I'm worried about the real estate market right now

[WJK]

Yup "Due for No Reason" clauses (which give lenders the ability to call a loan due when the collateral is insufficient to cover the loan balance) got popular after the 2008 melt-down, but I don't see too many loans with them these days. We do some large FNMA/FMAC commercial loans ($10M+), and haven't seen this clause in many years...

I wouldn't be surprised if some portfolio lenders were still using them, but they are pretty uncommon.

It all has to do with reserves. If the borrower's equity is less than 20%, then the bank must put up more money in their reserves due to the risk factor. I did a lot of those appraisals in the past to determine how much equity the borrower had in their property. It also comes up when portfolios of loans are sold. Those numbers can make or break the sale. Usually, the bank would ask the borrower to bring in the difference. The 1990s were a sea of bad loans and loan calls.

 

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[Deleted78083]

Can you help me pierce this real estate mystery?

Here's the tendency for rooms/studios in shared apartment/houses in Brussels at the moment:

- Many, many rooms are empty. The offer for rooms has never been so high.
- Prices have spiked like crazy since last year: what you could rent for 450 euros a month is now at 550, and what was at 500 is now at 650 euros. That's a spike of the order of 20-30%.

That doesn't make any sense...or does it?

Here are theories that would explain it.

Theory 1: the fixed cost theory

Faced with a decrease in the number of people that would rent the rooms, landlords had but no choice to increase the price of the rent of other tenants so that the current smaller number of tenants would pay as much as the normal number of tenants.

Theory 2: the "they don't have a choice" theory

Landlords know that whoever is coming to Brussels now doesn't have a choice as if they had, they wouldn't have come due to the crazy restrictions. As such, they assume new tenants will rent for a high price but if they came, it means they were forced to.

Theory 3: the "renting cheaper won't change anything" theory

Since people can't travel right now, landlords figured that it is useless to decrease the rent from 450 to 350 if no one is there to rent out the room anyway. That doesn't explain a spike in prices though.

Theory 4: the margin call theory

When they saw their revenue decreasing due to a halt of economic activity or people defaulting on their rent, landlords increased rent of paying tenants to compensate.

Theory 5: the inflation theory

I don't think electricity, water, gas, or taxes increased to such an extent it would justify such a spike in rent.

Any thought?

 

[WJK]

Can you help me pierce this real estate mystery?

Here's the tendency for rooms/studios in shared apartment/houses in Brussels at the moment:

- Many, many rooms are empty. The offer for rooms has never been so high.
- Prices have spiked like crazy since last year: what you could rent for 450 euros a month is now at 550, and what was at 500 is now at 650 euros. That's a spike of the order of 20-30%.

That doesn't make any sense...or does it?

Here are theories that would explain it.

Theory 1: the fixed cost theory

Faced with a decrease in the number of people that would rent the rooms, landlords had but no choice to increase the price of the rent of other tenants so that the current smaller number of tenants would pay as much as the normal number of tenants.

Theory 2: the "they don't have a choice" theory

Landlords know that whoever is coming to Brussels now doesn't have a choice as if they had, they wouldn't have come due to the crazy restrictions. As such, they assume new tenants will rent for a high price but if they came, it means they were forced to.

Theory 3: the "renting cheaper won't change anything" theory

Since people can't travel right now, landlords figured that it is useless to decrease the rent from 450 to 350 if no one is there to rent out the room anyway. That doesn't explain a spike in prices though.

Theory 4: the margin call theory

When they saw their revenue decreasing due to a halt of economic activity or people defaulting on their rent, landlords increased rent of paying tenants to compensate.

Theory 5: the inflation theory

I don't think electricity, water, gas, or taxes increased to such an extent it would justify such a spike in rent.

Any thought?

Real Estate prices and growth are governed by supply and demand. When prices get too high and the customers get too few, the market collapses and prices fall. It's a very elegantly simple system that runs in predictable cycles.

 

[Deleted78083]

Real Estate prices and growth are governed by supply and demand. When prices get too high and the customers get too few, the market collapses and prices fall. It's a very elegantly simple system that runs in predictable cycles.

So this market is on the verge of collapsing?

 

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[WJK]

So this market is on the verge of collapsing?

