According to CoStar the level of distressed commercial real estate loans appears to be reaching a peak. To date, the recession has only had an adverse impact on approximately 10% of all commercial real estate debt. The amount of distress still totals into the hundreds of billions of dollars. More normal levels of commercial loan origination should return in 2012, even as the level of distressed debt continues to stay high.
Banks are already setting aside fewer dollars for losses and that should free up capital for new loans. Only 7.4% of banks hold 80% of all the distressed commercial debt. The 10 largest banks in the country hold 29%. On the short list of five banks that have distressed real estate assets making up more than 30% of total assets three are in Georgia. They are First Choice Community Bank, Dallas, GA, High Trust Bank, Stockbridge, GA and Security Exchange Bank, Marietta, GA.
New home sales fell in May, offering further evidence that the real estate market is sputtering into its traditionally busiest time of year. The unemployment rate will continue to remain higher than usual until the real estate market is cleared of distressed properties and can be kicked into a more normal state. It was recently reported that the "shadow inventory" of distressed properties has recently fallen to a five month supply.
Most U.S. adults don't think there will be a real estate recovery until 2014. Although most real estate "experts" think that we have reached and are bouncing along the bottom of the cycle, value appreciation may be several years away. We are in a chicken or egg scenario where people say that the real estate market will improve when the unemployment rate drops, when so many of the jobs that were lost are related to the real estate market. Its going to be a while.
FNMA's recent forecast reviews much of what has been happening in the market for the past few months. They report that housing starts remain at depressed levels due to competition from foreclosures, and the spring housing market has remained lackluster and shows little momentum heading into summer. They report that construction spending increased in April, but only because volatile home improvement costs pushed it up. Stripping those costs out of the data shows that construction spending actually dipped below the first quarter's average, "dashing the hope for a weather-related rebound in residential investment in the second quarter."
Mortgage purchase applications fell in May and continued to fall in early June. Pending home sales plummeted 12 percent in April. They predict that continued declining home prices will decrease household net worth and hurt consumer confidence and spending. FNMA now doesn't expect the Fed to raise interest rates until the second half of 2012.
If you have any faith in the ability of this country and its people to right the course of this ship, then sometime in the next year is a great time to buy residential real estate. I believe that some day we will look back on this time and say "that was the opportunity of our lifetimes." Just like the spring of 2009 was the time to invest in the stock market, in hindsight 2011 will probably be seen as the time to invest in housing.
Hotel fundamentals have gotten up off of the floor although the economics are somewhat spotty. The state of the U.S. economy has some market participants remaining cautious, but most believe that the economy will continue to strengthen in the second half of the year. Supply and demand fundamentals are good in many markets and revenue per available room is expected to increase 8% according to Smith Travel Research, and should continue to grow at the same rate in 2012.
Capitalization rates, or the return to the investor based on the purchase price and net operating income, have fallen through 2010. This is primarily due to the fact that the sold properties are mostly "trophy" assets in major metropolitan areas. If sales activity picks up in the rest of the market, capitalization rates could rise even as property economics are improving. The capitalization rate is the ratio of income to value, and if income is rising faster than values, capitalization rates rise.
In addition, expectations of higher inflation and interest rates will also put upward pressure on capitalization rates as the risk free rate of return (U.S. Treasuries) rises. It has been surprising how quickly capitalization rates have dropped since the end of the "great recession." They have dropped too far and too fast as some publications that don't differentiate between the "trophy" market and everything else paint a rosy picture. I would like to see more sales of all types of income producing properties from various sub-markets so we can get a "real" indication of where capitalization rates are.
Bifurcation, or the splitting of a main body into two parts, is the commercial real estate buzzword this year. It refers to the fact that there are two markets for each property type. The trophy, or well-located class A properties....and everything else. It seems that yield hungry investors are finding value in commercial real estate, but they aren't ready to take a flyer on anything but the best properties.
Much of the interest in these trophy properties is being fed by the low interest rate environment, and the lender's willingness to lend. The transactions continue to be concentrated in the central business districts of major cities, and suburban properties continue to languish. There is little interest in suburban properties given their high vacancy rates and weak rents.
As was recently reported in the Wall Street Journal, owners of big-name office buildings are rushing to put them up for sale while prices are surging. A general partner in a Washington D.C. building said "Who knows what the market will be like in a year or so?" That is telling. When the "smart money" in commercial real estate wants to get out while the getting is good, and has no idea if the good times will continue to roll, it is time for caution.
