SPRINGFIELD, Mo. (KY3) – Two economists from the St. Louis Federal Reserve Bank spoke to a crowd of about 360 on Wednesday about what’s going on in the financial world at a luncheon sponsored by the Springfield Area Chamber of Commerce.
And what they heard about the Ozarks was generally upbeat.
“The Springfield economy has shown a more stable growth than the rest of the country in part due to the mix of health and education being such a big part of the area’s workforce,” said Nathan Jefferson, a Research Economist with the St. Louis Federal Reserve Bank. “You do have a tight labor market and tight housing market which can be a good problem to have because it’s driven by demand in both cases. But Springfield has a really low unemployment rate so there’s a big competition for workers and it’s hard for a lot of firms to find the workers they need.”
Springfield’s tight housing market has increased the cost of buying a home above the state and national average and Jefferson pointed to the housing situation as a key to the area being able to maintain its growth.
“Springfield offers a lot of amenities and a low cost of living which is a really good combination when it comes to what people are looking for,” he said. “But that influx of people has put a lot of pressure on the housing market and led to higher prices. So housing affordability is one of the main concerns. We’ve heard about supply chain issues and labor shortages which are things that get in the way of building the housing that is needed. The real challenge is going to be keeping up with that demand.”
The Springfield area’s low cost of living is a well-known factor in more people moving here. But it’s also a double-edged sword in that wages are also on-the-average lower than other parts of the country.
“Even though there’s a low cost of living here I think there’s going to be a need for wages to increase moving forward,” Jefferson said. “So another major challenge for Springfield is gonna be finding a balance between being an economically-competitive region and meeting the needs of its workforce.”
“Wage-growth and cost of living are always tied together in every community to a certain extent,” pointed out Springfield Area Chamber of Commerce President Matt Morrow. “But the real differentiator is communities that are skills-rich. So the opportunity we have as a community that has great educational and training resources is that we can invest in things that develop the skills for people so they can earn a great wage and earn it here.”
While the nation has so far avoided a major recession, the experts said that inflation is still higher than the Fed’s two-percent target and that housing sales have slowed down sharply with mortgage rates having doubled in the last year.
“Housing is an area where we’ve seen a real weakness over the last year-and-a-half,” said Kathleen Navin, a Senior Business Economist with the St. Louis Federal Reserve Bank, during her presentation at the Oasis Convention Center. “We’ve had substantial interest rate increases and that’s driven up mortgage rates. As of last Thursday the 30-year mortgage rate on a national average was about seven percent. And when we think about mortgage rates and house prices both being elevated, that translates to housing affordability being a pretty tough situation right now for potential homebuyers.”
Yet with all the challenges ahead, Morrow was encouraged.
“I’m most excited to be one of those communities and regions that’s growing,” he said. “When we’re growing we’re able to do a lot of things well. Our problems get smaller and our opportunities get bigger so that’s a really good advantage that we really need to fully take advantage of. Over the years we’ve seen the Springfield region tend to be pretty resilient. We tend to not go as deep into recession as the rest of the country and be a little quicker to come out of it. We’ve been more immune to some of the highs and lows. That’s a lot of what we heard today but we also heard about some of the unique challenges for not only us but the country as a whole. We have shortages of supply and housing and for a community like Springfield that’s growing faster than the national average, we really need to be looking at ways to provide the adequate housing supply for the growth that we all benefit from.”
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If you feel pressured to buy a home to feel successful, consider these reasons you might want to … [+]
The nation’s homeownership rate of 63.1% is at its lowest level in five decades in 2020, according to Census Bureau data. If you’ve been debating whether or not buying a home is a good financial decision, consider these qualitative reasons why renting might be better for you.
You Enjoy Hobbies More Than Household Chores
Pride is often cited as one of the main advantages of homeownership, where you have the freedom to express yourself in your house more than in a rental. Bankrate’s recent Financial Security survey reported 74% of Americans consider homeownership to be of higher value than any other economic stability measure, including a comfortable retirement, a successful career, having children and holding a college degree.
