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  • Writer's pictureRealFacts Editorial Team

RealFacts Weekly Real Estate Report

Updated: Apr 18

This Week's Topics

Deutsche Bank CEO sees continued commercial property turmoil through 2024

Christian Sewing, CEO of Deutsche Bank believes that the current crisis revolving around small and mid-size banks highly exposed to commercial real estate lending will continue throughout the year and that provisions for loan losses will be at the higher end of most analysts' expectations. According to Sewing, “Deutsche Bank is Germany's largest lender and also has the most outstanding loans to the commercial real-estate sector among its domestic competitors.” The CEO of a bank so large and so involved in commercial real estate making such a prediction is frightening to say the least.

As reported, “Deutsche Bank has forecast that provisions for credit losses in 2024 would be 25 to 30 basis points of loans,” and Sewing remarked regarding the sector, "There is no deterioration but there are also no ... signs of improvements."

Source: Yahoo! Finance

Realtors Reach Settlement That Will Change How Americans Buy and Sell Homes

On March 15th, the National Association of Realtors reached a settlement that will fundamentally change how realtors are compensated, especially buyer’s agents. The $418 million settlement comes after years of accusations against NAR for conspiring to keep agent commissions inflated.

For a generation, a home sale has gone like this: A homeowner decides they want to sell and hires a real estate agent. That agent would earn a certain percentage of the home’s sale price. When a buyer comes along with their agent, the buyer's agent would also be entitled to part of that commission in exchange for their work. The commission is typically 6% split evenly between the two. The issue here is that there is a clear dysfunction in the principal-agent relationship. If the buyer’s real estate agent is getting paid based on a percentage of the sale price, the agent has almost no incentive to negotiate the price down. This settlement would remove upfront offers to buyer’s agents baked into home listings and would allow buyers to negotiate compensation upfront directly with their agent.

If approved by a federal court, the settlement would go into effect in mid-July across most of the nation. This will give buyers more flexibility when shopping for an agent. They may negotiate limited services in exchange for a smaller fee or might opt out of using a realtor altogether. Ryan Tomasello, a real-estate industry analyst with Keefe, Bruyette & Woods, believes that this could lead to a 30% decrease in the $100 billion Americans pay each year in real estate commissions and eventually cut the number of realtors in half.

Some believe the change could negatively impact first-time homebuyers though. With the cost of a buyer’s real estate agent typically being financed into the home’s cost, buyers strapped for cash may not have the funds to pay agents out of pocket. “I think you are going to have first-time buyers that are just going to say, ‘I just can’t afford to pay you.’ Those are the people that need us the most, and a lot of them don’t have the money to pay us right away,” said Ryan Gable, chief executive of StartingPoint Realty. Buyers can still negotiate to have sellers pay their agents' fees; they just won’t be able to add that cost to the home listing. This strategy likely won’t be effective when the housing market is doing well, however.

In the short term, there likely won’t be any drastic changes in behavior because buyers and sellers are so accustomed to how the sale process has always gone. However, as time goes on, business models that make the market for low-cost buyer agents more efficient will likely emerge. This settlement is a win for homebuyers who for years have fought an uphill battle against some of the highest realtor commissions in the world. In the coming years, the homebuying process will be more of a level playing field that benefits both parties.

Source: The Wall Street Journal

Commercial Appraisers At Center Of CRE's Price Reckoning Pressure

Appraisals are a key part of understanding value for buyers, sellers, and lenders alike. Buyers don’t want to overpay, sellers don’t want to sell at a discount, and lenders don’t want to over-lend and risk not recouping their money should they have to foreclose and resell a property.

Now more than ever accurate appraisals are key to a healthy CRE market. Office buildings have plummeted in value thanks to the work-from-home movement coupled with preferences for Class-A space. Appraisers have found that different data carry different weights in the current market. For example, tenant quality has become much more important in assigning value to buildings. It’s much harder now to find a tenant to fill your space should the current one move. “Appraisers really need to look at every office facility, tenant by tenant, lease by lease,” said Adam Dembowitz, JLL’s senior managing director of value and risk advisory in the U.S.

With appraisals being perhaps more subjective and influenced by personal biases, there are bound to be slight variations between appraisers.“That figure will ultimately determine the financing an owner can get when they need to refinance, an important consideration when approximately $117B in office loans come due later this year,” Dembowitz reported about these variations in appraisals.

