April 12, 2017

Real Estate

WSJ – Teachers, Police Priced Out of America’s Big Metro Areas – Laura Kusisto 4/12

“Rising home prices are putting America’s largest metropolitan areas out of reach for teachers, police officers and other big slices of the U.S. workforce.”
“In all, teachers can afford less than 20% of the homes for sale in 11 of the 93 major U.S. metro areas studied.”
“The numbers underscore the challenges major metro regions face as home prices shoot beyond what workers in many industries can afford. It essentially leaves workers with a choice of leaving those areas or facing long commutes to work.”

FT – Fears mount over US construction boom – Alistair Gray 4/11

“As concerns grow about a supply glut, financial watchdogs this month began scrutinizing how the largest lenders would cope with a property market crash.”
“Officials at the Federal Reserve ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35% and rental apartment values collapsed by more.”
“While a simulated property downturn has long been part of banks’ annual ‘stress tests,’ the Fed has made CRE risks a bigger focus this year, reflecting increasing worries that bubbles are forming in parts of US real estate.”
“By the end of last year, US banks and other depository institutions had extended $2tn worth of CRE loans, a category that includes offices and retail space as well as ‘multifamily’ apartment buildings, according to data specialist CoStar. While the pace of expansion has slowed in recent months, balances are still up more than a third in just four years. Within the category, multifamily loans were especially fast-growing, rising 63%.”
“Bank funding has helped developers build roughly 1.5m apartments since 2011, according to Axiometrics.”
“As a result, the banking system has become more vulnerable to a market shock. The value of multifamily loans on lenders’ balance sheets now equates to about a quarter of commercial and savings bank capital of $1.6tn, the buffer against losses, according to CoStar.”
“Commercial property has caused big problems for banks before. A study by the Federal Deposit Insurance Corporation over 26 years found that lenders which specialize in the sector are more than twice as likely to collapse than the average community bank.”
“Building values have been rising for about eight years: CRE prices have more than doubled from a 2009 low to reach near-record highs, according to Green Street Advisors.”
“At the same time, property developers’ rental income has failed to keep up. This has pushed the so-called capitalization rate — a measure of returns — to the lowest level in 16 years.”
“Increases in prices would not be as problematic if rental income were rising commensurately ” – Eric Rosengren, head of the Boston Fed.
“In a sign of investors becoming more cautious, CRE prices have plateaued recently and edged down 0.5% last month.”
“Scrutiny from Washington watchdogs has already caused banks to pull back. CRE loans in New York shrank 17% last year to $82bn, according to CrediFi. New York Community Bancorp, the city’s largest CRE lender in 2015, shrank its loan balances by more than half.”
“With the regulatory spotlight still on the industry, banks are expected to remain cautious. A survey by the Fed of senior loan officers at US banks found that almost half expect to tighten apartment rental lending standards this year.”
“Regulators are right to be concerned, says Mr. [Chandler] Howard [CEO] of Liberty Bank. ‘When you add it all up — high concentrations, markets that have been appreciating fairly significantly, not a lot of cash invested by developers — it (the concern) is legitimate.'”