Jury Slams Brokers with $1.8B Verdict Over Elevated Commissions
Plus: The landscape of retail real estate is shifting, with strip malls rising as the new champions in the sector.
Jury Slams NAR & Brokerages with $1.8 Billion Verdict Over Elevated Commissions
A federal jury has ruled against the National Association of Realtors (NAR) and major residential brokerages, holding them accountable for $1.8B in damages, citing a conspiracy to artificially elevate home sales commissions.
What happened: After approximately two weeks of hearing testimonies from both the plaintiffs and defendants, the jury directed the NAR, along with real estate franchises HomeServices of America and Keller Williams, to pay $1.78 billion in damages. These damages are owed to the sellers of over 260,000 homes across Missouri, Kansas, and Illinois, who are the plaintiffs in this case.
Quick recap: The lawsuit primarily revolves around broker commissions. These are fees that home sellers pay to brokers for carrying out transactions and offering services, such as arranging property viewings. Typically, these fees are incorporated into a home's listing price.
In focus: The plaintiffs claim a rule inflates home prices by encouraging agents to favor properties with better commissions. This leads sellers to pay higher commission rates, potentially adding billions annually. For context, in 2020, Americans spent over $85 billion on residential real estate commissions. The NAR has faced prior scrutiny from the Department of Justice for potential antitrust breaches.
➥ THE TAKEAWAY
Why it matters: This verdict has the potential to fundamentally transform the U.S. real estate market, impacting the way Americans buy homes and the structure of broker fees. Although the final judgment is pending, the outcome could modify or even nationally prohibit the cooperative compensation rule. Such a change might relieve home sellers from bearing the costs of commissions for both listing and buying brokers.
Wait for it: Industry analysts say investors will focus on the Treasury Department's plan for long-term debt sales, overshadowing the Federal Reserve's policy statement.
Somehow, some way: WeWork (WE) has struck a 7-day forbearance deal with lenders after missing interest payments, giving temporary relief amid ongoing financial challenges.
Hasty acquisitions: CBRE Group (CBRE) continues its M&A strategy amidst the downturn by purchasing Sera Global's investment banking business and UK office developer, Candour.
Affordable housing hits market: Related Cos. is selling a package of 2,021 affordable housing units across 34 properties in the northern Bronx, with hopes of achieving at least $250M.
Bottoms up: Rexford Industrial Realty (REXR) purchases a 993 KSF brewery site in Irwindale, CA for $120M, potentially for redevelopment in the future.
Risk Renaissance: A ravaged Florida beach town destroyed by Hurricane Ian attracts affluent homebuyers willing to face future storms and build stronger structures.
Flex office flexes: Knotel, the flexible office startup, is close to leasing the iconic Flatiron building, winning the battle against WeWork and The Office Group for this prestigious location.
Net lease makes waves: Appreciation Homes introduces the first single-family residential net lease deal, featuring a 13-asset portfolio of build-to-rent homes in Oklahoma City suburbs.
Nightlife knockout: Jeffrey Soffer's efforts to extend hours at Story nightclub were thwarted by an appeals court, effectively ending any chance of reopening the venue.
Thriving single-tenant: Single-tenant trades accounted for a significant portion of CRE deal flow, surpassing the previous year's proportion, according to Marcus & Millichap's report.
Financial fears: A receiver has been appointed to take control of two major San Francisco hotels amid concerns over a defaulted $725M CMBS loan.
Murky future: The fate of a major data center project in Prince William County, VA is uncertain as county officials recommend rejecting rezoning due to insufficient info from developers.
Rising Concerns Over Regional Banks' CRE Exposure
Midsized regional banks are witnessing a significant rise in nonperforming commercial real estate loans and related losses, with regulators warning about the potential risks.
Surge in nonperforming loans: Of 18 regional banks with assets ranging from $50B to $250B, 15 have reported an 80% increase in nonperforming loans year-over-year. Charge-offs, denoting debts marked as losses, also climbed at 15 of these banks compared to the previous year.
