Archives for May 2023

Tech leaders took the stage at the 2023 REALTORS® Legislative Meetings(link is external) to discuss existing innovations and trends to help real estate agents level up their businesses. Several hundred Realtors® attended Tuesday’s “Emerging Business Issues and Technology Forum,” which provided insight into technologies that help agents maximize their presence on social media, streamline marketing, and attract and retain clients.

Alex Montalenti, co-founder of Real Grader, covered the importance of branding and having a well-curated social media presence. Real Grader measures, manages and maximizes the digital presence of real estate professionals. When asked about the most important thing that real estate agents should do when it comes to their social presence, Montalenti said that after setting up all social accounts, it is vital to connect with your sphere.

“Find your clients on Facebook, Instagram and LinkedIn and connect with them,” he said. “Once you’ve set that connection, they will follow your relationship and journey for years. With social media, you have the ability to keep in touch and stay top of mind.”

Mark Choey, founder of Highnote, spoke about the importance of streamlining the process of building presentations. Highnote is a drag-and-drop presentation and proposal platform that helps agents pitch and sell listings, offers, neighborhoods and themselves.

“Agents need great presentations, and they need them fast,” he said. “An effective presentation is the lifeblood of all great real estate agents.”

Glenn Shimkus, founder and CEO of Prisidio, discussed the importance of organizing and safely managing all types of vital documents and information. Prisidio provides consumers with a digital vault to capture and securely share the most important information with the key people in their lives.

When asked about tips for people interested in this type of software but who are unsure how to get started, Shimkus encouraged the audience to take things one step at a time.

“It’s all about tiny habits,” he said. “We want to enable you – in quick bursts – to go in and get organized. When you break everything up into little chunks, you will be amazed at how quickly you can be ready, prepared and have peace of mind.”

Prisidio, Highnote and Real Grader were all recently accepted to the 2023 REACH program, a technology scale-up program created by Second Century Ventures, NAR’s strategic investment arm.

In another Tuesday session at the REALTORS® Legislative Meetings, real estate industry expert Marki Lemons Ryhal shared valuable insights and practical tips about how real estate agents can leverage artificial intelligence technologies to enhance efficiency, productivity and reach in their businesses.

Her session, entitled “How AI is Transforming the Real Estate Industry,” highlighted the capabilities of ChatGPT, an advanced language model developed by OpenAI, describing it as a “productive, electrifying, trained assistant.” She also provided an overview of Canva’s AI tools, including text-to-image generation and a translation tool that can convert text within a design to more than 100 languages. Lemons Ryhal explained how these technologies are enabling real estate professionals to create engaging and visually appealing marketing materials while catering to a diverse clientele.

She shared that many agents use AI tools to write real estate descriptions but stressed these tools are not perfect, and proofreading content remains crucial.

“We still have to adhere to license law, the Realtor® Code of Ethics, and fair housing rules and regulations,” Lemons Ryhal said.

The National Association of Realtors® is America’s largest trade association, representing more than 1.5 million members involved in all aspects of the residential and commercial real estate industries. The term Realtor® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of Realtors® and subscribes to its strict Code of Ethics.

Source: “Tech Leaders Share Insights at 2023 REALTORS® Legislative Meetings“

The Federal Reserve and other regulators have been focused of late on bank problems, and well they should. But concern is now spreading to commercial real estate and the possibility that interplays between CRE borrowers and lenders could, under current conditions, create a positive feedback loop that could increasingly hurt both. The signs are in two Fed reports.

In its May 2023 Financial Stability Report, the Fed looked at the exposure of financial institutions to CRE debt. The report acknowledged reduced demand for office space—and lack of understanding as to how that will ultimately play out—and vulnerability to higher interest rates that could prevent refinancing. “With CRE valuations remaining elevated … the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt,” they wrote.

Although that seems to run counter to the recent breakdown by Moody’s Analytics, the Fed doesn’t include multifamily mortgages “because the fundamentals of that sector are substantially different.” Major devaluations of nonresidential CRE properties could then cause a big problem for banks that hold CRE debt. Plus, devaluations could likely trigger basic covenants, putting borrowers out of LTV requirements.

