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Many Investors Who Bought Multiple Units Near The Peak Will Be Forced To Sell At A Loss

A report from Bloomberg. “It was considered one of the root causes of the global financial crisis, and regulators have spent over a decade trying to stamp the practice out. Yet Kroll Bond Rating Agency Inc.’s $2 million fine this week shows how in the securitized-debt market, the battle against ratings shopping was never truly won. Kroll settled with the U.S. Securities and Exchange Commission over its failure to adhere to credit-rating standards for commercial-mortgage bonds and collateralized loan obligations, just months after rival Morningstar Credit Ratings LLC was hit with an even larger penalty by the regulator.”

“The recent fines are fueling concerns that rosy credit grades are masking deeper structural problems with the securities. The risks are particularly acute in the CMBS market, where shutdowns stemming from the coronavirus pandemic have battered revenues for malls, hotels and other commercial properties that back the debt, spurring a raft of downgrades.”

“‘The issue of ratings-shopping and grade inflation is still unresolved,’ said Jeffrey Manns, a law professor at George Washington University. ‘In good times, these problems don’t matter very much, but in bad times, these intrinsic problems become more salient. It would not be surprising if an economic downturn such as the current one exposes the structural problems of securitization ratings, and that this becomes a focal point.'”

“‘The ratings system is broken, unfortunately,’ said Marc Joffe, a senior policy analyst at Reason Foundation, a libertarian think tank, and a former employee of Moody’s Analytics and contractor for Kroll. ‘While this recession may not be as deep as the last one, there are some similarities. Last time, there was a housing bubble. This time, there was a commercial-property bubble. It just takes one thing to pop it, and this time around, it was Covid.'”

From Bisnow New York. “Some heavy hitters that leased big office spaces propped New York City’s office market up a bit in the third quarter, which ended Wednesday, but asking rates and sublease listings show it is still taking a beating from the disruption and uncertainty brought on by the coronavirus pandemic. Overall leasing volume in Manhattan rose by around 50% over Q2, and asking rents suffered their worst quarterly drop in more than 10 years, according Colliers International’s Q3 office report released Thursday. Sublease space now makes up its highest share of office inventory since the Great Financial Crisis, according to Colliers and Savills’ Q3 report.”

“The year-over-year drop-off far surpasses the last two recessions, said Frank Wallach, senior managing director of research at Colliers. ‘If leasing activity continues at the same pace for the rest of the year, we’re going to end 2020 with still the lowest year of leasing so far in this century,’ he said. ‘This is a period in the market where we’re seeing echoes of what we saw in the Great Recession.'”

From Bisnow Washington DC. “The coronavirus pandemic is continuing to hurt the office market in the nation’s capital, with demand for office shrinking, a host of sublease space becoming available and vacancy reaching another all-time high. CBRE’s report found negative net absorption of 177K SF in the District, bringing the year-to-date occupancy loss to 780K SF. It pegged D.C.’s vacancy rate at 15.4%, a new record high for the market.”

“Savills Research Manager Devon Munos said she doesn’t see much new demand from tenants on the market. Savills, a tenant rep firm that defines vacancy as the availability rate, pegged D.C.’s rate at 18.1%. ‘I think that in the coming quarters we’re going to see demand significantly drop,’ Munos said. ‘There’s really just fewer and fewer tenants willing to start the leasing process unless they’re forced to by an imminent lease expiration.'”

“The General Services Administration is continuing with its effort to save taxpayer money by consolidating offices and reducing its real estate footprint, which results in negative absorption for the D.C. office market. ‘The trend we’ve seen the past couple years of government downsizing is likely to continue, and that has contributed to increasing vacancy,’ Cushman & Wakefield Senior Director of D.C. Metro Research Nate Edwards said.”

The Boston Herald in Massachusetts. “A bill that would halt evictions and freeze rents for a year after Gov. Charlie Baker lifts the coronavirus state of emergency has cleared its first major hurdle but faces staunch opposition from landlords who say it would lead to foreclosures, slums and worse.”