It sounds like it. I'm not there to have my finger on that market pulse.

Here in Alaska, we're not going to have a tourist season again. Canada is not allowing cruise ships in their ports -- and therefore, our Federal laws don't allow them to dock here since they all have foreign flags. A lot of the businesses that they support won't make it since this is the second season of no business. Is the market you're talking about dependent on tourists or visitors?

It also depends on the owners' debt loads. The more debt they must service, the less chance of them surviving a bunch of vacancies. They have less discretionary income to spread over their other expenses. The more vacancies, the higher their overhead since they must get any new vacancies ready to rent -- while they must pay their fixed costs as well as all the utility bills for the property. And then if they do sell out, they will get less for the building since their NOI (net operating income) is lower, which pushes up their capitalization rate. It's an owners' nightmare.

Think about this -- people are herd animals. When one of the leaders drops their asking rents, the rest will follow as quickly as they can get out their pens. Then it can become a free-for-all. It's a type of deflation factor that has an interesting backlash. When inflation is happening, people jump on buying today to avoid higher prices tomorrow. When deflation happens, people grasp their money tightly waiting for how low that the prices will go. So deflation becomes a self-fulfilling downward spiral.

 

[PeterBoss]

I don't dabble too much in commercial RE, not to say, at all.. but I am genuinely interested in what the outcome will be for a lot of commercial RE portfolios holding office spaces.
With a lot of the valuations done based on the annual rent/occupancies and not in the actual "market" value of the unit, I would guess that some portfolios that are heavily leveraged will probably bleed a lot.
So far, from what I heard from people that cater to the sector, they seem to be in the 'lets wait and see' camp, others seem to be in borderline denial. BTW talking about big cities specifically, I assume the picture is different in smaller cities/towns.

 

[Deleted78083]

Is the market you're talking about dependent on tourists or visitors?

Yes, there are airbnbs, but mainly, real estate in Brussels depends on students and foreign workers. And none of them are here.

70% of inhabitants weren't born in Belgium. With the pandemic, a bunch of workers is back in their home country.

As for students...a friend of mine didn't get accepted into a program in September, then the university called him back in February to say that eventually, he could be accepted...that's how desperate for students they are.

I don't know about the debt level, but seeing the prices so high in such an empty market is weird, it simply doesn't add up.

 

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[Guest-5ty5s4]

That's true for single-family homes and small units. I have seen banks make borrowers pay down commercial loans for commercial properties and multi-family units when the market values fell. It depends on what kind of loan you're talking about.

Yup, ours has lots of covenants that are nit-picky and dig into the business's finances/operations as well as the owners' personal financial situations.

The bank can "call the loan" at any time if these covenants are in violation, and while they were agreed to originally (they shouldn't have been), they are what I would consider...arbitrary and predatory. The bankers actually have modified and moved the goal posts to help us be in good standing over the years because they know how BS these are.

But we are trying to switch banks to renegotiate. Current bank knows this and have been again trying to win back favor, but during COVID they got really aggressive with us despite never missing or being late on a single payment in decades (as well as, you know, the global pandemic and huge economic downturn that took place from stopping all economic activity).

Yes, this is all big commercial stuff, nothing residential.

-------------------------------------------------

I'm probably WAY oversharing, but this is just to highlight the issues that business owners face - non business owners think it's all a walk in the park. Forget that! It's harrowing.

 

[WJK]

I don't dabble too much in commercial RE, not to say, at all.. but I am genuinely interested in what the outcome will be for a lot of commercial RE portfolios holding office spaces.
With a lot of the valuations done based on the annual rent/occupancies and not in the actual "market" value of the unit, I would guess that some portfolios that are heavily leveraged will probably bleed a lot.
So far, from what I heard from people that cater to the sector, they seem to be in the 'lets wait and see' camp, others seem to be in borderline denial. BTW talking about big cities specifically, I assume the picture is different in smaller cities/towns.

This is NOT appraisal advice. (I am a retired commercial appraiser but still licensed.) These are my personal opinions.

