Data Center Real Estate Still Surging

 At the start of 2023, McKinsey released a report detailing the rapid surge in demand for data center real estate. They also projected that the industry would grow by around 10% per year through 2030.

Since then, we’ve seen the industry continue to go from strength to strength, with some experts even stating that the forecast may be low and that we should expect an even steeper growth trajectory.

Whichever of those predictions you believe, the overall upward trend is clear.  Evidence from indicators like construction, leasing, and investment activity all support an outlook of sustained growth and continued demand for data center real estate in the coming years.

Scaling up

One of the key trends we’ve seen is a dramatic increase in data center construction that shows no signs of declining. In fact, data from the June 2024 Dodge Momentum Index (a leading indicator of construction activity) shows that data centers “continued to dominate planning projects in June,” contributing significantly to a 14.5% surge in commercial planning. Dodge lists several massive data center projects as leaders of construction activity, including a USD420 million project in Leesburg, Virginia.

Those developments build on the trend of massive new data facilities (aka hyperscale data centers) springing up across the globe, with data from Statista showing nearly 300 new facilities built in the last two years alone. A large majority of those hyperscale developments (39%) have been built in the U.S., followed by developments in China and Japan.

Data center hot spots

Within the U.S. certain states are emerging as hot spots for new data center projects. Northern Virginia and Northern California, for example, have seen several massive new projects, as tech giants like Microsoft and Amazon rush to meet growing demand for artificial intelligence (AI) and cloud services.

Other hot spot states include Illinois, New York, and Texas, with the latter slated to house a USD1.3 billion Amazon prime data center on a 206-acre parcel of land near Austin.

Data REITs on the Rise

Naturally, demand for data centers has been reflected in growing interest in the asset class amongst investors, accompanied by a rise in the number of data centers being included in investment instruments like REITs (Real Estate Investment Trusts).

According to REIT trade association Nareit: “As of the first quarter of 2024 (the latest data available), data centers accounted for 11.5% of aggregate assets under management; the sector’s weight in the FTSE Nareit All Equity Index was 9.3%. This overweight highlights active REIT managers’ bullishness on data centers.”

The sector is supported by strong fundamentals. On average, net operating income (NOI) from data centers has experienced a 4.2% year-over-year gain, a figure that Nareit notes: “more than amply kept pace with inflation.”

Leasing surge

Data center leasing numbers have also been on the increase. Globally, data center leasing activity “hit a record in 2023, reaching approximately 4,300 MW” (megawatts (MW) rather than square feet are used as the principal size measurement for the sector). 

That trend has continued in 2024, with 1,800 MW of new leasing deals — 80% of which were in the U.S. Nareit adds: “Current sector vacancy remains limited and new project deliveries tend to be slow.” Meaning we should expect to see continued rent growth in the future.

Tapping into the data center trend

For commercial real estate (CRE) professionals, the growth of the data center sector presents some interesting opportunities. The most obvious of these lie in direct dealmaking, connecting tenants with colocation facilities,  or meeting the growing demand for smaller, localized data centers that support edge computing applications.

Many other opportunities are more tangential — sitting in the intersection between data centers and the infrastructure and support systems needed to keep them operating smoothly.  

In their 2023 report, McKinsey noted that the power demands of the data center sector are likely to create a lot of opportunities for sustainable energy providers, especially as those demands continue to increase year-on-year. In many cases, hyperscalers like Google have started funding renewable energy plants, boosting the expansion of existing facilities as well as the construction of new ones.

Other associated trends, like the manufacture of prefab and modular data center components, create opportunities in the industrial and logistics sectors, or the associated multifamily housing needed to support the workforce underlying these projects.

For savvy CRE professionals, these developments provide a wealth of potential deals. The key to succeeding in this context lies in anticipating new needs associated with the data center economy, and capitalizing on new opportunities as they arise.

https://infabode.com/post/1068682

Griffin Set to Break Ground on 54-Story Miami Tower Next Year

 Ken Griffin is expecting to break ground next year on a 54-story tower in Miami that will serve as headquarters of his Citadel financial empire, enlisting a Philadelphia developer as a consultant on the project.

