Dear CCIM Members,

Happy summer everyone!

NEW YORK CITY IS BACK - with a vengeance. The energy levels are soaring and the real estate markets continue the strong trend that began in the first quarter.

While we were in a rebound earlier this year, now we see clear signs of real recovery from a market that had started to suffer well before 2020. A thriving, growing economy, lower unemployment, low-interest rates, trillions of Federal stimulus dollars, and pent-up savings and demand combined with the promise of a new mayor has fueled this.

As we enter the second half of 2021, we can expect: a) Interest rates should rise (they have started to already) although historically they are very low. b) International buyers and investors will return. National buyers are very active. c) Real estate will be a good alternative investment as an inflation hedge. The allure of the City will surely kick into full gear in the fall with the return of Broadway as long as COVID is kept under control.

CCIM news: Our VP Tom Attivissimo attended leadership meetings in Pittsburgh last month and we have several candidates cleared to sit for the exam this month. Good luck to all!

Please remain safe as many of you go about your summer break with family and friends too.

As always, stay strong and remain positive!

Best,

-J.R.

(646) 481-3801

In 2019, I joined Dogwood State Bank as an SBA Business Lending Specialist. Since SBA lending is a bit more complex, at DSB we have a specialized team focused on providing SBA financing to qualified small businesses.

Prior to joining Dogwood State Bank, I have enjoyed a 25-year career in the SBA industry. Throughout my career, I have worked for both large and small lenders within divisions all focused on SBA financing. Positions held range from Sales, Regional Manager to National Sales Manager.

Volunteer work is focused on helping our veterans start businesses. I have been involved in the Veterans Launching Ventures program at Fairleigh Dickinson University for several years. At the VLV program, we work with veterans on helping them create a final business plan for a new or growing business.

Education includes a BS in Marketing from Providence College. In addition, I have successfully completed numerous SBA courses and courses from the National Association of Government Guaranteed Lenders.

Bisnow conducted a survey of 1,050 commercial real estate professionals in July, gauging how they feel about the return to the office now that it has begun, to one extent or another. On the central question of the future of work, Bisnow respondents skewed heavily toward the middle of the road, between going back to the way things used to be — five days a week at your desk — and never requiring anyone to come into the office again.

The survey was taken before the delta variant of the coronavirus drove a spike in cases, first bringing into question the predicted mass Labor Day return to the office, then definitively altering big corporations' plans for office returns. Still, many of the respondents Bisnow reached for further comment said the delta variant didn't change their feelings on returning to the office.

On the extremes, only 5.4% favored mandating a five-day return, and a similar number, 5.9%, said forcing anyone ever to come into the office is for the birds.

Many respondents (45.4%) favored either a case-by-case solution for companies, since some jobs need to be in an office more than others, or a hybrid solution (43.3%). Combined, nearly 9 out of 10 respondents said the future of office work won't be like pre-pandemic, but it won't involve as much remote work as during the coronavirus pandemic, either.

Those results show an even more pronounced tilt toward flexible office arrangements than Bisnow's survey in March, before many workers came back at all. At that time, the largest share of respondents, 45.8%, said they think employees should be allowed to work from home multiple days a week, but 11.4% still believed they should come back every day, and 9.8% said coming back wasn't ever necessary.

When asked their feelings about returning to the office and whether they have or not, 23.3% of the July respondents said they were already back and neither loving nor dreading the experience, while 22.9% said they were "somewhere in between" love and dread without being back yet.

Some 18% are back and "loving it," while 13.9% are "dreading going back." Though these are minority responses, they point to strong feelings on both sides of the question about returning to the office, full time or not.

"Dreading is a bit harsh, but I certainly don't want to return to the office," corporate real estate specialist Michael Keiser said. "I have always valued work-from-home for the efficiency, cost effectiveness, lack of chitchat — I'm not a small talker — and office politics, and finally the overall autonomy. It'd be difficult to return to an office, even if on a hybrid basis."

Keiser also cited legal complications as a factor in the future of office space. Unless the government implements regulations to protect businesses that use best efforts to protect workers and yet are still exposed to tort lawsuits, which he characterized as frivolous, he said there will be a major push for a return to work.

"The delta variant doesn't impact my thinking," Keiser said. "Work-from-home isn't only good for production from many workers, including me, it's also good for morale in the long term."

