Headlines – Week of February 7, 2010
February 15, 2010
Financing troubles loom for commercial (from the Urban Land Institute)
On February 9, 2010, the Urban Land Institute held its 2010 South Florida Economic & Development Outlook Program. The consensus from a variety of local and national industry leaders gathered at the conference seems to indicate that while the real estate industry in South Florida and across the country may be showing some glimmers of hope, there still is likely to be more pain in 2010, particularly when it comes to commercial real estate financing.
While delinquencies on residential loans may be peaking, a bigger crisis may be looming in commercial real estate, as commercial mortgages come due for refinancing on projects that are underwater. Delinquencies on CMBS loans are expected to steadily increase from the current level of about 4 percent, hitting a peak in late 2012 at 12 percent.
Trepp reported that the pace at which loans have been placed on watch list or transferred to special servicing has increased every month for the last 21 months. Today, loans in special servicing represent 10% of CMBS volume outstanding and loans on the watch list represent 20.3% of loans outstanding. If the watch list is a reasonable proxy for future default/delinquency trends, then office properties are going to be the next big stress point with 26% of all office loans (by balance) currently watch listed. In fact, while current office delinquency rates are well below lodging and multi-family rates, 44% of all office loans are in special servicing or on the watch list, as opposed to “only” 34% for lodging and 37% for multi-family.
The issue is what the industry has dubbed the game of “extend and pretend.” That refers to a tendency by lenders to extend the term of a loan in order to avoid writing down the value of the asset, which could have seen as much as a 50 percent decline.
The question is whether what happened during the savings and loan crisis, when properties were sold off at fire-sale prices by the Resolution Trust Corporation, would have yielded better results. However, since there is no government structure in place such as the RTC, the key to a successful workout is getting both lenders and owners to accept the new reality of what projects are worth. Until that happens on a large scale, any recovery is going to be hampered.
Four Demographic Trends That Affect Housing (from the Urban Land Institute)
A new report from the Urban Land Institute predicts two major changes in the U.S. housing market as we began a new decade.
Home appreciation will slow considerably to about 1 percent to 2 percent annually. The current U.S. homeownership rate, now at 67 percent (which is down from a record high of 69 percent), will fall further to about 62 percent.
The report also cites four major U.S. demographic trends that will have a major impact on housing.
- Aging baby boomers (ages 55 to 64 years old): They will keep working, and many will be forced to stay in their suburban homes until values recover. Those who are able to move will choose mixed-age living environments that cater to active lifestyles. Walkable suburban town centers also will appeal to this group.
- Younger baby boomers (46 to 54 years old): They are now entering their prime earning years but they will lack home equity and, unlike the older members of their generation, they won’t be able to purchase second homes. This will likely curb the prospects for the second-home market.
- Generation Y: They are larger than the baby boom generation (with a population of about 86 million). As they enter the housing market, they are less interested in homeownership than their parents were when they were young adults.
- Immigrants – both legal and illegal: They are nearly 40 million strong. They often prefer multi-generational households and if they can afford them, larger homes in neighborhoods with a strong sense of community.
2009 New Home Sales Set Record Low (from the Palm Beach Post)
New home sales last year dropped to the lowest level in recorded history as the economy suffered continued unemployment and increasing foreclosures.
The Commerce Department said sales of newly built homes fell 23 percent nationwide in 2009 from the previous year to 374,000; the weakest showing since 1963 when sales data was first collected.
About 202,000 new homes were sold in the South last year, a 24 percent drop from 2008 and the lowest amount since 1969.
Midwest sales of new homes plummeted by 41 percent. The Northeast and West saw sales increase 43 percent and 5 percent respectively.
The housing recovery has been largely fueled by federal spending that pushed down mortgage rates and propped up demand with an up to $8,000 first-time home buyer tax credit.
The National Home Builders Association is predicting more than 500,000 new home sales this year.
According to the Commerce Department, the nation had an eight month supply of new homes in December, a 28 percent drop from the previous year.