“‘The further people get behind in their rent, the less likely they will ever be able to pay it. If we don’t deal with this problem and we wait another year, there’s a lot of money that will never get paid,’ said Greg Vasil, CEO and president of the Greater Boston Real Estate Board. ‘It’s the property owners who lose. We’ll see foreclosures and properties will start to fall into disrepair.'”

The Puget Sound Business Journal in Washington. “With Amazon and other tech companies expected to add tens of thousands of jobs on the Eastside in the coming years, developers of multifamily housing are swarming the area. They may be a little early, however. ‘I think there’s a lot of excitement in Bellevue, but I think people might be getting a little overly enthusiastic,’ said appraiser Brian O’Connor of O’Connor Consulting Group, a Seattle company that advises multifamily developers.”

“Across the Puget Sound region, demand for multifamily housing has dropped significantly due to Covid-19 while supply increases, he said. The Eastside is not immune. Still, this has not deterred developers. ‘Demand will probably grow, but the development community — they don’t wait for it to grow, they just charge right in,’ O’Connor said. ‘There’s already an oversupply, especially in the Totem Lake/Redmond area.'”

The Sacramento Bee in California. “It’s been a tumultuous year in downtown Sacramento. Coronavirus sent state workers away, leaving offices empty and sidewalks bare. Restaurants faltered and failed. Civil unrest hit downtown streets, prompting storefronts to board up. Hundreds of housing units are under construction and hundreds more are planned to start soon. Some of the new housing being built will be affordable to residents with lower incomes. However, much of it will be aimed at young, well-paid workers, including emigrees from the Bay Area. The enticements often include dog spas, bicycle parking rooms, pools, gyms and communal barbecue areas.”

“Downtown City Councilman Steve Hansen said projects that weren’t quite ready to go when the virus hit face tougher challenges. That includes a key housing project planned at the empty, fenced off Eighth and K streets corner, where developers had hoped this year to build apartments that would have created some much-needed oomph for K Street.”

“Instead, they are stuck trying to find new lenders. ‘The question is how many that are conceived more recently will be able to go forward given the economic circumstances that could drag our city and downtown into one of the most dramatic recessions we’ve ever seen,’ Hansen said.”

The Bay Area Newsgroup in California. “High costs, remote work and shuttered bars, restaurants and shops have taken a toll on city living in the Bay Area. And during the covid pandemic, it’s showing up in plummeting Bay Area rents since March, according to a new study by Apartment List. Monthly rent dropped 17.8 percent in San Francisco, the steepest decline in the nation, 9.5 percent in San Jose, 7.9 percent in Oakland and 6.3 percent in Fremont.”

“Overall since March, rents are down in 41 of the 100 largest U.S. cities, according to Apartment List. Other cities that have seen big drops are New York (down 11.6 percent), Seattle (off 9.9 percent) and Washington, D.C. (down 8 percent). Omar Maissen, an agent at FM Partners in San Francisco, said sales of apartment buildings and investment condos have fallen as pandemic movers have searched for more space. Small apartment buildings, he added, are ‘getting crushed.'”

From the Globe and Mail in Canada. “Scotiabank strategist Hugo Ste Marie noted that apartment rents in Toronto and Vancouver are ‘skidding’ lower. ‘The pandemic has caused some distortion in the supply-demand relationship. On the demand side, fewer foreign students, less immigration, people likely moving out of city centres toward the suburbs, and the rapid adoption of the WFH trend, which we believe is here to stay, could be issues for the sector. On the supply side, less tourism has also likely created an influx of short-term rental units (think of all the folks being unable to rent their condos on Airbnb anymore) on the LT rental market (competing against apartments)… the number of apartments listed in Toronto has sharply increased this year. All those factors pushed the average rent of a two-bedroom unit down 5.5% YOY in Q2, according to the Toronto Real Estate Board … However, another source providing more timely data (PadMapper) has the average rent for a two-bedroom unit off 12% YOY in September in Toronto (-14% in Vancouver).'”

From Mortgage Broker News in Canada. “The Vancouver condo sector might become a buyers’ market soon amid steadily growing inventory and sustained price declines, according to CBC analyst Mark Ting. The market’s average home sales price saw its last peak in January 2018, at $751,632 – a level approximately 8% higher than the reading this month. Meanwhile, active listings swelled to more than 6,000 units, with much of the new volume entering the market in July and August.”