However, a recent survey by Hippo home insurance found 77% of homeowners dealt with an unexpected repair issue within the first year and 53% said the repair costs ranged from $1,000 to $5,000.
As a millennial interested in early retirement, not owning a home has freed up time and diverted financial resources away from household chores. I am learning to express my identity in hobbies and new interests instead of the home I live in.
In the past six months, I performed my first stand-up comedy set, signed up to dance in a hip hop show, and joined a weekly volleyball league with the money and time I previously spent on roof repairs, lawncare, and paint supplies.
My husband and I now have the energy for fun activities with more time on nights and weekends than we had before.
You Prefer City Culture Over Suburban Life
According to an analysis by Realtor.com, in 45 of the 50 largest U.S. cities, costs less than buying a starter home. The top five cities where it was cheaper to rent versus buy in 2023 were Austin, Texas; San Francisco; Seattle; Boston; and Portland, Oregon.
I live in Charlotte, North Carolina, and I sold my last home because location and convenience mattered to me more. I could buy another home on a 30-year mortgage for cheaper than what I rent right now.
But it would require me to move farther from the best restaurants, entertainment, and shopping in my city, many of which are currently within walking distance. My previous neighborhood was also much less diverse than where I live now.
I have met many of my neighbors through events organized by my apartment building, or hanging out in our communal areas, whereas I rarely spent time with the people in the neighboring houses before.
You Want To Invest In Multiple Income Streams
I still love real estate as a way to build wealth, and I’m not completely ruling out owning a home in the future. But since I’ve sold my homes, I’ve also freed up more mental space and money to learn and practice other ways of investing into early retirement.
Thanks to the money I received from my home sales, I’ve diverted my funds into other investments I was intimidated to try including:
- Treasury bills;
- Dividend exchange-traded funds;
- Real estate investment trusts; and
- Systems and experts to streamline my business.
The times I obsessed on improving my home and silently competed with my neighbors, I now spend growing my passive income and confidence as an investor with money that was tied up in my home equity.
You Value Traveling Instead Of Staying At Home
The amount of time you should stay in the home to recuperate the cost of purchasing it depends on your unique circumstances. But the general rule of thumb that you should stay in your home for at least five years is a good guideline to follow. The five-year rule also takes capital gains rules into consideration, where you might be subject to additional taxes if you sell your home less than two years after you bought it.
Closing costs and taxes aside, as a financial coach, whenever I’ve asked new students what their number one goal is in retirement, it’s travel. However, I most commonly hear they can’t travel because they can’t afford it with their current budgets, which are stretched thin (even though many of them are homeowners).
According to a new study by Chamber of Commerce, a real estate research and reviews company, more than one quarter of homeowners in the United States are “house poor,” spending more than 30% of their income on housing costs. Between housing and other rising costs like student loans and credit card debt, travel becomes very low on the priority list.
Currently many homeowners who want to sell their homes don’t feel the flexibility to move as they want. Due to higher interest rates, 82% of those looking to sell a home feel “locked in” by their low interest rate they got before the increase in housing prices and mortgage rates, according to a survey by Realtor.com.
By downsizing from a 4-bedroom house to a 2-bedroom apartment, I also canceled all but one of my streaming services, and got rid of my big screen TV. This encouraged me to spend less time at home, and look forward to more trips around the country and abroad.
I started traveling extensively in the last two years. Those experiences were made possible by not having my net worth tied up in the value of my home, to spend more money traveling instead.
I’m not saying that if you are a homeowner or want to buy a home, you’re making a bad decision. But as someone who felt the societal pressure to own a home and appear successful, I’m offering an alternative perspective that you can still live a fulfilling and rich life, even if you choose not to buy one.
There are currently some headwinds that may affect commercial real estate heading into 2024. For buyers, higher interest rates have the greatest impact as they increase the cost of borrowing, thereby reducing the capacity to borrow.
For property owners, higher borrowing cost affects the return and, consequently, property values.
Higher interest rates can deter buyers from purchasing a property when the cost of borrowing exceeds the investment return, resulting in what is referred to as negative leverage. For example, buying a property with a 5% return when the borrowing costs are 6% wouldn’t make sense unless there are other compensating factors.