The commercial RE market is a mess right now. In major cities, they have a bunch of scary market factors. One of those factors in the office market is the effects of the failure of the We Work business and similar businesses. And that's on top of the Covid meltdown of people working from home. Retail is also hit VERY hard. Yes, people are waiting to see what is going to happen. Yes, some have their heads in the sand. And it's happening both in the cities and in smaller cities and towns. The last time this happened, was in the 1990s. And that when the whole Savings & Loan and the Thrift industries failed. Now those markets are financed by Wall Street and the secondary market. I don't know where this is all going to go this time.

 

[WJK]

Yes, there are airbnbs, but mainly, real estate in Brussels depends on students and foreign workers. And none of them are here.

70% of inhabitants weren't born in Belgium. With the pandemic, a bunch of workers is back in their home country.

As for students...a friend of mine didn't get accepted into a program in September, then the university called him back in February to say that eventually, he could be accepted...that's how desperate for students they are.

I don't know about the debt level, but seeing the prices so high in such an empty market is weird, it simply doesn't add up.

You must realize that a lot of the owners have never been here before. They have never seen this type of RE market so they freeze. They don't know what to do. And they were totally unprepared. I have a lot of people around me in that same boat.

Before this market, I tried to tell some of them what could happen. I was told that I was stupid and I didn't know how to make money in RE because I don't believe in using heavy leverage. I belonged to a landlord's group that is no longer meeting because of the virus lockdowns. Within that group, I was treated like an unloved, redheaded stepchild. I own a mobile home park, which they considered to be an inferior property compared to their multi-family units. And I was trying to tell them that leverage and these high LTV (loan to value) ratios could get them into trouble. Now, I have some of them coming to me for RE advice. Go figure.

 

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[WJK]

Yup, ours has lots of covenants that are nit-picky and dig into the business's finances/operations as well as the owners' personal financial situations.

The bank can "call the loan" at any time if these covenants are in violation, and while they were agreed to originally (they shouldn't have been), they are what I would consider...arbitrary and predatory. The bankers actually have modified and moved the goal posts to help us be in good standing over the years because they know how BS these are.

But we are trying to switch banks to renegotiate. Current bank knows this and have been again trying to win back favor, but during COVID they got really aggressive with us despite never missing or being late on a single payment in decades (as well as, you know, the global pandemic and huge economic downturn that took place from stopping all economic activity).

Yes, this is all big commercial stuff, nothing residential.

-------------------------------------------------

I'm probably WAY oversharing, but this is just to highlight the issues that business owners face - non business owners think it's all a walk in the park. Forget that! It's harrowing.

Multi-family building loans are also commercial class loans. I used to do a lot of compliance appraisals for banks and holding companies that owned those loans. And yes those institutions put out calls on some of those loans. Most of my RE friends during the 1990s ended up losing everything when the RE market failed. It's a cautionary tale for me. I think we're to the point where they're going crackdown and make it harder rather than easier in the future.

 

[Guest-5ty5s4]

Multi-family building loans are also commercial class loans. I used to do a lot of compliance appraisals for banks and holding companies that owned those loans. And yes those institutions put out calls on some of those loans. Most of my RE friends during the 1990s ended up losing everything when the RE market failed. It's a cautionary tale for me. I think we're to the point where they're going crackdown and make it harder rather than easier in the future.

I don't know how this works exactly (not my business, I'm learning) but there is the SBA mixed in there, and now a PPP loan mixed too.

What's really crazy is the collateral is 4 times more than the loan and they still threaten to call it if you miss a target for a month, after 40 years of never being late to pay.

 

[WJK]

I don't know how this works exactly (not my business, I'm learning) but there is the SBA mixed in there, and now a PPP loan mixed too.

What's really crazy is the value of the property is 300-400% higher than the loan balance! And they hold all of it as collateral. I don't think people realize how crazy that is.

What's really crazy is that for any SBA loan over $20K, they can come after ALL of your assets. Their lien is not limited to that one property. I don't know how the PPP loans are gonna shake out. That script has not been written. And the Federal Government has unlimited legal resources to come after the borrower...

