Dr. Lawrence A. Souza, DBA, CRE, FRICS, CCIM

LAist reports that Los Angeles housing officials have released a long-awaited report recommending changes to the city’s rent control policies. If adopted by the city council, the new proposals would significantly lower rent hikes next year for the 42% of L.A. residents living in rent-controlled housing. This is one reason Paladin Realty Partners, LLC avoid investing in rent-controlled (1978 and older) apartments in L.A. As rent control erodes operating margins, owners have less incentive to invest in property upkeep, potentially leading to blighted conditions in many neighborhoods. Over time, properties may be removed from the rental market, worsening the #AffordableHousing crisis. https://lnkd.in/gV5RhGWi

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For the 3rd time in recent years, California voters rejected efforts to expand rent control by a resounding 20-point margin. The latest attempt, #Proposition33, would have repealed the 1995 Costa-Hawkins Rental Housing Act, a relatively balanced housing policy aimed at incentivizing new housing development by prohibiting municipalities from capping rent on vacant units, single-family homes and apartments built after Feb. 1, 1995. With a statewide housing shortage totaling one million units, the solution to California’s affordable housing crisis is clear:  WE NEED MORE SUPPLY!! Additionally, the Los Angeles Times published a new article with the #Prop33 election outcome. https://lnkd.in/gUZp5HF2   For more insight, see the link to my blog below:  https://lnkd.in/grxMpqzg

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Southern California's real estate market is on fire!

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Another well written and timely piece by Catherine Leffert. LTV can indeed be highly misleading. We noticed the fallcies of over-relying on LTV back around 2011. At that time, it was the reverse problem because we were getting false positives of bank failures when running stress tests. It turned out that we were too dependent on the appraised value of a property and not adjusting it for vintage. For example, we saw banks putting new loans on the books after the 2008 Financial Crisis and in the worst part of the recession at a relatively high LTV (say 75%) -- say between 2009-12. However, since those loans were originated after the crisis, proprety values had already crashed by then. Therefore, the "V" in the LTV equation was at a depressed value at the time of the appraisal. This ironically meant that the loan was underwritten very conservatively despite its relativly high LTV because there was far more upside appreciation potential in the "V" than downside risk at that time. When we adjusted the stress tests to reflect this idea of rightsizing the "V" based upon vintage, we got far more accurate results. In other words, give me a CRE loan with a 75% LTV but originated in 2010 all day long over a similar CRE loan with a 60% LTV but originated in 2007. Ditto is true for loans originated at a higher LTV in 2024 vs a lower LTV in 2021. Banks should make use of CRE indicies from companies such as Co-Star and GreenStreet to right size their valuations to current levels. They are not perfect, but both have free indicies that can be used. You can get very granular behind a pay wall by looking at indicies for differnet combinations of market and property type. They also have both Equal Weighted and Value Weighted indicies. Community banks can make use of the equal weighted indicies to get a better comp to their markets. Analyzing cap rates also is a good idea. Just keep in mind that the spread between cap rates and say the 10-year treasury can vary greatly, so i actually prefer using indicies because that combines changes in both NOI levels and cap rates. I also like looking at debt yields (NOI / loan balance) to get a sense of a lender's margin of safety if it has to rely on the collateral. This all assumes the cash flows are still okay for a given property. If the cash flows are or will be tanking, then youve got bigger problems and your LTV is useless.

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💡 Safehold Inc.’s Ground Lease Structure: A Key to Affordable Housing Solutions 🏠 Nareit reports that in a few years, residents of four upcoming affordable housing communities in Northern California will benefit from a financing model dating back to the feudal era: the ground lease. Safehold Inc. (NYSE: SAFE) is demonstrating how modern ground leases are a win-win for property owners and tenants alike. Why Ground Leases? 🤔 * Land as an Asset: Modern ground leases view land similarly to a corporate bond, separating land value from the development on top. This approach brings consistency and liquidity to the market. 💼📈 * From $350M to $6.5B: Since going public seven years ago, Safehold’s portfolio has expanded significantly, operating in top 30 U.S. markets with over 145 assets. 🌍📊 Ground Leases & Affordable Housing 🏡 * Innovative Financing: Safehold's ground lease structure is instrumental in developing or rehabilitating affordable housing projects. * Recent Success: In July, Safehold closed ground leases for 781 affordable units in San Jose and Concord, CA. Partnering with The Pacific Companies, this initiative showcases a practical solution amidst rising interest rates. 🌟📉 Benefits for Developers & Projects 🚀 * Cost Efficiency: Ground leases reduce the need for large permanent loans, providing capital at a lower overall cost. This can result in substantial savings and additional funding for projects. 💵💰 * Private Solutions: Safehold offers a market-based alternative to public subsidies, helping developers like The Pacific Companies navigate financial gaps. 🔍💡 Bridging Gaps in Affordable Housing 💪 * High Demand, High Costs: Safehold’s ground leases address budget gaps in affordable housing projects, particularly in high-cost coastal markets. 🌊🏙️ * Ongoing Projects: Notable collaborations include the 80 Saratoga development in Santa Clara, CA, highlighting Safehold’s commitment to expanding their impact in affordable housing. 🔨🏢 Flexibility & Simplicity 🌟 * All Phases Covered: Safehold’s ground lease structure supports acquisition, construction, development, and recapitalization phases. 📈🔧 * Simplicity Appeal: With a 99-year lease and fixed rent increases, the structure’s predictability is attractive to sponsors and lenders, enhancing liquidity and financeability. 🗓️🔒 Expanding Horizons 🌍 * Broad Applicability: Safehold’s approach is versatile, suitable for all property types and development stages. Their focus on affordable housing is just one aspect of their broader strategy. 🏘️🌐 * Future Prospects: Safehold is excited about continuing to support affordable housing and addressing the housing shortage through their innovative ground lease model. 📊🏆 https://lnkd.in/gXeDd7Jn

