Top 10 City Office Occupancy Crashes To 17.6% (San Francisco Worst At 9.9% Occupancy)

The US office market occupancy rate has dropped to a new low of 17.6% (average of 10 cities) with San Francisco leading the way with 9.9% occupancy.

A close-up of Washington DC’s back to work barometer shows the Covid-crash in March and the slow non-recovery to today.

Fannie, Freddie Whipsaw as Mnuchin and Powell Discuss Capital

(Bloomberg) — Common shares of Fannie Mae and Freddie Mac pared double-digit percentage losses in Tuesday trading as Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell discussed the government’s control over the mortgage giants.

Powell and Mnuchin testified before the Senate Banking Committee

In response to a question from South Dakota Republican Mike Rounds on when the government can end FNMA, FMCC conservatorship, Mnuchin said it’s something that should be done but it takes time, while Powell agreed it’s something that needs to be done “carefully”

Mnuchin said he didn’t think FNMA, FMCC should be let out from conservatorship without appropriate capital

“I would certainly like to see the GSEs return to private hands over time,” Powell said “with a lot of private capital behind it”

Yes Jerome, if there were that much private capital available, we wouldn’t be having this discussion in the first place.

The cure (which no one in the US Senate is really interested in) is for Fannie Mae and Freddie Mac to focus on purchasing 5/1 ARMs (adjustable-rate mortgages) rather than the dreadnought 30Y Fixed-rate mortgage that the affordable housing community is obsessed with. Generally, the 5/1 ARM rate is lower than the 30Y FRM rate.

Or Quicken’s push for 15 year mortgages that enable borrowers to pay down their mortgages much more rapidly. And 50 basis points less expensive the 30Y FRM.

But what does Congress insist on F&F doing? Buying the riskiest mortgage product, the 30Y FRM.

Commercial And Residential Real Estate Dependent on Fed Stimulus

The Federal Reserves is the largest holder of US Treasury debt and it looks like they are here to stay.

Both commercial and residential real estate have benefited from the massive expansion of The Fed’s intervention in financial markets since late 2008. Zero interest rate policies and massive balance sheet expansion ALMOST went away under Powell (2019), but Covid killed their exit plan.

No worries. The Fed is here to stay!!

MBA Mortgage Purchase Applications UP 24% Since Same Week Last Year, Saul Center’s Funds From Operations (FFO) Continue To Tank

Mortgage applications increased 1.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 23, 2020.

The Refinance Index increased 3 percent from the previous week and was 80 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier. The unadjusted Purchase Index decreased 0.3 percent compared with the previous week and was 24 percent higher than the same week one year ago.

Well, the red line shows the increase in MBA Purchase Applications under President Trump.

On the home price front, Zillow expects the Case-Shiller HPI to increase from 5.7% to 6.6%.

On the down side, REITs such as Washington DC’s own Saul Centers is showing the decline in Funds From Operations (FFO) and share price since the Covid lockdowns began. Saul Centers (previously BF Saul) tanked by over 50%.

Real Capital Analytics Office value index shows the Covid decline.

Speaking of Saul Centers, here is its share price against Milano, Italy HQ’d COIMA RES S.p.A that acquires and manages real estate properties. Its the same all over the world.

76% of American CEOs say they may shrink office space (28% say they need a lot less office space) As CMBX 12 loses 20% since March

Should you take out students loans to get a Masters in Real Estate Development (MRED) degree? Unless MRED programs move away from their usual orientation towards office space (George Mason University), they will be dead. And your student loans will be an albatross around your neck for a useless degree.

(Fortune) We knew it was a bad time for commercial real estate. We didn’t imagine it was this bad.

Among CEOs, 76% told Fortune their company will need less office space in the future. And 28% say they’ll need a lot less office space. That’s the finding from a Fortune survey of 171 CEOs in collaboration with Deloitte between September 23 to 30.* 

If we look at the office dominated CMBX 12,

And if we look at CMBX prices for S12, the price crashed with Covid in March 2020 and has only recovered from 100 to 80.19 as an indication of how bad the office market is.

And with prolonged government shutdowns, the demand for office space is in decline. Just sleep in.

The Return Of CDOs And The Decline In CMBX In Face Of Covid (Goldman Sach’s Abacus CDO Revisited)

Does this sound familiar? (The Big Short)

(Bloomberg) — Cerberus Capital Management is selling debt that packages commercial mortgage-backed securities rated at the cusp of speculative-grade into top-rated securities, a practice employed by collateralized debt obligations (CDOs) that contributed to the global financial crisis.

The offering bundles so-called interest-only slices of CMBS rated the lowest tier of investment grade into $300 million of bonds with preliminary ratings of AAA by DBRS Morningstar, the senior portion of a $390 million transaction. Some market observers are concerned that these strips might eventually be subject to losses.

“This is a CDO,” said Jen Ripper, an investment specialist at Penn Mutual Asset Management in Horsham, Pennsylvania. “There could be a real risk of some principal loss at the BBB- level, which most of these interest-only tranches are ‘stripped’ off of.”

The deal comes at a time when the CMBS market is in crisis, a victim of shutdowns stemming from the coronavirus pandemic that have battered revenues for malls, hotels and other commercial properties that back the debt. But the challenges also mean that hedge funds are looking for opportunities to profit amid the fallout.

The transaction is being referred to as a “resecuritization” in deal documents seen by Bloomberg. Those marketing materials say it is structured so that cash flows are “protected from both prepayments and losses.”

The deal is backed by about 9,300 mortgages, 27.6% of which are office, 25% retail and 15.5% hotel, while the rest is a mix of other commercial real estate sectors, initial marketing materials show. The short duration of the product — the AAA slice matures in just 2.2 years — and the top shelf rating could attract yield-hungry investors.

“I’m sure the ratings are what’s driving the demand,” said Jason Callan, head of structured assets at Columbia Threadneedle Investments.

CMBS interest-only strips are linked to the performance of corresponding bonds with the same ratings that pay both principal and interest. They represent securities backed by the excess interest generated from a pool of commercial mortgages.

A representative from DBRS Morningstar said that the ratings are still pending and that no presale report was available yet. A representative for Cerberus didn’t immediately provide a comment.

The deal is being arranged by Deutsche Bank AG, JPMorgan Chase & Co., and Wells Fargo & Co. Representatives for JPMorgan and Deutsche Bank declined to comment while a press officer for Wells Fargo didn’t immediately provide a comment.

Here is an example of Goldman Sach’s ABACUS CDO to refresh your memory. And read the following instead of listening to Selena Gomez and Richard Thaler explain synthetic CDOs.

Abacus 2007-AC1 is paid off. Here is the A1 tranche.

But if we fast forward to today in the commercial real estate space, office space is the worst performing property type in the mid-Atlantic region.

The CMBX 12 synthetic price fell to 58 in late March, but since rebounded to 79.86.

You can see the impact of Covid on CMBX prices in the following chart.

Here we are again, back in the CDO-era of the 2000s.