New Index Reveals Impact of COVID-19 on Real Estate

New Index Reveals Impact of COVID-19 on Real Estate | MyKCM

Earlier this month, realtor.com announced the release of their initial Housing Recovery Index, a weekly guide showing how the pandemic has impacted the residential real estate market. The index leverages a weighted average of four key components of the housing industry, tracking each of the following:

  1. Housing Demand – Growth in online search activity
  2. Home Price – Growth in asking prices
  3. Housing Supply – Growth of new listings
  4. Pace of Sales – Difference in time-on-market

The index then compares the current status “to the last week of January 2020 market trend, as a baseline for pre-COVID market growth. The overall index is set to 100 in this baseline period. The higher a market’s index value, the higher its recovery and vice versa.”

The graph below charts the index by showing how the real estate market started out strong in early 2020, and then dropped dramatically at the beginning of March when the pandemic paused the economy. It also shows the strength of the recovery since the beginning of May.New Index Reveals Impact of COVID-19 on Real Estate | MyKCMIt’s clear to see that the housing market is showing promising signs of recovery from the deep economic cuts we experienced earlier this spring. As noted by Dean Mon, Chairman of the National Association of Home Builders (NAHB):

“As the nation reopens, housing is well-positioned to lead the economy forward.”

The data today indicates the housing market is already on the way up.

Bottom Line

Staying connected to the housing market’s performance over the coming months will be essential, as we continue to evaluate exactly how the housing market is doing in this uncharted time ahead.

Posted on July 1, 2020 at 11:00 pm
Cara Milgate | Category: Coronavirus, Market Trends, Real Estate Tips & Strategy

Think You Should For Sale By Owner? Think Again

Think You Should For Sale By Owner? Think Again [INFOGRAPHIC] | MyKCM

Some Highlights 

  • For Sale By Owner (FSBO) is the process of selling real estate without the representation of a real estate broker or real estate agent.
  • According to the National Association of Realtors’ Profile of Home Buyers & Sellers, 35% of homeowners who decided to FSBO last year did so to avoid paying a commission or fee. But, homes sold with an agent net 6% more than those sold as a FSBO according to Collateral Analytics.
  • Before you decide to take on the challenge of selling your house on your own, let’s connect to discuss your options.
Posted on July 1, 2020 at 11:00 pm
Cara Milgate | Category: For Sale By Owner, Seller Tips & Strategy

What Are Experts Saying About the Rest of 2020?

What Are Experts Saying About the Rest of 2020? | MyKCM

One of the biggest questions on everyone’s minds these days is: What’s going to happen to the housing market in the second half of the year? Based on recent data on the economy, unemployment, real estate, and more, many economists are revising their forecasts for the remainder of 2020 – and the outlook is extremely encouraging. Here’s a look at what some experts have to say about key areas that will power the industry and the economy forward this year.

Mortgage Purchase Originations: Joel Kan, Associate Vice President of Economic and Industry ForecastingMortgage Bankers Association

“The recovery in housing is happening faster than expected. We anticipated a drop off in Q3. But, we don’t think that’s the case anymore. We revised our Q3 numbers higher. Before, we predicted a 2 percent decline in purchase originations in 2020, now we think there will be 2 percent growth this year.”

Home Sales: Lawrence Yun, Chief Economist, National Association of Realtors

“Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lock down and hence the cyclical low point…Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

Inventory: George Ratiu, Senior Economist, realtor.com

“We can project that the next few months will see a slow-yet-steady improvement in new inventory…we projected a stepped improvement for the May through August months, followed by a return to historical trend for the September through December time frame.”

Mortgage Rates: Freddie Mac

“Going forward, we forecast the 30-year fixed-rate mortgage to remain low, falling to a yearly average of 3.4% in 2020 and 3.2% in 2021.”

New Construction: Doug Duncan, Chief Economist, Fannie Mae

“The weaker-than-expected single-family starts number may be a matter of timing, as single-family permits jumped by a stronger 11.9 percent. In addition, the number of authorized single-family units not yet started rose 5.4 percent to the second-highest level since 2008. This suggests that a significant acceleration in new construction will likely occur.”

