Keep up to date with the news about valuation trends..... 

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Banks Prepared for Wave of Loan Defaults

The largest U.S. banks signaled that the worst of the coronavirus recession is yet to come, opting to stow away tens of billions of dollars to prepare for an expected wave of loan losses. JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. said Tuesday they took large hits to their second-quarter profits to collectively stockpile $28 billion to cover losses as consumers and businesses start to default on their loans. The provisions amount to a sharp increase above what they put away in the first three months of the year, reflecting a shift in their assumptions about the length and severity of the pandemic's economic toll. JPMorgan, the largest U.S. bank by assets, said it put aside extra to prepare for an unemployment rate that remains at double digits well into next year and a slower recovery in gross domestic product than the bank's economists assumed three months ago. "This is not a normal recession," said James Dimon, JPMorgan's chief executive. "The recessionary part of this you're going to see down the road." July 15, 2020
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Real estate CEO expects ‘exodus’ of central business districts to last the next two years

The coronavirus pandemic is pushing businesses and dwellers out of city centers and downtowns into the outskirts in the short term, but demand can be expected to return to big cities, according to the head of the largest commercial real estate broker in the country. Hessam Nadji, president and CEO of Marcus & Millichap, on Tuesday told CNBC that it will be a test for suburban areas to accommodate exponential demand. Suburban areas outside of major cities are in high demand, as people migrate from dense urban areas in response to the Covid-19 outbreak. “I think the next 18 to 24 months are going to show a lot of exodus out of central business districts, as you can expect,” Nadji said in an interview on “The Exchange.” “We’re seeing there’s a lot of office vacancy, for example, in the suburbs that have now been absorbed; there’s a lot of demand for rental homes that we’re seeing because people are fleeing especially hot spots like New York, but ... you just have to keep a long-term view on it.” July 7, 2020
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Q2 Economic Sentiment: Commercial Real Estate Execs Confirm COVID-19 Market Downturn

Commercial real estate executives confirmed a downturn in Q2 market conditions due to job losses and business shutdowns related to COVID-19, according to The Real Estate Roundtable’s 2020 Q2 Economic Sentiment Index released today. The report also shows there is an expectation for an improvement in market conditions by next year, dependent upon the return of jobs and the ability to safely reopen businesses. “The commercial real estate industry, like all industries, experienced in the second quarter a sudden onset of economic disruption due to business lockdowns and stay-at-home shutdown orders put in place to combat the pandemic,” said Real Estate Roundtable President and CEO Jeffrey DeBoer. “The economic damage to commercial real estate has been particularly harmful for the retail and lodging sectors of the industry. Although our Q2 survey results show there is hope for improved conditions within the next year, there are significant concerns that other sectors of the industry could be dragged down if jobs don’t rebound and government assistance tapers off. June 30, 2020
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Warehouses Offer Crowded Shelter in Retail Storm

Warehouses are proving to be a safe haven in a commercial real-estate market battered by the coronavirus. While retail and mall landlords are facing a reckoning as stores go out of business, owners of sites focused on distribution are on a steady path thanks to the broad changes that are sweeping the consumer sales world the WSJ’s Carol Ryan writes. Spending has moved online during widespread lockdowns aimed at containing the virus, and many experts say some of that shift will be permanent. UBS expects one-quarter of all U.S. retail spending to be online by 2025, a trend expected to force 100,000 physical stores to close by the middle of the decade and punish owners of retail properties. U.K. department-store landlord Intu just filed for the local equivalent of bankruptcy. Meanwhile, warehousing giant Prologis says it collected 95% of rent due globally in May. June 30, 2020
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US Property Price Growth Decelearates in June

Commercial property price growth slowed in June across all U.S. property types, dragged down by the continued impact of the health and economic crisis. The US National All-Property Index was flat in June from May and gained just 3.6% year-over-year, the latest RCA CPPI summary report shows. Retail prices fared the worst of the sectors, dipping 0.3% from May and down 0.7% over the past year. This is the first annual decline in prices seen for the beleaguered sector since 2011. Retail sector distress ballooned in the second quarter of 2020, which will likely speed price discovery for this asset class. The office sector gained just 2.3% year-over-year and was flat on the month. CBD office was hit especially hard, with prices falling 0.8% from the first quarter and increasing just 0.8% from a year ago. Apartment price growth wound down to 7.1% year-over-year. Industrial prices eased to a 7.6% year-over-year increase. Activity in the U.S. commercial real estate market plunged 68% in the second quarter of the year, as shown in the new edition of US Capital Trends, also released this week. Industrial sector sales volume was half that of a year earlier, and the other major property types fared worse." July 23, 2020
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Top Federal Reserve Officials Are Starting To Brace For A Prolonged Recession