“Prices will likely drop further due to surges in Vancouver’s inventory, largely stemming from owners forced to sell because of lost employment. ‘Many investors who bought multiple units near the peak of the market that no longer provide cash flow will be forced to sell at a loss,’ Ting said.”

The Express and Star on the UK. “Robin Lloyd reckons he got off lightly. When his new tenant refused to pay rent, he was £12,000 out of pocket by the time he managed to evict him. ‘The average amount amongst other landlords I spoke to was £33,000,’ he says, adding the experience with his other rental property, in Shropshire, was even worse. ‘I had drugs being sold to kids in my garden by someone who killed one of them with his sword,’ he says. ‘The judge said he was convinced he had acted in self defence. Curtains were set on fire by the said drug seller, and furniture slashed. Okay, he was a guest of the tenant but you do not need it do you?'”

“Mr Lloyd tells how one of his ex-tenants had begged to rent his flat from him, after he was found sleeping on a pallet in the basement of a café with his pregnant wife. ‘The sensible thing to do was walk away. No references, a recent immigrant, benefits, part-time work as a labourer,’ he says, but he took pity on the man. ‘As soon as he was in there he said, ‘this is my home now, I live here’ and refused to pay rent.'”

“Mr Lloyd adds that the man continued to claim housing benefit while living rent-free, and even complained about the lack of a view from the window. ‘Property no longer makes a profit for me,’ he says. ‘I hang on for my pension to kick in. If not for that I would be ‘financially embarrassed’ as they say in polite society.'”

“Bernie Lewis, chairman of Wrekin Landlords Association, says the group has lost 18 members over the past three years because they had decided being a landlord was no longer worthwhile. ‘When people used to ask me where to invest their money, I always used to say that property was the best investment you can make, but I wouldn’t recommend it today,’ he says. ‘We’re all very concerned. It’s nowhere near as attractive as it was 20 years ago, and it’s getting worse.'”

“Another problem is ‘accidental’ landlords, who maybe through bereavement or a change in family circumstances, find themselves with an empty property they are unable to sell. Mr Lewis says they very quickly find they are ill prepared for the work required. ‘They think ‘I’ll rent that out’, but they have no idea of what you have to do,’ he said of the work involved.”

From Bloomberg on Hong Kong. “There’s a saying in Hong Kong property circles that if the city’s richest man, Li Ka-Shing, is selling, you don’t want to be the buyer. Now, a group of investors who paid $5.2 billion for Li’s stake in The Centre almost three years ago — making it the world’s most expensive skyscraper — is finding out why. After initially making quick profits flipping floors in the 73-story tower, the combination of anti-government protests, the coronavirus pandemic and escalating US-China tensions has seen vacancies surge, rents drop and dealmaking dry up.”

“Just one sale has been made this year — at a 35 per cent discount to early 2019 prices, according to property-data provider Real Capital Analytics. Almost one-fifth of the building is empty — one of the highest vacancy rates in Hong Kong’s sought-after central business district — and rents are down about 20 per cent from a year ago.”

“‘It was a reasonable investment decision back then,’ said Thomas Lam, an executive director at Knight Frank LLP. ‘Market prices were higher than the average cost the group paid, and flipping floors seemed easy. But now, as rental yields and office demand decline amid the worsening economy, buyers are much more reserved.'”

“All that has put the buyers in a hole. ‘These guys were hoping to flip the properties at a 30 per cent gain straight away, but they’ve been caught out by other factors,’ said Phillip Zhong, a real estate analyst at Morningstar Investment Service. ‘Rental income may not cover interest payments on loans to finance the deal, meaning even selling at the initial cost price would mean taking a big hit overall.'”

“The most high-profile members of the group are Ma Ah-muk and Pollyanna Chu, who initially took 13 and seven floors respectively. Chu had a lengthy spell as Hong Kong’s richest woman, but despite her family empire now spanning hotels and watchmakers, her net worth today is a fraction of what it used to be.”

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This Post Has 61 Comments

  1. ‘The General Services Administration is continuing with its effort to save taxpayer money by consolidating offices and reducing its real estate footprint, which results in negative absorption for the D.C. office market’

    Eat yer crows taxpayer.

