Office Loan Modifications jump dramatically May, 2024

 

Office Loan Modifications Jump

Recent update from CNBC here:  

The details: 

Rising office loan modifications and delinquencies.

1.42B in office modifications in Q1 2024 vs. $117M in Q1 2023

"Government intervention may be needed".

See more on loan modifications stats in Commercial RE posted on this blog in April. 

Weitz Commercial Real Estate, Legal & Economics Blog: Office loan defaults near history levels (realestatelawwa.blogspot.com)

Weitz – I have a hard time seeing government intervention just 15 years after the last bank crisis where the “too big too fail banks” became even bigger. That said, memories are shockingly short and the importance of a healthy banking sector can’t be understated in a system based entirely on debt. Time will tell I suppose, but I’m guessing the political will to save banks won’t be there.

I'd also suggest that the 'kicking the can down the road strategy' will eventually run out of steam. I don't want to say it won't work, but owners may find that getting cash out of their properties may be better than paying large fees/ interest rates and simply hoping things rebound soon. 

For more help on Snohomish Commercial Real Estate, feel free to email or call me: 

Weitz Commercial

Scott@WeitzCommercial.com

t: 306.306.4034

New Home Build sale drop significantly. May, 2024

 CNBC article highlights new build weakness. 

See article here. 

The Highlights: 

Sales of newly built homes dropped 4.7% in April compared with March and fell 7.7% from the prior year the US consensus said Thursday.

March sales were also revised significantly lower.

Weitz take: So tired of downward revisions by the government. How is it so hard to get those figures right and why release them until you do have them accurate? 

Builders say they cannot lower prices due to the high cost from labor and materials.

Weitz take: Ummm hmmm.... Their profits would indicate otherwise. 

For all the happy talk from the big builders the entire build industry is selling new homes at a pace below the five year average according to Bleakley Financial Group.

With the nationwide shortage of roughly 1.5 million homes the lack of housing units is the primary cause of growing housing affordability challenges policymakers at all levels of the government need to enact policy changes that will allow builders to construct more homes such as speeding up permit approval times providing resources for skilled labor training and fixing building material supply chains” cited Robert Dietz, the NAHBs chief economist.

Weitz: this is so true. The bureaucracy of local governments has become totally outrageous. The length and costs of simply having the 'approval/ right'  to construct does not coincide with the huge need for reasonably priced housing. 

Overall, this coincides with my call for a top in the market in the near future (if not now). It's all about inventory, but if new homes are not selling, that will add onto the inventory levels and as I've said, that is the #1 indicator for prices as we move forward. 

 

National Real Estate market update - May, 2024

 The latest Realty Check from CNBC's Diana Olick 

See article here

The basics and my analysis: 

Median Price of a home sale rose 5.7% to $407,600, a 5.7% increase. 

Inventory rose 9% month over month and up 16% YOY. 

Sales were down 1.9% from last year. 

"Home prices reaching a record high for the month of April is very good news for homeowners, said NAR Chief Economist Lawerence Yun, however the pace of price increases should taper off since more inventory is becoming available". (WEITZ - AKA - price drops). 

Weitz take: TIIIIIIIIMMMMMMMBBBBBBEEEERRRRRRR..... here is the inventory number we have been talking about and anticipating. That is by far the biggest predictor on pricing moving forward (along with interest rates at a close 2nd). If inventory continues to rise and rates stay anywhere close to where they are, we will start to see price slashing. 

I'll go ahead and make a bold prediction...... The current market top has either been reached or will be reached in the next few months....I think we will have notable price drops by year's end in almost every major market.... you don't get that on CNBC! I may be wrong, but I strongly believe this inventory increase will start to cause ripples. 

If you are interested in investing in Snohomish County Commercial Real Estate, shoot me an email or a text and I'd be happy to help. 

Weitz Commercial

108 Union St. 

Snohomish, WA 

Scott@WeitzCommercial.com

t: 206.306.4034

Multi-family Distress rate climbs significantly nationally.

 

See below excerpts from Bisnow.com article found here.

The worst isn't over for the distressed riddled multifamily industry according to new monthly financial indicators. The overall distress rate set a new record of 8.35% in April according to real estate data firm cred IQ, with multifamily leading the increase. The multifamily distress rate increased from 3.7% in March to 7.2% in April.

The jump was led by a loan backed by the 3222-unit Parkmerced, one of the largest multifamily complexes in San Francisco being transferred to a special servicing.

