Tags: Banks | Housing | Construction | Boom

FT: Housing Construction Boom Threatens Already Stressed Banks

FT: Housing Construction Boom Threatens Already Stressed Banks
(AP/Steve Helber)

By    |   Wednesday, 12 April 2017 12:54 PM

U.S. regulators and financial watchdogs reportedly are raising concerns about banks’ exposure to the frothy American real-estate market after developers went on a building binge.

Officials at the Federal Reserve “ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35 percent and rental apartment values collapsed by more,” the Financial Times reported.

While a simulated property downturn has long been part of banks’ annual ‘stress tests,’ the Fed “has made CRE risks a bigger focus this year, reflecting increasing worries that bubbles are forming in parts of U.S. real estate,” the FT reported.

“We’re being very wary of it right now,” Mary Ann Scully, chief executive of Maryland-based Howard Bank, told the FT. “The wound has healed, the scab is gone, and we [as an industry] are thinking this isn’t such a bad asset class after all — but we often have shorter memories than we should.”

By the end of last year, U.S. banks and other depository institutions had extended $2 trillion worth of CRE loans, a category that includes offices and retail space as well as “multifamily” apartment buildings, according to data specialist CoStar.

"While the pace of expansion has slowed in recent months, balances are still up more than a third in just four years. Within the category, multifamily loans were especially fast-growing, rising 63 percent," the FT reported.

Bank funding has helped developers build roughly 1.5 million apartments since 2011, according to Axiometrics. Last year more units became available as a proportion of the total market than any year since 2000, according to Deutsche Asset Management.

“As a result, the banking system has become more vulnerable to a market shock,” the FT explained.

Meanwhile, Reuters reported that fears of higher home mortgage rates this year will keep buyers away and hit home sales could be overblown.

While interest rates are expected to rise this year and wages will likely remain stagnant, buyers can look forward to a potential slackening in home prices during the crucial spring selling season.

Home prices are expected to rise at their slowest pace in six years as affordability - an industry measure based on income and home prices - is expected to hit its lowest since the recession.

But there are other signs that all is not well in other aspects of the commercial real-estate industry.

Manhattan landlords, who have seen retail occupancy plummet after boosting rents to record levels, are trying to avoid big price cuts. Instead, they’re writing checks for things like interior redesigns and moving expenses to keep storefronts from going empty, Bloomberg reported.

Tenant-improvement allowances haven’t been typical in the Manhattan retail market. But now the concessions, which can pay for anything from lighting and displays to a complete overhaul, are becoming a key component in some new leases, particularly for large, flagship stores in high-profile areas, such as Madison Avenue and Fifth Avenue, according to Steve Soutendijk, an executive director at brokerage Cushman & Wakefield Inc.

“We’re seeing tenant-improvement and concession packages that retail landlords never, ever contemplated before,” he said.

(Newsmax wire services contributed to this report). 

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U.S. regulators and financial watchdogs reportedly are raising concerns about banks' exposure to the frothy American real-estate market after developers went on a building binge.
Banks, Housing, Construction, Boom
518
2017-54-12
Wednesday, 12 April 2017 12:54 PM
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