The office building sales volume is still well below the peak in 2007. Some predict that the 2010 sale volume will remain less than 50% of the peak volume. The recent run-up in prices has some scaling back on acquisition plans. However, some owners remain optimistic enough to sell partial ownership interests to cash in on the surge, while holding onto partial ownership in the hope that values will keep on surging.
It appears that the deadline to appeal Fulton County assessments has been extended for many of you. Due to the errors on the original notices regarding the tax estimate and the resulting uproar that it caused, new notices were recently sent out. I have one in my possession dated 6/11/2011 with a (revised) appeal deadline of 7/26/2011. The value didn't change, only the dates and the tax estimate did.
On the housing front it was recently reported that the average homeowner now has 38% equity, down from 61% ten years ago. 23% of homeowners are under water, or they owe the bank more than the house is worth. Mortgage rates are as low as ever but no one seems to be interested in buying.
Home prices are projected by many to continue falling. Robert Shiller, creator of the Case-Shiller home price index, recently said he wouldn't be surprised if home prices fell another 10-25%. There continues to be a backlog of foreclosures due to the regulatory review of how the banks have been handling the foreclosure process. Until all of these foreclosures are allowed onto the market and get bought up - at whatever price - we cannot begin to recover.
As reported in the AJC DeKalb County cut property values in some upscale neighborhoods based on distressed sales and the loss of six appraisers to a higher pay scale in Fulton County. Huh? Values in Candler Park were slashed because some appraisers left? Sounds like a managerial problem to me. In other neighborhoods some property values plunged and some dropped by a reasonable amount. Sounds like those six appraisers left a present for the management.
As I have said the value of my little slice of DeKalb County only fell 2% according to the County. In a subdivision not far from my house a friend's value dropped over 20%. She said she has been on DeKalb's website trying to figure out what happened, but values in her subdivision are all over the board. Overall DeKalb's tax digest fell 13%, while Gwinnett's fell 9% and Fulton's fell approximately 8%.
The deadlines to appeal in Gwinnett and Cobb Counties has passed but there is still time to appeal your property tax assessment in Fulton and DeKalb Counties. After the DeKalb County Commissioners said over and over that they would not raise the tax rate they are now considering a 4.5 mill increase. Don't get caught paying more tax on an unchanged or little-changed assessment.
Atlanta made a short list of four cities where home values are now below year 2000 values. The others on the list are Detroit, Cleveland and Las Vegas. Atlanta values are 1.6% below the year 2000 index value and down 27.9% since the housing peak. Nationwide housing prices fell 4.2% in the first quarter of 2011 after declining 3.6% in the fourth quarter of 2010. This is not good news for the economy as typically housing and consumer spending lead economic recoveries.
Separately, a business research group said that its confidence index fell to 60.8 last month down from 66 in April as Americans grew more pessimistic about the economy. Economists say it could take years for housing to recover, and for that to happen we need faster economic growth, lower unemployment and higher consumer confidence. It doesn't help that economists are scaling back their economic growth estimates for second quarter.
Twelve of the twenty metropolitan areas tracked in the Case-Shiller home price index showed new lows in March. With home equity sinking there is little demand for new or trade up homebuyers. Although home values stabilized last year while we had a new homebuyer tax credit that was very short-lived. Although many people, including myself, have called this a double dip in housing prices, the simple fact is we have never really started to recover.
I received my DeKalb County assessment notice over the Memorial Day weekend. The county's market value estimate on my house has been 4.6% higher than the 2003 sale price for the past several years. My new value is now 1.9% lower than last year but is 2.6% higher than the 2003 sale. This is interesting given that the Case-Shiller home price index is indicating that values in the Atlanta Metro area are now below year 2000 levels.
The County annual notice of assessment is dated May 27 with a last day to file appeal of July 11. Everyone who has had little movement in their assessed value for the last several years should consider appealing. The county probably hasn't moved much because they think they have a lack of sales data to change values in your neighborhood. But they should be looking in other competing neighborhoods for indications of value.
In my experience it is harder to work with the county's residential appraisers than the commercial appraisers. The residential appraisers are married to their values or they take changes to their values much more personally than commercial appraisers. You need to go into a formal hearing on a house value with all the ammunition you can muster.