Policymakers at the Federal Reserve, after some initial optimism that the Covid-19 slump would be deep but confined to the second quarter of this year, now seem braced for a more prolonged recession marked by high unemployment and a rising risk of corporate bankruptcies. Top officials have launched what appears to be a coordinated shift in tune in public remarks over the last couple weeks, particularly as the prospect of a worsening second wave of infections that could deal yet another blow to an already fragile economy becomes reality. July 21, 2020
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6% Economic Contraction then Recovery starting in the 3rd Quarter

16 chief economists from some of the largest U.S. Banks say that the U.S. economy will experience about a 6% contraction this year, but will begin to recover from a severe second-quarter downturn in the third quarter, according to the latest forecast of the American Bankers Association’s Economic Advisory Committee. May 29, 2020
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Fed signals interest rates near 0% through 2022

Despite last week’s blockbuster jobs report, the Federal Reserve is showing no letup as it continues to respond aggressively to economic damage from the coronavirus pandemic that could linger for years. The Fed on Wednesday held its key interest rate near zero and signaled it likely won’t lift it until at least 2022, noting the outbreak “will weigh heavily on economic activity” and “poses considerable risks to the economic outlook.” “We’re not even thinking about raising rates,” Fed Chair Jerome Powell said in a virtual news conference. “We’re not even thinking about thinking about raising rates." June 10, 2020
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Buyer/Owner Price Disconnect Widening

Do not be fooled into thinking that U.S. commercial property prices have already fallen at high double-digit rates. Until market participants can comfortably start visiting properties, clients, and other service providers – and we enter the price discovery phase of the downturn – prices cannot move. However, the spread between buyer and owner expectations on pricing has widened sharply. June 11, 2020
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Commercial Rental Defaults Up in April

As businesses begin to re-open across the U.S., commercial property owners are coping with rent-collection woes triggered by the COVID-19 pandemic and protest-related property damage, which was reported in at least 25 cities. The retail and hospitality sectors have been especially hard-hit. Owners of 30,000 strip malls in the U.S. received just 30 to 50 percent of April rent, according to Green Street Advisors. June 10, 2020
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Global Trend is bouncing back? Maybe

Despite the slowdown in real estate markets accelerating across most of the world into the second quarter of the year, acquisition trends in two key global cities, both in China, have turned positive. Global volumes started to wane around March this year, but the weakness in Asia Pacific had already been apparent for some time, as all of the region’s top 10 metros suffered double-digit declines in the first quarter. In contrast, more than half of the key metros in Europe and the U.S. recorded an increase in transaction activity, as economic shutdowns and travel restrictions were implemented later in the quarter. June 10, 2020
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Home Prices/Rents directly linked to jobs

The U.S. economy added 2.5 million jobs in May and the unemployment rate declined to 13.3% from the prior report’s 14.7%, according to the Bureau of Labor Statistics. With jobs on the upswing, Mike Swell, co-head of global fixed income portfolio management at Goldman Sachs Asset Management, says a housing crisis is unlikely. According to Swell, the residential housing market will be 100% correlated to the jobs market and adds that he expects the commercial real estate market to stabilize. In this Video Spotlight, Swell speaks with Bloomberg's Tom Keene, Lisa Abramowicz and Jonathan Ferro on the job market's relationship with the housing market. June 8, 2020
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CBRE Expert Roundtable Flash Call

The COVID-19 situation around the world is fluid and evolving. As difficult as this period is, uncertainty will bring about unprecedented change and an opportunity to influence the future—and likely some transformational innovation, too. Preparing to reopen workplaces will require careful consideration and tailored plans. As we begin to execute a thoughtful and phased reopening approach, human behavior, along with digital and building technologies, will play a vital role in mitigating risk. To explore this topic further, CBRE hosted a roundtable discussing key issues related to a safe and healthy return to work. Subject matter experts shared insights on the global economy, prudent reopening practices, the role of smart buildings and technology, COVID-19 track-and-trace strategies, and more. May 19, 2020
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Shrinking Buyer Pool May Accelerate Price Floor Discovery

The drivers of the current downturn in the economy and commercial property markets are distinct from those which led to the Global Financial Crisis (GFC). This Covid-19 downturn came on suddenly, while warning bells were ringing a number of years ahead of the collapse of the housing market in the last recession. The variation in drivers could lead to a faster race to the bottom for market prices this cycle. May 27, 2020
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Is the housing price-rent ratio a leading indicator?