Bottom Line

The experts are optimistic about the second half of the year. If you paused your 2020 real estate plans this spring, let’s connect today to determine how you can re-engage in the process.

Posted on July 1, 2020 at 10:59 pm
Cara Milgate | Category: Coronavirus, Market Trends

Are New Homes Going to Be Available to Buy This Year?

Are New Homes Going to Be Available to Buy This Year? | MyKCM

In today’s economy, everyone seems to be searching for signs that a recovery is coming soon. Many experts agree that it may actually already be in motion or will be starting by the 3rd quarter of this year. With the housing market positioned to lead the way out of this recession, builder confidence might be a bright spark that gets the recovery fire started. The construction of new homes coming right around the corner is a huge part of that effort, and it may drive your opportunity to make a move this year.

According to the National Association of Home Builders (NAHB): 

“New home sales jumped in May, as housing demand was supported by low interest rates, a renewed household focus on housing, and rising demand in lower-density markets. Census and HUD estimated new home sales in May at a 676,000 seasonally adjusted annual pace, a 17% gain over April.” 

In addition, builder confidence is also rising, opening up opportunity for newly constructed homes in the market. The NAHB also notes:

“In a sign that housing stands poised to lead a post-pandemic economic recovery, builder confidence in the market for newly-built single-family homes jumped 21 points to 58 in June, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Any reading above 50 indicates a positive market.”

As noted above, this upward trend is supported by builders reporting an increase in demand for single-family homes in suburban neighborhoods with lower-density populations, a result of the COVID-19 health crisis.

Moreover, the most recent Monthly New Residential Construction Report from the U.S. Census indicates that authorized building permits for new residential construction increased by 14.4% month-over-month from April to May, and housing starts were also up 4.3% over the same time period. (See graph below):Are New Homes Going to Be Available to Buy This Year? | MyKCMAlthough housing permits and starts are both considerably lower than they were at this time last year, indicating the new construction market is still working on building its way back up, the trends are moving in the right direction when it comes to having an impact on the U.S. economy. They’re also poised to create the much-needed new homes for Americans to purchase in a time when inventory is so scarce.

Dean Mon, Chairman of the NAHB notes:

“As the nation reopens, housing is well-positioned to lead the economy forward…Inventory is tight, mortgage applications are increasing, interest rates are low and confidence is rising. And buyer traffic more than doubled in one month even as builders report growing online and phone inquiries stemming from the outbreak.”

The gap between homes to buy and the high demand from purchasers may be narrowed by new construction, and the data shows that these homes are on their way into the housing market.

So, if you’ve debated whether or not to sell your house this year because you’re not sure where to move, a newly-built home – designed to your specific liking – may be your answer.

Bottom Line

With new residential construction right around the corner, you can feel confident about selling your house and having a place to move into. Maybe it’s time to finally design the home you’ve always wanted. Let’s connect today to discuss selling your house while demand from eager buyers is high.

Posted on July 1, 2020 at 10:59 pm
Cara Milgate | Category: Coronavirus, Recession, Seller Tips & Strategy

A Historic Rebound for the Housing Market

A Historic Rebound for the Housing Market | MyKCM

Pending Home Sales increased by 44.3% in May, registering the highest month-over-month gain in the index since the National Association of Realtors (NAR) started tracking this metric in January 2001. So, what exactly are pending home sales, and why is this rebound so important?

According to NAR, the Pending Home Sales Index (PHS) is:

“A leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.”

In real estate, pending home sales is a key indicator in determining the strength of the housing market. As mentioned before, it measures how many existing homes went into contract in a specific month. When a buyer goes through the steps to purchase a home, the final one is the closing. On average, that happens about two months after the contract is signed, depending on how fast or slow the process takes in each state.

Why is this rebound important?

With the COVID-19 pandemic and a shutdown of the economy, we saw a steep two-month decline in the number of houses that went into contract. In May, however, that number increased dramatically (See graph below):A Historic Rebound for the Housing Market | MyKCMThis jump means buyers are back in the market and purchasing homes right now. Lawrence Yun, Chief Economist at NAR mentioned:

“This has been a spectacular recovery for contract signings and goes to show the resiliency of American consumers and their evergreen desire for homeownership…This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”

But in order to continue with this trend, we need more houses for sale on the market. Yun continues to say:

“More listings are continuously appearing as the economy reopens, helping with inventory choices…Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.”

