Weekly CRE News Roundup: CRE Distress, Mortgage Applications, & Multifamily
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, and welcome back to another edition of our weekly commercial real estate news roundup, where we guide 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 falling multifamily rents in Austin, TX, the surging 10-year US Treasury, and Atlanta, GA's resilient multifamily real estate market.
Did you know? Tokyo, Japan has a unique commercial real estate phenomenon called "love hotels." These are short-stay, highly niche hotels designed for couples looking for privacy and intimacy.
On today's agenda:
- Today's commercial real estate turmoil remains uncharacteristically different from previous cycles, especially regarding distressed asset sale volume.
- Mortgage applications have plummeted to all-time lows thanks to rising mortgage rates and falling homebuilder sentiment.
- Conditions for multifamily investing have improved thanks to high occupancies, rent growth, and falling multifamily starts.
Let's get started.
#1 – Distressed Asset Sale Volume Uncharacteristically Low
In the ever-evolving world of real estate, today's financial distress differs from past crises. The complex interplay of factors has property owners grappling with tough decisions and investors navigating a unique landscape.
A Shift in Distressed Transactions
Unlike previous downturns where property owners grappled with improperly leveraged assets, fundamental problems mark today's distress, a simmering uncertainty about future income and a sluggish velocity of transactions.
During the first nine months of this year, only 205 distressed properties changed hands, a fraction of the numbers seen during the 2008 financial crisis.
Fundraising Challenges
Fundraising has been subdued, with just one fund targeting distressed assets closing this year. This contrasts sharply with the flurry of activity seen during the previous crisis.
The rise in delinquency rates for bank-held commercial real estate loans further proves today's market's unique challenges.
Meanwhile, a staggering $1.4 trillion worth of commercial real estate debt is set to mature between 2024 and 2026, adding another layer of complexity.
Lenders' Reluctance
Lenders, reluctant to add underperforming properties to their balance sheets, have opted for loan extensions in the hope of better financial conditions.
However, this strategy may have its limits, especially with no immediate relief in the form of interest rate cuts on the horizon.
The Changing Face of Buyers
As the distressed landscape evolves, the composition of buyers has shifted dramatically. Unlike in the past, where institutional investors were key players in distressed asset acquisitions, private buyers dominate today's market.
These smaller, more hands-on investors have a better pulse on the market and often possess the skills needed to reposition troubled properties effectively.
One player that has seen both sides of the distressed real estate game is BH3 Management. Launched during the height of the 2008 crisis, it spent its formative years acquiring distressed and restructured debt.
However, BH3 Management recognizes that today's distress differs, marked by its concentration in specific asset types and locations.
Navigating Uncertainty
While lenders have been extending loan terms in the hope of better days, the market remains uncertain. The bid-ask spread between what buyers are willing to pay and what sellers are willing to accept remains substantial.
Despite the opportunity, many investors are cautious, only willing to buy distressed assets at deep discounts.
The future of the distressed property market hinges on how debt maturities are managed. Lenders may eventually have to take back properties in default, forcing owners to decide whether to absorb losses or invest further.
In this ever-evolving real estate landscape, stakeholders are learning to adapt to a new era of financial distress. Patience and strategic decision-making have become the keys to navigating this complex terrain.
#2 – Rising 30-Year Fixed Mortgage Rates Hinder Mortgage Activity
The 30-year fixed mortgage rate has risen for the sixth consecutive week, reaching a significant 7.70%. However, this rate surge has notably impacted the mortgage market.
Mortgage applications have plummeted, hitting their lowest level since 1995. The substantial increase in mortgage rates is discouraging both the refinancing of existing mortgages and the origination of new mortgage loans, thereby reshaping the housing market landscape.
Growing Popularity of Adjustable-Rate Mortgages (ARMs)
There has been a growing interest in adjustable-rate mortgages (ARMs) in response to the soaring fixed mortgage rates.
The share of ARMs in home financing activity has reached 9.3%, marking the highest level in 11 months. This trend suggests that some borrowers are actively exploring ARMs as an alternative way to reduce their monthly mortgage payments, adapting to the shifting economic environment.
Refinancing Activity Hits Historic Lows
The rapid escalation of mortgage rates has led to a historic low in refinancing activity. Given the current multi-decade high rates, the limited incentive to refinance has discouraged homeowners from pursuing this financial option.
Many existing homeowners find themselves "locked in" to mortgage rates considerably lower than the rates currently offered, further reducing the appeal of refinancing.
Dip in Building Permits Reflects Homebuilder Uncertainty
The housing market's challenges extend beyond mortgages. Building permits, a reliable indicator of future home construction, have declined by 4.4% this month, totaling 1.47 million.
While this figure was slightly better than what economists had expected, it underscores the diminishing confidence among homebuilders.
High interest rates have left builders with a bleak near-term outlook for the market. In fact, in October, the National Association of Home Builders (NAHB) reported the lowest sentiment level in nine months, highlighting the prevailing uncertainty in the industry.
#3 – Conditions Improve for Multifamily Investments
John Sebree, Senior Vice President and National Director of the Multi-Housing Division at Marcus & Millichap, highlights the opportune climate for multifamily investments, citing strong fundamentals and a significant pool of available capital.
He emphasizes that "now is the right time to buy" in the multifamily sector due to several key factors.
High Occupancy and Rent Growth
Sebree notes that occupancy rates remain very high, and rent growth is robust. Moreover, the United States is grappling with a housing shortage, and there has been an unprecedented influx of new multifamily units to the market in recent years.
Drop in New Multifamily Starts
Between Q4 2022 and Q3 2023, new multifamily construction starts have decreased by more than 50%, as reported by Marcus & Millichap. This decline in new construction contributes to a more favorable market for investors.
Anticipated Vacancy Rate Adjustment
While vacancy rates may have experienced a slight increase due to the surge in new units, Sebree predicts that this will be temporary. As these new units get absorbed by the market, vacancy rates are expected to stabilize, putting upward pressure on rents.
Abundant Capital Waiting to Enter the Market
One of the most significant drivers of opportunity is the substantial amount of capital currently on the sidelines. Investors are poised to re-enter the market, recognizing the favorable conditions.
Preemptive Investment Strategy
Sebree advises investors not to wait for a sign that the market has hit bottom but to be proactive. Analyzing the market and defining investment goals is crucial. As competition intensifies with the influx of capital, investors should act aggressively.
Determining Cap Rates and Considerations
Investors must determine their cap rates based on current interest rates, agency debt, and bank debt. Sebree suggests that in today's market, cap rates may be five and a half to six rather than seven.
Aggressiveness in Property Pursuit
Once investors have their parameters and investment strategy, Sebree stresses the importance of being highly assertive in pursuing properties within their target zone. He anticipates that competition will increase significantly as more capital enters the market.
Property Management's Critical Role
In the current environment of higher expenses, Sebree emphasizes the critical role of property management. Efficient property management operations are essential for maximizing property values in this market.
Sebree's conviction is based on feedback from investors, and he encourages a proactive approach to seize the opportunities in the multifamily real estate sector.
Other Goings-On Around the Industry
Some other notable happenings in the industry for this week include:
- A New Paradise: New data illustrates that recent retirees are starting to favor Austin, TX's warm climate and low costs of living over Floridian alternatives.
- Double-Digit Declines: Office space deal volume shrunk again in August, according to recent data from MSCI.
- "Netflix House": Netflix has some big commercial real estate plans for 2025.
- Office Comeback? Surprisingly, employers seem to be having more luck than was initially anticipated with getting employees back into the office.
- Industrial Moderation: The sizzling industrial sector is starting to moderate as absorption falls.
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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