Weekly CRE News Roundup: San Fran Property Owners, Construction Starts, & CRE Debt
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Happy Friday! Welcome to another edition of our weekly commercial real estate news roundup, where we walk you through some of this week's most notable happenings in the industry.
In case you missed it, here's last week's edition, where we discussed how lenders are struggling to sell commercial property loans, how advanced manufacturing investments are propping up the thriving US industrial real estate sector, and the dangers that pre-pandemic office space leases are posing to the sector.
On today's agenda:
- The aftershock of the COVID-19 pandemic is continuously felt in San Francisco as the city's property owners demand more tax relief and assessment reductions.
- Construction starts in July rose significantly over June 2023's numbers, propped up by new nonbuilding construction and multifamily projects.
- Contrary to popular belief, small banks aren't the ones holding the majority of commercial real estate debt.
Let's get started.
#1 – San Francisco Property Owners Demand More Tax Relief & Assessment Reductions
Real estate values in the city of San Francisco continue to plummet thanks to the continued ramifications of the COVID-19 pandemic. While the city's office space sector is seeing some reprieve thanks to tech companies scooping up commercial square footage, the overall picture still looks bleak as experts predict office tower prices to fall by nearly 60% below pre-pandemic values.
San Francisco property owners are turning to the city's government for more assistance, demanding tax relief and more property assessment reductions. The volume of reduction appeals has nearly doubled since 2020, and the average requested reduction amounts to 48% on property that's valued at or over $60 billion.
About 55% of the almost 2,300 reduction appeals heard will get a reduction, placing San Francisco's financial picture in even hotter water as city tax revenues decline. Some of the city's largest landlords, like Brookfield and Columbia Property Trust, are requesting significant assessment cuts, while Blackstone and Equity Residential are looking to secure more modest reductions.
San Francisco isn't the only major metro living with these difficulties: Others in the nation, like Chicago, Los Angeles, and New York, are also seeing more government assistance requests from their property owners in the forms of tax cuts and assessment appeals thanks to the ongoing popularity of hybrid work.
#2 – Construction Starts on the Rise Thanks to Nonbuilding & Residential Sectors
The month of July posted a 17% month-over-month increase in construction starts, according to data published by Dodge Construction Network. Commercial starts rose 11% and residential starts rose 20%. Meanwhile, nonresidential building starts declined by 6%. Cumulatively, this 17% increase amounts to nearly $1.2 trillion.
Notably, nonbuilding construction starts rose by a staggering 38% over June 2023's numbers thanks to a new liquefied natural gas (LNG) facility currently under construction in Texas; without this project, nonbuilding construction starts would've declined by 7% over June. Other projects contributing to this growth include a new dock in Pearl Harbor, Hawaii and a new solar farm in California.
The 20% rise in residential starts can be largely attributed to the multifamily sector, which saw a significant 62% increase over June's multifamily starts. However, year-over-year, total residential starts declined by nearly 21% compared to June 2022. Single-family starts grew modestly by 2%.
Despite these positive figures, experts at Dodge predict that the rest of 2023 will see new construction starts stagnate thanks to rising interest rates and labor shortages. The silver lining, says Dodge, lies in an expected surge in infrastructure activity.
#3 – Small Banks Don't Hold That Much CRE Debt, According to Recent Data
Contrary to public opinion, local and regional banks aren't the ones holding the majority of the nation's commercial real estate debt. In fact, according to recent data, they're only responsible for about 30% of that number, while much larger institutions hold the rest.
The data comes from the Federal Reserve who says that, while local banks do hold the most CRE debt among domestically chartered commercial banks, approximately 70% of commercial real estate loans are owed to banks within the top 25. Banks, as a lender class, still hold the overwhelming majority of commercial real estate debt.
However, small local and regional banks tend to have the highest concentration of CRE debt on their books compared to their larger counterparts, and new CRE loan originations from these smaller lenders have grown significantly to as high as 31% since 2018. Despite this, the majority were issued in 2019, so no maturity issues will be on the horizon any time soon.
Smaller banks, which largely still depend on CRE debt, are trying to adjust to a hawkish Fed and rising commercial real estate vacancies, but the issues surrounding CRE occupancies don't fall solely on their shoulders. Addressing the current state of the market requires broader co-operation between financial institutions and local governments.
Other Goings-On Around the Industry
Here's some other notable commercial real estate news that popped up this week.
- Office Occupancies: Recent data illustrates that 10% of US office space is responsible for the overwhelming majority of occupancy decreases since the onset of the pandemic.
- Multifamily Demand: High-end apartment rentals are seeing increases in demand, largely from millennials looking to lease.
- Apartment Recovery: Net apartment demand is finally positive again after three consecutive quarters of decline.
- Los Angeles Rents: Southeast LA is enacting rent control measures to keep its housing affordable.
- Falling Confidence: Homebuilder sentiment has dropped for the first time in seven months.
Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.
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