Barbara Corcoran warns a 'bloodbath' is coming for CRE

 While the housing market has been no stranger to volatility since the COVID pandemic, the residential market could see a rebound while the commercial sector remains in a troubling position, according to one leading industry expert 

"The residential is starting to rebound," Barbara Corcoran said on "The Claman Countdown" Wednesday. "But the commercial is in trouble."

The Corcoran Group founder and "Shark Tank" star echoed the analysis of Federal Reserve Governor Michelle Bowman, who argued the residential real estate market appears to be "rebounding." Bowman added that while lower rents will eventually be reflected in inflation data, home prices are leveling out. 

Tesla CEO Elon Musk offered a different take. He said the residential real estate market is poised to follow the meltdown commercial real estate is experiencing. 

The Corcoran Group founder Barbara Corcoran warns the commericial real estate market will see a bloodbath while residential properties can expect a rebound. (Photo by STEFANI REYNOLDS/AFP via Getty Images / Getty Images)

Corcoran said while the residential market is in a "Mexican standoff," things are changing in ways that fuel a more optimistic outlook.

"So you get a Mexican standoff going on, but things are changing," she said. "The people who are going out there and buying are finding their overbuilding. They're having a hard time getting their hands on the house. And right now, what everybody's afraid of is the high-interest rates. But the minute those interest rates come down, all hell is going to break loose and prices are going to go through the roof."

According to data from Bankrate, the 30-year fixed mortgage rate rose from 6.88% in March 2023 to 7.13% in May 2023. Home buyers and sellers are "staying put," according to Corcoran, to keep the lowest rate possible. However, once rates drop, she predicts people will re-enter the residential markets and "buy like crazy."

"The house prices, I would not put it by the housing market that prices go up by 20%. We could have COVID all over again," she stated.

"What we really have holding up the market is the bottleneck that's out there. Sellers don't want to move from their apartment or their home because they don't want to take on higher interest rates. And buyers are too afraid because they're getting less house," Corcoran added.

The real estate magnate added buyers are often getting about half the house they did roughly two years ago.

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While expressing some optimism about the residential sector, Corcoran warned that the commercial market is facing a "bloodbath." 

"It's great to say pennies on the dollar, but no one has the confidence to buy now. No one really believes it's going to turn the corner," Corcoran said. "I don't see that turning around. I think it's going to be a bit of a bloodbath before it gets better."

One of the main reasons for commercial real estate's struggle according to Corcoran, is the changing workplace dynamic. Since the pandemic revolutionized remote work and hybrid schedules, commercial office buildings have seen a dramatic decrease in occupancy. 

"People are staying home. Our best office buildings in midtown Manhattan are 50% occupied, and in most major cities or in secondary cities, we have a 20% vacancy rate. No one wants to take that chance," she reasoned. 

What's more, she noted that banks will "take it in the gut" when it comes to industry struggles. 

"All the banks, the regional banks, the small banks who have financed it. And a lot of the different funds have come out now, and they're late on their mortgage payments to their lenders. And that's not a good sign," she said.

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Corcoran said regional banks are going to be "in trouble" as they are often writing commercial real estate loans. Both the commercial market struggles and banking industry fears in light of several bank collapses spell further trouble.

"When you look at their portfolios, they usually have 25% of their assets in commercial real estate. You can't take that kind of a hit and keep on ticking. No, they're going to be in trouble. Without a doubt," she concluded.

Despite her concerns, Corcoran argued the residential market will likely have a rebound and will not follow suit with the commercial market.

https://www.foxbusiness.com/real-estate/shark-tank-star-barbara-corcoran-warns-bloodbath-coming-real-estate-sector

Lawler: Census Finally Releases 2020 Census Demographic Profile, Demog, Housing Characteristics

 Today, in the Calculated Risk Real Estate Newsletter: Lawler: Census Finally Releases 2020 Census Demographic Profile and Demographic and Housing Characteristics File

Excerpt:

From housing economist Tom Lawler:

After an unusually long delay related to the challenges associated with conducting a Census during a nationwide pandemic, last week Census finally released the 2020 Census Demographic Profile and Demographic and Housing Characteristics File.  ... The table below focuses on housing/household related data.