Economic forecasters are always on the lookout for variables that can help predict upcoming recessions. One such variable that has gotten some recent attention is the housing price-rent ratio. As this ratio becomes higher, the rental option becomes more attractive. If it rises high enough, some households might switch from owning their homes to renting them; then the demand for owner-occupied housing would fall. The result is a contraction in the housing market that can have adverse effects on the entire economy. This narrative seems to match well with the behavior of the housing price-rent ratio leading up to the Great Recession. So if the housing price-rent ratio is on the rise again, does that mean it’s cause for concern? Let’s try to evaluate whether the housing price-rent ratio is a reliable leading indicator by graphing it, with data going back to 1975.
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Commercial Sales Activity off 71%

The headline rate of annual U.S. commercial property price gains came in at 6.5% in April, little changed from the growth rate seen in 2020 so far, the latest RCA CPPI summary report shows. The US National All-Property Index gained 0.5% from March. While transaction prices have not yet been pounded by the Covid-19 upheaval, acquisition volume has. April sales activity across all property types sank 71% from a year earlier, on the heels of a 17% year-over-year decline in March, as reported in the latest edition of US Capital Trends, also released this week. May 21, 2020
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Multifamily Sector Sees Reduced Construction: Report

Around 300,000 multifamily units were expected to open this year, but projections now show the number is closer to 250,000 due to the effects of the coronavirus pandemic, according to commercial real estate firm Marcus & Millichap, Multi-Housing News reported May 12, 2020. The multifamily outlook for the next couple years is mixed and largely dependent on lender confidence.
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US Hotel Market Frozen

In the month of April fewer than 10 hotel properties changed hands across the entire U.S. We have never seen this level of illiquidity in the hotel market. It is effectively a frozen marketplace. Hotel sector investment activity was already spinning downward even before the economic crisis wrought by Covid-19. A construction glut in key markets and challenges from upstarts such as Airbnb had put the sector under pressure. May 20 2020
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Small Business Pulse Survey: Tracking Changes During the COVID-19 Pandemic

The experimental Small Business Pulse Survey (Business Pulse) measures the changes in business conditions on our nation’s small businesses during the coronavirus (COVID-19) pandemic. May 14, 2020.
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The Good and Bad of Retail Sales

Abundance of demand for high-quality assets with investment grade credit tenants that are open and paying rent. - Financing is readily available. - Capitalization rates for high-quality assets are unchanged from pre-COVID-19 20%-50% of retail tenants paid rent in April. - 30% of small business paid no rent or mortgage payments while 20% made a partial payment. - On average, market rents have probably declined to levels seen 1 to 2 years ago. - 10% to 40% or restaurants are projected to not reopen. See this 120 minutes presentation from experts examining the impact of the coronavirus on commercial property. April 20, 2020.
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NAIOP CRE Sentiment Index at New Low; Occupancy, Cap Rates Among Low Scores

The Commercial Real Estate Development Association's CRE Sentiment Index fell to 45 in March — its lowest score since NAIOP launched its bi-annual index in 2016; a score below 50 indicates that unfavorable CRE conditions are expected for 12 months. The scores for occupancy rates and first-year cap rates were among the lowest. May 14, 2020
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Office Sector Expected to Recover; Newer 'Green' Buildings to Grow in Demand:

CBRE The office sector is expected to recover from the coronavirus pandemic, but it likely will be changed as companies may seek more space, not less, to accommodate social distancing, and choose newer buildings with green elements like improved indoor air quality over older buildings with outdated features, according to real estate firm CBRE, CNBC reported. May 14, 2020
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Recession vs. Depression

How would each affect housing and does it matter anyway? May 18, 2020.
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Annual Price Change of Global Metros Q1 2020

Commercial property prices pushed higher in the majority of leading global metros in the first quarter of 2020, the latest RCA CPPI Global Cities report shows, with the Covid-19 crisis not yet hitting sale prices. The headline rate of global price growth eased to 2.3% from a year ago and dipped 0.2% from the prior quarter, but most of the weakness came from declines already underway in Asia Pacific. Annual price growth for North American metros came in at 5.4% and for European metros the annual pace was 5.9%. The price index for Asia Pacific metros dropped 4.7% from a year ago, dragged down by Hong Kong’s slide.
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