The proposed building at 1201 Brickell Bay Drive will have 1.7 million square feet, combining offices and a roughly 413,000-square-foot hotel on the upper floors, according to plans filed with Miami-Dade County on Monday. The waterfront project is expected to break ground in the third quarter of 2025, a spokesperson for Griffin said.

The billionaire founder of hedge fund Citadel and market maker Citadel Securities first proposed the project in 2022, with its cost estimated to be more than $1 billion. That same year, Griffin relocated his family and his businesses to Miami after leaving his longtime home in Chicago. His firms will serve as anchor tenants for the new tower.

The building, set to be one the city’s tallest, will “redefine the Miami skyline,” the spokesperson said, adding that it will bolster Miami’s reputation as a “destination for talented professionals and their families, businesses and culture.”

Griffin, 55, has tapped Philadelphia-based Gattuso Development Partners to consult on the project, the filings show. The firm’s co-founder, John Gattuso, has worked on multiple projects with Comcast Corp. Griffin previously dropped Chicago-based Sterling Bay from the project.

Foster + Partners is handling the design for the Miami tower, which will also include retail and waterfront restaurant space, according to the filings, as well as a public pedestrian path along the water.

https://www.bloomberg.com/news/articles/2024-08-26/griffin-set-to-break-ground-on-54-story-miami-tower-next-year

San Francisco Sweeps Homeless Camps Following Court Rulings

 by Lear Zhou via The Epoch Times,

Homeless people in San Francisco are adapting to the city’s new encampment sweeping policy, which was enacted after a recent Ninth Circuit ruling paved the way for the city to clear out homeless camps.

Previously, the city had to offer shelter to the homeless individuals every time it swept out a camp. After the new ruling, it can clear a recently swept area without shelter offers.

San Francisco has thus performed a citywide homeless encampment sweeping in the last few weeks, targeting the largest encampment areas.

An Epoch Times reporter visited the corner of Mission Street and Van Ness Avenue on the evening of Aug. 8 and found no tents in the neighborhood, which used to be a major encampment site near downtown. Some of the homeless people from that area are now scattered into smaller encampments, with tools like bicycles that give them the mobility to set up tents for the night.

That same evening, on Folsom Street on the block between 17th Street and 18th Street, which was also a large encampment site, the reporter found only five tents left. One unhoused person with a bicycle mentioned to the reporter that the others had probably moved to another spot.

If that spot is in San Francisco, they are still risking being swept out by the city. San Francisco will continue to address homeless encampments, the mayor’s office told The Epoch Times on Aug. 8 via email.

“Enforcement against camping on San Francisco’s streets will consist of progressive penalties,” Mayor London Breed stated in a memo.

The penalties start with a warning and could escalate to citations or even arrest in some cases.

“Our work still centers around helping every person living on our streets find their way indoors to shelter and services or to a better opportunity with friends or family if that resource is available to them,” the mayor’s office stated.

The Public Defender’s Office declined to comment when The Epoch Times asked if it had seen a surge of requests for help due to the encampment sweeping.

Lawsuit Against San Francisco

A case called Coalition on Homelessness v. City and County of San Francisco was filed in September 2022, challenging San Francisco’s encampment sweeps on the grounds that they violate the Eighth Amendment regarding cruel and unusual punishment.

In December 2022, the District Court issued a preliminary injunction preventing San Francisco from sweeping homeless encampments without offering shelter to the homeless individuals.

The Ninth Circuit ruled in September 2023 that the city could clear homeless encampments if the homeless people living there refused an offer of shelter, according to a May press release from the mayor’s office. With that clarification, San Francisco was able to reduce the number of homeless tents and structures from 609 in July 2023 to 360 in April 2024, and after that there were only nine encampments left that had five or more tents or structures.

In June this year, the U.S. Supreme Court ruled in a different court case that enforcement of laws against public camping does not count as cruel and unusual punishment. On July 8, the Ninth Circuit revised the injunction against San Francisco, allowing the city to enforce its public camping laws.

