Your February Newsletter from CALCAP!

CALCAP CONNECTIONS

February 2023

Principal's Corner

Rebalancing the Capital Stack

Multifamily will experience limited distress in 2023, according to a new report from Newmark. Rents are declining but overall forecasts for the asset class remain positive long-term. While purchase and refinance activity has slowed down significantly since Q1 22, the projected volumes for the fourth quarter of 2022 were still robust enough to make it the third best performing 4th quarter on record. Multifamily remains the most sought-after real estate sector for both domestic and global capital. In 2022, multifamily properties represented 40.3% of US commercial real estate investments by international investors.

Banks expanded their lending activity on multifamily properties in 2022, increasing their balance sheets by $11 billion YOY in January 2023. With the rise in interest rates and widely projected economic downturn, banks are now becoming much more conservative. Fannie Mae and Freddie Mac continue to be active in the market but have lowered their LTVs and increased their debt coverage ratios. Debt, in general, will be tougher to obtain until rates become stabilized and price discovery becomes more clear.

There will be some limited distressed opportunities on highly leveraged properties unable to service debt as interest rates have risen substantially. There are also many borrowers who purchased rate caps on short-term floating rate loans within the last 2 years. These rate caps are essentially insurance contracts to hedge against rate increases. Many of these loans now require the borrower to purchase a new rate cap at which can cost 10-20 times or more the price of the original contract! This alone will put further financial stress on assets and sponsors who do not have the financial wherewithal.

The combination rents softening, debt payments doubling, and rate caps expiring will defaults. While this will force some sales, most experts believe that these properties will end up being re-capitalized with some combination of new debt and new equity. Given market lending constraints, most of these loans will have a shortfall in proceeds forcing the borrower to come in with more equity or seek “gap financing” in the form of mezzanine debt or preferred equity. CALCAP is an active provider in the preferred equity space, and we see a lot of opportunities in the coming months for this business.

Edward M. Aloe

President and CEO

626-229-9057

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Latest Headlines...

Existing home sales continue to decline in 2023

January marked one full year of monthly declines for existing home sales

“This is the lowest level of home sales activity since May 2020 when the COVID-19 pandemic had shut down much of the economy,” Lisa Sturtevant, the Bright MLS chief economist said in a statement. “Before that, you have to go back to October 2010 to find total sales this low.”

Despite this industry analysts remain optimistic.

“While home sales have now fallen for 12 months in a row, the January decline is much smaller than previous drops,” Sturtevant said. “January sales reflect purchase contracts made in November or December, and there is evidence that in many markets, the housing market has bottomed out and buyers are beginning to return to the market.”

The median sales price of an existing home continued to climb in January, rising 1.3% year over year to $359,000. This marks 131 consecutive months of yearly increase — the longest running streak on record.

View Article Here

These four cities will see 2008-like correction in home prices: Goldman Sachs

These “overheated" housing markets will see a decline of more than 25%, the company predicts

The company is eyeing the San Jose, Austin, Phoenix, and San Diego markets in particular. These “overheated” housing markets will see “peak-to-trough declines” of more than 25%, according to Goldman Sachs. This, in turn, will lead to risks of higher delinquencies for mortgages originated last year or late 2021, according to the company.

The expected declines in these markets are not far from what occurred during the 2008 housing crash, when home prices in the U.S. fell by approximately 27%, according to the index.

The national decline, on the other hand, is expected to balance out the decline in these four markets — and is predicted to be enough to avoid mortgage credit stress and a sudden hike in foreclosures across the U.S.

According to Redfin, San Diego and Phoenix are among the most popular markets for seller concessions. These concessions include offering buyers money for home repairs and mortgage-rate buydowns as homeowners continue to sell homes for below the asking price.

View Article Here

Weaker economy, inflation caused mortgage delinquency uptick in Q4

The delinquency rate for mortgage loans rose to a seasonally adjusted rate of 3.96% in Q4 2022

The delinquency rate for mortgage loans on one- to four-unit residential properties rose 51 basis points from the previous quarter to a seasonally adjusted rate of 3.96% of all loans outstanding in the fourth quarter of 2022, according to the Mortgage Bankers Association (MBA).

“As expected, the overall national mortgage delinquency rate increased in the fourth quarter of 2022 from its previous quarterly survey low,” Marina Walsh, MBA’s vice president of industry analysis, said.

For the past 15 years, mortgage delinquencies have tracked very closely with employment conditions, Marina Walsh, MBA’s vice president of industry analysis, noted.

While recent indicators pointed to resilience in the job market, the MBA forecasts slower hiring and rising unemployment, with the interest rates hitting 5.2% by the end of 2023. This in turn, will likely mean further increases in mortgage delinquencies, the MBA said.

View Article Here

On the lighter side....

About CALCAP Advisors

About CALCAP

California Capital Real Estate Advisors, Inc., and its affiliate entities (CALCAP Asset Management, CALCAP Properties, CALCAP Lending, CALCAP Senior Healthcare, and CALCAP Strategic Opportunities, collectively known as “CALCAP”), is a California-based investment company founded in 2008 and headquartered in Pasadena, California. The Company sponsors alternative real estate investment opportunities focused on demographically driven housing. CALCAP has been able to consistently provide both individual and institutional investors with outstanding returns over the last 14 years. The Company uses a highly selective and disciplined investment approach, focused on delivering superior risk-adjusted returns. CALCAP currently has over $650mm in Assets Under Management. To learn more visit www.calcap.com.

Social Mission

CALCAP CARES is a 501(c)(3) private foundation organized to encourage employees to find a way to give back to the neighborhoods where we invest. CALCAP has created "GiveTime4Autism" as its initial program which gives employees the opportunity to donate unused vacation and sick days for a very worthy cause.