Marterra Market Monitor - April

Marterra Market Monitor - April
Marterra Real Estate Featured Listing: 2326 Cornell Dr, Costa Mesa
List Price: $1,495,000
3 Beds / 3 Baths / 1,800 Sq.Ft.
YTD Activity
Home Sales Closed Units: 10
Home Sales Volume ($): $8,519899
Residential Properties Leased: 30
Gross Collected Rent: $2,391,381
Single Family Transactional Market: Christine asked ChatGPT to write "write a paragraph about high interest rates but low inventory and make it funny". ChatGPT delivered:
Well, well, well, looks like we've got ourselves a real estate paradox here. On one hand, we've got interest rates that are higher than Snoop Dogg on a Sunday afternoon. And on the other hand, we've got inventory levels lower than a limbo stick at a midget convention. It's like trying to find a needle in a haystack, but the needle is a house and the haystack is the entire housing market. I mean, it's no wonder why home buyers are feeling more confused than a chameleon in a bag of Skittles. But hey, at least we can all agree that this situation is a "laughing to keep from crying" kind of way.
Interest rates are high, and with layoffs making the news, its not surprising that buyer demand is softening. But more than buyer demand is softening, supply is ruthlessly constrained. Property owners with prop 13 protections and interest rates locked in the 2s and 3s have little motivation to sell. The vast majority of sellers today are selling due to a life event. When desperately needed inventory arrives, it is swooped up immediately. We are still seeing multiple offer situations on properties, but multiple offers in this situation mean 2-3 offers, as compared to 15 or more when we were in the low-interest rate environment. The multiple offers are keeping buyers competitive and helping to maintain home values.
Residential Leasing Market: it finally happened - we have lowered the asking rent on an apartment unit compared to a lease signed last year for a model match unit. The effective decrease is just over 3%. It is too soon to tell if this data point is an aberration or indicative of a changing tide.
Mortgage Rates: The Fed was widely expected to hike rates by 0.25% this month in spite of the banking drama. As such, the hike itself had little-to-no impact on interest rates. Mortgage rates tend to track fairly well with 10yr Treasury yields and this month was no exception. Both pushed into their lowest levels since Early February. The Fed's outlook for its own policy rate remains around 5% all the way through 2024. Meanwhile, financial markets are already betting on roughly a full point of rate cuts by the end of 2023. Many consumers wonder if this is the beginning of another housing crisis or anything remotely like it. No, it's not. The underlying financial conditions of the mortgage market are infinitely more sound and perhaps most importantly of all, there simply is not a glut of new or existing home supply as there was back then. Home prices were badly in need of a correction and this is that correction. Please note that home prices are seasonal and February already moved higher versus January--it just did so at a slower pace than last year.
- Amit Singh Neo Home Loans
Capital Market Commentary: With the recent bank crisis headlines still fresh, liquidity in the commercial mortgage market is quickly tightening. While the Fed did not begin to increase interest rates until mid-2022, large commercial banks had already begun to reduce their CRE lending volume. Much of the pullback at larger national banks was being absorbed by regional and community banks which had increased their Commercial Real Estate (“CRE”) lending by almost 20% year-over-year. By early 2023 tightening was underway at many smaller banks, even prior to the Silicon Valley Bank, Signature Bank, and First Republic Bank debacles.
Credit spreads (the margin charged over a corresponding index) may widen further. Some active lenders are openly discussing the pricing opportunity that reduced competition from banks will foster and most have already raised spreads 20 to 50 basis points while waiting to see where underlying index rates settle. To date, net pricing impact is favorable as the underlying indices have decreased 40 to 90 basis points, reflecting the flight to quality.
- Shaun Moothart
Executive Vice President, Capital Markets
Commercial Real Estate (CRE): The decrease in CRE values are becoming increasingly evident. According to Greenstreet, there has been an estimated 15% decline in the past year. As CRE loans mature (a tidal wave is maturing in '23 and 24'), the asset class faces a potential negative feedback loop as borrowers are forced to sell properties when they are unable to replace the existing debt with similar proceeds. The new buyers will face similar financing challenges that will put downward pressure on purchase prices. These new sale comps will put further downward pressure on comps.
Macro Observations: a few months back, I joked that this economy felt like the scene in Austin Powers where the security guard stands in front of a steamroller yelling at Austin Powers to stop. As the scene goes on, the steamroller slowly moves toward the security guard and squishes him. For months, we have seen inflation rage and the economy showing increasing signs of deterioration as the technology sector began shedding jobs. The pain in the technology sector has now clearly spread to the banking and finance sector, as evidenced by the recent banking crisis. The recent failures (and near failures) of regional banks and Credit Suisse will further weaken the economy as credit tightens. Much of the weakness in the banking sector is directly related to high-interest rates - as the value of their assets goes down as interest rates go up.
For example (I will oversimplify this), if a bank lends $1,000,000 at 3%, the bank will expect to generate $30,000 in interest income. As I write this, the 10 yr treasury is generating a 3.5% yield; for an investor to find the aforementioned $1,000,000 loan equally attractive to the 10 yr treasure, they would be willing to pay the bank approximately $855,000 for the loan, meaning the loan has lost approximately 15% of the value. Meanwhile, the Federal Reserve just raised the federal funds rate by 25 basis points to further try to fight inflation. The Federal Reserve will continue to raise rates until they believe they have broken the back of inflation.
What does this mean? Someone is going to get squished.
Project Updates: We have several ongoing projects; here is a quick update on one of them:
Mission Drive, Costa Mesa: we closed escrow on a 4-unit multifamily property in Costa Mesa in August of 2021. The property sits on a pie-shaped corner lot, giving the property +4,300 sf of excess land. Planning and the permitting process for 2 ADUs commenced during our escrow process, completed in November 2022. Grading kicked off in December of 2022, and we almost immediately got hit with a storm rivaling anything I had seen in my lifetime. In a more reasonable setting, plans and permits would have been expected to be received within six months, construction would be expected to take six months, and we would have delivered two new naturally occurring affordable housing units to our market within a year. However, we now hope to deliver these units within 2.5 years of starting the process. These unnecessary delays are, unfortunately, a cost of doing business in the State of California and create unnecessary barriers to entry that further exacerbate our housing affordability crisis.
As you can probably tell, we are dealing with a slight rain delay (this photo is from 3/27 - it has not rained in 5 days, and it's expected to rain again on the 29th and 30th. Once the rain stops, we will pump out the excess water and to get back to work.
What's The Good Word: we here at Marterra are all-in on our community. We have two events that will help support two of our favorite organizations, the Boys and Girls Club of Central Orange County, which provides after-school enrichment to children, and Let's Be Kind, which helps foster a student-led culture of kindness on our local campuses. If you are interested in participating in either event, please reach out.

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