  2. ‘the man continued to claim housing benefit while living rent-free, and even complained about the lack of a view from the window’

    That’s the spirit!

    1. Well, may I ask what you expected to see out of a Torquay hotel bedroom window? Sydney Opera House, perhaps? The Hanging Gardens of Babylon? Herds of wildebeest sweeping majestically…

      …Basil Fawlty

    1. DJT just put out a new video on Twitter. He sounds a bit out of breath but ok so far. Don’t celebrate yet. Boris Johnson was doing ok for 7-9 days and then suddenly went to ICU. (My guess is that Trump’s area at WR is an ICU.) Fortunately, the medical care has improved greatly in the past six months. The course of this disease is pretty well established. DJT is still in the replication phase. If the immune system, with help from the MATH+ protocol, can’t control the replication, cytokine storm will kick in in ~7 days. There are still things they can do after that.

      For a short and sweet summary of the disease progression and MATH+ protocol: https://www.evms.edu/media/evms_public/departments/internal_medicine/EVMS_Critical_Care_COVID-19_Protocol.pdf

      If Trump can keep it together medically, he has advantages. (1) Dems will have no choice but to delay at least one of the debates or risk being criticized for profiting off a sick man. (2) Trump will be able to campaign as the Immune President.

  5. As a state worker, I’ve been remote since March but rents not dropping in midtown where I live. Looking at very old homes built in the 1950s-1970s, prices are still sky high in Sacramento and Placer county areas due to low inventory, bay arean locust tech workers moving here due to covid wfh, mortgage free cheese moratorium. If WFH goes perm, I will just buy out of state for less than what I pay to rent a craptastic 1 bedroom apartment here. The nonstop bad air due to wildfires is bad and reason enough to leave the state.

    3. “The nonstop bad air due to wildfires is bad and reason enough to leave the state.”

      Indeed. My sister in Napa has had a terrible summer. Between covid shutdowns, earthquakes and the constant fires she’s just about played-out on the Golden State.

  7. “If not for that I would be “financially embarrassed”

    Those of us who are not degenerate gamblers and consistently live below our means don’t have these kinds of problems.

  8. “The recent fines are fueling concerns that rosy credit grades are masking deeper structural problems with the securities.

    Ya think? Maybe if captured/complicit regulators and ratings agency whores were given perp walks and prison sentences for criminal negligence and willful dereliction of duty, we wouldn’t have so many systemic risks to the financial system.

  9. ‘The average amount amongst other landlords I spoke to was £33,000,’ he says, adding the experience with his other rental property, in Shropshire, was even worse. ‘I had drugs being sold to kids in my garden by someone who killed one of them with his sword,’ he says. ‘The judge said he was convinced he had acted in self defence. Curtains were set on fire by the said drug seller, and furniture slashed. Okay, he was a guest of the tenant but you do not need it do you?’”

    I am going to take a WAG (wild @ss guess) and assume this landlord did not “screen like crazy” or make sure the renter had “perfect or near perfect credit” like Small Landlord did with the tenants he chose to rent to.

    For the life of me I can’t remember having any roommates or houseguests that ever sold drugs to kids, killed someone with a sword, slashed my couch and Lazy boy before setting the curtains on fire for good measure before leaving. i know fish and houseguests stink after three days but come on.

    1. am going to take a WAG (wild @ss guess) and assume this landlord did not “screen like crazy” or make sure the renter had “perfect or near perfect credit” like Small Landlord did with the tenants he chose to rent to.

      For all we know that could be illegal in the UK.

      1. Actually I’m surprised that the screening like crazy didn’t trigger some disparate impact here in the US. Screening like crazy almost always results in POCs being left out as a whole. Maybe it works if you only have a few rentals, but don’t try that with, say, a 200-unit high rise.

    2. I hadn’t thought much about sword attacks until recently. I’ve had two clients charged with assaulting people with swords in the last 18 months.

  10. Monthly rent dropped 17.8 percent in San Francisco, the steepest decline in the nation, 9.5 percent in San Jose, 7.9 percent in Oakland and 6.3 percent in Fremont.”

    Is that a lot?