Some respondents fully embraced remote work and aren't looking back.

"I used the mandatory quarantine — being forced to work from home — to convert to working from home permanently after the quarantine," said Randy Renwand, a business process analyst in Colorado. "In my current role, I have no reason to go to an office 99% of the time, and I provide more value to my company from home. Delta has not changed anything for me."

At the other end of the spectrum are those who really want to return, though not necessarily every day of the week.

"I'm excited to return to the office to meet colleagues and our real estate community in person, to collaborate on projects, initiatives and assignments," Avison Young principal and President, Americas Professional Services Sheila Botting said.

"There’s nothing better than meeting friends and colleagues at downtown locations for breakfast, lunch, receptions and so on, to simply to engage and interact," Botting said.

Still, flexibility will be key going forward, Botting said, citing research conducted by Avison Young indicating that 46% of employees would look for a new job if flexible work weren't an option in their return to the workplace, while 59% of employees would only consider a new job that offers flexibility.

Survey responses also showed a divergence between productivity and happiness when it comes to working at home. Some 44% said they were more productive working from home during the pandemic, while 28.4% reported lower productivity, and a similar number (27.6%) observed no change.

As for happiness in their work-life balance during the pandemic, 58.3% said they were happier working from home. Only about a quarter characterized themselves as less happy working from home during the pandemic, and even fewer (15.6%) experienced no change.

Most respondents said in-person office work fosters creativity among workers, but more (35.9%) don't see daily attendance as necessary to get those benefits than those who believe daily attendance is critical to creativity (20.3%). Some 16% said they used to believe in daily attendance but don't anymore, saying once or twice a week is all that is needed.

Most respondents to the July survey weren't overly concerned about what will happen to downtowns or other places with high concentrations of office space once the new reality of office work is sorted out.

The majority of respondents, 57.8%, said that the emergence of flexible office schedules would have a small impact at most on the future of office space usage. They said companies will maintain their offices while working out flexible work situations, in other words.

Another 22.9% said it is unlikely that a significant number of companies will abandon their offices, meaning that downtowns will continue to thrive, but 19.2% took the view that downtowns will be majorly impacted by shifting patterns of office usage and "may lose their appeal for at least a generation."

Among respondents in smaller markets, there was extra concern about work-from-home in an environment in which internet connections can be dodgy. In that kind of environment, centralized office space is more than a luxury, becoming a necessity for a lot of workers.

"We live in a very rural area, so one resource that we do not have equal access to is broadband," Wayne County, Pennsylvania, community network specialist Kim Rickard said. "So it has been a struggle for many trying to work from home or attend school from home."

Rickard said that she experienced the problem on a professional level.

"I work with a collaboration of people from our community, and that's a challenge when trying to conduct Zoom meetings," she said. "The lack of broadband access presents many challenges here in rural Pennsylvania."

Bisnow's respondents were more evenly divided about the impact of remote work on efforts in the real estate industry to solve its diversity woes. A little less than a third (30.5%) agreed that if real estate struggled to recruit and retain diverse talent pre-pandemic, work-from-home isn't going to accelerate real estate’s diversity hiring goals.

Fewer respondents (26.4%) said that a hybrid model allows a greater diversity of people to be hired and then perform well since it strips away some office politics that can hold people back, while 21.5% said that work-from-home might actually worsen diversity because of unequal access to resources and mentorship.

Bisnow’s survey responses were collected in July from 1,053 reader respondents. The largest percentage (16.3%) of respondents were from the Washington, D.C., market, while 11.7% were from metro New York, 8% were from Atlanta, 7.7% from Chicago and 7.1% from the Bay Area. Other markets representing more than 4% of respondents were Boston, Los Angeles, Philadelphia and Dallas-Fort Worth.

Source: Bisnow

The expiration occurred despite a last-minute attempt in Congress at an extension, which the National Multifamily Housing Council and National Apartment Association opposed. The NAA has also filed suit to recover damages that landlords suffered under the moratorium.

As the clock wound down on the moratorium, the White House called on state and local governments to step up disbursement of Emergency Rental Assistance funds. “State and local governments began receiving Emergency Rental Assistance funding in February and were eligible for an additional $21.5 billion passed in the American Rescue Plan,” according to a White House statement.

