The pandemic has hit commercial properties hard – especially restaurants, retailers and hotels, which are having a hard time making mortgage payments because of reduced business. As a result, the industry is facing a “wave of foreclosures” over the next several quarters, according to securities data company Trepp, which warned that “borrowers may be strategically defaulting on their loans.” Borrowers with loans coming due in 2021 or before have stopped making payments at a rate six times greater than those whose loans are due later, according to Trepp (a 1.66 percent delinquency rate compared to 0.27 percent, respectively). That suggests such borrowers, believing they will not be able to find financing to keep their buildings when their current loan expires, are cutting their losses by defaulting sooner, rather than later. Stopping payments can also put pressure on a lender to negotiate with the borrower, said Matt Anderson, managing director at Trepp. While data suggest owners of smaller properties are more directly impacted by the recession — loans with balances of less than $1 million have a delinquency rate twice that of the overall portfolio — larger property owners appear to be most aggressively cutting their losses. The term of a commercial real estate loan generally comes due before it is fully paid off. When the loan expires, or becomes mature, borrowers generally take out a new loan to pay off the first – a practice that allows both sides the flexibility to reset the terms to better reflect market conditions and the borrower’s financial state. Click to read more at www.lmtonline.com.
COLLEGE STATION (Real Estate Center) – Second quarter numbers released today by the Real Estate Center at Texas A&M University show a Texas land market hit hard by plummeting oil prices and the pandemic. Research Economist Dr. Charles Gilliland issued the state’s land report card:
Price: + 1.7%
Sales volume: – 8.7%
Average acreage sold: – 9.1%
Total acres sold: – 23.5%
Total dollar volume: – 22.2%
“The average $2,929-per-acre sales price inched up 1.7 percent, well short of the 6.5 percent increase in the first quarter and falling short of that quarter’s $2,986-per-acre price,” Gilliland said. “Closed land sales dropped 8.7 percent, more than double the decline posted in the first quarter.” Typical transaction size fell 9.1 percent to 1,217 acres. Gilliland said this points to an increase in the sales of smaller properties. The drop in activity resulted in a 23.5 percent decline in the number of acres sold compared with a first-quarter dip of 4.3 percent. That decline caused the total dollar volume to fall 22.2 percent to $1.1 billion, down from a first-quarter increase of 6.1 percent. “Overall, Texas land market results are encouraging considering the negative forces impacting the state and world economies,” said Gilliland, who has tracked Texas land markets for decades. “Regional results varied.” Panhandle-South Plains’ prices retreated, and Far West Texas had a profound drop in activity along with lower prices. West Texas and Northeast Texas markets had increasing prices but contracting numbers of transactions and total acres sold. Click to read more at www.recenter.tamu.edu.
OVID-19 drastically affected the financial landscape worldwide. The effects have rippled through every industry, including commercial real estate (CRE). Long-struggling malls and retail stores have taken an especially devastating blow. Between social distancing and consumers cutting discretionary spending, malls simply can’t catch a break. Without loan restructuring and innovative solutions to keep retail stores afloat, malls could become a thing of the past. To predict the future of malls and commercial real estate, it’s important to examine how we got here. Ecommerce: The Original Retail CRE Challenge: In February, the COVID-19 pandemic was mere weeks away from taking hold in the U.S. At the time, retail management company Vend boiled the Ecommerce vs. retail race down to purchase type. “Consumers are making more convenience purchases online,” Francesca Nicasio wrote, “but they’re still making their luxury and experiential purchases in person.” Indeed, retail CRE investors had been closely tracking the growing popularity of Ecommerce. Online sales were predicted to grow from $1.3 trillion in 2014 to $4.5 trillion in 2021, and that was before the pandemic. In response, some CRE investors moved away from retail. Hedge funds found CRE bundles with a high proportion of mall loans and bet against them. Then came the pandemic. Click to read more at www.pioneerrealtycapital.com.
By Christopher H. Volk | Spring 2020
As much as commercial real estate is a game of numbers, data, and analysis, the human component plays a huge role in what deals are made and how they get done. Examine your decision-making process — can you comfortably say you’re free of unknown cognitive biases? Probably not. In that case, what biases — psychological, emotional, and/or cultural, for instance — influence your choice to go this way instead of that? To begin this discussion, let’s take a simple hypothetical: You have an opportunity to invest in either a store operated by an Ashley Furniture licensee or a nearby Home Depot. If all significant variables are eliminated, which do you choose? When I ask graduate business students, they generally opt for the Home Depot. Those who don’t are reluctant, still preferring the Home Depot but assuming some subterfuge on my part. After all, Home Depot has exceptional brand awareness, a high investment-grade A credit rating, and is the nation’s largest home improvement chain, with approximately 2,200 locations. In contrast, Ashley Furniture has about 800 locations, most of which are operated by individual licensees. Simply put, Home Depot as a tenant seems to make the real estate more desirable. Click to read more at www.ccim.com.
When the commercial real estate market is in turmoil, valuations are needed. And when the market is stable, valuations are needed. Either way, a professional valuation is not guided by a magic crystal ball—the process is both art and science. North Texas had been humming along thanks to an 11-year long bull run. The region was leading the country in job growth. The prospects for relocating companies to the area from out of state fueled a seemingly ever-robust office market. Businesses saw record profits and income close to historical highs at the end of 2019. Meanwhile, the DFW real estate market paced the country in multifamily and industrial construction. That all came to an abrupt stop with COVID-19. Many of us have dealt with natural disasters, such as tornadoes, hurricanes, floods, wildfires, earthquakes, and drought. Human-caused disasters include riots, mass violence, terrorism, shootings, and industrial accidents. COVID-19 is like nothing we have ever seen; it seems to have touched nearly every aspect of our lives. Click to read more at www.dmagazine.com.
The real estate sector includes companies that own, develop, and manage residential, commercial, and industrial properties. Each of these three real estate segments includes publicly traded real estate investment trusts (REITs). REITs are vehicles that legally allow individual investors to buy shares in real estate portfolios that receive income from a variety of properties. REITs’ key metric is funds from operations (FFO), a measure of earnings particular to the industry. Some big names within the sector include American Tower Corp. (AMT), Prologis Inc. (PLD), and Digital Realty Trust Inc. (DLR). Real estate stocks, as represented by the Real Estate Select Sector SPDR ETF (XLRE), have underperformed the broader market with a total return of -5.8% compared to the S&P 500’s total return of 8.7% over the past 12 months.1 These market performance numbers and the statistics in the tables below are as of May 26. Here are the top 3 real estate stocks with the best value, the fastest earnings growth, and the most momentum. Best Value Real Estate Stocks: These are the real estate stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated. Click to read more at www.investopedia.com.