In a report later this week I will discuss some of the issues associated with the Census population numbers with respect to age distribution and discuss how that impacts folks trying to project the population by age.

https://www.calculatedriskblog.com/2023/05/lawler-census-finally-releases-2020.html

Cargill to sell China poultry unit to private equity firm DCP Capital

 U.S. agribusiness giant Cargill said it is selling its poultry business in China to private equity firm DCP Capital, exiting a Chinese meat market that has become increasingly challenging, especially for foreign players.

The sale of the unit known as Cargill Protein China is subject to regulatory approvals but is expected to close this year, Cargill said in a statement on Wednesday.

It did not give a transaction price and DCP declined to comment on the deal.

China is the world's No.2 poultry producer after the United States, producing about 19 million tonnes of chicken meat last year.

Privately-owned Cargill, one of the top poultry producers in the U.S., started its China poultry business in 2011, breeding, raising and processing chickens in Chuzhou in eastern Anhui province.

In 2019 it added a $48.8 million plant to the operations, which can process 65 million birds annually.

Livestock farm margins in China have however been squeezed in the last two years as the Ukraine war drove up feed prices and weak demand during the COVID-19 pandemic depressed meat prices, Juhui Huang, an agribusiness consultant at Beijing Means Consulting Co, said.

"Local companies in China are generally better in managing their costs and more flexible in sales strategies like payment terms, which makes them more competitive in such a difficult environment," he said.

Despite the pressures, China's largest poultry players have continued to expand, far outpacing smaller operations such as Cargill's.

Wellhope Foods, one of the largest domestic firms, slaughtered 700 million chickens last year and has a goal of 1.5 billion birds by 2029.

The company also introduced plant protein products in 2020 produced in the Anhui facilities.

China's DCP Capital has invested in several other food and agriculture businesses including another of China's top poultry producers, Fujian Sunner Development, its website says.

The private equity firm is focused on Greater China and led by former members of the KKR and Morgan Stanley private equity businesses, according to the website.

https://www.marketscreener.com/quote/future/FEEDER-CATTLE-FUTURE-GF-4373646/news/Cargill-to-sell-China-poultry-unit-to-private-equity-firm-DCP-Capital-43994766/

Chinese Developers Resorting To "Negative Down Payment" Practices

 In its attempt to reboot China's real estate property market bubble, which burst spectacularly in late 2021 when most housing developers blew up in the aftermath of Evergrande's historic bankruptcy amid Beijing's ill-fated deleveraging push, and which according to Goldman calculations is the world's largest real estate bubble...

... China's real estate agencies have been quietly resorting to some of the oldest tricks in the US housing bubble book, such as marketing homebuying with "zero down payment" or "negative down payment" so that consumers not only don't need to pay for down payment but also can obtain funds for future renovation, according to media reports.

Of course, with Beijing still stuck in some bizarro Schrodinger economic purgatory where the government both wants housing to reclaim its pre-bubble all time highs yet is loath to inject the massive amounts of credit required, the It didn't take long for some local overzealous bureaucrat to spill the beans, and as the Global Times reports, the Shenzhen Real Estate Intermediary Association in South China's Guangdong Province released a notice on Friday, cautioning local agencies to avoid participating in or assisting the illegal practices of "zero down payment" and "negative down payment," which have sparked discussion among homebuyers.

One real estate agency based in Shenzhen reportedly was telling clients that if a property is evaluated at 5.7 million yuan ($806,828) the owner would sell it at 5.2 million yuan, the homebuyer could then buy the property in full using a bank loan of 5.7 million yuan while using the remaining 500,000 yuan for renovation, cnr.cn reported.

As for the so-called "negative down payment," the report said that it is executed through developers using down payment installments and returning down payment to buyers or setting a relatively high contract price for consumers to apply for a larger bank loan.

If the funds returned to the buyer from the developer, or the bank loan secured against the property exceed the original down payment, the a "negative down payment" is "achieved," per the report from cnr.cn.