As we move through the year, we’ll see an increase in the number of houses being built. This will help combat a small portion of the inventory deficit. The lack of overall inventory, however, is still a challenge, and it is creating an opportunity for homeowners who are ready to sell. As the graph below shows, during the last 12 months, the supply of homes for sale has been decreasing year-over-year and is not keeping up with the demand from homebuyers.A Historic Rebound for the Housing Market | MyKCM

Bottom Line

If you decided not to sell this spring due to the health crisis, maybe it’s time to jump back into the market while buyers are actively looking for homes. Let’s connect today to determine your best move forward.

Posted on July 1, 2020 at 10:58 pm
Cara Milgate | Category: Coronavirus, Market Trends, Real Estate Tips & Strategy

California Issues Guidelines for More Pandemic-Related Retail Openings

Rules Also Cover Manufacturing, Logistics and Other ‘Low Risk’ Locations Serving Stores

California Gov. Gavin Newsom announced guidelines allowing low-risk retail and industrial facilities to reopen starting Friday. (Gage Skidmore/Flickr)California Gov. Gavin Newsom announced guidelines allowing low-risk retail and industrial facilities to reopen starting Friday. (Gage Skidmore/Flickr)

California officials issued second-stage guidelines intended to put more retail, logistics and manufacturing companies on a path to post-coronavirus pandemic normalcy starting Friday, allowing them to reopen with necessary site modifications and precautions.

Guidelines announced by Gov. Gavin Newsom, and posted on the state’s pandemic response website, are similar to those issued earlier for businesses that were deemed essential in the state’s first phase of response to the virus, such as grocery stores, drugstores, banks and gas stations.

Those businesses are required to provide the high levels of sanitation, social distancing and other protocols to try to prevent the spread of the virus. If they follow the same standards, more businesses deemed “low risk” for virus transmission can open for business Friday, including retailers selling clothing, sporting goods, toys, books, music and flowers. The same state standards would generally also apply to manufacturing, warehouse and other logistics businesses serving retail customers that could be eligible to begin to reopen.

The new guidelines are the first in a series that are scheduled to be issued in coming weeks to help the 70% of businesses in California’s economy that are still reeling from stay-at-home orders issued by the state in mid-March. Newsom said practices will be subject to adjustment over the course of a total of four phases of reopenings that could play out over the course of several months.

“This is not etched in stone,” Newsom said of the latest guidelines. “We want to continue to work with people across sectors and address unintended and not just intended consequences of these meaningful modifications of the stay-at-home order.”

Since many retailers are small businesses, owners will be left to decide their own opening timelines based on the extent to which they are able to invest in the personnel and other expenses required to enforce social distancing, hygiene and other elements already being carried out by essential businesses such as supermarkets.

For instance, the state’s new retail guidelines call for businesses that open to provide temperature or symptom screenings for all workers at the beginning of their shifts and for any work-related personnel entering the facility. Protective gear should be supplied by the business to cashiers, baggers and other workers with “regular and repeated interaction with customers.”

The guidelines encourage the use of pickup and delivery services like those already being used by many stores and restaurants to minimize in-store contact and maintain social distancing. The rules acknowledge that may not be an option for all types of retailers, because of the ways in which people browse and shop depending on the product.

The retail guidelines call for closing in-store bars, bulk-bin options and public seating areas, and also for discontinuing product sampling.

Slow Recovery

While many retailers may be legally able to open their doors, some may still wait to do so, according to brokers. The restrictions may still pose logistical and financial challenges that could not end up being worth the effort.

“For clothing stores or shoe stores or others where there is a need to try things on and get the right sizing or fit, there isn’t any advantage to have people pick up curbside,” Mike Moser, partner in San Diego-based brokerage firm Retail lnsite, told CoStar News.

“And for shops where people browse through and purchase, the thought that these retailers are going to be able to do any business with a curbside pickup isn’t a solution that helps nor does it make that much sense,” Moser said.