“Five months later, with localities across the nation showing that they can deliver funds effectively – there can be no excuse for any state or locality not accelerating funds to landlords and tenants that have been hurt during this pandemic.”

Source: Connect CRE

Back in May, the Centers for Disease Control and Prevention provided new guidelines that people who are fully vaccinated against Covid were no longer required to wear masks or physically distance, regardless of the location or size of the gathering. However, many hotels still did not open.

That left owners wondering whether they will be able to survive until the recovery has worked its way through the system. With more than one billion unsold room nights in 2020—the highest ever recorded—many hotel owners are not able to meet their debt-service payments or cover their basic operating expenses.

Others who are coming out of pocket to cover these costs in order to keep their loans current are finding that servicers are conflicted and must protect their lienholders' interests by trapping cash flow and imposing restrictions as specified by loan documents.

How are owners of hospitality assets going to cover operating expenses and debt service until the market stabilizes, which may not happen for another two to three years?

Capital Aplenty

The answer is capital, and it just so happens that there is plenty of it available right now. Lenders are providing capital in many forms for hotel owners, be it equity to purchase properties or creative debt structures to ensure liquidity and carry interest until stabilization. Suzanne Mellen, senior managing director of HVS International, one of the nation’s leading hospitality advisory and valuation companies, noted that hotel values are not being discounted today. "Investors are purchasing hotels based on 2019 income, though those numbers are not expected to be realized again until 2023 to 2024." She pointed out that this results in zero or negative capitalization rates today for quality assets that are trading.

However, many hotels have not yet reopened or are only opened with limited services.

Jeff Lugosi, executive vice president of CBRE Hotels Advisory, another leading advisory and valuation firm to the hospitality industry, said, "Hotels are utilizing (Paycheck Protection Program) funding and whatever money may be available from other sources to pay their operating expenses, or are opting to open with limited services, including housekeeping and food and beverage outlets." He noted that hotels subject to ground leases "are especially negatively impacted." So why are lenders and equity providers looking to the hospitality market? Part of the reason may be that hotels provide an attractive alternative to other real estate investment classes, such as multifamily and industrial properties, where credit spreads and yields have been severely compressed.

Randy Reiff, chief executive of Allegiant Real Estate Capital, a leading provider of capital to the commercial real estate industry, explains: "We are a basis lender and see an opportunity to lend in the hotel sector right now. The volatility of hotel cash flows makes a lot of investors nervous. As a result, many are quick to sell off in distressed markets. People need to travel and don't be surprised if the market recovers more quickly than many think. We believe this provides a great opportunity to obtain attractive risk-adjusted returns."

Not All Hotels Are Created Equal

The rapid recovery is not being realized equally throughout the market, however, as not all hotels are created equal. Leisure demand has been leading the market recovery as evidenced by the fact that Marriott resort hotels in the United States and Canada are seeing reservations over 60% above 2019 levels and at rates almost 20% higher for rooms booked at least 30 days out, according to Leeny Oberg, executive vice president, and chief financial officer of Marriott International.

When Hawaii rolled out its program of vaccine passports, the Hawaiian Airlines website crashed due to volume. As a result, much of the liquidity available for hotel loans is earmarked for assets that cater to the leisure traveler. Lenders are aggressively pursuing these assets and providing capital. They're including interest reserves that allow for debt-service payments for up to 3 years. Hotel properties with near-term maturities or with limited or no operating history that cater to leisure travelers are finding an abundance of available financing, which has resulted in interest-rate compression.

Capital for hotels that aren't necessarily driven by leisure travelers also is available. Well-located properties with limited or no operating history or hotels that have not yet seen their cash flows improve may be attractive to some lenders. Financing for these types of assets typically requires a multi-tranched structure, with a lower leverage first mortgage and a subordinate mezzanine and/or preferred-equity tranche.

Such a structure can be beneficial for hotel owners facing a pending loan maturity against a property lacking the in-place cash flow to refinance an existing loan, or for owners who do not have the capital to keep their existing loans current.

Providing capital to hotel owners facing a near-term maturity or that have prepayment flexibility "allows them to lower their first mortgage debt and, therefore, perhaps reduce the interest rate, creating less stress on the asset," explained David Brown, senior managing partner of Somera Capital Management, a Los Angeles company with investments in hospitality. "We will then provide capital to provide for interest carry until the loan stabilizes."