Eric Smith at the corner of Haight Street in San Francisco. Lear Zhou/The Epoch Times

Homelessness in San Francisco

The mayor’s memo stated that police officers will look for small homeless camps and will work with Public Works staff to address them and prevent them from becoming larger encampments.

Breed stated in an executive order issued Aug. 1: “We will not be a city with a reputation for being able to solve the housing and behavioral health needs of people across our country.”

The executive order requested that all city workers first offer relocation services to homeless persons, enabling those from outside San Francisco to return to their hometowns, before offering other services such as shelter.

According to the executive order, 40 percent of unsheltered people in San Francisco did not live there before they arrived.

San Francisco had a homeless population of 8,323 as of Jan. 30, among whom 4,354 were unsheltered, according to the Department of Homelessness and Supportive Housing (HSH).

The San Francisco Police Department’s (SFPD) Healthy Streets Operations Center (HSOC), the main entity implementing the encampment sweepings, was launched in January 2018 before Breed assumed office in July 2018. The purpose of HSOC is “to coordinate the City’s response both to homeless encampments and to behaviors that impact quality of life,” according to a report from the Controller’s Office.

The task force combines city staff from SFPD, Public Works, the Department of Public Health, HSH, and the Department of Emergency Management.

In HSOC’s first year, it reduced the number of tents citywide from 568 in July 2018 to 341 in January 2019, and it reduced the number of encampments with 5 or more tents or structures from 17 to 5 in the same time span, the Controller’s Office reported.

However, HSH reported that in January 2020 the number of large encampments was 19. In February 2020, HSH counted 1,545 tents and structures.

Large encampments, defined as those with more than five tents or structures, have higher levels of substance abuse and infectious disease and can increase public health and safety concerns in and around them, according to an HSOC presentation in 2018.

Homeless individuals are also at constant risk of having their belongings stolen.

Eric Smith, who lives in the Haight-Ashbury District and has been homeless since the COVID-19 pandemic began, told The Epoch Times that he has been robbed multiple times but often finds his possessions lying on the street, including items that used to belong to his mother or grandmother.

To Smith, homelessness was like being “a refugee in my own country.”

https://www.zerohedge.com/political/san-francisco-sweeps-homeless-camps-following-court-rulings

California weighs sweeping reforms in insurance regulations, amid mounting wildfire risk

 The raging wildfires that have become a mainstay in certain California communities are not only devastating family dwellings — they are also impeding Californians from procuring the insurance necessary to protect these homes in the future.

Aiming to both quell soaring prices and bring back firms that have left the Golden State, regulators are proposing sweeping reforms that they believe could revive a competitive insurance market.

While experts agree that the status quo may no longer be sustainable, opinions remain divided on the merits of the proposed changes — which some fear could drive up prices further.

“The situation is hurting consumers badly,” Amy Bach, executive director of the consumer advocacy group United Policyholders, told The Hill.

“It doesn’t feel like it’s going to resolve on its own,” Bach added.

California Insurance Commissioner Ricardo Lara last week called for public input on the final phase of his wildfire modeling regulation, which is many months in the making and has sparked significant debate.

Lara’s strategy would update Proposition 103, a 1988 ballot measure that served “to protect consumers from arbitrary insurance rates and practices” and encouraged a competitive and fair marketplace, according to the Insurance Commission. 

Proposition 103 determined that rate changes could only occur with the authorization of the commissioner, while also establishing a public participation process in which so-called “intervenors” could provide technical input and recover associated costs.

Lara’s office said in a press statement that his update aims to close a loophole in Proposition 103: Insurance firms today can request rates at any level to help compensate for an increased risk of losses but are not required to cover all Californians.

The new regulation, in contrast, would require companies to insure properties in distressed regions at a rate equivalent to 85 percent of the firm’s statewide market share. 

In addition, the proposal would incorporate the state’s first use of “catastrophe modeling,” localized simulations of potential risk based on historical analyses and probabilistic calculations that such events will occur in the future.

Whether relying upon such simulations, also known as “cat models,” would end up lowering or raising consumer rates, however, is a matter of contention.

Those in favor of employing these tools argue that other states have long done so and that proactive efforts to adapt California homes to a changing climate could mitigate risk.