Under the state guidelines, retailers will be able to operate at no more than 50% of normal capacity, and are advised to be “prepared to queue customers outside while still maintaining physical distance, including the use of visual cues.” In grocery stores, for instance, those cues have included floor markings intended to keep customers six feet apart in checkout lines.

Moser said small retailers want to open for business in a safe manner, but many may decide to wait because those modifications will not pay off when store traffic is lingering between 25% and 50% of normal capacity. Operators have staffing, inventory replenishment and other costs to consider in addition to the coronavirus-related modifications.

Newsom said another set of openings for the current second phase is being worked out, and details are expected to be announced in coming weeks for modified on-site restaurant dining, as well as the operating of outdoor museums, car washes and other low-risk businesses.

A return to more crowded settings such as office buildings, gyms and bars is not likely to occur until the third phase in California, and full operating of most types of businesses and public spaces won’t happen until the fourth phase. Newsom said the state is currently allowing counties to proceed faster with openings than the state if they can certify progress in areas such as infection and death declines, and increases in testing for the virus.

Officials of some hard-hit cities, including San Francisco and Los Angeles, have already said they will be proceeding slower than California as a whole when it comes to current and future business openings.

The Commerce Department reported that nationwide retail sales dropped 8.7% from a year ago in March, the sharpest plunge on record, with apparel store sales down 50% and restaurants and bars dropping 26%,

April U.S. retail figures are not yet available but are likely to show steeper declines, reflecting a full month of retail closings compared with March’s half month.

Posted on May 14, 2020 at 6:46 pm
Cara Milgate | Category: Commercial

Office Sublease Availability in San Francisco Jumps By 1 Million Square Feet in 2020

CoStar Insight: Further Rise Expected as Tech Firms Slash Payrolls

If you’re currently looking for office space in San Francisco, there’s a good probability that you’ll be considering a sublease option. Roughly 30% of the available space in the market is listed for sublease from an existing or prior tenant, rather than from a landlord directly.

In January, CoStar was tracking just over 5 million square feet of available sublease space in San Francisco. As of early May, sublease availability jumped another 1 million square feet, to over 6 million square feet total, representing roughly 3.3% of total market inventory. By comparison, direct space availability totals more than 14 million square feet, or 7.8% of total inventory. Largely driven by the recent rise of sublease space, total availability in the market has now eclipsed 11%.

San Francisco now has the highest sublease availability rate across the country, significantly outpacing the second place San Jose market, where 2.4% of existing inventory is available for sublease. San Jose had maintained its ranking as the country’s most saturated market for sublease availability from the second quarter of 2017 through the third quarter of 2019, which was partially driven by consolidations in the semiconductor industry. But sublease availability in San Jose steadily declined in 2018 and 2019, while it has recently spiked in San Francisco.

The rise of sublease listings in San Francisco can largely be attributed to cost-sensitive businesses leaving the market, as well as technology tenants banking space for future growth or coming to the realization that they will not fulfill aggressive growth plans. And now, victims of the coronavirus pandemic’s shelter-in-place and social distancing measures have begun to shed space as well.

New listings in the market include 55 Hawthorne St., where KeepTruckin has offered 34,108 square feet for sublease. The unicorn startup that helps truck drivers log hours laid off 349 employees in April, or 18% of its global workforce.

Credit Karma moved into the Phelan building at 760 Market St. in 2014, and expanded in 2017 to a footprint spanning 121,000 square feet. In February, the company listed two floors for sublease, totaling 24,320 square feet.

Macy’s announced plans to close its tech offices in San Francisco and is moving positions to New York to streamline operations. Accordingly, Macy’s.com listed its office at 680 Folsom St. for sublease in January. The eight vacant floors total 272,401 square feet, encompassing half of the building. Macy’s employed 880 full-time workers and about 200 contractors in the building.

At 795 Folsom St., the defunct robotics-enabled Zume Pizza has offered 64,177 square feet for sublease. The start-up cut 80 San Francisco-based positions in January and shut down pizza delivery operations after four years in business.

With tech firms in hard-hit segments of the economy slashing jobs and small businesses clamoring to obtain payroll protection loans to stay afloat through the recession, it’s likely that sublease space will continue to flood the market in the year ahead.

