RealEstateNews 8.5.24
Weekly News Roundup
- Will Housing Market Crash?
- Signs of Bottom in Commercial Real Estate
- Changing Preferences in Office Properties
Will Housing Market Crash?
The U.S. housing market had finally started slowing in late 2022, and home prices seemed poised for a correction. But a strange thing happened on the way to the housing market crash: Home values started rising again. So much for the now-quaint notion that the post-pandemic “housing recession” would reverse some of the outsized price gains in homes.
The main driver of record home prices is a one-two punch straight from Econ 101 — a lack of housing supply coupled with strong demand. Inventories have been growing but remain frustratingly tight, with NAR’s June data showing a 4.1-month supply. Not even high mortgage rates have slowed price appreciation. Housing economists and analysts agree that any market correction is likely to be modest. No one expects price drops on the scale of the declines experienced during the Great Recession.
Housing economists agree that it will not crash. Even if prices do fall, the decline will not be as severe as the one experienced during the Great Recession. Housing economists point to five compelling reasons that no crash is imminent: Inventories are still too low; Builders aren’t building quickly enough to meet demand; Demographic trends are creating new buyers; Lending standards remain strict; Foreclosure activity is muted. Source: BankRate.com
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Signs of a Bottom in Commercial Real Estate
Banks and other lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, a sign that the sector’s punishing downturn is entering its next phase and approaching a bottom. In the second quarter, portfolios of foreclosed and seized office buildings, apartments and other commercial property reached $20.5 billion, according to data provider MSCI. That is a 13% increase from the first quarter and the highest quarterly figure since 2015.
Distress is working its way through the financial system after more lenders conclude that obsolete office buildings won’t recover their former value, even when interest rates decline. That is leading to sales of foreclosed properties and distressed mortgages. It is also bringing an increase in short sales, where lenders and borrowers work together to unload troubled property for whatever they can get.
It is possible that commercial-property values could deteriorate even further if the U.S. economy falls into recession and companies start laying off workers and want less office space. But in previous downturns, comparable surges in foreclosure activity has signaled the approach of a market bottom. Once lenders seize a property, they are typically quick to sell it, a process that helps determine values of properties after long periods of sluggishness in the sales market. Source: Wall Street Journal
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Changing Preferences in Office Properties
For office workers, the Federal Reserve’s most recent Beige Book gave us a hint about some of the workplaces people are occupying. The Richmond Fed said agents in Virginia and Maryland reported tenants were “rightsizing” their offices and upgrading from Class B to Class A space. So what does that really mean?
Class A office buildings are what they sound like: classy, nice views, good parking, crazy fast internet. Maybe a cafeteria right in the building. Class B buildings might have been Class A, like, in the 1980s. But now, the elevator’s kinda creaky and the fixtures are pretty out of date. And as for Class C? “Maybe the heating and air works every day. Maybe it doesn’t. But, you know, the rent’s cheap,” said Scott Wimbrow with MacKenzie, a commercial real estate firm that manages and leases office buildings, primarily in Maryland.
Wimbrow said some employers are opting to shrink their office footprints by 15% to 25%, but they want those footprints to be a whole lot nicer. “So their annual rent cost is the same, more or less, but they’re getting much nicer digs,” said Wimbrow. It’s not always just nice digs some tenants want, but fancy amenities, too. “I’ve called it an almost religious belief among a certain segment of tenants that what they need in the post-pandemic workplace is they need everything,” said Phil Mobley of the CoStar Group, a global real estate data and analytics firm.
Other employers are going the opposite route. Mobley’s seeing some of the lower quality office spaces get snapped up because they’re affordable. “There are plenty of occupiers out there who just need a place to park people, and they want to do it as cheaply and efficiently as they can,” Mobley said. So, Mobley said it’s the buildings that are more toward the middle — between the top 10% and above the bottom 60% — that are being hurt the most. Source: MarketPlace.org
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