Such structures work nicely for assets that are not seasoned, or perhaps are in locations dependent upon corporate travelers. Pricing for the subordinate tranche in these transactions typically is in the 10% to 12% range but could be as high as 15% to 17%, depending on the property's location and perceived risk. Though some owners may feel the cost of this subordinate capital to be expensive, it is less expensive than equity and a better alternative to a work-out situation with an existing lender.

We are often asked when the long-term fixed-rate loans will eventually be available for the hospitality sector. Hotels, unlike other asset classes whose net operating income is supported by long-term tenant leases, are underwritten on a trailing 12-month basis as opposed to expectations. Due to the last 12-months showing poor operating results for hotels, lenders are having difficulty sizing new loans for a 10-year fixed­rate execution. Some lenders are looking at 2019 performance and discounting those numbers in order to size new fixed-rate loans, but those lenders are selective. As a result, few long-term loans have been originated during the pandemic.

Hotel Construction Loans Hard to Line Up

Among the most difficult hotel transactions to finance today is new construction. Lenders are wary of making loans for new hotels in a market that is still recovering from the worst year the industry has ever seen. This will bode well for existing hotel owners, as they seek to stabilize their own assets without worrying about new supply. The drive-to-leisure market, however, may experience some increase in supply, as this is a market that has proven to be resilient, even during the pandemic.

Markets with barriers to entry, such as coastal locations, may see some increase in supply if owners are able to get approvals to build. Debt for these types of properties typically is provided by commercial banks, which could lend up to 50% to 55% of a property's construction cost, and debt funds, which might be willing to lend as much as 65% to 70% of the cost for quality assets.

In summary, we continue to be in a historically low­interest rate environment, with a tremendous amount of pent-up capital-both debt and equity-that is looking for yield. Prudent lending and investing in the hospitality sector right now provide a risk-adjusted return for those who are comfortable with the risks. As evidenced by the resurgence of the leisure traveler and the expectation that corporate demand will return, it is expected that capital will continue to be available for hospitality transactions at least through the return of stabilization for these assets.

Effective asking rents in the U.S. jumped 2.2% from June to July, which was 8.3% higher than effective asking rents were in July of last year, according to RealPage's monthly report. That represents the largest year-over-year jump on record, while the national average occupancy rate was 96.9% in July, also a record.

In smaller metropolitan areas, the rent growth was truly eye-watering. The Boise, Idaho, market has seen a 24% year-over-year bump, RealPage reports. In 65 of the country's largest metros, rents have increased by over 10% year-over-year. Effective asking rents in San Francisco and New York are still lower than where they were a year ago, but both markets have been closing that gap in recent months.

Players in the capital markets seem unconcerned about how sustainable this run will ultimately be, spending $53B on U.S. multifamily assets in the second quarter, setting a Q2 record, according to Real Capital Analytics data reported by Bloomberg. Among the factors that give investors confidence is the expiration of pandemic-driven leases with heavy concessions, as well as the ongoing supply chain issues slowing down construction of single-family homes and apartments alike, thereby holding down the supply side of the equation.

Desperate to deploy capital on properties that often have upward of 30 bidders, investors have been sweetening their offers by waiving inspections and shortening due diligence periods, Bloomberg reports. Of course, the most common strategy in separating oneself from competing bidders is to raise the offer, which has been happening with enough frequency for multifamily to drag overall commercial real estate prices to above pre-pandemic levels.

The two most active buyers in multifamily since the year began have been Blackstone Group, which has placed huge bets on both affordable housing and single-family rentals in the past two months, and Morgan Properties, which never slowed down its pace of acquisitions, Bloomberg reports. The suburban-focused landlord now owns the second-most apartments of any company in the country.

Source: Bisnow

With the supply shortage seeing slight progress, June snapped a four-month streak of declining existing-home sales, according to new data from the National Association of Realtors (NAR).

With the supply shortage seeing slight progress, June snapped a four-month streak of declining existing-home sales, according to new data from the National Association of Realtors (NAR).