“Over the past several years, the state has put billions toward wildfire mitigation efforts and homeowners have made significant investments in home hardening,” Lara said in a statement.

“This is not accounted for by our existing retrospective, past-focused models for ratemaking,” the commissioner continued. “We want consumers to reap the full benefits of these efforts through modern, forward-looking models on how rates are calculated.”

But others are far less certain that the models would account for such improvements — especially because the technology is often proprietary.

Bach cited catastrophe models as a reason for her muted enthusiasm about Lara’s proposal. Yet she expressed willingness “to let the commissioner’s sustainable insurance strategy go into place.”

“If it doesn’t work, then I guess we go back to the drawing board,” Bach said, expressing approval for the mandatory coverage component of the regulation.

Bach stressed that thus far, she has seen no indication that catastrophe models, when applied to wildfire-prone areas, are accounting for active mitigation efforts in price determinations. She also expressed concern that wildfire models are much newer than those for, say, hurricanes.

“We are nervous,” she continued. “The reality is that prices are so high already, and affordability is so low right now.”

Nonetheless, Bach acknowledged that California’s lack of catastrophe models was contributing to the exodus of insurance companies from the state. Beginning in 2022 and 2023, many big firms stopped offering services to new customers, often citing wildfire risk. 

“The writing was on the wall that cat models are going to come to California, just for practical reasons,” she acknowledged.

“We’re glad at least there’s a quid pro quo — that as a condition of insurers getting to use cat models, they also have to pledge to insure more homes in the areas that have been abandoned,” Bach added.

Harvey Rosenfield, founder of Consumer Watchdog and the author of Proposition 103, decried catastrophe models as “completely unjust, untested and unreliable.”

“Models are cloaked in the guise of technological infallibility, but they are drafted, they’re written, they’re controlled by humans,” Rosenfield told The Hill.

He also argued that their use would violate provisions of the voter-approved Proposition 103, because this would deny consumers their legal right to examine the details of these models.

“Nobody has the power to rewrite Proposition 103 to eliminate its protections,” Rosenfield added.

The applicability of catastrophe models to wildfire risk assessments was one focal point in a June 2024 working paper about the adaptation of insurance markets to a changing climate. Although these models have improved the ability of insurers to gauge wildfire risk, the resultant projections remain “inherently uncertain,” according to the paper, published by the National Bureau of Economic Research.

“The modern catastrophe models bring a lot of value to insurance pricing and rate setting,” co-author Judson Boomhower, assistant professor of economics at the University of California San Diego School of Social Sciences, told The Hill.

“They give you a much more nuanced view of risk for a given property or a given area,” added Boomhower, who is also a faculty research fellow at the National Bureau of Economic Research.

That more detailed vantage point, he explained, is more sophisticated than the “backward-looking historical rate-setting methods that insurers have been required to use in California.”

Nonetheless, Boomhower also recognized that catastrophe models “are sort of a black box” due to their proprietary nature and resultant questions of transparency.

“Those are legitimate challenges for regulators to think about, but at a high level, this is the best scientific method for assessing catastrophe risk,” he said.

Boomhower described Florida as “a little bit ahead” of California from this perspective, as the state requires companies to give regulators some insight into how their individual models work.

In the working paper, Boomhower and his colleagues reconstructed pricing formulas used in California by six major insurers — combining data from company-provided premiums with proprietary information from about 100,000 households.

The authors found that following the 2017 and 2018 wildfire seasons, both premiums and the rate of policy cancellations in high-risk areas surged. They also observed increasing reliance on the state’s “quasi-private insurer of last resort” —  called California FAIR —  the basic but expensive property insurance provided when traditional coverage is unavailable.

Among the paper’s key findings was the fact that insurers exhibited “striking variation” in how firms priced wildfire risk, with some only divided the market roughly, at the zip-code-level, and pricing risk at a more granular level — using catastrophe models.

“There’s tons of heterogeneity in wildfire loss risk, even within zip codes or even within neighborhoods,” Boomhower said.

Insurers with less sophisticated models seemed to end up with a slew of higher-risk customers and greater-than-expected costs, which the authors dubbed the “winners’ curse.”