        1. That, and substance abuse. At least 95% of the homeless in Colorado Springs, at least, are drug addicts or alcoholics.

          1. I once read an interview with a guy who had been homeless but managed to pull himself out and rejoin society. He said something to the effect of “if you aren’t an alcoholic or drug addict when you become homeless, you will be.”

  11. “Another problem is ‘accidental’ landlords, who maybe through bereavement or a change in family circumstances, find themselves with an empty property they are unable to sell.

    You can sell anything if the price is right, greedheads.

  12. Chu had a lengthy spell as Hong Kong’s richest woman, but despite her family empire now spanning hotels and watchmakers, her net worth today is a fraction of what it used to be.”

    What’s the best way to become a millionaire property investor? Start off as a billionaire property investor.

  15. We are now in a period of time in the US where nothing is affordable anymore in terms of houses, autos, etc., and there is nowhere to get a return on any investment. Great job, central bankers, great job.

      1. Nor do I. There’s no more meat left on the bone anywhere. In fact, there’s no bone left either. It’s disgusting.

  16. The Deep State used to operate behind the scenes. Now they are the scene.

    Meet the Biden-Supporting General Deploying Military Grade Information Warfare Tools Against Trump Supporters

    So here we have a former General involved in an effort to censor the President of the United States and his supporters, using information warfare technology originally intended to fight ISIS terrorists. This is neither the first, nor will it be the last such example of a former national security officer using tools designed to fight America’s adversaries against Trump-supporting American citizens.

    https://www.revolver.news/2020/10/biden-loving-general-is-deploying-military-grade-information-warfare-against-trump-supporters/

    1. Hmm, maybe that would explain why the comment sections of Marketwatch and TheHill have gone full TDS. What I find interesting is that the polls this year look similar to the polls of 2016: Dem ahead by 5 with Trump creeping up. Only this time, I think the Trump supporters are even LESS inclined to talk to pollsters.

      1. Only this time, I think the Trump supporters are even LESS inclined to talk to pollsters.

        Or to just about anyone for that matter. The risk of being doxxed and cancelled is too big.

    2. This is a terrible development. McChrystal is an effective leader, not a rear echelon manager. He’s also formally educated and battlefield tested in unconventional guerilla warfare.

  19. Market Extra
    ‘Anything can happen:’ Why the hottest investing trend is playing it safe
    Last Updated: Oct. 3, 2020 at 9:01 a.m. ET
    First Published: Oct. 1, 2020 at 4:45 p.m. ET
    By Andrea Riquier
    Shocks of 2008 and 2020 “illuminated the idea” that anything can happen, says one adviser
    …

    Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.
    ― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

    Does anything from your recent experience make you feel like Taleb’s poor turkey on the fateful Wednesday before Thanksgiving? Say February 2020, when stocks plummeted from all-time highs to a sharp correction in a matter of days? Or maybe you think of September 2008, when the entire financial system was brought to its knees?
    …

  20. The Financial Times
    Opinion Work & Careers
    The hard business lessons Covid is about to teach
    Why the hair salon, the gym and work-related travel may never be the same again
    Pilita Clark
    Guess what? I discovered home hair-dye kits are almost as good as salon colouring
    © Getty
    Pilita Clark October 3 2020
    Be the first to know about every new Coronavirus story

    I have very few friends who could plausibly be described as gym fanatics.

    But I do have one in London who has been working out with weights since he was 14, up to six days a week, most recently at a nice health club that costs him £30 a month, thanks to a corporate discount.

    He’s in his early forties and when he told me last week he had cancelled his membership and was never going back, I was shocked.

    It turned out life in lockdown had led him to consult YouTube, where he had discovered callisthenics — exercises you can do at home without barbells or fancy equipment.

    Out went bench presses in the gym. In came chest dips at his kitchen bench, with results he had never thought possible.

    “In the six months I’ve been doing callisthenics, I’ve reshaped my body and got so much stronger,” he said, a note of wonder in his voice. Everyone at work had dumped their gym memberships too, he added, as had his wife. And just think: but for the pandemic, he never would have thought of doing something he wished he had started years ago.

    Listening to him talk reminded me of a question that keeps recurring as the Covid crisis goes on.