In the first week of May alone, Airbnb announced the termination of 1,900 employees, or roughly one-quarter of its workforce, and Uber said it is slashing 3,700 positions, or 14% of its workforce, while Juul recently announced plans to move out of the city and cut roughly 25% of its U.S. staff of 1,800. All three firms expanded offices in the city substantially during the expansion cycle.

Lyft likewise announced cuts of 982 one week earlier, and Yelp slashed 1,000 jobs in early April. Opendoor and Eventbrite cut 600 and 500 jobs, respectively, last month.

Exacerbating the effect that severe job losses and business failures will have on demand for space in the San Francisco office market, a CoreNet Global survey conducted between April 22th and 27th found that 69% of end users surveyed say that their company’s real estate footprint will shrink as a result of increased work from home. With excess space on hand, even tenants that survive the recession may consider subletting portions of their offices to others in order to recoup costs.

Posted on May 14, 2020 at 6:45 pm
Cara Milgate | Category: Commercial

Coronavirus Reveals the Weak Links in Global Supply Chains

CoStar Insight: Why China Stands to Lose and US Stands to Benefit in the Wake of COVID-19

Most manufacturing is expected to reshore to other parts of Asia post-pandemic, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland. (iStock)Most manufacturing is expected to reshore to other parts of Asia post-pandemic, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland. (iStock)

The COVID-19 crisis has profoundly affected global economies in an unprecedented way, putting millions out of work all at once, slowing commerce to a crawl and wreaking havoc on equity markets. And yet the effects of the pandemic may also prove instructive, illustrating plainly some of the systemic weaknesses and deficiencies that were papered over and unexposed during the steady economic growth of the most recent expansion.

In particular, supply chains of unwieldy length depending solely on Chinese manufacturing and ports have shown themselves to be extraordinarily brittle. Also, confidence in the trustworthiness of the Chinese government after initial assurances minimizing the severity of the COVID-19 crisis was found to be misplaced, resulting in an erosion of trust after the government reversed its previous stance and forced manufacturers to shut down operations in January.

Given the lessons being swiftly taught worldwide by breakdowns in supply chains for businesses and consumers alike, there are ramifications that should have long-lasting and far-reaching impacts for manufacturers, domestic markets and ultimately industrial investors looking to capitalize on the shifting composition of supply chain management.

Although the true extent of the frailty inherent in supply chains built without redundancies may just be coming to light, it is likely that the current state of the global economy may only exacerbate trends that were already taking place. Spurred by a number of concerns, including rising wages, total cost considerations and an administration driving an extended trade war with China, the average monthly value of imports from China fell more than 6% between 2015 and 2019, a drop of nearly $2.6 billion.

Over the same period, U.S. imports from other Asian countries, the European Union and Mexico all grew by double-digit percentages, with Vietnam in particular appearing to pick up a great deal of the slack afforded by China’s diminished export numbers. The conclusion appears certain: China cannot remain the world’s sole factory for the long term, and numerous other destinations look set to reap the rewards.

The most likely outcome of the shakeup prompted by the COVID-19 outbreak is a greater focus on building redundancies and increased resiliency into supply chains at all levels. No single country is likely to benefit in a lopsided manner from firms moving production out of China. Instead, a combination of reshoring, which involves shifting operations either to other Asian nations with low-cost labor pools or to regional trading partners like Mexico or Canada, and onshoring a smaller amount of production back to the U.S., will allow companies to diversify supply chains and mitigate the supply risk associated with concentrating in a single nation.

For companies that have chosen to onshore production after a sustained period using offshore suppliers, a number of negative factors related to supply chains prompted their return. Though quality of work and necessity for rework was cited a quarter of the time among the top 10 reasons for abandoning an offshoring strategy, freight costs, delivery or inventory concerns and supply chain interruptions made up 40% of the negatives associated with the practice, according to a 2018 study by Reshoring Initiative.

Similarly, among the benefits cited by respondents to the study were lead times, supply chain optimization and proximity to market, altogether accounting for 34% of the top 10 positives for onshoring production.