Total existing-home sales reached a seasonally adjusted annual rate of 5.86 million, growing 1.4% month over month and 22.9% year over year. Both single-family and condo sales grew 1.4% monthly. Reversing a troubling trend over the spring, none of the four major U.S. regions saw a sales decline, with sales in the Midwest, Northeast and West rising and sales in the South staying level from May.

“Supply has modestly improved in recent months due to more housing starts and existing homeowners listing their homes, all of which has resulted in an uptick in sales,” said NAR chief economist Lawrence Yun. “Home sales continue to run at a pace above the rate seen before the pandemic.”

Total housing inventory at the end of June was at 1.25 million units, up 3.3% from May. Inventory has now increased for four consecutive months, though for-sale supply is still down 18.8% from June last year. Homes continue to fly off the market quickly, remaining on the market for an average of 17 days in June, down from 24 months one year ago.

Unsold inventory is at a 2.6-month supply at the current sales pace, up moderately from May’s 2.5-month supply but down from 3.9 months in June 2020. Low numbers of for-sale listings continue to help drive price appreciation, with the median existing-home price in June at $363,300 — a record high and up 23.4% from June 2020. June’s annual increase marked 112 consecutive months of year-over-year price growth.

“[June’s price jump] is an indication that affordability challenges persist for many potential buyers,” said Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association. “Our data on mortgage applications show that purchase activity has moved lower since March, while the average loan size has stayed elevated, consistent with the elevated share of all-cash sales and higher median prices reported by NAR.”

“Huge wealth gains from both housing equity and the stock market have nudged up all-cash transactions, but first-time buyers who need mortgage financing are being uniquely challenged with record-high home prices and low inventory,” said Yun. “Although rates are favorably low, these hurdles have been overwhelming to some potential buyers.”

He added that while price growth looks to stay torrid in the short-term, some relief may be on the horizon for potential homebuyers later in 2021 and beyond.

“At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year,” Yun said. “Ideally, the costs for a home would rise roughly in line with income growth, which is likely to happen in 2022 as more listings and new construction become available.”

Strachan Forgan, an architect who works downtown at 255 California St., is still struck by how much street life has changed around his office building. Gone are the pre-pandemic crowds of bankers and lawyers who jammed into the famed Tadich Grill across the street from his office. In recent months in his two-block walk from the nearby train station, he said, he has frequently been verbally assaulted and physically threatened by the rising number of homeless people.

That's because even though San Francisco commercial office buildings are emptier than they have been in decades and the city is estimated to have 8,000 homeless people, it's unlikely that any of the empty offices will become homes for anyone at any economic level, even though more housing is desperately needed in general. Forgan, who both works on office-to-housing conversions and struggles to find employees who can find affordable housing to work at his firm, said it's too difficult to make happen.

"It almost takes the stars to align," he said. "It's a unique set of circumstances that makes sense. So that's why it is relatively rare."

Such conversions aren't happening in the rest of the country, as well. Planning departments of major cities, including San Francisco; San Jose, California; Seattle; Phoenix; New York; Fort Worth, Texas; Dallas; and Houston, said there are very few, if any, new attempts to turn existing offices into housing. Over the last two years, even during the height of the pandemic, there have been just a handful of such conversion applications in those cities, building officials said.

The New York City Department of Buildings has received just 100 project applications for commercial-to-residential conversion since Jan. 1, 2020, said Andrew Rudansky, the agency's spokesperson. Just 12 have been filed this year.

"This includes applications for large expansion and conversion projects for the entire building, as well as applications for smaller projects that only change the use of a single floor or part of a building," Rudansky said by email.

Even in cities like San Francisco, where homelessness remains a major challenge and office vacancy is relatively high, developers, property owners and city officials don't think conversions make financial sense in the long run.

"There's definitely an incentive for cities to continue to promote vibrant central business districts that are centered around employment," said Manan Shah, an architect in Oakland, California, with Gensler, a firm that has worked on and studied such conversions for years. "We would need to see a long-term trend and vacancy was high for a number of years for somebody to take the time to go through the conversion process."

Empty Buildings

High office vacancy rates are plaguing cities nationwide, according to Avison Young, a commercial real estate firm. In the second quarter of this year, the commercial vacancy rate across San Francisco reached 15.4 percent, more than the 12 percent figure last year and more than double what it was just two years ago.

