity firm KKR’s Real Estate Finance Trust, a property investment vehicle with money in commercial mortgages, is a recent example, its stock losing a quarter of its value in early February on news that it would cut its dividend on an office loan loss.

Delinquency rates for commercial mortgage back securities are on the rise in recent months, though they’re still well below highs reached in the immediate aftermath of the pandemic and the fallout from the 2008 financial crisis.

“The decline in office property demand may take time to stabilize as tenants navigate remote-work decisions and adjust how much space they need,” the latest FSOC report says. “In addition, a slow return to densely populated urban office centers could reduce the desirability of office properties located there and even nearby retail space.”

Powell delivered much the same message to the Senate Banking Committee last week, going so far as to declare that there will be failures among smaller and regional banks that have made commercial real estate loans.

“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” he said.

“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” Powell said.

Investors are heeding Powell’s warnings about the sector but they’re also taking them with a grain of salt, arguing that traditional liquidity crises of the sort that took down Silicon Valley Bank and Signature Bank last year are unlikely to result from the losses.

“I think Powell’s statement was a little simplistic,” Westwood Capital managing partner Daniel Alpert told The Hill. “There will be disruptions. How those resolve themselves, either with help from the government or outside capital, I believe is going to be very, very different than what we saw with the three banks [last year] and certainly what we saw with any of the other crises.”

The pressure on banks due to commercial real estate exposure isn’t something that “happening overnight,” he added, describing the situation as a “slow-moving train wreck” that allows time for asset repricing.

Still, short sellers are moving quickly to make a profit off the miscalculations.

One investment plan shown to The Hill pertaining to a real estate investment trust (REIT) aims to take advantage of the REIT’s swollen balance sheet before rising interest rates and lagging rent growth slashed the value of its assets.

The proposal said the REIT’s properties would face a reevaluation “in relatively short order.”

Whether or not banks fail as a result of their real estate losses and prompt another government intervention like the line of credit set up for the financial industry by the Fed last year may not be the biggest economic question stemming from the crunch on office and retail real estate.

Rather, the longer-term effects on commercial construction and on the way that land is used in U.S. urban centers may prove to be the most salient macroeconomic issues to face policymakers resulting from the rise in remote work.

“We’re not going to see a lot of commercial construction in the economy for a decade or two,” Alpert said. “That’s a big negative on a macro level.”

Commercial real estate loans for construction and land development have tapered off in recent months after surging during the pandemic recovery and appear close to a possible cycle peak.

Total construction spending has also dipped slightly in recent months after a post-pandemic high, though major recent investments in manufacturing construction could fill the gap left by office projects.

The work to repurpose empty offices and to redesign downtown business districts in accordance with the decreased demand for in-person work is also underway in many parts of the country, experts told The Hill.

“There are some silver linings to this in terms of the shift in land uses in commercial real estate markets,” said urban planner Alice Shay of Buro Happold Cities in New York.

“COVID really shifted our view of how a city can operate and where its centers of gravity are. In New York City, the outer boroughs have really flourished with people working from home, spending their dollars in local districts.”

While strictly remote work has fallen in popularity since the years when the pandemic made it a necessity, hybrid work increasingly appears to be a lasting effect.

In February, about 28 percent of paid work days in the U.S. were work-from-home days, down from more than 60 percent at the height of the pandemic but quadruple their level before the pandemic, according to the national Survey of Working Arrangements and Attitudes from Stanford University.

Notably, the prevalence of remote work in the researchers’ data appears to be stabilizing at current levels.

“The pandemic permanently increased work-from-home,” they noted in multiple versions of the survey.

A 2023 survey by public opinion research agency Pew found that 35 percent of workers who can work remotely choose to do so all the time. That’s up from 7 percent before the pandemic, though down from its peak of 55 percent in 2020.

Labor productivity within the workforce also appears to have normalized along with the shifting trend toward remote work. After surging along with many other economic metrics during the post-pandemic recovery, productivity relaxed, then rose again, and is now in line with longer-term trends.

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banks


commercial real estate


Economy


federal reserve


Jerome Powell


Jerome Powell


productivity


Copyright 2024 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Calgary home prices expected soar even higher at year's end – CityNews Calgary

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Another day, another hit to those looking to enter Calgary’s real estate market.

Prices are expected to soar once again in the city at the end of 2024, according to an updated forecast by Royal LePage. It comes after the aggregate price of a Calgary home hiked by 9.7 per cent in the first quarter of 2024.

The aggregate home price in Calgary is expected to jump by 8 per cent between September and December of this year, which is just short of the national 9 per cent expected in Canada around the same time.

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The city’s aggregate home price was over $676,000 in the first quarter of 2024 — the highest Q1 increase seen in all major Canadian markets.

Corine Lyall, owner and broker of Royal Lepage Benchmark, says it’s all being driven by a shortage of inventory, and it’s not just a trend in the City of Calgary.

“Any of our bedroom communities, Airdrie, Cochrane, Chestermere, Strathmore, Okotoks, they are all experiencing the same thing,” she says.

“Low inventory market and buyers that are interested in moving, but they’re competing with as many as 20 or 30 other people for the same property.”