 

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[Lyinx]

happening in reverse where I live (Lancaster county, PA)
land prices are way up

neighbors house went on the market on Thursday, signed a contract on Tuesday (higher than asking price, according to rumor)

another neighborhood property was out for rent, never even listed it, a small time realtor knew two candidates that were looking, they signed someone who made a good offer. the one offer that they had included 3 months of advance rent if they could get the place, not sure on the conditions that they signed on but I'm sure it favored the owner

what's driving prices up? our theory is that people are moving out of the cities and into the country

 

[WJK]

happening in reverse where I live (Lancaster county, PA)
land prices are way up

neighbors house went on the market on Thursday, signed a contract on Tuesday (higher than asking price, according to rumor)

another neighborhood property was out for rent, never even listed it, a small time realtor knew two candidates that were looking, they signed someone who made a good offer. the one offer that they had included 3 months of advance rent if they could get the place, not sure on the conditions that they signed on but I'm sure it favored the owner

what's driving prices up? our theory is that people are moving out of the cities and into the country

Yes, the SFR (single-family residential) market is going crazy. People are fleeing the big cities and moving to small towns. The question is how they will settle in -- are they going to bring their big city ideas and politics?

 

[WJK]

I knew I was concerned. Today's news says that the Feds are too...

"The Federal Reserve warned of significant risks of business bankruptcies and steep drops in commercial real estate prices in a report published on Friday.
'Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.'”

Correction: the Feds report was present to Congress and dated February 19th. It came out in one of my journals today.

 

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[Guest-5ty5s4]

I knew I was concerned. Today's news says that the Feds are too...

"The Federal Reserve warned of significant risks of business bankruptcies and steep drops in commercial real estate prices in a report published on Friday.
'Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.'”

Correction: the Feds report was present to Congress and dated February 19th. It came out in one of my journals today.

They planned this.

Theres no way they expected businesses to take on billions in PPP loans and manage to retain full employment based on END OF FY2019.

It almost feels like a scam.

Edit: make no mistake, we will power through this and take cuts to keep it together, but wow talk about a ripoff of a program, terrible solution. Fuel to the fire!

 

[WJK]

They planned this.

Theres no way they expected businesses to take on billions in PPP loans and manage to retain full employment based on END OF FY2019.

It almost feels like a scam.

I agree. We just went through a period of time where everyone was using OPM (other people's money) and leveraging as much as possible. It was like the 1980s all over again. They kept the interest rates artificially low so no one could get a decent return on their money except by playing the Stock Market. Wall Street was raising the money for RE loans by packaging them into securities and not following the normal lending guidelines. What did they expect?

And now they are fussing about inflation. The Feds have been printing money like a drunken sailor expanding our money supply. This is textbook, Economics 101 stupid moves.

 

[Lyinx]

I agree. We just went through a period of time where everyone was using OPM (other people's money) and leveraging as much as possible. It was like the 1980s all over again. They kept the interest rates artificially low so no one could get a decent return on their money except by playing the Stock Market. Wall Street was raising the money for RE loans by packaging them into securities and not following the normal lending guidelines. What did they expect?

And now they are fussing about inflation. The Feds have been printing money like a drunken sailor expanding our money supply. This is textbook, Economics 101 stupid moves.

unless your playing chess, and the other players don't know the endgame

 

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[Deleted78083]

Today I learned that the EU Commission intended to decrease by 70% its office space in Brussels in the upcoming years. They have 60+ offices and employ in Brussels +- 25 000 people.

When they'll do so, everyone else will follow.

And yet, RE prices keep on climbing.

It's like watching a crazy truck headed for a big wall. And no one seems to realize it.

 

[Lyinx]

It's like watching a crazy truck headed for a big wall. And no one seems to realize it.

90+ % of people know they are headed towards a wall, we have all been headed towards it for years, and have never gotten there, and we need something in the meantime (house/business/etc) and can no longer operate how it was before.

So we keep buying.

 

[WJK]

90+ % of people know they are headed towards a wall, we have all been headed towards it for years, and have never gotten there, and we need something in the meantime (house/business/etc) and can no longer operate how it was before.

So we keep buying.

They don't believe what is happening...

 

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[Lyinx]

They don't believe what is happening...

I believed that we were crashing in Feb/March 2020 when the covid craziness started, laid workers off for 2 weeks (paid vacation). I KNEW the market was going to crash, and crash hard.
Guess what?
Business boomed, we hired new people (plus the old ones stayed on) and we are busier than ever.