It should be noted that most onshored manufacturing is often highly complex, high-value-add work producing goods such as computer, electronics, auto and heavy equipment. This type of manufacturing is also extensively automated, and requires higher skilled workers for the jobs that do end up being created.

A distinct lack of those highly skilled workers domestically limits the amount of offshore jobs that are likely to return onshore from places like China. In contrast, manufacturing goods that require low-skilled labor and are difficult to automate constitute the bulk of production being reshored elsewhere, and are almost certainly not going to return to the U.S.

For industrial investors domestically, an added benefit may be found in inventory shortages created by the crisis. For decades, one prevailing motivation for supply chains was suppressing costs through just-in-time strategies, implementing push-pull management or other ways to reduce inventory and associated holding costs. Inventory-to-sales ratios dropped across the board prior to the Great Recession, most precipitously for manufacturers. The relatively recent rise in e-commerce forced a moderate rise in inventories, though remaining well below the ratios of the 1990s and early 2000s.

Now, however, with widespread demand causing unforeseen shortages for consumer goods, intermediate goods and raw materials alike, it is not unreasonable to expect that firms at a number of levels in the supply chain will see the added benefit of increasing inventories in the short or medium term, despite the associated storage costs. That should contribute to minor increased demand for warehouse space once economies begin to reopen, and will likely push average inventory to sales ratios above 1.4 for the manufacturing and retail segments of the market.

Given that this is largely in response to COVID-19, a “black swan” occurrence, companies are unlikely to sustain heightened inventory carrying costs permanently. Rather, this should prove to be a one-time boost for the segment when entering the next expansionary cycle and then dissipate along with the psychological effects of current shortages.

There are a number of considerations for investors targeting markets that are likely to experience tailwinds from reshoring and potential onshoring of manufacturing from China. Most manufacturing is expected to reshore to other parts of Asia, a factor that will help keep steady port traffic in West Coast markets such as Los Angeles, Seattle and Oakland, and East Coast ports such as New York, Norfolk, Savannah and Jacksonville should see similar returns to stability in the numbers of imported TEUs, or 20-foot-equivalent units, a measurement used in the maritime industry to record international containerized freight volumes.

Increased manufacturing activity in Mexico could likewise boost industrial demand in Los Angeles and the nearby Inland Empire, but could also provide additional demand in Texas markets and eastern ports.

For markets likely to experience smaller boosts from onshoring of overseas production, it’s evident from jobs created from onshoring operations between 2010 and 2018 that Southern markets are heavily favored given their lower costs for labor, the often considerable subsidies made available by these states and business-friendly policies that eschew red tape and barriers to entry. Additionally, the same states are usually equally popular for foreign manufacturers looking to locate manufacturing facilities in the U.S. market.

Though industrial investors in states attractive to firms considering onshoring will benefit directly from increases in the local manufacturing base, the reality of increased reshoring rather than onshoring should reinforce already established national and regional distribution hubs over the longer term, allowing crucial increased stability of supply chains globally and helping to mitigate risk for industrial assets across the U.S. from future disruption.

While this may be of little help in the current crisis, it is reason for cautious optimism for industrial investors looking ahead to a return to economic normalcy.

Posted on May 14, 2020 at 6:44 pm
Cara Milgate | Category: Commercial

Plunge in Bay Area Leasing Activity Highlights Challenges Moving Forward

CoStar Insight: Weekly Figures Showcases Coronavirus’ Effect on Retail Sector

The unprecedented drop seen in new leasing activity around the San Francisco Bay Area is hardly surprising given the limitation on the population under the current shelter-in-place order, which went into effect on March 17 and closed all non-essential businesses, sending shockwaves through the retail industry.

In the commercial property sector, the inability to have physical property tours limits the ability of landlords and brokers to showcase available retail spaces. New retail tenants are likely tentative, given the uncertain outlook for an economic recovery and a return to relatively normal social interactions and commercial consumption levels. And owners are struggling with the ramifications of lost rental revenue and the challenges in keeping occupancy rates up in buildings, potentially attempting to renew existing tenants early.