Documents that read “Mortgage,” a calculator, and a model home.
The fall of some regional banks has also had a negative impact on commercial real estate, as these banks account for about 69% of outstanding commercial real estate loans. The ongoing troubles in the regional banks made them tighten their lending practices.
A report from Goldman Sachs estimates that $1.07 trillion worth of mortgage loans will mature before the end of 2024. The investment bank believes this could put more pressure on net operating income and potentially increase vacancies and delinquencies, mainly in the office sector.
Property owners with maturing loans or adjustable-rate mortgages may need to sell to avoid higher rates, creating opportunities for investors. Sellers are beginning to improve pricing and offer more attractive returns to compensate for higher interests.
The reality is that rates are currently high as the Fed tries to tame inflation, which has been at a 40-year high. However, if the right opportunity presents itself, it’s important to remember that you can always refinance when rates come down.
The other factor that could impact commercial real estate is a potential recession. That could have a damaging effect on businesses, causing companies to delay or cut expansion plans. During an economic downturn, there would be decreased demand for space, and this put pressure on rents. This will affect the cash flow of properties, resulting in lower returns for investors.
However, sectors such as healthcare facilities and essential retail, including groceries and fast-food companies, are more resilient and can potentially mitigate the impact of an economic downturn.
So, where are the opportunities?
An aerial view of a loading dock with warehouses and packing containers.
It is expected that new opportunities will emerge in the market as loans mature and adjustable-rate mortgages reset. This will create perhaps the greatest opportunities for buyers in recent years.
In an economic downturn, investors should also consider distressed properties or those with potential appreciation through repositioning or renovation. To be able to acquire properties, investors should maintain a sufficient cash reserve. It is crucial to identify areas with strong economic fundamentals.
No matter which direction the US economy takes, Florida is expected to perform better than other states due to its business-friendly environment, migration, lack of income tax, a robust service economy and tourism. Consumer spending should all contribute to Florida’s success and allow businesses to better withstand any economic downturn.
Fernando Echeverri, is a broker specializing in commercial investments properties, and works with Great Properties International on Key Biscayne.
US banks continue facing severe financial pressures, with First Republic’s failure now being followed by intensified pressure on PacWest, Western Alliance and others previously thought to be healthy. A key driver is banks’ exposure to falling commercial real estate values, driven in part by the rise in working from home and reduced demand for commercial office space.
The scale of the growing banking crisis is raising concerns about a larger financial meltdown that could pull the rest of the economy down. The New York Times reports the three recent large failed banks had a total of $532 billion in assets (First Republic, $213 billion; Silicon Valley Bank, $209 billion; Signature Bank, $110 billion.) That’s bigger than the $526 billion “held by the banks that collapsed in 2008 at the height of the global financial crisis.”
Initial reports treated each recent failure as unique events. Silicon Valley Bank and First Republic had large accounts from start-up firms not fully covered by FDIC insurance. Signature took risks with crypto. And the Federal Reserve has admitted to not taking “forceful enough action” in regulatory oversight.
But more banks keep getting into trouble, with PacWest’s share price falling by 50% on May 4, hitting “a record low.” Just nine days ago, some analysts were saying PacWest’s “deposit situation” had “stabilized,” and the bank’s stock was a “high-potential recovery bet.”
What’s causing this pressure? One key is the heavy exposure PacWest, Western Alliance, and other regional banks have in commercial real estate (CRE). That sector, especially offices, remains troubled as working from home puts downward pressure on office rents and building valuesAnd high exposure to residential lending is suffering from the Fed’s ongoing interest rate increases.
The Real Deal reports “almost 80 percent” of PacWest’s portfolio “is dedicated to commercial real estate-backed loans and residential mortgages.” As I noted in March, “CRE leases often are long term” and “many CRE loans are coming due in the next few months.” Banks face a toxic brew of lowered building values, higher refinancing rates due to the Fed’s continued rate increases, and tightening credit standards as federal regulators worry about bank lending quality.