Meanwhile, they found that companies using the more granular models tended to attract lower-risk customers. With that in mind, Boomhower projected that there would be “a lot of competition among insurance companies to find the low-risk homes in these designated high-risk areas.”

“There are parts of the state where wildfire risk has increased really rapidly,” he continued. “Those are places where insurance rates probably do need to go up relative to where they’ve been historically, just to reflect the increasing risk.”

To the extent that Proposition 103 has held rates down, Boomhower acknowledged that the proposed updates could end up raising prices.

“On the other hand, that may be what you need to ensure availability in some of those places,” he said.

While the status quo may not be ideal for anyone, Rosenfield stressed his belief that insurance firms might come back to California without a change in regulation — simply because it will be in their financial interest to do so.

“California is the biggest single insurance market in the planet, and they’re just going to come back in and take advantage of that,” he said.

https://thehill.com/policy/energy-environment/4844968-california-wildfires-insurance-reform-proposal/

Landlords Cry Foul as More States Seal Eviction Records

 When pandemic-era tenant protections expired, rents immediately soared, and eviction filings surged last year more than 50% over pre-pandemic levels in some U.S. cities.

These filings can cast long shadows. Simply being named in an eviction complaint, regardless of the outcome, can severely limit future housing options and prolong housing insecurity, according to a recent University of Michigan study.

The situation underscores a growing debate across the country: Should eviction records be shielded from public access to offer tenants a cleaner shot at finding another home?

In recent years, more states are saying, “yes — at least in some cases.”

Eviction filings are public court records. Landlords and property owners can buy databases of the records to screen potential tenants.

Property owners argue that sealing data on eviction filings — most of which are for nonpayment of rent — eliminates crucial insights into rental history. Housing advocates, however, warn that any filing can unfairly block renters from future housing because the outcome may not be an eviction.

An eviction filing doesn’t provide enough information to determine a tenant’s ability to honor their next lease, said Katie Fallon, a principal policy associate with the Urban Institute, a research and advocacy think tank focusing on urban policies.

“Given the low quality of this eviction filing data and the lack of outcomes in the filings themselves, it is a very open question of how accurate these filings are and what information they really provide to landlords,” she said.

This year, Idaho, Maryland and Massachusetts enacted laws to seal certain eviction records from public scrutiny and from tenant screening companies.

Last year, Connecticut and Rhode Island also enacted laws that allow for the sealing of certain eviction cases. Arizona, meanwhile, enacted a law in 2022 requiring courts to seal eviction records if cases are dismissed, dropped or adjudicated in the tenant’s favor.

In total, 17 states and Washington, D.C., have measures sealing at least some eviction records, according to PolicyLink, a national research and advocacy group with a focus on housing.

Zafar Shah, assistant director of advocacy for Maryland Legal Aid, said lawmakers are starting to understand how eviction records can prevent tenants from finding another home.

“We have clients that know they will lose their eviction case, but they want us to shield the information so that the next potential housing provider is not going to use it against them,” said Shah.

“That has really been the impetus for shielding and sealing across the country. These filings don’t tell us a lot, but they carry so much weight in the search for housing.”

An eviction filing could be resolved in a number of ways: A case might be dismissed if the landlord and tenant reach an agreement. The judge might rule in favor of the tenant, allowing them to stay in their home. Or the judge could side with the landlord, evicting the tenant.

Regardless of the outcome, the records live on in online court databases.

Third-party tenant screening companies scan court records for eviction cases, then sell the data to landlords to use in their leasing decisions.

Housing advocates say the data is often inaccurate and misleading. In one state — Illinois — less than half of eviction filings led to actual evictions, according to a 2019 review by Housing Action Illinois, an advocacy group.

Alexandra Alvarado, director of education and marketing at the American Apartment Owners Association, a tenant screening provider, told Stateline that the group’s database only displays eviction records with a completed judgment that were filed within the past seven years, which is the time limit set by the federal Fair Credit Reporting Act.