    Will my friend’s discovery — and others like it — end up leaving even deeper scars on some business sectors than the lockdowns and social distancing that are causing so much financial pain today?

    Put another way, once you learn that you can do something cheaper, faster and better at home, will you ever go back to paying someone else more to do it for you?

    When it comes to hair, I think not.

    Pre-pandemic, I spent hundreds of pounds, and hours of my weekends, keeping grey roots and other follicular atrocities at bay.

    When salons closed, I discovered something I never imagined possible: a friend next door could do just as good a job in a third of the time with a £6.49 packet of Clairol hair dye.

    I still remember staring in the mirror at the results of her first effort — also done with help from YouTube — and thinking: why didn’t I do this years ago?

    It is true there have been tense moments. Once, we got so caught up blathering that we forgot to check how long to leave the colour on. Thus I learnt that, even though the instructions say 35 minutes at most, you can keep it in for 40 without any visible damage.

    So will I chuck my old hairdresser? Not entirely. My friend draws the line at a cut and blow-dry, so salon-level maintenance will be needed. Just not nearly as much as before.

    So are hair salons in trouble post-Covid? I have no idea. I may be a serious outlier.

    If I had to take a stab, I would guess that cinemas will survive Netflix (nothing matches the group experience); Zoom will kill much business travel (now that we know how to use it); and cafés will be fine.

    On the matter of gyms, I am agnostic.

    I too have cancelled my membership, having discovered the park-based seven-minute workout. And my callisthenics friend is not alone.
    …

    1. When it comes to hair, I think not.

      I tried cutting my own hair during lockdown, with tragic results.

      1. I tried cutting my own hair during lockdown, with tragic results.

        I think I’ve cut my own 4 times now…and honestly, I think I do as good or better a job than what I got for $50 a pop.

        I think I’d still prefer to outsource the job though, if anything just so I don’t have to stare at the pile of gray hair afterwards…when did it all turn gray?!?!?!

        1. It looked like the Red Cross cut my hair. During an earthquake.

          My wife & teenaged daughters could’ve showed sympathy and understanding. No such luck.

          1. It looked like the Red Cross cut my hair.

            Priceless!

            This applies to the back for me. Top and sides I learned to do long ago when a haircut meant a reduction in the grocery budget. In those days I had someone to help with the back.

            Fortunately, my barber only charges $13 and she does a great job.

      2. My hair has never looked worse. I tried to cut the sides – no good. Shaving it off is the only thing that produces even results, but I don’t look as good with a buzz cut as I do with my hair. I suppose I should be thankful I’m not bald like a lot of my friends.

    2. From what I have heard, hair salons are doing fine here in my little burg, often booked for weeks.

      1. Since the shutdown, July was the only month my son’s/husband’s stylist was able to pay her rent. My stylist moved his business from a chair in a salon to his dining room.

        1. The gal who cuts my hair had to shut down for about 6 weeks early in the pandemic. She was booked solid when she reopened and has stayed that way since then. She is a relative, so she squeezes me in and I get at discount as she charges $40 for a men’s haircut. She’s told me that a women’s cut and color can be from $150-200.

          1. She’s told me that a women’s cut and color can be from $150-200.

            For quite some time.

  22. From the WSJ:

    There’s No Place to Hide Anymore When the Stock Market Plunges

    All the obvious hedges against stock-market volatility—Treasurys, gold, bitcoin and the VIX—stopped working in September

    This is what happens when the Fed and its primary dealer trading desk accomplices have completely rigged and manipulated all the markets and bought up both ends of the yield curve to prevent the bond market from performing its traditional function of signaling trouble ahead (or crashes) in the stock market.

    1. Sometimes the market rigging becomes so blatant, and draws so much attention from non-MSM commentators, that captured and complicit regulators have to pretend to do their jobs. The outcome in these cases is always the same: fines equivalent to a fraction of the profits the Fed’s primary dealer accomplices made from their illegal market manipulation, a few low-level “bad apples” spanked, but never any criminal penalties for criminal behavior, especially against senior bank officials.

      https://www.economist.com/finance-and-economics/2020/10/03/jpmorgan-chase-faces-a-fine-of-920m-for-market-manipulation

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