It’s hard to see any of these factors improving soon. The Fed may pause its interest rate increases after its May 3rd raise of .25%, but its base rate is now at its the highest level in over 15 years. And rates were just above zero in March of last year. We’ve seen ten rate increases in just over one year, further pressuring banks holding older federal debt with low interest rates. Real Estate Capital notes the rate increases are creating “rising refinancing risks” for a “more than $400 billion maturity wall this year.”
Credit standards also will tighten, as the relaxed supervision contributing to recent bank failures will encourage tougher regulation going forward. The Fed’s Vice Chair for Supervision, Michael Barr, said a recent report found Federal Reserve weaknesses in supervision contributed to Silicon Valley Bank’s failure, promising to improve the “speed, force, and agility of supervision.”
And downward pressure on CRE values will continue in the face of persistent working from home (WFH). Stanford Economist Nicholas Bloom, who tracks WFH closely, has found that “only around 5% of the typical U.S. workforce worked from home” before COVID-19. But now close to 30% work from home at least some of the time, and that share seems to be stabilizing at levels higher than many (including me) anticipated.
That’s bad news for commercial office space, rents, and values. Although most WFH is moving towards a “hybrid” model with workers splitting time between home and the office, that still means less demand for office space. Less demand translates into lower rents, meaning lower values for office buildings. And that puts downward pressure on banks—like PacWest—with significant CRE exposure.
Sectoral problems aside, the overriding fear is that bank pressures and failures will lead to wider economic distress via a process of “contagion.” Problems first spread through the financial sector and then can bleed over to the rest of the economy. Financial failures can lead to a lack of credit which in turn can choke off investment and growth.
I’ll again point to economist Hyman Minsky, who told us how “financial fragility” under capitalism systematically produces these threats. Minsky saw how crises erupt in different parts of the financial system when undue sectoral risks flow into the rest of the system. He told us “stability leads to instability” by encouraging these risks and that profit-seekers will “always outpace regulators.” The history of crises from developing world debt, mortgage-backed securities, savings and loans, the “dot com” bubble, and residential real estate leading to the Great Recession all underscore Minsky’s warning.
But our current pathway might have surprised even Minsky: a global pandemic leading to reduced office occupancy, which in turn hammered CRE values to the detriment of regional banks with high CRE exposure. Let’s hope we don’t get the entire cycle, and the CRE problems of regional banks don’t turn into a full-fledged financial panic or a deep recession.
Berkshire’s vice chairman warns the commercial property market is in trouble but according to economists and business owners in Omaha, that’s not the case here.Chris Decker, a UNO economist, said Omaha’s always had a pretty steady economy. While we may see growth in commercial development slow, he said it likely won’t be drastic.”We have a relatively diversified economy, so we don’t go through the high booms and busts in terms of the business cycle that a lot of other cities of similar size tend to do,” Decker said. “We’ve had some recent activity on some pretty major construction projects.”Decker said commercial building permit numbers have been decreasing since 2022 as interest rates increase. While some builders may continue buying properties to prevent locking in a higher interest rate in the future, the growth we see will likely get smaller. “That might show up as a slowdown in our overall city’s economy,” he said.Decker predicts a less than 1% decrease in growth.However, with projects like the Mutual of Omaha Tower, downtown Omaha could be the exception. “That could lift a lot of demand and could spur some additional construction and perhaps reconstruction of buildings as well,” Decker said.Right now, Omaha’s downtown scene is flourishing and as foot traffic increases, businesses are paying attention. Kristi Andersen, the vice president of brokerage at CBRE, said several businesses are opening in the capitol district in the next month. One of those is The Fatt Putter Golf Lounge, opening in June. Owner Michael Worley said the space in his building and the foot traffic attracted him to the new location. “Downtown area is just good for my business based on positioning and how we’ve got everything working on our locations,” Worley said.CBRE statistics show retail vacancies are at less than 7%.”Look around downtown and you’ll see a lot of projects coming out of the ground,” Andersen said. She expects this trend to continue. Andersen said office inquiries are starting to pick up again, too, as people move away from the pandemic. “I know what’s happening because my phone rings,” she said. “If I’m doing tours and people are looking at space, that means people are wanting to be here. They’re back out looking at things and that’s an optimistic sign for us, too.”Decker said his prediction is based on the history of Omaha’s economy over the last 50 years, but things could change depending on what happens overseas politically. Top headlinesOmaha City Council to consider design services for new police, fire headquartersBerkshire Hathaway shareholders meeting in Omaha this weekend Omaha’s Muchachos location opening this weekend
OMAHA, Neb. —
Berkshire’s vice chairman warns the commercial property market is in trouble but according to economists and business owners in Omaha, that’s not the case here.