About $1.2B worth of multifamily CMBS loans were transferred to special servicing in April boosting the multi-family commercial mortgage backed loan ‘special servicing to 5.1% according to Trepp.

Loans on more than 58,000 multifamily properties totaling $525B will mature over the next five years according to Yardi. That accounts for almost half of the 1.1 trillion of current apartment loans. About 150 billion of that is set to mature by the end of next year multifamily dive reports.

Interest rates rose as multifamily property values fell 20% to 30% from peaks in 2022.

As refinancing long-term loans for newly built properties has become more and more difficult for owners and developers, distress numbers could rise further in coming months the outlet reports.

Ben Kreigsman, Dallas based Lion Real Estate Group’s director of acquisitions told Multi-family Dive that refi out of construction financing is “getting exceeding difficult”.

Weitz – if you read this blog, none of this should be a surprise. What I do find moderately surprising is the multi-family component of all this. They have been one of the ‘belles of the ball’ and presumably more of a safe haven than their office, and retail counterparts. A distress rate increase from 3.2% to 7.2% in a single month is nothing less than staggering – that may be a short term anomaly, but I expect the overall rate will likely increase from current levels regardless.

Sadly, I think the “party” is just getting started and we can expect more of the same in the coming months/ years…. especially if rates stay at the levels they are at. The banks have to be feeling the pinch at least modestly making re-fi’s harder in general and especially challenging in the current interest rate environment.

Our Firm

Weitz Commercial

108 Union Street 

Snohomish, WA 98290

Scott@WeitzCommercial.com

T: 206.306.4034

FREDDIE APPLIES TO BE IN SECONDARY MORTGAGE MARKET

This one is interesting.

Freddie Mac filed with the NAH to be a provider on the secondary market.

On April 16^th, Freddie MAC filed with the NAH would be able to get into secondary mortgage market.

This is just great (extreme sarcasm). Let’s get the government involved with providing even more consumer debt any other lender would ever give. This gives a short term boast to lenders, banks, etc but at what cost? 

Imagine if this becomes common amount homeowners to get cash out simply to pay for overpriced inflationary good and then the market goes down a bit…. Nothing less than a foreclosure disaster.

This is like solving diabetes with even more sugar. Our government is back peddling, realizes we have a problem coming and have no clue how to handle it.

Office loan defaults near history levels

 

Below are some highlights from a WSJ article last week. Everything we have predicted is slowly becoming a reality. We expect more for remainder of the year and will continue to follow carefully.

WSJ:

1. Defaults are reaching historic levels in the office market as a growing number of owners capitulate to persistently high interest rates and weak demand. More than $38 billion [worth of] US office buildings are threatened by defaults foreclosures or other forms of distress according to data firm MCSI. That is the highest amount since the fourth quarter of 2012 in the aftermath of the 2008/09 financial crisis.

2. Office owners are paying back their loans at a much slower rate. As recently as 2021, more than 90% of office loans that were converted into commercial mortgage-backed securities were paid off when they became due according to Moody's. Last year that figure fell to 35% - the worst rate in the history of the data which goes back to 2007.

Weitz- I'm not sure this figure can be highlighted enough. We went from 90% payoffs on maturity to 35% ..... simply put, this is a staggering issue for the owners, the general market, and arguably most importantly, the banks. Once they are forced to take losses, we have some major risks of a capital concerns, shutdowns, etc. How far does the spiral go? How does the government intervene if at all? we shall see. 

3. In the next 12 months, 18 billion of the office loans converted into securities will mature more than double the volume in 2023. Moody's projects that 73% of loans will be difficult to refinance because of the property income, debt levels, vacancy and approaching lease expirations.

Earlier this year, industry hopes were high that the Federal Reserve would begin cutting rates. In recent weeks those hopes have faded as inflation concerns have persisted.

4. The US offensive vacancy rate is currently at a record 13.8% compared with 9.4 at the end of 2019 according to data service costar group.

Weitz- more than anything, this is the real problem. Most businesses have changed the way they operate / communicate, and large offices are simply no longer a necessity or priority. Even tenants that seek to renew they leases are generally doing so with a smaller footprint given the costs and change in operational structure. 

For more information on Snohomish County Commercial Real Estate Investing, we are happy to help. 

Weitz Commercial

108 Union Street

Snohomish, WA 98290

T: 206.306.4034

www.weitzcommercial.com