Welcome to August, can we slow the pace of summer down!
Here are the stories you need to know about as the month begins:
Rental Slowdown Hits Apartment Sector
Apartment supply is starting to outpace demand, especially in big cities.
The 42-year high in the number of apartment buildings under construction is expected to result in a decrease in rents, which in June capped their biggest 12-month jump in almost a decade.
“Apartment investments have had it too good for a long time,” says Ken Riggs, President of Situs RERC. “Not surprisingly, historically high rents have triggered a wave of new developments in the market, leading to more of an imbalance in certain markets.”
The boom in Apartment construction in New York and San Francisco has resulted in Equity Residential, the largest publicly traded U.S. apartment owner to cut its revenue forecast.
The REIT expects revenue growth to decrease to between 3.5% to 4% in 2016, according to the company’s second-quarter earnings statement.
“Low interest rates and a surge in job growth means that home affordability can and does put downward pressure on the demand for rental properties,” says Situs’ Riggs. “The success of the apartment sector on an investment and rental levels have peaked for now, and rental growth will continue to face supply-side pressures for near future.”
The most recent report from real estate consultants Miller Samuel has the median rental price in Manhattan down a whopping 2.8% since this time last year, with an even bigger 5.2% drop in Queens. San Fransisco also reports a drop although less substantial.
Whether this is short lived or long term, time will tell.
Office, Apartment, Retail Markets Soar in July According To Ten-X
The Ten-X Commercial Real Estate (CRE) Nowcast shows commercial valuations increased by 1.1 percent in July, marking the strongest monthly increase this year and a 5.2 percent year-over-year gain.
“This recent string of monthly increases confirms that overall pricing of commercial real estate remains on the upswing following the weakness seen earlier this year,” said Ten-X Chief Economist Peter Muoio. “That said, we are noticing distinct differences across the five major property sectors, with each telling its own story.”
The office, apartment and retail sectors all saw monthly increases in July, with the Ten-X Office CRE Nowcast posting the strongest gain for the second consecutive month, rising 4.8 percent from June and 7.6 percent above its year-ago level, the best year-over-year gain noted for any of the commercial sectors since January. Strong pricing of Office deals transacted on the Ten-X platform contributed to this gain.
The Ten-X Apartment CRE Nowcast, which has posted the most consistent gains this year, increased 1.1 percent in July from the previous month and 6.8 percent above last year’s level.
“The Apartment sector is unencumbered by technology driven shifts that have impaired demand for many other property segments and has long-term demand potential represented by a myriad of social changes that are currently favoring renting,” noted Muoio. “We will be watching closely to see if the sector’s consistent growth continues, but our survey results show a very positive outlook towards the segment among investors.”
Italian Bank Fails Stress Test
All but one of the major European banks have come through the latest round of stress tests with capital to spare, although the results of the health-check suggested that RBS’s balance sheet would be rattled by a wide-ranging economic shock.
The European Banking Authority has put the balance sheets of 51 banks through their paces, examining how they would react under hypothetical strains in the hope of minimizing the chances of another systemic financial crisis.
Overall, only Monte dei Paschi di Siena, the beleaguered Italian bank that is already in rescue talks, had its capital buffers wiped out within three years by the crisis scenario.
RBS, which was bailed out by the UK Government in 2008, would suffer one of the biggest shocks under the EBA’s stressed circumstances, although with its common equity tier 1 ratio deteriorating from 15.5pc to 8.1pc, it would likely weather the hypothetical storm.
Britain May Cut Rates on Thursday
The Bank of England may be forced to cut a key interest rate this summer as it grapples with economic uncertainty created by Britain’s vote to leave the European Union, Mark Carney, the bank’s governor, said in a speech on Thursday.
The referendum result last week has led to sharp declines in the value of the pound against the dollar and has shaken the British political establishment. Separately, Standard & Poor’s lowered its rating on long-term European Union debt to AA, from AA+, citing the uncertainty after the British referendum results.
The process to leave the European Union is expected to take years of negotiations and, in the short term, could put further pressure on the British economy,
Dems See Little Hope for Housing Finance Reform
Democrats appear to have given up on housing finance reform.
