Despite falling behind other CRE sectors in economic recovery, some office markets are bucking the trend.
The National Association of Realtors revealed Monday the top 10 commercial office markets in the nation.
In its Commercial Market Insights report, NAR analyzed 390 CRE markets and found that the multifamily, industrial, and retail property sectors are bouncing back to pre-pandemic levels. The apartment and industrial spaces have seen historically low vacancy rates in the past few months, while retail has experienced a more gradual recovery.
However, the office sector continues to struggle as absorption rates and rents have plummeted as remote work becomes the new normal. But NAR noted some positive indicators in small- and medium-sized metro areas, which are reporting increases in office occupancy rates that outperform most large cities and the national average.
“Even as the economy makes a steady recovery, the one sector still lagging behind has been the office market,” said NAR chief economist Lawrence Yun. “Work-from-home flexibility looks to be the defining shift of the new post-pandemic economy. Despite the overall challenges, however, some local markets are bucking the trend with more office occupancy and rising rents. A combination of strong in-migration and relatively lower cost of doing business is driving these growth markets.”
The top 10 commercial office markets (in alphabetic order) are:
Home equity wealth to boost economic activity in the coming year
US homeowners with mortgages gained a collective $2.9 trillion in equity in the second quarter, according to a new CoreLogic report released Thursday.
That means that each homeowner saw an average gain of $51,500, or 29.3% year over year, CoreLogic said. Mortgage borrowers account for roughly 63% of all properties. Despite the effects of the pandemic, 59% of them feel extremely confident in their ability to keep current on their payments in the coming year.
“The growth in homeowner equity provides a strong financial cushion for tens of millions of Americans. For those most impacted by the pandemic, equity gains will help play a critical role in staving off foreclosure,” said Frank Martell, president and CEO of CoreLogic. “Based on projected increases in economic activity and home values over the next year, we expect to see further gains in equity and a corresponding drop in negative equity, forbearance rates and foreclosure.”
“Home equity wealth is at a record level and will bolster economic activity in the coming year,” said CoreLogic chief economist Frank Nothaft. “Higher wealth spurs additional consumer expenditures and also supports room additions and other investments in homes, adding to overall economic activity.”
Meanwhile, the total number of mortgaged homes in negative equity or underwater mortgages fell 12% to 1.2 million homes quarter over quarter (2.3% of all mortgaged properties). Year over year, negative equity share was down by 30%, or 520,000 properties in the second quarter.
The national aggregate value of negative equity was about $268 billion at the end of Q2, down by $5.2 billion (1.9%) in Q1 and approximately $18.9 billion (6.6%) lower than in Q2 2020.
“Because home equity is affected by home price changes, borrowers with equity positions near (+/- 5%) the negative equity cut-off are most likely to move out of or into negative equity as prices change, respectively,” CoreLogic said. “Looking at the second quarter of 2021 book of mortgages, if home prices increase by 5%, 160,000 homes would regain equity; if home prices decline by 5%, 211,000 would fall underwater.”
It’s the largest-ever increase
US household net worth surged to a fresh record in the second quarter as Americans enjoyed an ebullient stock market and the largest-ever increase in the value of their real estate holdings.
Household net worth increased by $5.8 trillion, or 4.3%, to $141.7 trillion in the second quarter, a Federal Reserve report out Thursday showed. The advance included a $3.5 trillion gain in the value of equities and a $1.2 trillion improvement in real estate held by households.
Stocks have surged to record highs, and low borrowing costs have supported a flurry of home buying -- and ultimately home price appreciation. The figures highlight how the massive support provided by the government and the Fed has bolstered Americans’ wealth.
Equity shares as a percent of total household assets rose in the second quarter to almost 29.5%, up from 25.6% in 2019, the Fed’s report showed.
But not everyone is benefiting from those wealth gains. A large share of Americans are not invested in the stock market, and for many renters, the sharp rise in housing prices pushed the reality of owning a home further out of reach.
Net private savings grew at an annualized pace of almost $2.9 trillion in the second quarter after a $4.8 trillion surge in the prior quarter -- a product of federal stimulus efforts. Excess savings have been a key driver of consumer spending, including last quarter, where consumer outlays jumped at one of the fastest paces on record.
Business debt outstanding increased by $63.2 billion from the prior quarter, or at an 1.4% annualized rate, in the April to June period to a total of nearly $18 trillion.
Federal debt outstanding increased $578.8 billion, or an annualized 9.6%, to $24.7 trillion. Government debt has swelled during the pandemic, as policy makers stepped in to ease the economic impact of the health crisis on people and businesses with trillions of dollars of support.
The government is currently on track to default on its financial obligations without congressional approval to raise the statutory limit on US debt.
Consumer credit outstanding not including mortgage debt rose by $91.2 billion in the second quarter.
Existing-home sales declined slightly in August after two consecutive months of increases, according to a National Association of Realtors report released Wednesday.
NAR revealed that total existing-home sales slipped 2% month over month and 1.5% year over year to a seasonally adjusted annual rate of 5.88 million in August.
“Sales slipped a bit in August as prices rose nationwide,” said NAR chief economist Lawrence Yun. “Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory.”