The Shenzhen Real Estate Intermediary Association on Friday issued the reminder to caution the market, stressing that the so-called practices of "zero down payment" and "negative down payment" violate China's financial and credit policies. It warned local agencies and practitioners to strictly abide by the principle that "houses are for living in, not speculation," calling for review and adjustment of agency management and prohibiting any form of participation in similar practices.

If local agencies and practitioners are found to have been involved in offering assistance in implementing these illegal practices, the association will immediately report these parties to the competent administrative departments for investigation and punishment in accordance with the law.

The so-called "negative down payment" is essentially the creation of a fictitious purchase agreement, which in turn inflates the purchase price of a home in order to fraudulently obtain a larger loan for the down payment, Yan Yuejin, research director at Shanghai-based E-house China R&D Institute, told the Global Times.

Yan stressed the importance for financial regulators to monitor the situation, aiming to prevent the emergence of financial instability or financial risk, calling for a greater effort to regulate fraudulent contracts, falsified loan materials, and lax bank audits.

Yan also noted that the concept of a "negative down payment" is illegal and comes with high risk. The leverage will be easily raised if a home purchase is not backed by a real down payment, burdening subsequent payment pressure for homebuyers and resulting in a higher risk of mortgage default.

Chinese authorities issued a notice in 2017, strictly banning domestic developers and real estate intermediaries to engage in illegal practices such as providing down payment financing or down payment installments.

Earlier in May, Huizhou in Guangdong issued a notice to further strengthen regulation and on property sales tackling the aforementioned illegal practices, according to media reports.

https://www.zerohedge.com/economics/chinese-developers-resorting-negative-down-payment-practices

NYC will use cell data to study impact hybrid work has on mass transit

 New York City will conduct a sweeping new study on the impact hybrid work has on transportation and the economy following “long-term shifts” in travel patterns first triggered by the COVID-19 pandemic.

The federally-funded study will be conducted by the city Department of Planning and will analyze a series of data points provided by cell phones used in office buildings and other locations to better understand people’s movements.

“Using cell phone mobility datasets, this project seeks to establish a better understanding of present and future work-related and non-work-related trip behavior,” reads a description of the plan outlined in a 2023-24 budget report drafted by the regional New York Metropolitan Transportation Council.

“The use of cell phone data allows for the opportunity to understand trip behavior, economic activity, footfall, and significant mobility patterns with more precise location and time information in comparison to previously accessible data.”

The study will analyze a series of data points provided by cell phones used in office buildings and other locations to better understand people’s movements.

Getty Images

The draft report explains the need for a “comprehensive analysis” of the shift to remote work in order to “guide future decisions about the region’s transportation network and economic growth strategy.”

The funding for the project is set at $501,789.

The agency just awarded a $99,000 contract to Placer Labs Inc. to provide some of the data.

Placer analyzes foot traffic at 800 office buildings across the country.

The city Department of Transportation will also conduct a related analysis of the “long-term implication of teleworking” on vehicle miles traveled by motorists during the work day.

During the pandemic, a survey by the DOT found that nearly half of the employed population worked from home. 

“The use of cell phone data allows for the opportunity to understand trip behavior, economic activity, footfall, and significant mobility patterns,” according to the budget report.

Getty Images

The new DOT study will build on that survey and target persons living in “lower density areas of NYC,” such as suburban neighborhoods with one-and-two-family homes.

Trends indicated that the hybrid work schedule — working some days in the office and some at home — is here to stay.

Midweek subway ridership is still just 70% of pre-virus levels, according to the MTA.

Manhattan-based workers are spending at least $12.4 billion less per year than they were before the COVID-19 pandemic, according to a report released in February.

The shift has put a significant dent in city tax revenues.

The prognosis is particularly sobering for owners of commercial office space.

The funding for the project is set at $501,789.

Getty Images/iStockphoto

An industry report released last week said the impact of hybrid work could slash the value of office buildings by 44 percent with fewer employees populating them.

Placer, the city contractor, said in a recent blog post that the hybrid work structure is here to stay.