“It can be a monetary or non-monetary judgment, but there must be a judgment. So, if an eviction case is filed, but the parties settled outside of court or the tenant won, then it wouldn’t show up in our reports, even though technically it is public record,” Alvarado said. “Our members are getting evictions that have merit and weren’t erroneously filed.”

A Scarlet ‘E’

According to researchers at the Eviction Lab at Princeton University, of the 3.6 million eviction court records in the 12 states they tracked from 2011 to 2015, more than 1 in 5 eviction cases contained little information on the resolution of a case. Ambiguous data can also falsely represent a tenant’s eviction history, affecting both renters and scholarly researchers, according to a 2020 study by the group.

“While many people think an eviction filing is evidence of late rent payment, nonpayment of rent or a violation of the lease terms, this is not necessarily true,” said Fallon, of the Urban Institute. “Filings can include inaccurate data, such as the parties named in the eviction filing and inaccurate name spellings.”

Alvarado, of the American Apartment Owners Association, said landlords have mixed views about laws that allow courts to seal cases that have been dismissed or ruled in a tenant’s favor. What’s more important to landlords, she said, is that their screening process can look back the full seven years for problem evictions.

Laws that limit the lookback period — such as in Oregon, where tenants can request an expungement after five years — affect the tenant screening process more, she said.

The system is problematic, Eviction Lab found in a 2020 study of eviction cases filed between 2012 and 2016 in 39 states. In addition to inaccurate information, Black households are overrepresented in eviction filings, Eviction Lab found, as are women — especially Black and Latina women.

“When landlords say they need to use eviction filings, which we know aren’t the most reliable information, to make housing decisions, we need to push back on that,” said Jasmine Rangel, senior housing associate for PolicyLink.

She and other advocates want eviction court records to be sealed as soon as a landlord files an eviction notice. Otherwise, she said, “third-party services can still scrape that eviction record from online databases and into their tenant screening algorithms.”

Advocates point out that eviction records could be made public later if a judge rules in the landlord’s favor.

But Shuntera Brown, who lost her home in Phoenix in 2021, said in an interview that any eviction record hurts single moms like herself.

Brown, who has three children, has struggled to pay rent even with a full-time job. In December 2020, a bout of COVID-19 caused her to miss work shifts, a paycheck disruption that eventually put her over the edge months later.

“It’s a Scarlet ‘E.’ You have this record, you have this thing on your file of an eviction, but there’s no understanding of the context or circumstances behind it,” Brown said. “I remember pleading with the judge that I’ve usually paid on time and that my kids need a home, but he sided with the landlord in, like, seven minutes, and the eviction immediately was on my credit.”

Sealing the records

State by state, the laws differ on the details: Many states allow for eviction records to be sealed almost immediately if the case was dismissed or dropped, or if the tenant won the case. Other states have a waiting period, often several years, during which the tenant must demonstrate good behavior before a record is sealed.

Under Maryland’s new law, which takes effect in October, courts must shield records within 60 days of a resolution that doesn’t end in a tenant losing possession of their home. The state also will increase the eviction filing fee from $8 to $43.

Maryland landlords filed roughly 400,000 “failure to pay rent” cases in the state’s 2023 fiscal year, according to housing advocates who testified in favor of the new law. In some cases, landlords would file monthly failure to pay rent cases against tenants prematurely and tack on illegal fees on top of the back rent, according to a report from the Maryland-based advocacy group Public Justice Center.

“The low cost and low barrier to entry have driven the massive quantity of filings, with many cases simply being leveraged to get rent money out of tenants quickly,” said Shah, of Maryland Legal Aid. “I think that the court overall has become more receptive to shielding these cases, recognizing that if a case was dismissed or settled, there’s no reason to hold it against the renter.

“This attitude has shifted significantly over the past decade,” he said.

In California and Colorado, as in Maryland, an eviction lawsuit can be automatically sealed as soon as it’s been filed unless the landlord wins the case within 60 days. Indiana and Minnesota require a tenant to formally petition for sealing once a court reaches judgment.

Idaho’s new law shields dismissed eviction cases after three years. And in Massachusetts, tenants can request their case be sealed for a variety of reasons, no matter the outcome, after a period of time ranging from a few months to several years.

