The real estate industry looked with optimism to 2011 as the year of renewed growth and rejuvenation. Now that we've passed the halfway point, the industry's performance as a whole has been a mixed bag. Commercial real estate investing scored best thanks to a healthy multi-family sector, while bullying from a tough economy and lending-averse banks kept consumers from reaching the front of the class. But a business as broad as real estate is truly a sum of its parts. To truly tell if real estate is passing or failing at midterm, we need to look at the key markets and the factors influencing their progress this year:Investors
• Distressed properties at bargain prices - Typically engaging in all-cash transactions, great deals abound this year in banked-owned and short sale properties.
• Increase in value of multi-family inventory - As homeownership loses favor to renting, vacancies have dropped and rents have risen to make apartments a profitable investment. Offering a safe return, the cap rates have been amazingly low on quality projects.
• Increased value in office properties in top urban markets – Prime office space values are climbing forcing investors to widen their search into suburban commercial space.
• Access to credit - In contrast to the residential market, banks are starting to return to the commercial market as a source of loan origination, and have more confidence in securitizing commercial loans. The qualification process is difficult but getting better.
• Rising delinquencies on old commercial debt - Securities backed by commercial loans originated between 2005 and 2007 are showing increasing signs of impairment in contrast to loans originated in 2011.
Consumers:
• Falling home values seem to be stabilizing – Downward pressure will continue as a result of the flood of foreclosed homes and short sales anticipated. High loan-to-value mortgage holders are suffering the most.
• The cost of the average mortgage - The good news: average mortgage rates remained below 5% for the first two quarters of 2011; the bad news: loan closing costs are nearly 9% higher than in 2010.
• Tighter credit – More stringent underwriting guidelines implemented by major lenders this year has kept many first-time buyers from obtaining mortgage loans.
• More homeowners facing foreclosure - Despite recent statistics showing a drop-off in foreclosure starts, industry experts agree the trend is a result of continuing bottlenecks in the servicers’ processing track. Consumers continue to face the threat of foreclosure in the coming years as lenders address internal issues and resume foreclosure filings in full force.
• Loan modifications gaining traction – Even with the specter of a wave of new foreclosures, the number of both federally-sponsored and proprietary loan modification programs has increased substantially this year helping more borrowers stay current.
Which brings us back to how is the industry doing? Over the past thirty-five years, I’ve seen the ups and downs of a number of cycles. With this current cycle, there are now guarded signs of an upward trend in all markets. Investors are clearly the best positioned to see strong returns in a safe environment with multi-family properties and single-residence rentals standing to gain the most in a longer-term outlook. Today, delinquent commercial loans present opportunities for those investors who specialize in purchasing distressed notes. Servicers have begun addressing the inadequacies identified in their foreclosure process procedures and have reluctantly embraced short sales, loan modifications, and other cures as options to remove distressed properties from their foreclosure pipelines; which brings us to the consumer. As lenders receive more pressure to relax credit criteria and if rates remain low, homeownership should become more attractive during this unprecedented era of deflated home prices.
It won’t be easy for real estate to end the year overall with a good grade, but it is possible. If investors continue to sustain the market and if lenders make it easier for consumers to participate in a rebound, we may see the next upturn more quickly than anticipated.
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