They claim office visits in Manhattan were down 37.5% in the first quarter of 2023 compared to pre-pandemic 2019.

“Month-over-month data also shows that the average number of office visits per workday has not changed very much over the past several months,” Placer’s Lila Margalit said in the blog post.

“As we’ve noted, the persistence of this pattern appears to reflect a new hybrid normal, which sees employees coming in less frequently and concentrating visits in the middle of the week. This holding pattern seems to indicate a stalled recovery.” 

An industry report said the impact of hybrid work could slash the value of office buildings by 44 percent with fewer employees populating them.

Getty Images

Margalit said “foot traffic data indicates the continued strength of the hybrid model” and the back-to-office push “does not yet appear to have meaningfully moved the needle overall.”

“Looking ahead, hybrid work arrangements that offer both employers and workers the best of both worlds may be here to stay, Margalit said.

A rep for the Department of City Planning said the work-at-home study is in line with its ongoing research of changes occurring in the Big Apple.

“Speaking broadly, we are constantly monitoring work and commuting patterns to strengthen our planning efforts; there are not any immediate policy changes planned,” said DCP spokesman Casey Berkovitz.

One business advocate representing the city’s largest corporate and financial firms insisted the era of working in the office work is not dead.

“New York City attracts ambitious people who appreciate the importance of being present, in person, in order to advance professionally and build relationships. The `new normal’ is flexibility, not remote or hybrid work. Office culture will continue to be important,” said Kathryn Wylde, CEO of the Partnership for The City of New York.

https://nypost.com/2023/05/28/nyc-planners-weigh-impact-on-hybrid-work-on-transit-economy/

Remote work will destroy 44% of NYC office values

 With the return to office seemingly plateauing at about 50 percent occupancy, the long-term impact of remote work on New York’s office values looks even more dire than previously thought.

That’s according to an update from researchers at New York University and Columbia University, who revised a study they released last year measuring the effect of work-from-home on New York City’s office stock.

The update, published in May, now calculates that the city’s offices as a whole will lose 44 percent of their pre-pandemic value by 2029 — up from the estimated 28 percent when the authors first published the study a year ago.

“We now estimate a more persistent work-from-home regime, which has more of an impairment of office values even in the long run,” NYU’s Arpit Gupta, one of the authors, wrote in an email.

Even the most optimistic office evangelists have come to admit that remote work has proven more enduring than they expected.

“The hybrid work model has persisted far longer than I expected it to,” SL Green Realty CEO Marc Holliday acknowledged in December.

New York’s office buildings saw a notable uptick in physical occupancy after Labor Day last year, hitting nearly 47 percent. But that seems to have been somewhat of a ceiling. As of May, occupancy was slightly higher than 48 percent.

(For its occupancy figures, the NYU/Columbia study used data from the entry-swipe company Kastle Systems, which some have criticized as an incomplete measurement because it misses some large office portfolios with high occupancy rates.)

The authors found that companies that make little use of their office space are declining to renew leases or moving forward with only a portion of their space. They point to data from Cushman & Wakefield that show just shy of 78 percent of Manhattan’s office stock was contractually leased in the fourth quarter — a 30-year low.

Remote work is “shaping up to massively disrupt” office values, the authors wrote.

“Firms appear to demand substantially less office space when they adopt hybrid and remote work practices,” the authors wrote of their findings. “Such practices appear to be persistent.”

https://go.arielpa.nyc/e/710183/stroy-44-of-nyc-office-values-/zxptj/868904115

PCE Measure of Shelter Still Accelerating YoY

 Here is a graph of the year-over-year change in shelter from the CPI report and housing from the PCE report this morning, both through April 2023.

CPI Shelter was up 8.1% year-over-year in April, down from 8.2% in March. 

Housing (PCE) was up 8.4% YoY in April, up from 8.3% in March.

Since asking rents are soft and Year-over-year Rent Growth Continues to Decelerate this means both CPI and PCE measures are currently overstating actual inflation.

https://www.calculatedriskblog.com/2023/05/pce-measure-of-shelter-still.html