Chris Decker, a UNO economist, said Omaha’s always had a pretty steady economy. While we may see growth in commercial development slow, he said it likely won’t be drastic.
“We have a relatively diversified economy, so we don’t go through the high booms and busts in terms of the business cycle that a lot of other cities of similar size tend to do,” Decker said. “We’ve had some recent activity on some pretty major construction projects.”
Decker said commercial building permit numbers have been decreasing since 2022 as interest rates increase. While some builders may continue buying properties to prevent locking in a higher interest rate in the future, the growth we see will likely get smaller.
“That might show up as a slowdown in our overall city’s economy,” he said.
Decker predicts a less than 1% decrease in growth.
However, with projects like the Mutual of Omaha Tower, downtown Omaha could be the exception.
“That could lift a lot of demand and could spur some additional construction and perhaps reconstruction of buildings as well,” Decker said.
Right now, Omaha’s downtown scene is flourishing and as foot traffic increases, businesses are paying attention.
Kristi Andersen, the vice president of brokerage at CBRE, said several businesses are opening in the capitol district in the next month.
One of those is The Fatt Putter Golf Lounge, opening in June. Owner Michael Worley said the space in his building and the foot traffic attracted him to the new location.
“Downtown area is just good for my business based on positioning and how we’ve got everything working on our locations,” Worley said.
CBRE statistics show retail vacancies are at less than 7%.
“Look around downtown and you’ll see a lot of projects coming out of the ground,” Andersen said.
She expects this trend to continue. Andersen said office inquiries are starting to pick up again, too, as people move away from the pandemic.
“I know what’s happening because my phone rings,” she said. “If I’m doing tours and people are looking at space, that means people are wanting to be here. They’re back out looking at things and that’s an optimistic sign for us, too.”
Decker said his prediction is based on the history of Omaha’s economy over the last 50 years, but things could change depending on what happens overseas politically.
Top headlines
Toby Cobb has been in the catbird seat of the commercial real-estate market for decades, holding the reins on who gets loans during boom years, and the cards when things go bust.
Cobb was Deutsche Bank’s co-head of U.S. commercial real estate in the run up to the global financial crisis of 2008. In its wake, he shared the helm of LNR Property, one of the nation’s biggest workout shops for soured property deals, with longtime colleague Justin Kennedy.
He now thinks office woes could put other areas of commercial-real estate at risk of contagion, and that the U.S. could be headed for a meaningful economic downturn, as banks pull back from lending because they end up reeling from their office exposure.
“Every single crisis in my lifetime has been headlined by real estate,” said Cobb, co-founder and managing partner of 3650 REIT, a lender and debt servicer he co-founded in 2018.
“In each case, it has been about a fundamental mismatch in supply and demand. We had way too much square feet and not enough people to put in it,” Cobb said. “Overbuilding has historically been the culprit.”
This time, Cobb again sees a supply and demand imbalance, but it can’t be pinned on overbuilding, particularly with construction lending in the embattled office sector having been “relatively responsible.”
Instead, he sees the problem as defining which office buildings in what cities have enough allure to compete with living rooms, impromptu home offices and nonexistent commutes.
“I’m a work-from-the-office kind of boss,” Cobb said, speaking of his team of about 70 people in Miami, New York, Los Angeles and several other major U.S. cities, with some flexibility around how often staff reports to the office. “I don’t know how much space I need. And I am pretty insistent that you’ve got to be in the office if you want to learn and grow.”
