Editors’ Weekly News Roundup, May 29th – June 2nd
The themes behind the past week’s five most read stories on Connect CRE were a mix of shifting circumstances and a continuation of ongoing trends. For shifting circumstances, the week’s top story reported on a reversal of a pricing trend the single-family housing industry has experienced since last summer.
Single-Family Home Prices Turn the Corner with Two Months of Gains reported the latest results of the S&P CoreLogic Case-Shiller Indices, which showed a continuing recovery in housing prices. All 20 major metro markets covered by the monthly index saw month-over-month price increases, up from 12 in the previous month.
For multifamily owners and investors, it’s encouraging news. Higher prices in the for-sale market make the renting option look that much more attractive. That’s especially true given the current mortgage rate climate.
High interest rates apply to commercial real estate loans, too, and that’s one of the drivers behind the increase in CRE delinquency rates. The Mortgage Bankers Association said late last week that there were more loans in arrears for each of the major lender groups during the first quarter, and Connect CRE’s coverage of this report, titled MBA: CRE Loan Delinquencies Rise for All Major Lender Groups, was our second most read story this past week.
MBA’s report doesn’t break out delinquencies by property sector and doesn’t include construction loans. The quarterly increases in delinquencies were relatively small, no more than 13 basis points for any lender group. However, when even the GSEs and life insurance companies start to see increasing delinquencies, it portends “additional strains that are likely to work their way through the system,” as MBA’s Jamie Woodwell put it.
Coming in third was a story in the May 27 Weekender that offered a forecast on just how bad these delinquencies could get. Commercial Real Estate Debt Maturities: A Certainty. How Bad? It Depends offered insights into what the coming wave of loan maturities may hold in store.
Spoiler alert: the level of loan defaults isn’t expected to reach the tsunami we saw during the Great Recession, although a white paper from CommercialEdge warns that “conditions are ripe for a spike in commercial mortgage delinquencies.” The current CMBS delinquency rate, according to Trepp, is 5.6%: twice the pre-pandemic level, but a far cry from 10.5% at the height of the pandemic, let alone the peak it reached during the previous recession.
On the subject of relatively small percentages, the week’s fourth best read story was a regional story about a national trend. Google Puts 1.4M SF on Sublease Market in Silicon Valley drew reader interest in both California and across the U.S.
Yes, 1.4 million square feet is a hefty sum, even when spread across seven buildings in two cities. For a frame of reference, though, it’s less than 5% of Google’s total footprint across the Bay Area. Yet, when you combine this news with the company’s recent announcement that it would let 12,000 employees go, it’s a disheartening indicator of the current uncertain outlook for large tech companies, which were mainstays of office and R&D leasing prior to the pandemic.
Nonetheless, the past week’s fifth most read story offered an encouraging forecast for the office sector, although it may not be what office landlords would most like to see: occupiers leasing up in an across-the-board rejection of remote working. CBRE predicts that long-term relief will come instead from a decrease in new development.
Construction Slowdown Expected to Relieve Office Sector’s Rising Vacancies quoted CBRE’s Manish Kashyap, who compared the impending slowdown to what the retail sector experienced. The pace of construction tapered after the Great Recession, allowing new demand to eventually catch up and retail rents to continue rising. “It is a multiyear shift that might foreshadow what’s in store for the office market,” said Kashyap.
The latest edition of Weekender provides another forward-looking piece on a CRE segment that is taking a pummeling at the moment: REITs, and more specifically their stock prices. History shows that following the cessation of a round of rate hikes from the Federal Reserve, REITs outperform the broader market. Based on these precedents, we’re likely to see history repeating itself.