In an analysis of new retail leasing in seven Bay Area metropolitan areas, including San Francisco, San Jose, East Bay, San Rafael, Santa Rosa, Napa and Vallejo-Fairfield, leasing volume has plummeted to historically low levels. The seven weeks from mid-March to the end of April saw average weekly leasing activity of just 36,000 square feet. To give that figure further context, the average weekly leasing volume since 2007 across the Bay Area is over 120,000 square feet.

While it isn’t unexpected that newly signed leases have been almost non-existent in recent weeks, it does highlight yet another obstacle the retail property sector is going to have to overcome. Businesses will close as a result of the current economic downturn, leaving more vacant space in need of new tenants. The stark slowdown in leasing activity could leave a gap in new demand entering the market just as vacancies start to increase, exacerbating increases in near term vacancy rates. And restarting the leasing engine will be a crucial factor in gaining some positive momentum in the retail property market.

The effect on retail rents is expected to be negative as well. Rising vacancies and a strong pullback in demand should result in declining rental rates as owners look to fill empty retail spaces. It will be worth keeping a close eye on available space in the coming months. Across the Bay Area, availability is below 5% on average, with availability registering 5% in the East Bay, 4% in San Jose, and just over 4% in San Francisco.

From a slightly more optimistic perspective, the Bay Area retail market performed relatively well through the previous economic expansion period following the Great Recession. Strong economic and population growth in the Bay Area, along with limited supply pressure, helped to maintain healthy market fundamentals. And the Bay Area is forecasted to fare better from an employment and economic growth perspective than many other areas of the country in the coming years. So, while challenges are abundant for the retail sector, Bay Area properties may be able to outperform national trends through the current downturn.

Posted on May 14, 2020 at 6:43 pm
Cara Milgate | Category: Commercial

Retail Loan-To-Value Levels On Steadier Footing Heading Into Economic Downturn

CoStar Insight: Retail Properties Facing Major Headwinds, But Debt Levels Are Lower Than Just Before Financial Crisis

Retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. (CoStar)Retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. (CoStar)

Retail properties are expected to have the most challenging road forward due to the acute effects that the coronavirus pandemic is having on the sector. Shelter-in-place orders, which began in mid-March in the San Francisco Bay Area, have been extended through the end of May, placing significant pressure on retail property incomes.

In the most recent March retail sales report from the U.S. Census Bureau, total retail sales retreated 8.7% across the United States, the worst monthly decline since the data became available in 1992. The hardest hit retail sector was clothing stores, which saw sales decline by 50%, according to the report. And furniture, bars and restaurants, and sporting goods all saw sales declines of over 20%.

Given the stress that retail property financials are undergoing, it is worth looking at leverage levels in some of the larger retail property sales in recent years compared to the levels seen prior to the Great Recession of 2008.

The loan-to-value analysis takes a broad, high-level look at the 40 largest transactions across the San Francisco, South Bay/San Jose and East Bay/Oakland metropolitan areas, where CoStar has data on loan amounts. Despite the broad view, it does give insight into the comparative lending trends for retail properties, and the relative risk for property loans compared to recent history.

Comparing the relative ratio of loan-to-value figures — the ratio of a property’s sales value to the amount the buyer financed on the deal — shows that there were significantly higher leverage levels undertaken in retail asset purchases during 2006-2007 compared to 2018-2019.

In 2006-2007 over 10% of the 40 largest retail transactions in which CoStar captured loan financing with LTV ratio’s over 80%, compared to 0 from 2018-2019. Properties with LTVs between 60% and 80% represented 45% of the sales in 2006-2007 compared to just 20% in 2018-2019. And while sales with LTVs lower than 60% accounted for 45% of retail sales from 2006-2007, 80% of the sales in 2018-2019 had LTVs 60% or below.

Clearly, retail investors and lenders have been far more conservative in recent years compared to the years leading into the Great Recession. And landlords appear to have more sustainable mortgage payments relative to their property’s net operating incomes.

This is to be expected, given changes in the financial industry stemming from the financial crisis and changes in consumer behavior as e-commerce has risen significantly in popularity. Retail properties will need all the help they can get to avoid a wave of distressed selling, which would further damage a sector already facing a number of major headwinds moving forward.

Posted on May 14, 2020 at 6:41 pm
Cara Milgate | Category: Commercial