But as it turns out, the LTV question is more complicated than it might seem. “As of the fourth quarter of 2022, current LTVs (that is, ratios that incorporate recent estimates of building value rather than building value at loan origination) of mortgages backed by office and downtown retail properties were in the range of 50 to 60 percent, on average, for the loan-level data that are available,” the Fed wrote. The reason was that for properties bought before the pandemic, “values rose materially,” which doesn’t help if values for some property types—say B and C Class offices—took a tumble.

And then, in the April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices, SLOOS for short, “banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.” The “most frequently reported changes pertaining to wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios.”

“Regarding the second set of special questions about reasons for changing standards on all loan categories in the first quarter, banks cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about banks’ funding costs and liquidity positions,” the Fed wrote.

The tightening also isn’t over as “major net shares” of banks expect to tighten all categories of CRE loans this year.

Looking at the second report, Moody’s Analytics in a report projected trends for CRE lending. On multifamily: “Continued weakening demand along with lenders continuing to tighten standards as vacancies rise modestly.” For nonresidential CRE: “Very weak demand will continue and lenders will continue to tighten standards amid weaker economic forecasts along with weakness in certain sectors.”

That brings things to the potential for positive feedback—which means forces that will push conditions to get even worse.

“Up until now, banks under pressure have had critical weaknesses that jeopardized their ability to operate,” Lauren Goodwin, senior director of multi-asset solutions at New York Life Investments wrote in emailed comments. “Banks were paying more for their funding than they earned on their assets.”

“The more recent round of banks under pressure are different; they have viable businesses, stable deposits, and manageable funding costs,” she continued. “While each bank has some area of vulnerability, such as loan losses or uninsured deposits, these vulnerabilities would not necessarily be problematic under normal circumstances. Nonetheless, markets appear to be zeroing in on those exposures, and regardless of business model, deposits are vulnerable to flight. Price action may very well exacerbate banking sector stress by creating a self-fulfilling prophecy of deposit flight.”

And something that could trigger deposit flight and bank stability is the prospect of large CRE loan losses, which would then upset the base of lending and create the sucking sound of a vicious circle vortex.

Source: “The Fed Worries About Bank CRE Loans for a Good Reason“

Whether consensus expert forecasts of consumer price index or consumer expectations of inflation this year and for the next few, two new reports say there’s a lot to be concerned about.

FactSet’s consensus forecasts for April’s CPI report say that inflation reduction is slowing to a point at which you could walk away, come back weeks later, and notice little difference, as Morningstar and others report. If correct, 12-month inflation in April 2023, which is being reported today, will have been almost the same as in March 2023.

“For the month, the CPI is forecast to rise 0.4%, while core CPI—which excludes volatile food and energy costs—is expected to rise 0.3%,” Morningstar reported. “In the March report, the overall CPI clocked in at an increase of 0.1%, which was the smallest increase in two years.”

Inflation having fallen isn’t enough. The Fed will not ultimately stop holding interest rates where they are, or even increasing them, until inflation eventually comes down to 2%, assuming that actually happens.

Those are the professional expectations. Then there are those of consumers, predictions that are even more important because they can help drive inflation by changing the behavior of the people who fuel about 68% of GDP.

The Federal Reserve Bank of New York released its most recent polling of consumers. If the panel of 1,300 household heads are properly representative, and there is a chance they may not be, then consumers are saying that they expect inflation to be 4.4% in a year. That in three years, CPI will still be at 2.9%, and in five years, 2.6%. Which is saying that the Fed won’t be getting its 2% for a long time. And the spread of expectations narrows over time, indicating greater consensus.

The April jobs report offered a surprise high number. That’s one data point. Inflation? Another data point. The Fed made its position clear on May 3, when it raised interest rates again:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Enough data and everyone can forget lower interest rates. And, as a result, probably avoidance of a recession.

Source: “New Reports Show Expectations of Slow Inflation Decline and a Long Slog Ahead“

A new report from the Mortgage Bankers Association (MBA) shows that its Commercial/Multifamily Mortgage Origination Index declined by 56% year-over-year in the first quarter of 2023, and was down 42% quarter-over-quarter. The decline comes after a 54% year-over-year drop in originations recorded by the index in the fourth quarter of 2022. The MBA origination index is benchmarked at 100 as equal to an average quarter in 2001.