Offices laid out
Cobb, like other industry veterans, has been bracing for fallout in commercial real estate after a decade of low interest rates, specifically, the wrecking ball of remote work in the $3.2 trillion U.S. office property market.
Cobb earned a reputation for being in the right seat, at the right time, whether at Deutsche Bank when commercial real estate was flying high or at LNR when it was crashing down to earth. He attributes his success to an aptitude for, “defining the line between the winners and loser, and only lending to the winners.”
After making loans at Deutsche Bank, he shifted to LNR to work on troubled properties when borrowers defaulted in the wake of 2008. As lending rebounded, Cobb helped engineer LNR’s sale to Barry Sternlicht’s Starwood Property Trust for about $1 billion.
He’s now trying to solve a new puzzle: should home offices be counted as part of the permanent office landscape? “We’ve never seen it before,” Cobb said. “Is overdevelopment actually coming from private homes?”
Like with the glut of U.S. malls plaguing the retail sector for years, Cobb expects home offices to exacerbate the office problem. “I don’t think people are talking about this,” he said.
Jones Lang LaSalle estimated that 20% out of about 4.8 billion square feet of existing U.S. office space was vacant in the first quarter of 2023, with another 90 million square feet under construction or renovation.
A more comprehensive tally, including home office space, might factor in America’s estimated 142 million housing units.
While 3650 REIT remains cautious on office buildings, it has been selectively making loans in the sector. “There are great office buildings that can still be done in really scary markets,” Cobb said.
The bulk of the U.S. office inventory also skews heavily toward older buildings constructed in the 1980s and before, which are “at the end of their useful life and very expensive to tenant,” Cobb said.
“There are just a bunch of buildings now that nobody is going to want.”
Related: Office property woes could be tip of iceberg if credit freezes up as $1 trillion bill comes due
Also read: A much predicted U.S. recession still hasn’t happened thanks to consumers
The cost of household goods and utilities is cutting into Americans budgets and creating further housing strife for many while the average tenant is already rent burdened.
Although inflation cooled annually in March, prices remain stubbornly high. Annual food prices increased by 8.5 percent, but they were only down from 10.2 percent in February.
Even so, consumer confidence reached a 9-month low this week amid fears of a looming recession, which the Fed says is likely given recent troubles in the banking sector.
The average tenant is rent burdened
Tenants already burdened by soaring rent hikes are feeling the pinch of higher prices for household necessities like gasoline, food and utilities, Moody’s Analytics Deputy Chief Economist Cris deRitis told The Hill.
“Families have less income available to spend on housing after dedicating a larger share of their budgets to these other essential items,” deRitis said.
“Families have coped with these higher expenses by cutting back on spending where they can, moving to more distant or less desirable locations where housing is cheaper, delaying household formations, and increasing their borrowing,” he added.
A report released by Moody’s earlier this year shows the average renter now pays at least 30-percent of their income on housing.
Homeownership elusive even for families with two incomes
The current economy is making a moving target out homeownership even for families with multiple revenue streams.
Lakia Prue, a building manager in Washington, D.C., with more than 25 years of experience in the industry, told The Hill that she and her husband aspire to one day be homeowners. Yet conditions over the past several years led both to look for side-gigs, like baking, for extra income.
Prue said there’s also concern about monthly payments, adding that she wants to know exactly how much they will owe at the end of each month. And she does not want to take on a mortgage with an adjustable rate.
But she said she wants to be part of the American dream, and after living in the same co-operative apartment for 25 years she welcomes homeownership even her new home might not have all the perks.
“It doesn’t have to have a garage. It doesn’t even need a driveway. If I can park my car at the curb, I’m blessed. “But if I can pull up in a driveway, I’m winning,” she said.
Consumers are losing confidence in the market
And even as recent data shows inflation cooling, consumers are losing confidence. A survey released by the Conference Board on Tuesday showed that the group’s confidence index dropped to its lowest level since July 2022, falling for the third time in four months.
This means consumers are more pessimistic about the direction of the business and labor markets and expect conditions to worsen in the next six months, Ataman Ozyildirim, the Conference Board’s senior director of economics, said in a statement.