Phoenix's office market vacancy is "elevated" at 16.2 percent, while Miami is at an "eight-year high" of 16.9 percent and Los Angeles has reached "all-time highs" of 17.8 percent. Meanwhile, New York City is at a "post-2000 high" of 19.2 percent vacancy, and Houston is at a "record high" 22.9 percent of such workspaces that are going unused.

At the same time, the number of homeless people is as high as it has ever been in the U.S. — over 560,000. More than a quarter of them are Californians. About 161,000 people are experiencing homelessness in California, more than in any other state. While Gov. Gavin Newsom signed a historic $12 billion bill to address homelessness, much of the money is likely to be used to convert older hotel and motel rooms.

Reasons Not to Change

In parts of the country where land is relatively cheap, it's far less expensive to build housing from scratch than to convert old offices. And some cities don't mind having empty offices.

"The overall economy is going well for us and we have a low office vacancy rate," Alan Stephenson, director of the Phoenix Planning and Development Department, said by email. "It is hard for the economics to work for a developer to give up the more lucrative office rents in exchange for housing units."

Stephenson's agency approved two office-to-residential conversions that are in progress. But they will add just 225 new housing units in a city of 1.63 million people.

"You combine this market reality with the large amount of underutilized land where it is cheaper to build a new four- to five-story apartment complex than convert an existing office building to housing," he said.

Often, real estate and architectural experts say, the bureaucratic processes are too difficult and the conversions are too costly, and many developers and property owners would rather wait out the pandemic than begin a yearslong process.

Developers also note just how important timing is. Marc Babsin, a developer with the Emerald Fund, a real estate development firm in San Francisco that has worked with Forgan and his firm, SCB, on multiple projects, said the groups worked together on the city's largest commercial-to-residential conversion so far: a 2015 project at 100 Van Ness in San Francisco.

That was a 1970s-era concrete-laden monstrosity adjacent to City Hall that was once the offices of the California State Automobile Association. Today, a 600-square-foot, one-bedroom apartment in the shiny glass building rents for around $4,000 a month.

"You need a bunch of factors to come into line to make that work, and they happened to do that at 100 Van Ness," Babsin said, noting that the project began in 2012, in the wake of the Great Recession, and took three years to complete.

"A couple years later, [100 Van Ness] would have made more sense as an office," he said.

Often, such conversions work only in dense cities where land is at a premium, and even then, only certain kinds of buildings can be converted. Finally, even when such conversions do happen, the bulk of the apartments will usually be rented at high market-rate prices. While it may seem like all that empty space would be better used for unhoused people, architects must navigate challenges like finding the right amount of space between a building's elevator bank and its windows.

"There's a Goldilocks factor: The floor plate can't be too small, and it can't be too big," said Kristina Garcia, a researcher with the real estate brokerage Cushman Wakefield, using an industry term for the leasable space on a given floor of a high-rise office tower. "There's limiting factors to why adaptive reuse hasn't happened as much."

Most modern office buildings have floor plates of about 25,000 square feet — about half the size of a football field — a figure that has generally crept up over the decades. More recently built high-rise office buildings are often considerably larger than their decades-old counterparts.

Gensler, the architectural firm, recently concluded after a study of building stock in Calgary, Alberta, that "the worse the office building, the better candidate it is for conversion to residential," particularly in a city where the office vacancy rate is at a stunning 32 percent. Typically, that means that older and often more run-down buildings are ripe for conversion.

"For modern office buildings, the concept was to build the largest floor plate you could," said John Cetra, a New York City-based architect whose firm, CetraRuddy, has worked on several notable conversion projects in recent years, including 20 Broad Street, near Wall Street in lower Manhattan.

The office tower, which was built in 1957 and is connected to the New York Stock Exchange, reopened in 2018 after the conversion was completed. The age of the building means the distance from the elevators to the edge of the building, known as a "lease span," is a maximum of 45 feet, at about the edge of what is practical. In other words, newer office buildings are often too large to be used as residences — substantial parts of their interiors would have little natural light.

"The donut around the building is the habitable zone. What do you do with the interior space?" Cetra said.

Limited Numbers

While Forgan's firm, SCB, also completed a similar conversion of 1132 Bishop St. in downtown Honolulu and is evaluating a "confidential high-rise conversion" in downtown Los Angeles, he said the projects represent a very small percentage of the firm's overall portfolio.

