It looks like 2012 will be another good year to be proactive and save money. A forecast released by PriceWaterhouseCoopers and the Urban Land Institute indicates that the commercial real estate market will see an increased supply of properties for sale during 2012, but diminished buyer interest. The absence of job growth will have a major impact on this issue. Job creation is essential for a sustained recovery in the commercial real estate market.
Here in Atlanta there have been several office building sales of the distressed variety. Office investors in Atlanta are buying even while vacancy rates remain high. At the end of the third quarter, the vacancy rate for office was 21%, according to a report from Marcus and Millichap Real Estate Investment Services. Asking and effective rents have remained flat. The median price of properties sold over the past year was $94 per square foot, which is down 10% year-over-year.
In other news, Cousins Properties, Inc. sold One Georgia Ctr. in Midtown Atlanta for approximately $130 per square foot or $48.6 million. Cousins bought the property 11 years ago for $35 million. The Georgia Department of Transportation leases approximately 78% of the tower.
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6,373,000
According to Lender Processing Services (LPS)
That is an insanely large number. I never would have guessed a number this high. This is not good news heading into the traditionally slow house sales period of winter months. Of this insanely large number, 2,172,000 are foreclosure pre-sale inventory (ready to flood the market). Of the remaining 4,202,000 that are more than 30 days delinquent, 1,844,000 are more than 90 days delinquent. The Case Shiller 20 city home price index for August is due out tomorrow. It will be interesting to see what has happened since the economic slowdown began this summer.
Meanwhile, federal regulators are rolling out an "upgrade" to the government's Home Affordable Refinance Program (HARP). The goal is to allow underwater homeowners that are current on their mortgage payments to refinance at lower interest rates. Many homeowners that are current on their mortgage payments cannot refinance because they would have to put more money into the deal to create enough equity to refinance and that is not possible.
The new HARP will waive appraisal requirements and other fees that increase closing costs to make refinancing more affordable as well. HARP will allow homeowners to refinance regardless of how far their values have fallen. It is estimated that 1.6 million refinancings will take place by 2013 if the restrictions are relaxed.
Some think that this will be a shot of adrenaline for the economy. I agree that some people that refinance will have more disposable income after refinancing, but aren't we going through a deleveraging process? Aren't people refinancing into 15 year mortgages from 30 year mortgages to take advantage of the low rates and interest savings? Aren't saving rates rising and revolving debt falling?
Given the large 6,373,000 number above, representing the homeowners that are not eligible for HARP, I don't see anything approaching a panacea in this approach. I think the reason behind HARP is to prevent strategic default. The regulators know that once a homeowner's loan balance is 120% of the house value, default rates rise, even if the homeowner can afford the payments. They are hoping that if they help the people that are current on their homes they will stem the tide of foreclosures.
The commercial real estate sector slowed last quarter as the economy grew sluggish and debt financing began to dry up. According to Real Capital Analytics, Inc. (RCA) the dollar volume of commercial real estate transactions fell 15% in the third quarter vs. the second quarter. RCA only includes property transaction with values above 2.5 million dollars. CoStar Group, Inc. which includes all commercial transactions showed a drop in transaction volume of 29%. There is increasing concern that the European debt crisis will surge onto the U.S.A.'s weak economic shores and cause major damage.
The PwC Real Estate Investor Survey shows that capitalization rates on the majority of property types were down slightly in the third quarter vs. the second quarter, with only power centers and regional malls ticking up slightly. Atlanta has the distinction of being the only city included that shows an increase in office property capitalization rates. The Atlanta office market cap rate is essentially unchanged this calendar year, however.
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As Whitney Tilson and Glenn Tongue pointed out in their 2009 book More Mortgage Meltdown, the mortgage loans that actually brought Fannie and Freddie down were Alt-A loans, not sub-prime loans. Alt-A loans, were issued with a lack of income documentation and were later dubbed "liar loans." As Tilson and Tongue showed, interest rate resets on Alt-A's that were issued at low "teaser" rates are still resetting, and the resets won't peak until late in 2012.