In Rhode Island, a tenant can only make a request once every five years.

Researchers at Eviction Lab told Stateline that state laws should still allow data access for scientists. The 2022 eviction-sealing law in Washington, D.C., for example, specifies that records can be unsealed for scholarly, educational, journalistic or governmental purposes.

“There is an important public right to know what is going on in the housing market, and this is one of our data points into the eviction crisis,” said Carl Gershenson, lab director at Eviction Lab. “There is a balance that can be achieved that is in the best interest of tenants and how these filings can be used as data points to understand the housing crisis.”

https://www.american-apartment-owners-association.org/property-management/landlords-cry-foul-as-more-states-seal-eviction-records/

One mortgage company' hopes to ride a possible home-lending surge'

 United Wholesale Mortgage is hiring as mortgage lenders gear up, while big banks are reducing exposure to the retail home-financing business

The business of providing home loans is already showing signs of a turnaround after a tough couple of years, ahead of an expected drop in interest rates and a possible soft landing for the economy.

As lending to consumer homeowners picks up steam, the stocks of non-bank lenders have already performed strongly this year as they are expected to benefit from lower interest rates.

If financing activity tops expectations, stock prices could get a further boost once the Federal Reserve starts to cut.

To be sure, uncertainties remain.

While mortgage rates have fallen to their lowest levels in 15 months, buyer demand hit a six-month low this past week.

Nevertheless, financial firms have been preparing for more demand, especially refinancings from borrowers who inked deals during the past few years, which saw higher interest rates.

The 30-year fixed-rate mortgage averaged 6.49% as of Aug. 15. While that's up 0.2% from the previous week, it's still down from 7.09% in the year-ago quarter, according to data released by Freddie Mac. And refinancings have climbed 117% from year-ago levels.

Companies such as Rocket Cos. Inc. (RKT), LendingTree Inc. (TREE), Redfin Corp. (RDFN) and UWM Holdings Corp. (UWMC) - the parent company of United Wholesale Mortgage - will be in the spotlight, along with PennyMac Financial Services Inc. (PFSI), Mr. Cooper Group Inc. (COOP), Rithm Capital Corp. (RITM) and Guild Holdings Co. (GHLD).

Among the group, LendingTree leads in year-to-date gains with a 72% rise as of Tuesday, followed by a 39.4% advance by Mr. Cooper and a 34% jump by Rocket, which is the parent of Quicken Loans. United Wholesale Mortgage's stock has risen by 29% so far this year.

"It's a good time to be in the mortgage business again," Desmond P. Smith, chief growth officer at United Wholesale Mortgage, told MarketWatch.

The surge comes as banks have seen their role in the mortgage-lending business decrease, though the role is still a major one. At the same time, activity from non-bank lenders such as Rocket Mortgage (which changed its name from Quicken Loans in 2021), and United Wholesale Mortgage have geared up. (See 2023 rankings below).

These players are poised to handle potential refinancings of mortgages that have been closed in the past two or three years - worth trillions of dollars. Many of these refinanced mortgages will result in lower monthly payments.

Over the past three years, mortgage rates have ranged from the upper 7% level to a peak of just over 8%.

Lower interest rates could lead to mortgages in the 6% range, which would make it worthwhile for many homeowners to refinance.

As of Aug. 9, the average 30-year mortgage rate was 6.48%, which puts the number of U.S. borrowers that would benefit from refinancing (75 basis points of incentive) at 2.4 million, according to estimates from Intercontinental Exchange.

The 2.4 million ranks as the highest level since April 2022 and it's up about 60% or by 900,000 people from the prior week, according to ICE.

For the average U.S. mortgage of $350,000, the borrower's monthly payment goes down by about $200 with a 6.5% mortgage compared with 7.5% roughly a year ago.

Wells Fargo steps back

While good times may soon beckon for mortgage providers, some big banks have been stepping back from the business of providing home loans to consumers, but they often remain active in other ways such as the securitization of debt.

Banks have reduced their exposure to the retail mortgage business as they focus on higher-yielding sectors such as investment banking and wealth advising.