Additionally, total housing inventory dropped 1.5% from July’s supply and down 13.4% from a year ago to 1.29 million units. Unsold inventory sits at a 2.6-month supply at the current sales pace, unchanged from July.
The median existing-home price for all housing types was $356,700 – a 14.9% jump from August 2020 ($310,400), as prices increased in each region. NAR said that this marks 114 straight months of annual gains.
“High home prices make for an unbalanced market, but prices would normalize with more supply,” Yun said.
MBA chief economist Mike Fratantoni noted that first-time homebuyer share dropped from 30% in July to 29% in August. He said that the decline highlights the inventory shortages and fast-rising home prices that continue to challenge prospective buyers..
“The inventory of existing homes on the market remains more than 13% below last year’s levels. Fortunately, new inventory is on the way. There are more than 700,000 homes under construction,” Fratantoni said.
“Securing a home is still a major challenge for many prospective buyers,” Yun added. “A number of potential buyers have merely paused their search, but their desire and need for a home remain.”
There are fewer bidding wars and homes selling above asking price
Though the demand for homes remained strong across the United States in August, there are clear signs that the housing market is past its peak.
A report from residential brokerage Redfin found that pending sales across 400 metro areas were up 6% year over year in the four weeks that ended Sept. 5. Still, the 69,563 homes that went into contract represented a 9% decrease from the high point set in May 2021.
The decrease in pending sales is just one indicator of a softening in the competitiveness of the housing market: the number of homes with an accepted offer within two weeks on the market fell nine percentage points from the 2021 peak set in March, and the share of homes sold above asking price dropped to 50.1% from 55% in early July 2021, according to Redfin.
Redfin’s lead economist Taylor Marr said in a statement that he believes this cooling off in the housing market to be seasonally typical and that he expects demand for homes to remain strong throughout the fall.
“More homes were listed this summer, but they were quickly snatched up by homebuyers even as bidding wars have become more rare,” Marr added.
Also noted as seasonally typical is the 16% decline in new home listings from the 2021 peak in June. Overall, however, new home listings are down 7% from a year ago and total active home listings are down 23% from 2020, Redfin said.
This limited inventory and strong demand is reflected in the 14% increase of the median home-sale price to $358,250, with the median asking price of newly listed homes at $353,500. Although this price is on-par with asking prices in April of this year, it is down 2% from the all-time high set in June 2021.
The Redfin report also found that on average nearly 5% of homes for sale each week during the month that ended Sept. 5 had a price drop, which is the highest level of price drops per week since October 2019. This may be a reflection in the median number of days homes that sold were on the market increasing to 19 days from an all-time low of 15 days in late June and early July 2021.
While the average sale-to-list price ratio remains above 100% at 101.4%, this is a decrease of 0.9 percentage points from its peak in June and July 2021. (It is still two percentage points higher than the 2020 high, according to Redfin.)
While a housing market report by the National Association of Realtors found that existing-home sales grew 2% in July from the prior month, first-time homebuyers were disproportionately squeezed by tight inventory and rising prices.
If substantial relief for those homebuyers comes, it may not be until the fall at the earliest. Housing starts that month fell 7%, which experts attributed to slow labor growth and choked supply lines. Such economic indicators are likely to improve slowly and gradually in upcoming months.
They haven’t been this down on it, since 1982
The last time Americans were this turned off by the US housing market, borrowing costs were over five times the current rate.
The share of people who think now is a good time to buy a home fell in September to 29%, extending the plunge from March when the proportion was more than twice as high, data from the University of Michigan consumer sentiment survey showed Friday. It’s also the smallest chunk of respondents since 1982.
Back then, the average for a 30-year fixed rate mortgage topped 15%. That compares with today’s 2.86% rate, according to Freddie Mac.
The figures highlight how property price appreciation has rattled prospective buyers and more than offset the bright side of cheap borrowing. Prices have skyrocketed amid low inventory as Americans compete for space, with year-over-years gains on previously-owned, single-family homes exceeding 20% --surpassing the inflation-fueled increases seen in the late 1970s and early 80s, according to the National Association of Realtors.
The median selling price of such properties rose 18.6% in July from a year earlier to $367,000, a slight drop from the previous month. August figures due next week will show if fed-up homebuyers have helped extend the cool-off.
What are the implications for future homebuyers?
Rental prices in the US saw double-digit growth for the first time in two years in August, as the rental market continues to recover from the setback caused by the pandemic.
In August, the median rental price was $1,607 per month, an 11.5% spike from this time a year ago. The rent growth has now tripled since March 2020 (+3.2%) before the onset of the COVID-19 crisis, according to the latest Realtor.com rental report.
“Put simply, August trends suggest rents are making up for lost time,” said Realtor.com chief economist Danielle Hale. “Rents remained low during some of the worst months of the pandemic, growing at a sub-2% pace from September 2020 to March 2021, which is also when for-sale home prices were growing by double-digits. Now we’ve reached a stage in the COVID recovery where people are ready to move, and we’re seeing urgency to find new living spaces immediately.”
