RealEstateNews 7.15.24
Weekly News Roundup
- Suburban Offices Outperform Downtown Properties
- Cash Buyers Dominate Real Estate in Manhattan
- Regional versus Big Bank Real Estate Distress
Suburban Offices Outperform Downtown Properties
After years in the shade, humble suburban offices are faring much better than glamorous city-center towers as home working continues to upend the property world. Downtown-office valuations have halved from their peak in early 2022, based on MSCI Real Assets data. For suburban offices, the drop is a more manageable 18%. This is the opposite of what happened after the 2008-09 financial crisis, when prices for out-of-town offices fell slightly more than in major hubs.
For the first time since at least the late 1990s, city-center offices have been emptier than suburban locations for eight consecutive quarters, based on data from real-estate consulting firm Colliers. Big-city tenants still want to be downtown, close to a large pool of workers, but they are shrinking their real-estate footprints more aggressively once their leases come up for renewal. The Covid-19 pandemic had a more dramatic impact on working patterns downtown than in the suburbs. City centers hollowed out for longer as workers didn’t want to travel on mass public transport. They also liked not having a long commute five days a week and have held on to this flexibility thanks to a strong labor market. Workers in suburban office markets, who tend to drive to work, returned to the office earlier.
Downtown-office valuations were more vulnerable to a crash because they were previously considered such a safe bet. As e-commerce made it toxic to own stores, everyone from pension companies to sovereign-wealth funds doubled down on offices in central business districts. This pumped up prices in a way that didn’t happen in the suburbs. Downtown offices have gone from being trophy assets to toxic in a handful of years. The suburbs don’t have a clean bill of health, but they are turning out to be a safer bet. The distinction is becoming ever clearer in property markets. Source: Wall Street Journal
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Cash Buyers Dominate Real Estate in Manhattan
Across the country, buying a home in cash is increasingly common. In Manhattan, it’s become the standard. In April, buyers paid entirely in cash for 64 percent of the homes sold in Manhattan, according to Marketproof, a provider of New York City real estate data. In contrast, cash buyers accounted for 39 percent of April sales in large U.S. metro areas, according to ATTOM, which provides national real estate data. (Manhattan was a similar outlier even within New York City.) The gap between Manhattan and the rest of the country has grown since 2022, when interest rates first spiked, making cash a more attractive option for those who have plenty of it.
Over two days in February, 52 of the 76 closings were in cash. Interviews with 28 buyers on those days and some of their agents, as well as a review of public records, revealed that the people paying cash were mostly American and often New Yorkers. They worked in health care, tech, fashion and the arts. Their ages spanned from the late 20s to the 80s. They got the cash by selling stock or a previous home, or from their parents, or from years of saving. The places they bought touched every corner of Manhattan, from the city’s most exclusive condos to its most affordable co-ops.
The cash buyers necessarily had one thing in common: access to a lot of money. It’s a capacity that escapes most Americans, and even most New Yorkers, who find themselves priced out even more than usual with interest rates around 7 percent. While sales are down overall, prices have largely held steady because there are few apartments available to buy. As cash buyers extend their reach into the bottom of Manhattan’s market, they create another barrier for buyers who depend on mortgages. For many Americans, homeownership is the gateway to building wealth, and the overwhelming majority of first-time buyers use mortgages. Source: New York Times
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Regional versus Big Bank Real Estate Distress
Commercial real estate is often talked about as a problem for smaller banks, but big banks are emerging with the most evident scars so far. Regional, community and smaller banks do represent more than a quarter of commercial real estate and multifamily property debt in the U.S., which is more than twice the share for the top 25 biggest banks, according to a recent Moody’s analysis. However, larger banks face more- immediate maturities in key categories.
According to a March analysis from MSCI Real Assets, national banks held 29% of the value of the tracked office debt that matured last year and have 20% of the debt due this year. The regional and local banks’ share was 16% last year and 13% this year. In addition there is trouble at big banks and their loans to properties that are intended to be leased to third parties. For CRE loans involving properties that aren’t owner-occupied and are held by banks with over $100 billion in assets, more than 4.4% were delinquent or in nonaccrual status in the first quarter. That was up over 0.3 percentage point from the prior quarter.
Meanwhile, in each of the size categories of banks below $100 billion in assets, as well as for those bigger banks’ owner-occupied loans, the rate was below 1% in the first quarter. The difference can come down to higher interest rates. Properties for lease are far more sensitive to the level of interest rates. If the property’s income—affected either by the occupancy rate, or what the latest rents are—isn’t keeping up with what it now costs to pay the loan, or to refinance a loan coming due, then the loan can be problematic. Source: Wall Street Journal
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