Industry players said big banks have done this partly because it's difficult for a bigger financial firm with many business lines to compete with smaller rivals that are laser-focused on mortgage products.

Another challenge to the mortgage business is the cyclicity of the market. When interest rates rise, there's less demand and the overhead is difficult to maintain for large banks and retail mortgage firms, an industry source said.

The cost of their overhead is often higher than for a wholesale lender, according to a source.

Among the largest U.S. banks, Wells Fargo (WFC) said in early 2023 it would scale back its mortgage business, which has contributed to the bank's overall drop in head count.

In the second quarter, Wells Fargo said its retail mortgage originations fell 31% from a year ago. The bank has reduced its staffing by about 45% since early 2023. A Wells Fargo spokesperson declined to provide a specific number of job cuts in the unit.

"We're focused on our customers, profitability, returns, and serving minority communities, not volume or market share," Wells Fargo Chief Executive Charles Scharf said last year. "The mortgage product is important to our customer base and the communities we serve, so it will remain important to us. But we do not need to be one of the biggest originators or servicers in the industry to do this effectively."

Other banks such as Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and U.S. Bancorp (USB) remain active in the retail mortgage business.

Big banks also provide warehouse lines of credit for non-bank mortgage companies to tap, and they also buy and sell non-agency loans such as jumbo loans, which are traditionally aggregated into private-label securitization (PLS) deals, a source said.

United Wholesale Mortgage is betting on a mortgage recovery

As Wells Fargo has scaled back, United Wholesale Mortgage has added staff.

Smith said the company saw an uptick in activity when bond yields dropped to near 4% during the market volatility in early August. That's one indicator that mortgage activity is poised to rise as the Fed readies interest-rate cuts as early as next month.

"We know it's coming," Smith said. "We're ready to go."

The company is achieving growth by offering high-quality loans at competitive pricing with rapid closing times, he said.

United Wholesale Mortgage averages 14 to 15 days for mortgage approval with an appraisal, while banks take 40 to 70 days. Its closing costs are often lower.

Alex Elezaj, chief strategy officer at United Wholesale Mortgage, said the company's growth is also due to its business model of using a network of independent brokers, which has won out over in-house mortgage providers such as rival Rocket.

"We're helping [consumers] purchase a home or refinance their mortgage and allowing the brokers that work with them to have a product that's better than a bank," Elezaj said.

All told, the brokers' share of the direct-lending mortgage market has risen to about 27% in the first quarter from 23.6% for full-year 2023 and from 19.7% for full-year 2022, according to industry data cited by United Wholesale Mortgage.

Jonathan Haddad, an independent mortgage broker based in Bingham Farms, Mich., and president of Next Door Lending, said he switched over from being a retail loan officer about five years ago.

For Haddad, working as an independent broker has more upside potential and it offers the advantage of having more products to offer to a wider universe of borrowers.

About 58% of his business goes to United Wholesale Mortgage, but Haddad works with nearly 80 different lenders.

As the environment improves, mortgage brokers have been staying in touch with clients who closed loans in the past couple of years to help them capitalize on lower rates, Haddad said.

"The pipeline looks good," said Haddad, who is also chief executive of the Association of Independent Mortgage Experts. "You're seeing a lot more smiles at industry events, optimism is much better than it was 12 months ago."

Much of this positivity has already been baked into stock prices of United Wholesale Mortgage and other mortgage providers, according to some pundits on Wall Street.

Wedbush analyst Brian Violino said in an email to MarketWatch that he's kept a neutral rating on United Wholesale Mortgage to reflect his view that the current rate dip is already priced into the company's relative valuation, which is at a premium to its peers.

Violino has buy ratings on PennyMac, Mr. Cooper Group and Rithim Capital. Guild Holdings also trades at a cheaper multiple than United Wholesale Mortgage, he said.

"We're definitely seeing some renewed optimism, especially for refinancings, with the recent dip in rates," Violino said. "And this is after almost two years of little to no ... refi activity."

https://www.morningstar.com/news/marketwatch/20240822374/heres-how-one-mortgage-company-hopes-to-ride-a-possible-home-lending-surge