"We do a lot of multifamily high-rise projects, and probably 90 or 95 percent of them are new construction," he said, saying that is where the money is. "They tend to be urban. They tend to be aimed at the more luxurious end of the market. So they tend to be new construction ground up rather than adaptive reuse projects."

He said such buildings are within a "sweet spot" that makes them ripe for conversion. He said that in the case of the Los Angeles conversion, the property owner has a lot of vacant office space.

"He has empty office space that will be more valuable as residential," Forgan said.

Growing interest

In Dallas, James McKey, the city's interim assistant building official, said that while there was a dip in applications for such conversions last year, there seems to be renewed interest this year to turn office buildings into mixed-use properties.

In 2019, 19 applications for conversions were submitted to the city, which collapsed to just three last year. However, this year it has picked up again, reaching 12 to date. The jump in applications may be bolstered by a recently completed conversion of what used to be called the First National Bank tower, a 52-story building dating to 1965. It had been closed for the bulk of the previous decade.

The newly revamped tower, now called The National, is part hotel, part apartment building, part offices and part retail.

"Me being an older Gen Xer, I wouldn't rent an apartment in The National for $3,000 a month," McKey said. "But the generations behind me — as soon as one comes up they want to — it's a paradigm shift. There are people that are jumping at the chance to live downtown — it's too noisy for me — but I guess if you're on the 52nd floor it doesn't matter."

California dreams

Back in California, as the state tries to tackle the decades-old problem of too little housing for too many residents, the answer for some developers has been to avoid office conversions and concentrate on changing other types of properties.

The tactics are as diverse as the state's plan to adapt motels, to reusing ground-level retail spaces as housing, to allowing for religious entities to build on their own land, to even a grand proposal to streamline the process to convert old big-box-style retailers.

The bill, known as SB 6, would explicitly allow for residential development on previously commercial land, like shopping malls or big-box retailers. A recent analysis by Urban Footprint, an urban planning software company, concluded that the bill, if enacted, could "increase market-feasible capacity by as much as 2 million new homes while generating substantial fiscal benefits to cities."

The author of the bill, state Sen. Anna Caballero, who represents a large swath of agricultural communities between San Jose and Fresno, points to a years-old empty Kmart in Salinas, a farming town where she was once mayor.

"You could just take out the Kmart and put single-story retail and condos above or take out the whole store," she said. "Make it feel like something that people would want to walk through!"

Source: NBC

The relatively low share of borrowers who were distressed last month adds to signs that the offramp from pandemic-related relief may not lead to an overwhelming foreclosure wave.

“Seeing the national delinquency rate fall back below its pre-Great Recession average shows just how strong the recovery trend has been,” said Andy Walden, vice president of market research at Black Knight, in an email.

Delinquency rates prior to the Great Recession may have been a little higher than what’s been seen in more recent years because underwriting was relatively looser and less regulated then. Distress just prior to the pandemic was unusually low due to a long economic expansion and tight underwriting.

In that context, the actual number of distressed loans still looks relatively high. While mortgages with payments that have been late by 90 days or more (but not in foreclosure) also fell in June, the number of them was still nearly four times its pre-pandemic level at more than 1.5 million. In comparison, serious delinquencies totaled 1.67 million in May. At the current rate of decline, 1 million of those borrowers could still be distressed when a large number of forbearance plans expire.

The rate at which borrowers have been late for 90 days or more also fell during June to 2.9% from 3.1% in May. In June 2020, the serious delinquency rate was 3.5%. Prior to the pandemic, it was less than 1%, and hadn’t topped 2% since 2015. At its peak in early 2010, the serious delinquency rate was 5.4%.

While overall mortgage distress is shrinking, relatively high regional concentrations do exist, and in some cases those are areas that were hard hit during the Great Recession as well.

The five highest serious-delinquency rates seen in individual states in June, excluding foreclosures, were: Mississippi, 4.89%; Louisiana, 4.59%; Hawaii, 4.14%; Nevada, 4.14%; and Maryland, 4.04%.

The share of loans in active foreclosure fell to yet another record low in June at 0.27%. Foreclosures have been constrained by bans that generally only allow those involving vacant properties to proceed.

Source: National Mortgage News

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