A walk down memory lane: Post the 2008 financial crisis, many regional banks increased their CRE lending and maintained this approach during the pandemic. The direct lending to landlords nearly doubled to $2.2T during the seven years leading up to 2022. Smaller and midsized banks, those with assets under $250B, held about three-quarters of all CRE loans in the second quarter of this year.
NY’s watchdog is sounding the alarm: Seven months after Signature Bank's collapse, NY's Department of Financial Services has raised concerns about banks' commercial real estate (CRE) exposure and the associated unrealized losses due to rising interest rates. Superintendent Adrienne Harris highlights the focus on loan-to-value ratios and risk management, reflecting a national worry with bank exposure to CRE at $3.6 trillion, or 20% of deposits.
Zoom in: Increased lending in CRE is causing issues amidst declining property values, higher interest rates, and a maturing $331B in U.S. commercial and multifamily mortgage debt this year. For instance, New York Community Bank's nonperforming loans rose by 64% from the previous quarter due to two office-related loans, while Zions Bank moved $64M in loans to nonperforming status.
➥ THE TAKEAWAY
Between the lines: While the present problems with loans appear to be isolated incidents, analysts warn of potential broader credit deterioration in the future. Banks are anticipated to face more losses, especially as smaller banks have more significant exposure to real estate. Consequently, regional banks are becoming more cautious, reducing their CRE lending, as evident from the largest quarterly decline in market share since 2011.
📊 POLL OF THE DAY
Given the recent surge in nonperforming commercial real estate loans and related losses among midsized regional banks, how do you perceive the future of CRE lending and its impact on the banking sector?
📖 READ: Walmart (WMT) has invested $9B to upgrade over 1,400 of its locations nationwide. Changes include more space for online grocery pickup, new "dollar shops," and revamped pharmacies.
🎧 LISTEN: In this Best Ever CRE episode, Bob Thomas predicts a unique opportunity soon emerging in Class A office space.
📊 EARNINGS: Cushman & Wakefield (CWK) report a $34M loss in Q3 due to declines in leasing and capital markets transactions. But CRE recovery is expected in the second half of 2024.
Rise of the Strip Malls: A New Era in Retail Real Estate
PHOTO: JESSICA PONS/BLOOMBERG NEWS
The landscape of retail real estate is shifting, with strip malls rising as the new champions in the sector. Their success lies in the changing consumer habits, especially as more people work from home, driving demand for convenient and easily accessible shopping venues.
Case in point: SITE Centers, a prominent owner of open-air shopping spaces in affluent suburbs, is divesting all its strip malls, housing them in a new publicly traded entity named Curbline Properties. These 61 strip malls, valued at $1.7 billion, are distinctive for not being anchored by large grocery or big-box stores.
By the numbers: The hybrid work era has catapulted strip malls to the forefront of retail real estate. Pandemic-driven shifts in suburban shopping behavior led to an 18% uptick in strip mall foot traffic compared to pre-COVID times. With evolving consumer preferences favoring these malls, U.S. convenience store centers are commanding record-high rents of $20.37 per square foot. Additionally, strip mall vacancies have plummeted to an all-time low of 5.3%, underscoring their burgeoning appeal.
➥ THE TAKEAWAY
Rising demand: Previously, strip malls, lacking big-box anchor stores, were perceived as riskier investments. But as consumer habits evolve, these establishments, with their ease of access and shorter, frequent visits, are now lucrative hotspots. Investors need to acknowledge this changing landscape and realize that strip malls are not just playing second fiddle in the retail real estate orchestra – they're becoming the main act.
The average size of U.S. office leases in square feet is near its 1Q21 lows (3,221 SF per lease), but total office leasing volume by square feet is very healthy (94.6 MSF), indicating that while average lease sizes are small, a lot more office leases are being signed than in 2Q20.
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