Hale attributed a lot of this demand to people returning to their offices in the city thanks to vaccines and homebuyers needing to take a break from the red-hot housing market.
“And many are willing to pay top dollar to make that happen quickly, which may lead to even more growth in rents over the next few months,” Hale added.
All unit sizes tracked by Realtor.com hit new rental price highs in August: Two-bedrooms at $1,828, one-bedrooms at $1,524, and studios at $1,338. The pandemic-induced demand for more space also pushed up both two-bedroom (+12.3%) and one-bedroom (11.6%) rent growth to double digits year over year. Studio rents posted an 8.3% year-over-year increase to a median of $1,338 per month.
“Many of today’s renters are future homebuyers, so while rising rents can be viewed as a good thing – a signal of rebounding economic activity – they need to be navigated carefully by households hoping to own a home one day.
Whether you plan on buying a home in 2022 or 2027, it’s important to remember that housing costs are typically your largest monthly expense. In other words, what you spend on rent will impact how much you have left to save,” Hale said.
However, mortgage payments are rising faster
A recent Redfin report revealed that mortgage payments are rising faster than rents – pricing both prospective homebuyers and renters out of the market.
Despite record low interest rates, the national median monthly mortgage payment for new homebuyers rose 67% faster than rents in August. This is the second consecutive month that growth in mortgage payments outpaced that of rents.
However, Redfin noted that rent growth picked up pace during the period while mortgage payment growth slowed. Nationwide, renting ($1,836 average monthly rent) is still more expensive than taking on a mortgage ($1,494 median monthly mortgage payment).
“Record high home price growth has priced many renters out of buying, leaving many facing higher rents this summer as more households look to move thanks to the rise of remote and flexible work arrangements,” said Redfin lead economist Taylor Marr. “The end of pandemic eviction moratoriums and mortgage forbearance may also cause landlords to raise rents to cover the risk of future tenant protections or make up for lost rental income.”
Top 10 metros with biggest increases in rents:
“We’ve been working with several landlords who want to sell their properties to cash in on high home prices. But renters right now really don’t want to move, so they’re staying put with long-term leases because they have nowhere to go,” said Redfin Austin market manager Jennifer Hoffer. “I think we will see a spike in rents in the next few months as leases come to an end.”
It delivers latest survey findings
Mortgage application volume has fallen to its lowest level since mid-July, according to data from the Mortgage Bankers Association’s survey for the week ending September 03.
MBA’s Market Composite Index dropped 1.9% on a seasonally adjusted basis from last week and was down 3% on an unadjusted basis. The Refinance Index posted a 3% decrease from the previous week, and the Purchase Index dipped 0.2%.
“Refinance volume has been moderating, while purchase volume continues to be lower than expected given the lack of homes on the market,” said MBA chief economist Mike Fratantoni. “Economic data has sent mixed signals, with slower job growth but a further drop in the unemployment rate in August.”
Of the total applications, the refinance share of mortgage activity held steady at 66.8%, while the adjustable-rate mortgage (ARM) share of activity dwindled to 2.5%, and the FHA share decreased from 11.2% to 10.9% week over week.
Meanwhile, the VA share of total applications rose from 9.7% to 10.4%. The USDA share remained unchanged at 0.5%.
“We expect that further improvements will lead to a tapering of Fed MBS purchases by the end of the year, which should put some upward pressure on mortgage rates,” Fratantoni said.
Report reveals impact of moratorium expiration on foreclosure activity
Foreclosure activity spiked 27% month over month and 60% year over year in August following the expiration of the federal moratorium.
The number of homes facing foreclosure grew to a total of 15,838 properties, according to ATTOM’s Foreclosure Market Report released Thursday. The figures reflect the first month since the government foreclosure ban ended.
“As expected, foreclosure activity increased as the government’s foreclosure moratorium expired, but this doesn’t mean we should expect to see a flood of distressed properties coming to market,” said Rick Sharga, executive vice president at RealtyTrac, an ATTOM company.
Sharga expects increased foreclosure activity to continue over the next three months “as loans that were in default prior to the moratorium re-enter the foreclosure pipeline, and states begin to catch up on months of foreclosure filings that simply haven’t been processed during the pandemic. But it’s likely that foreclosures will remain below normal levels at least through the end of the year,” he said. Nationwide, one in every 8,677 housing units had a foreclosure filing in August, with Illinois at the top of the list of states with the highest foreclosure rates (one in every 3,848 housing units with a foreclosure filing). Nevada (one in every 4,738 housing units), New Jersey (one in every 4,868 housing units), Delaware (one in every 5,348 housing units), and Ohio (one in every 5,517 housing units) followed.
Foreclosure starts were also up 27% from the previous month and 49% from a year ago. Lenders started the foreclosure process on 8,348 properties in August.
“While foreclosure starts increased significantly compared to last month and last year, it’s very important to keep these numbers in context,” Sharga said. “Both last year’s and last month’s foreclosure starts were artificially low due to the government’s moratorium. But in August of 2019, the last year we had ‘normal’ foreclosure activity, there were almost 28,000 foreclosure starts – over three times more than this year.”