While many people looking to get into the real estate market are still being pushed to the sidelines, Lyall says the city will see some inventory relief come 2026, when most mortgages have been renewed and have forced overleveraged homeowners to downsize and list their homes.

“The builders are trying to catch up, and definitely our new housing starts have increase this year, which is good,” Lyall says. “It’s still maybe not enough to give people an opportunity to buy something.”

Even though property values dropped across the country last year, Calgary bucked the trend, seeing record price increases instead.

The surge led market analysts to believe that Calgary would once again lead the country in price increases this year, but that forecast has since changed with the Greater Toronto Area and Montreal expected to outpace Alberta’s largest city when it comes to home price appreciation.

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Canadian Real Estate Prices Slipped, Inventory “Jumps” In April

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Canadian real estate had a slow start last month, but activity picked up towards the end. Canadian Real Estate Association (CREA) data shows sales and new inventory both showed only minor movements in March. Prices slipped lower but haven’t moved much since last year. The big insight was the surge of activity towards month-end, and a sudden “jump” in new listings at the start of April.

Canadian Real Estate Prices Slipped Lower In March  

Canadian real estate prices did fall, but not much from last year. The seasonally adjusted benchmark price of a home fell 0.3% to $718,400 in March, but remains 1.1% higher than last year.

Canadian Real Estate Prices

The seasonally adjusted benchmark price in Canadian dollars. 

Source: CREA. 

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Canadian Existing Home Sales Climbed, But Remain Weak

Existing home sales got a boost, but overall remained weak in contrast to historical levels. Seasonally adjusted sales climbed 0.5% in March, representing a 1.7% increase from last year. That sounds better than it is, considering last March was one of the worst on record when it came to sales volume.

Canadian Real Estate Prices

The seasonally adjusted benchmark price in Canadian dollars. 

Source: CREA. 

New Listings of Homes For Sale Pulled Back, But Jumped In April

New inventory on the other hand pulled back slightly. Seasonally adjusted new listings contracted 1.6% in March, slightly tightening the market from February. Although new listings are still much higher than last year—about 10.1% higher. Tighter than a month prior, but much better supplied in contrast to last year.

The most important takeaway was the weekly tracking, according to CREA. Activity was a little soft at the start of the month, but new listings bounced in the second week. They also note the last week of March is when sales began to pick up, with a “jump” in listings in the first week of April.

In other words, the hype on activity was overstated. There was little change when it came to sales and new listings over the month, and prices fell slightly. Additionally, Easter falling in March this year would have contributed to slower activity.

However, April beginning with a sudden influx of inventory is a trend worth watching. If it’s absorbed, the market may be ready to advance, but look out if it lingers.

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Montreal, Quebec real estate sales, listings up by double digits

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Real estate listings and sales are up by double digits both in the Greater Montreal Area and the province of Quebec, with experts expecting a hot market coming in the final quarter of 2024.

The Quebec Professional Association of Real Estate Brokers (QPAREB) reports that Montreal sales increased 20 per cent from the same quarter in 2023, and listings are up 16 per cent.

Sales across the province are up 17 per cent from 2023 with listings up 20 per cent, and the rebound was felt in all sectors except Trois-Rivières and Gatineau, said QPAREB market analysis director Charles Brant.

“These results, however, must be put into perspective: although the number of sales seems to indicate a recovery, which will have to be confirmed in the second quarter, it remains slightly below the historical average for this period of the year,” he said.

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Experts say prices could rise even more in 2024.

The Royal LePage House Price Survey and Market Forecasts says the price of a home in Greater Montreal could increase by 8.5 per cent in the fourth quarter of this year.

“Given the ongoing housing shortage and the widespread expectation that the Bank of Canada is preparing to lower its overnight rate in 2024, we warned last December that pent-up demand would return to the market well before interest rates fell, and that’s exactly what happened in the first quarter of the year,” said Royal LePage vice-president Dominic St-Pierre. “Calculating that rates could start to come back down around June, buyers rushed back into the market in a race against the clock, hoping to sign their deeds of sale just as financing costs started to come down. The problem is that, with inventory still well below the needs of the growing population, other candidates have had the same idea, which has had the effect of pushing prices up significantly in the space of just one quarter.”

St-Pierre adds the window may close fast for those hoping to take advantage of the market slowdown and lower financing costs.

He says he also expects the rental market to heat up in 2024.

Plex sales surging

The biggest jump was in plex sales (up 28 per cent in Montreal, 25 per cent in Quebec) with median prices increasing six per cent in Montreal (to $740,000) and 15 per cent in the province (to $520,000).

Quebec saw increases in single-family home and condominium sales (both up 16 per cent) with prices jumping 10 per cent ($439,000 for a single-family home) and five per cent ($365,000 for a condo).

In Montreal, the average single-family home costs $553,250 (up five per cent) and a condo will generally cost around $395,000 (up four per cent)

With the consumer price index trending down and interest rate cuts a possibility, Brant says it has given the real estate market a tailwind.

“This context has inevitably led to many homebuyers deciding to take action in anticipation of a potential overheating,” he said. “With a double-digit growth in the number of properties listed for sale in many markets, activity is trending toward recovery.”

The association said Quebec sales in 2024 are around the average number since market data started being compiled in 2000.

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