Thanks to the Federal Reserve, this large volume of interest rate resets shouldn't prove too painful, due to the historically low level of interest rates. However analysis and opinion continues to predict a poor housing market for the foreseeable future.
Housingwire.com recently reported that sales of foreclosures may not peak until 2013. They report that half of all bank sales of foreclosed properties, or REO sales (real estate owned), this year have been from private banks. They predict that in the coming years it will be Fannie, Freddie, and HUD that dominate the supply of REOs for sale. Bank of America Merrill Lynch predict that total REO sales won't drop below one million a year until 2015.
Analysts at Barclays Capital say a "triple-dip" in housing prices will likely appear early in 2012. They warn that housing prices could fall another 6 to 7 percent during this downturn. They say close to 4 million houses are seriously delinquent or in foreclosure. A supply-demand imbalance could remain well into 2013 or 2014.
They say that nothing is certain but death and taxes, but they don't say high taxes. As long as local tax revenues are down, there is a risk that property tax rates will rise. Don't get caught with a declining asset (your house?) value and a rising tax bill. Contact us for
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Realtor.com recently reported that the number of housing units listed for sale is 20% lower than last year and is at the lowest level they have recorded since starting in 2007. At first this may seem like a positive development. If the number of listings is down, then demand must be increasing relative to supply. But it ain't necessarily so.
Many realtors report that their clients are pulling their houses off of the market because they are unwilling to lower their price to a level that generates interest. In addition, the number of foreclosures is down. This is temporary because the foreclosure processing debacle has slowed the foreclosure process. The banks and attorneys general are trying to negotiate a settlement in the tens of billions of dollars and when this is settled the pace of foreclosures should increase.
The foreclosure "shadow inventory" is estimated to be a million or more houses, nationwide. I am doubting that the residential real estate market has legs from here. Continued value pressure from distressed properties will plague the market for a couple more years. The Atlanta real estate market is bouncing along the bottom, at best, and is at risk for another decline if the economy slips back into recession next year.
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The overall trend in office vacancy has been down since the depths of the recession. However, the last few months have seen a slowdown in the rate of absorption. With the consensus outlook for the economy being cruising along at "stall speed" the outlook is for continued, although slow, improvement. Reis doesn't expect the office vacancy rate to dip below 15% until 2014, a recovery that is half the speed of the last recovery.
The Atlanta Business Chronicle recently reported that there are two large office properties in distress. The owners of Colony Square in Midtown are close to defaulting on two loans on that property. Already in foreclosure is 245 Perimeter Center, whose owners tried and failed to restructure the debt on that property.
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The foreclosure backlog continues to build up and delinquent borrowers are able to spend more time in their homes before the lender repossesses the home. Today, when a borrower defaults, they continue to live in the home, without payment, for one year and nine months. This length of time between default and repossession is more than twice as long as it was three years ago.
The number of defaults in the pipeline has been huge, and lenders have had to pick and choose which ones to deal with. In August there were 4 million homes 90 days late on payment or in foreclosure. Many of the delinquent borrowers are delinquent for the second time. They caught up on their payments once, but now they aren't paying again. Until these foreclosures are pushed through the system and exposed to the market their numbers will continue to weigh on expectations and values.
This summer, as Europe reared its ugly head yet again, and the U.S. economy showed signs of impending recession, investors pulled back from Commercial Mortgage Backed Securities (CMBS). Recently Standard and Poor's decided against rating one of these commercial real estate-backed bond deals. Even the "safest" and senior of the tranches of debt are now expected to provide buyers with more protection than what was demanded earlier this year.
Just as only the best properties in the best locations have been fetching high sale prices while the rest of the market remains soft, the senior level CMBS debt is selling quickly, but there is little demand for the more risky securities. The recovery of the CMBS market has helped to support commercial real estate values recently. Given the ultra low interest rate environment, the returns on commercial real estate have looked relatively good, and CMBS added needed liquidity.
Although the U.S. economy isn't expected to double dip, sluggish growth will continue to weigh on business growth and the commercial real estate recovery. The "smart money" is still avoiding all but the best of assets, and even the best are paying up to borrow money now. For now Class B and Class C assets will continue their bottoming process.