With so much weight being placed on accurate appraisals, it isn’t comforting to know there is such a lack in recent historical sales data. “The issue going forward becomes paradoxical: Appraisers need transactions to mark values down, but sellers, convinced their assets are worth more, won’t sell at discounts until appraised values fall.” This paradox can become extremely dangerous. Appraisers can’t make as accurate of appraisals until there are transactions in the market to compare to, but sellers refuse to sell thinking they are selling at below market value thus withholding valuable sales comp data. If the cycle continues, sellers may find themselves in a distressed sale as loans mature and they aren’t able to refinance at a higher rate.

“Two, three sales, that’s not the market, some might say, but when you start getting to eight, 10 sales, you can’t call them distressed anymore,” said Lance Doré, president of The Doré Group. With too many of these distressed sales, that could ultimately become the standard for the market and send values into a tailspin as they become the norm.

Some also worry about future legal ramifications. Joseph Cioffi, chair of the Bankruptcy, Creditors' Rights and Finance Practice Group at Davis+Gilbert, predicts that there will be similar disputes and disagreements regarding appraisals just as there were after the 2008 Global Financial Crisis. “Years down the road, these appraisals might become the subject of litigation, and the credibility and methodologies used would follow the same path,” he said in reference to litigation caused by the GFC.

Investors should keep a close eye on any increases in office transactions in their markets if they want to have a better understanding of market values.

Source: Bisnow

China’s Real-Estate Market Just Set a Record—but Not a Good One

According to The Wall Street Journal, China saw secondhand home prices in some of China’s most developed cities tumble 6.3% in February YoY marking the worst year-over-year decline in more than a decade since the government began making data public in 2011. Transactions of secondhand homes, however, have risen 96% in 8 major cities during that same one-year period. This data suggests that homeowners are coming to terms with selling at a lower price. “If price reductions are needed to enable transactions, it indicates that market sentiment is still quite pessimistic, making it difficult to support a sustained rebound in transactions,” remarked Li Yujia, chief researcher with the Guangdong Housing Policy Research Center.

So, what exactly led to China’s current real estate crisis? For years the economy boomed, and citizens viewed real estate as the most secure form of investment. This caused developers to load up on debt amidst the optimism. Around 3 years ago, Beijing began to worry about the increasing debt on developer's books and took action to slow down the market. This spooked lenders into extending less debt which eventually caused a wave of developer defaults. This has caused consumer confidence in the housing market to take a significant hit.

With the fates of some of the largest developers in China in free fall, Beijing is trying to reverse the damage and encourage banks to continue injecting funds into these developers. Some even believe that the government should freeze construction altogether until the crisis subsides. If China’s housing market continues this trajectory, it could be heading toward the worst housing crisis in years.

Source: Wall Street Journal

The Future: ESG in Commercial Real Estate

In the heart of Downtown Brooklyn, 505 State Street emerges as a trailblazer. Standing 44 stories tall with 440 rental units, it's set to become NYC's first all-electric residential tower. Committed to sustainability and meeting upcoming regulations, Alloy Development pioneers a shift towards greener living.

ESG factors are increasingly considered by investors and organizations seeking to align their investments or operations with sustainable and responsible practices. In this Brooklyn buildings case, "Beginning in 2026, most new buildings in New York will be required by law to use electric heating and appliances to combat climate change." This was the driving factor for this building, but these practices can also provide a more efficient building and opportunities for greater returns.

Innovations in property technology (PropTech), nuances within tax regulations, and broader economic trends present an opportunity for real estate investment that aligns with environmental, social, and governance (ESG) principles, potentially yielding robust returns. Alloy Development Group added forty-five LIHTC (Low-Income Housing Tax Credit) housing units to their building to get government support throughout their project. They also created higher demand by developing the building's brand around environmentally friendly principles.

Energy efficiency has hit an all-time high through new property technology. This involves high-efficiency HVAC systems, smart energy management systems, and other features that cut down on operational expenses and create a higher demand for environmentally conscious tenants.

Real Estate investors get paid for renewable energy solutions. The government offers tax credits to integrate these practices, providing a better initial return, reduced monthly utility costs and a fixed energy bill, which protects your investment from inflation and rising utility costs. Overall, these provide opportunities for better NOI (Net Operating Income) each year while staying in line with social responsibilities.

Source: New York Times

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