Weekly CRE News Roundup: Hidden Cost Disclosures, Bank Loans, & Office Distress
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Happy Friday! Welcome to another edition of our weekly commercial real estate (CRE) news roundup, where we take you through some of this week's most notable happenings in the industry.
Here's last week's edition, in case you missed it.
On today's agenda:
- Online real estate marketplaces, like Zillow & Apartments.com, agree to disclose previously hidden costs for apartment renters in their upfront pricing as part of the Biden administration's plan to identify and reduce "junk fees."
- Banks are finding ways to dodge CRE loan defaults by reworking terms, offering extensions and modifications, and setting interest costs by selling derivatives.
- Thanks to rising defaults and interest rates, the office space sector has surpassed hotel and retail in distressed assets as the valuation of office buildings in trouble grows to nearly $25 billion.
Let's get started.
#1 – Zillow, Apartments.com, and Others Agree to Disclose Hidden Costs
The White House is chasing down "junk fees" in an effort to make renting in the US a more transparent and affordable process. Currently, hidden costs, like convenience fees and what the White House calls "January fees," or fees that seem to be charged because, well, it's January, can add up to hundreds of extra dollars in out-of-pocket expenses.
Zillow, Apartments.com, AffordableHousing.com, and others have now agreed to disclose such fees in their advertised upfront pricing.
The move comes about as the Biden administration continues to fight lingering inflation, which has been on the decline for 12 consecutive months yet still remains above the Fed's target of 2%.
And apartment renters aren't the only ones whom Biden is trying to help: He's also going after similar price gouging tactics in the air travel and live entertainment industries.
#2 – Banks Dodge Defaults by Reworking Terms, Adding Extensions, & Selling Derivatives
It seems as though a newfound sense of empathy is starting to emerge from the banking sector as more institutions agree to work with borrowers on loan refinancing, especially for those financing office space and retail buildings.
Naturally, banks are worried that defaults on these assets could amount to tens of billions of dollars in losses. According to recent industry data, extensions and modifications on commercial real estate loans are growing in numbers. Banks want businesses using these distressed spaces to become profitable again, so they can start getting paid again.
While this may work in the near-term, it does little other than mask growing concerns about the future: Nearly 220 million consumers are predicted to shop online this year alone, and the popularity of the work-from-home movement has forever changed how office employees in the US work.
Steve Jellinek, head of commercial mortgage-backed securities research at DBRS, says that the office space sector faces "the fiercest headwinds even as some investors are dipping their toes back in on newer, high-quality space."
#3 – Office Space Sector Distress Grows to Nearly $25 Billion, Retail & Hospitality Close Behind
An ironic follow up to our previous story, indeed. According to data from CRE research and data firm MSCI Real Assets, office space sector distress surpassed that of the retail and hospitality sectors in Q2 2023, growing to nearly $25 billion, a 36% quarter-over-quarter increase.
For comparison, distressed retail properties hit about $23 billion, and distressed hotels reached $13.5 billion. Total US commercial real estate sector distress grew by about 13% over Q1 2023.
According to MSCI, investors are not confident about a prominent return to pre-pandemic norms for office space thanks to remote work and weakening demand. As if that weren't enough, another $162 billion worth of commercial real estate is wavering on the brink of distress thanks to rising vacancies, late loan payments, and imminent debt maturity.
For landlords of office space especially, the time is now to begin rethinking strategies and pinching pennies: Hundreds of billions of dollars worth of office space debt are set to mature between now and 2024.
Other Goings-On Around the Industry
Here's what else has happened recently in the commercial real estate industry:
- Chipotle Expands: The Mexican-style chain is set to open nearly 800 new locations in small towns across North America.
- Joe Gebbia Jumps Ship: The co-founder of Airbnb recently dumped $1 billion of his stake in the company since leaving it last year.
- A Potential San Francisco Recovery: The California city is in a tight spot, but there's potential light to be found at the end of the tunnel.
- Recession Doubts: Thanks to a continuously resilient labor market, US Treasury Secretary Janet Yellen doesn't see a recession in the future.
- Supply Issues Plague Data Center Growth: The global supply of available power is in the midst of a shortage, directly affect global data center growth.
Thanks for reading this week's CRE news roundup! Until next week, stay diligent, do your research, and happy investing.
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