“Overall purchasing plans for homes, autos, appliances, and vacations all pulled back in April, a signal that consumers may be economizing amid growing pessimism,” Ozyildirim said.
Wobbly mortgage rates are impacting the market
Volatile mortgage rates have also hampered potential buyers and renters alike. Since the Fed began tightening its monetary policy to curb inflation, mortgage rates have soared.
At their height, the 30-year fixed rate mortgage rose above 7 percent after reaching historic lows during the pandemic. This has pushed payments too high for many prospective buyers and kept them in the rental market.
Despite the Fed’s continued tightening, mortgage rates leveled out at the end of March and through the first half of April.
But last week, the 30-year fixed rate mortgage suddenly jumped up to 6.39 percent. And economists at real estate brokerage Redfin noted the upward shift pushed monthly payments for buyers to their highest level on record at $2,538.
A separate Redfin report found that nationwide median rents declined annually for the first time since 2020, which is attributed partly to renters tightening budgets while prices are rising elsewhere, Redfin Chief Economist Daryl Fairweather told The Hill.
“This is because renters have been pinched by inflation and are less willing to splurge on rent. Instead, renters are living with family or roommates instead of renting an apartment on their own,” Fairweather said. “This is a return to earth from the large jumps in rent that happened in 2022.”
And Moody’s expects rent growth to ease further as the year progresses and a construction boom of 1 million multi-family units enters the housing market.
“The number of single-family homes under construction isn’t quite as high but remains well above its pre-pandemic level as well. The increased supply will help to stabilize house prices and rents,” deRitis continued.
“Assuming no significant shock hits the economy, and the job market remains healthy, both headline and rent inflation should moderate significantly over the next 12 months,” he said.
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Commercial real estate that appears “significantly overvalued” could tumble in price, as debt costs rise and lenders come under pressure, the International Monetary Fund warned on Tuesday.
Commercial real estate has begun to face significant pressures as global central banks tightened their monetary policy stance, the IMF said in its latest global financial stability report.
In the U.S., banks have been tightening lending standards, making it harder for landlords to secure funding, while funds that also lend in the commercial real estate sector are retrenching, the report said.
Stress in real-estate investment trusts (REITs) and in the commercial mortgage-backed securities (CMBS) market, both important sources of loans to landlords, also could add to the sector’s woes, the report said.
Read: Office property woes could be tip of iceberg if credit freezes up as $1 trillion bill comes due.
This could “exacerbate adverse shocks if the economy slows significantly,” according to the IMF, which warned of rising defaults and losses at lenders from falling property values and illiquid markets.
Smaller U.S. banks in focus
The IMF said, “a decade of very low interest rates boosted values in the run-up to the pandemic in 2020 beyond what was explained by fundamental factors.”
As a result, the agency sees risks of a “broader correction” in commercial real-estate values, even after U.S. listed REITs already fell almost 14% in value in the first quarter of 2023 from a year ago.
The IMF on Tuesday also projected the weakest global economic growth in more than 30 years.
See: High inflation and interest rates to hobble U.S. and global economies for several years, IMF says
U.S. Treasury Secretary Janet Yellen signaled a more upbeat tone though, saying Tuesday that it was important not to overdo the negativism in the outlook for the global economy, ahead of an annual IMF-World Bank summit.
Still, the collapse of Silicon Valley bank in March put a focus on the stability of smaller U.S. banks, with less than $250 billion in total assets, which account for three-quarters of all commercial real estate lending. Any “deterioration in asset quality would have significant repercussions both for their profitability and lending appetite,” the IMF stability report said.
Commercial real estate has been vulnerable to past booms and busts. Last year, commercial real-estate loan volumes touched a roughly 12% annual rate at U.S. banks, as a portion of their total lending activity, or the highest since 2006 (see chart).
Commercial-real estate bust?
Torsten Slok, chief economist at Apollo Global Management, estimated that a pullback in commercial real estate construction could result in a drag of around 0.75% to U.S. gross domestic product over the coming three years.
“In other words, with the commercial real estate bubble bursting, we are likely to enter three years with low growth, similar to what we saw after the housing bubble burst in 2008,” Slok said in a Tuesday client note.