Despite efforts by President Obama to wind down Fannie Mae and Freddie Mac since their government seizure nearly eight years ago, policymakers attending the Democratic National Convention here believe their current arrangement as wards of the state is tenable for now.
“Fannie and Freddie will remain government agencies,” said Rep. Brad Sherman, D-Calif. “They will continue to have underwriting standards that assure that they are actuarially sound and actuarially providing a profit to federal government.”
By Buying Yahoo, Verizon Scoops Up a Rare Prize: Silicon Valley Real Estate
With its $4.8-billion acquisition of Yahoo, Verizon has snatched up an Internet pioneer with a massive audience.
But it has also secured something equally coveted in Silicon Valley: real estate.
When the deal closes, the New York telecom giant will become one of the largest office landlords in the nation’s technology hub thanks to the roughly 1 million-square-foot campus Yahoo owns in Sunnyvale, Calif. — a desirable position amid the current tech boom.
“We have seen a big upswing in rents,” said Jennifer Vaux, a Silicon Valley researcher for brokerage Colliers International.
Indeed, the office market has been on a multiyear upswing as tech giants and start-ups have expanded.
CRE Exposure Looms Large Over Bank M&A
Concerns over commercial real estate exposure factored heavily in efforts by Suffolk Bancorp in Melville, N.Y., to sell itself.
Suffolk, which feared that heightened regulatory oversight of commercial real estate would significantly stymie growth, sought out a buyer that did not have a heavy concentration in CRE loans. In fact, Suffolk ruled out three potential suitors because each had high levels of CRE on their books, according to a recent regulatory filing tied to the $2.3 billion-asset company’s pending sale to People’s United Financial in Bridgeport, Conn.
People’s United agreed in June to buy Suffolk for $402 million, or $33.55 a share. The $39 billion-asset People’s United had the size and loan diversity to do the deal; the company said when it announced the acquisition that its CRE levels will only increase from 276% of capital to 283% when the deal closes.
The disclosures highlight the challenges that banks with heavy CRE exposure face — as buyers or sellers — should they show an interest in mergers. While such deals are possible, Suffolk clearly had doubts as to whether regulators would sign off on such combinations.
Suffolk, meanwhile, had kept an open mind about mergers for years, holding informal talks with People’s United and other institutions over time, the filing said. Suffolk, under the leadership of CEO Howard Bluver, completed a major turnaround after the financial crisis, emerging from a regulatory order in 2013.
Insurance Companies Have Joined the Ranks of Shadow Banks
When all else fails, lend.
That’s the strategy of some of the biggest U.S. insurers as they seek higher returns in an investment universe where buying bonds sometimes means guaranteed losses.
The largest U.S. banks are constrained by post-2008 rules that make it tougher for them to extend loans. So companies such as MetLife Inc. and American International Group Inc. are grasping more market share. While many insurers have been in the commercial real-estate market for decades, the industry is branching out into home mortgages, small-business lending, car loans, renewable-energy financing and student debt.
“There’s no question that insurance companies are looking to diversify into new areas and innovate as much as possible,” said Adam Hamm, North Dakota’s insurance commissioner who serves on the U.S. Financial Stability Oversight Council.
Land Scarce for Luxury Homes
The demand for land is driving up prices—especially for prime lots in affluent neighborhoods.
Median list prices for land in the country’s top luxury markets were up 8.7% in the first half of the year compared with the same period last year, according to listings website Realtor.com. The South saw the steepest increases, with median asking prices up 13.33% from last year.
In the U.S. overall, the median list price for a lot in a high-end neighborhood was $635,000, according to Realtor.com. Beverly Hills, Calif., Southampton, N.Y., and downtown neighborhoods in Miami, and Chicago saw the greatest jump in median land prices in luxury markets, according to Realtor.com. ( News Corp, which owns The Wall Street Journal, also owns Realtor.com, the listing website of the National Association of Realtors.)
Driving up prices is a shortage of vacant, developed lots in prime areas, according to a survey by the National Association of Home Builders, a trade group. Released in May, the survey found that 69% of the 333 home builders surveyed said “A” lots—the most desirable parcels because of their location—were in low or very low supply.
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