Compared to the first quarter of last year, life insurers pulled back the most on the volume of loans they originated—by 73%, followed by investor-driven lenders (down 67%), CMBS shops (down 59%) and depositories (down 54%). Lending volume year-over-year fell the least for government-sponsored agencies (GSAs)—by 14%, according to the MBA.

Life insurers and depositories continued to pull back on commercial/multifamily lending considerably compared to the fourth quarter of 2022—they were down by 56% and 48% respectively. Investor-driven lenders decreased their origination volume by 42% quarter-over-quarter and the GSAs by 40%. CMBS shops, however, stepped up their activity on a quarter-over-quarter comparison, by 99%.

The decline in mortgage originations is due to a confluence of factors on both the supply and demand side of the equation, said Jamie Woodwell, vice president in the research and economics group of MBA. Lenders have tightened their criteria in response to concerns about property fundamentals in some sectors of commercial real estate, troubles among regional banks and a more uncertain economic outlook. But investors have also been far less active as interest rates have risen and a bid/ask gap between buyers and sellers has not been resolved, leading to lower demand for acquisition loans. In the first quarter of this year, investment sales volume fell by 56% compared to the first quarter of 2022, to $85.0 billion, according to data from research firm MSCI Real Assets. In some sectors—office and multifamily—investment sales volumes fell by more than 60%.

As a result, “It’s hard to say how much of a decline we are seeing is due to lack of availability of debt vs. lack of demand for debt,” Woodwell noted. He cited recent Federal Reserve surveys of senior loan officers. In the Fed’s April survey, 42.9% of bank officers said their lending standards for commercial and industrial loans have “tightened somewhat” over the three months leading to the survey and 54.0% said they remained “basically unchanged.” But 65.0% also noted weaker demand for loans from large and mid-size firms and 61.7% noted weaker demand from small firms.

Both lenders and real estate investors continue to experience a heightened period of uncertainty regarding the health of property fundamentals in certain sectors, the volatility in the debt markets and availability of equity, according to Woodwell. When it comes to longer term mortgages, spreads have come down in recent months after widening in the wake of multiple interest rate hikes last year, so things appear to be stabilizing there, he noted.

But “in the equity markets, there is still a lot of uncertainty about where things are, folks are trying to get a sense of where cap rates are, where values are. And it’s sort of a catch-22—people want to get a sense of clarity on where things are [to start transacting], but without things happening, there’s not a lot of clarity.”

In addition, there continues to be uncertainty about where cash flows may be headed in some property sectors, office being one of them, Woodwell added. “That’s taking a bit of time,” he said. A similar story played out with retail in the immediate aftermath of the COVID pandemic, which eventually ended up with more and more investors getting comfortable with multiple retail formats. For some firms, betting on what they view as sound properties in sectors that are going through such periods of uncertainty might be an opportunity to get some upside, Woodwell noted. But most lenders and investors will typically prefer to wait it out.

Looking at which property sectors saw the greatest declines in origination volumes in the first quarter, according to MBA’s figures, these were not office or retail, as some might have expected. Instead, the biggest year-over-year decline in loan volume happened in the industrial sector, at 72%, followed by the healthcare sector, at 69%. There was a 67% decrease in loans originated for office properties and a 50% decrease in loans for multifamily properties. Hotel and retail sectors both saw origination volumes decline by 8% compared to the first quarter of 2022. Some of the difference in origination declines might be due to more favorable comparisons for property types that have been out of favor for much of 2022, like office. But the relatively modest decline in originations for hotel properties comes after a 359% increase in originations recorded in the first quarter of last year.

Woodwell expects that as the year progresses and more commercial real estate loans reach maturity (MBA estimates that $331.2 billion in commercial and multifamily mortgages held by non-bank lenders will come due in 2023), seeing the terms lenders are willing to offer during refinancing will help the market discover where true values are and get things moving on the transaction front.

“What we are looking at is about 16% of outstanding commercial/multifamily debt is maturing this year,” he said. “And so, those loans will start the process of adjusting to where interest rates are today, where values are. And as they mature and loans are refinanced or new equity comes in, that’s going to create good marks on where the market is, so people see it and start to transact.”

Source: “Commercial Real Estate Loan Originations Recorded a Big Drop in the First Quarter, Partially Due to Lack of Demand“