He also expects the Federal Reserve to interest cut rates later this year, and to keep them low for several years, while also resuming large-scale asset purchases, or quantitative easing, in 2024.
U.S. stocks were mostly higher on Tuesday, with the Dow Jones Industrial Average
DJIA
up 150 points, or 0.5%, at last check, and the S&P 500 index
SPX
up 0.2%, according to FactSet.
Published: April 5, 2023 at 7:59 p.m. ET
A downward spiral of commercial property prices can hurt sectors beyond the real-estate industry, warns Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Morgan Stanley analysts think commercial property prices could tumble as much as 40%, nearing declines seen in the aftermath of the 2008 global financial crisis.
The…
A downward spiral of commercial property prices can hurt sectors beyond the real-estate industry, warns Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Morgan Stanley analysts think commercial property prices could tumble as much as 40%, nearing declines seen in the aftermath of the 2008 global financial crisis.
The estimate comes as trillions of dollars of commercial mortgage debt is set to mature in the next few years, likely in a higher rate environment. But there is also worry of broader ripple effects from half-empty office buildings.
“These kinds of challenges can hurt not only the real-estate industry, but also entire business communities,” Shalett said in a weekly client note. She warned that recent resilience in the stock market to start 2023 “demonstrates that investors continue to ignore genuine risks to the economy and corporate earnings.”
San Francisco Mayor London Breed’s office said a week ago that it was projecting a $780 million budget shortfall in the coming two fiscal years through 2024, up $51.5 million from its projection in January.
Its revised forecast pointed to higher interest rates that make borrowing on residential and commercial real estate more difficult as a drag on the city’s finances, but also to the remote-work dynamic that “makes office space an unattractive investment.”
See: Office property woes could be tip of iceberg if credit freezes up as $1 trillion bill comes due
Beyond potential cracks in commercial real estate, Shalett at Morgan Stanley said other potential sources of stress could come from further pain in the venture-capital world and from private equity, despite its estimated $2.3 trillion capital on hand to deploy.
“The collapse of Silicon Valley Bank put a spotlight on the already-stressed VC industry,” she wrote, adding that venture capital-backed firms employ more than 5 million people and “continue to burn through their cash reserves.”
For private equity, she sees a “dimming economic outlook,” a multiyear slowdown in new fundraising and “markdown risks” at portfolio companies.
The S&P 500 index
SPX
was up 6.5% on the year through Wednesday, while the Dow Jones Industrial Average
DJIA
was 1% higher and the Nasdaq Composite Index
had advanced 14.6%, according to FactSet.
City asked to reconsider role in commercial developments
Recently, I responded to the City of Flagstaff (COF) appeal to residents regarding current budgeting priorities and objectives. Earlier this year I had the opportunity to attend the City of Flagstaff’s budgeting retreats. Over multiple days, I learnt a great deal regarding the anticipated spending on operations and capital projects for fiscal year 2023-2024. The days were filled with charts, tables and diagrams.
At the end of one day, a COF staff member presented the refurbishing and rebuilding of a commercial property owned by the COF. The property is located before the entrance to Buffalo Park and it is primarily leased to the USGS. He proceeded to tell the budget meeting attendees, City Council and City Staff primarily, that a new investment in the USGS buildings would cost over $50 million. This amount was higher than prior year estimate of over $35 million! But not to worry, USFS and the COF were close to agreeing to a five-year lease with a five-year renewal! Not one question from the audience! Not a peep! Not a graph, table or diagram! I was stunned! I do not believe any commercial developer would spend over $50 million with a potential five- or 10-year lease in the future.
Developing commercial property is NO WHERE to be found in the Flagstaff Key Community Priorities and Objectives used in the COF budgeting. The COF mission does not mention the COF developing commercial property.
If the COF remains in commercial building business, this presents numerous conflicts of interest for the COF. This situation today is like having the fox guarding the hen house given the COF enforces and creates the building codes!
The COF should divest all commercial property; the residents tax dollars can be better spent on actual COF’s Priorities and Objectives.
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