 

[WJK]

I believed that we were crashing in Feb/March 2020 when the covid craziness started, laid workers off for 2 weeks (paid vacation). I KNEW the market was going to crash, and crash hard.
Guess what?
Business boomed, we hired new people (plus the old ones stayed on) and we are busier than ever.

In some sectors that is true. I'm starting to look for secured paper that I can buy. I think it's prime time again to start the bird-dogging program.

 

[Keeton]

All players in the current commercial(large, medium, small) that are in trouble are hoping for a government bailout as that is the only thing that can save them at this point.

Yeah, investing in commercial is just not smart anymore. Unless its warehouse spaces or apartments. Most companies are going online. So there's no need for as many commercial buildings. I have no Idea what we are going to do with all the malls that have been/will be closing in the future. there's massive malls, and brick and mortar stores closing everywhere now. The commercial real estate market is on its last leg. I didn't even mention how most companies have gone remote too, So they don't even need their office buildings either.

 

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[WJK]

Yeah, investing in commercial is just not smart anymore. Unless its warehouse spaces or apartments. Most companies are going online. So there's no need for as many commercial buildings. I have no Idea what we are going to do with all the malls that have been/will be closing in the future. there's massive malls, and brick and mortar stores closing everywhere now. The commercial real estate market is on its last leg. I didn't even mention how most companies have gone remote too, So they don't even need their office buildings either.

I agree and that why I started this thread. I don't know what we're going to do with the malls, office buildings, and stores. Do they have another life? Can they be converted to other uses? And this has far-reaching effects in our economy. It will change the land-use models in many cities. What will the zoning maps look like? Think about this -- how is it going to affect sales taxes and property taxes that support the city services?

 

[Guest-5ty5s4]

Yeah, investing in commercial is just not smart anymore. Unless its warehouse spaces or apartments. Most companies are going online. So there's no need for as many commercial buildings. I have no Idea what we are going to do with all the malls that have been/will be closing in the future. there's massive malls, and brick and mortar stores closing everywhere now. The commercial real estate market is on its last leg. I didn't even mention how most companies have gone remote too, So they don't even need their office buildings either.

Only specific types of companies CAN go online.

If you broaden your perspective to the whole economy, you will see what I mean.

I can't build you a new roof over a Zoom call, for example. You also can't refine oil digitally, or extrude plastic with remote workers.

 

[WJK]

Only specific types of companies CAN go online.

If you broaden your perspective to the whole economy, you will see what I mean.

I can't build you a new roof over a Zoom call, for example. You also can't refine oil digitally, or extrude plastic with remote workers.

You're right about manufacturing and industrial space. There are segments that still need their space. BUT office buildings, malls, and retail space are for the most part vacant. And there's very little prospect of them getting good quality tenants in the near future. In the meantime, there are mortgages & taxes to pay, and maintenance to do on those structures. Without a clear path to a reliable income stream, the owners of those properties are toast. So are the investors who hold the paper. The last time that this happened, starting around 1990, it brought down the whole Saving & Loan and the Thrift industries. That was all private money and they lost everything. This time, the secondary market (government-backed) and Wall Street own that paper. How are they going to handle these losses?

 

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[Keeton]

Only specific types of companies CAN go online.

If you broaden your perspective to the whole economy, you will see what I mean.

I can't build you a new roof over a Zoom call, for example. You also can't refine oil digitally, or extrude plastic with remote workers.

I know a lot of service businesses cant go digital, But I'm mainly talking about retail. The market is not growing, there will always be brick and mortar businesses, but right now the most commercial buildings being built are warehouses, because all these online companies need places to store their products. I believe we are in the transition between physical and digital. All the businesses that can go online; will.

 

[Keeton]

You're right about manufacturing and industrial space. There are segments that still need their space. BUT office buildings, malls, and retail space are for the most part vacant. And there's very little prospect of them getting good quality tenants in the near future. In the meantime, there are mortgages & taxes to pay, and maintenance to do on those structures. Without a clear path to a reliable income stream, the owners of those properties are toast. So are the investors who hold the paper. The last time that this happened, starting around 1990, it brought down the whole Saving & Loan and the Thrift industries. That was all private money and they lost everything. This time, the secondary market (government-backed) and Wall Street own that paper. How are they going to handle these losses?

Thank you, I couldnt have said it better myself.