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With #ElectionDay happening tomorrow, our time to learn about the severe consequences of #Prop33 passing is running out. If passed, it would further destabilize California's already strained housing market and worsen our #HousingCrisis. I created a detailed blog post that I highly encourage you to read to learn more about why we must vote NO on #Prop33. In a state with a massive housing shortage, heightened rent control regulations will only hinder the construction of much-needed #AffordableHousing. https://lnkd.in/grxMpqzg

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Latest Savills Research report reveals San Diego and the San Francisco Bay Area are leading the nation's life sciences market. Even amidst economic challenges, tenant demand remains strong in these innovation hotspots. San Diego Highlights: - IQHQ's 1.7M SF lab/R&D space is nearing completion, still awaiting tenants. - DermTech, the brains behind a non-invasive skin cancer detection sticker, is expanding to restructure debt and initiate asset sales. SF Bay Area Highlights: - Foresite Capital secured $900M for a venture fund aimed at companies using AI in healthcare and life sciences. - IQHQ's new 330,000 SF, 5-story life sciences building in South San Francisco is part of a larger development. Other Key Takeaways: - VC funding surged nearly 30% from last year, with many companies raising millions. - Smaller leases (under 10,000 SF) are driving demand as occupiers watch costs. - Tenants are delaying decisions and relocations to optimize their spaces amid economic uncertainties. The Bottom Line: San Diego and the Bay Area are at the cutting edge of life sciences innovation. Firms that navigate current headwinds will be set for long-term growth in these dynamic markets 🌱🚀 Savills North America

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Many of the large real estate investors I've spoken to have called California uninvestable for the past few years, and unfortunately, things do not seem to be pivoting. Here are the key points highlighting the challenges: Corporate Exodus: Numerous companies, including major housing developers, are relocating out of California due to high taxes, stringent regulations, and a more business-friendly environment in states like Texas and Arizona. This trend has seen over 350 companies move their headquarters from California between 2018 and 2021, continuing into 2024​​. Insurance Exits: Major insurers like State Farm, Allstate, Farmers Insurance, and The Hartford are no longer issuing new homeowners insurance policies in California. They cite the increased risk of wildfires, rising reinsurance and construction costs, and a stringent regulatory environment as key reasons​​. Impact on Housing Market: The withdrawal of insurers is making homeownership increasingly difficult and expensive. Prospective buyers are left with the costly California FAIR Plan as their only option, which is significantly driving up homeownership costs​. Regulatory and Political Factors: The insurance industry is lobbying for legislative changes to allow for more flexible rate adjustments. Consumer advocates argue that the current moves by insurers are strategic to push for deregulation​​. These issues highlight the complex and challenging environment for real estate investment, homeownership, and all businesses in California. The state's economic and regulatory landscape needs significant adjustments to attract and retain businesses and residents. #RealEstate #California #Investment #Housing #BusinessEnvironment https://lnkd.in/eZ9jyTSu

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Clever Real Estate published a very interesting survey on the attitudes of recent homebuyers and those who are planning to buy soon. It's a small sample size, to be sure, but a lot of people express regrets about the home they've ended up with. For real estate agents, it should be a bit shocking that half of the prospective buyers are considering going without representation. HousingWire has been reporting on the issue of brokerages needing to communicate agent value to clients - and we'll continue to do so. #homeownership #realestate https://lnkd.in/g54DCCiK

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The apartment sales market continues to thaw. Transactions increased 18% year over year in October, hitting $11 billion, according to MSCI Inc.. However, that total is still 35% below the five-year average for an October before the pandemic. Prices fell 6.1% YOY in October. However, they only dropped 0.3% from September, suggesting a more moderate 3.7% annualized decline. But many observers expect things to pick up in 2025. On the Houston-based REIT’s fourth-quarter earnings call earlier this month, Camden Property Trust CEO Ric Campo said the conditions exist for more properties to come to market next year. “You have $650 billion worth of multifamily debt coming due, merchant builders who have [preferred equity loans] that are eating into their profits, banks who want their loans paid down,” Campo said. “So there’ll be a very robust transaction market over the next couple years.” Here's more from the monthly report. https://lnkd.in/eyaJYSce

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The multifamily market is flattening as it normally does this time of year. Leading indicators are mostly unchanged at the national level, but some divergence is emerging at the metro level. Seattle and Reno continue their strong start to the year with steady traffic, modest occupancy increases and strong rent performance. They are a few markets to keep an eye on in the second half of 2024. On the economic front, a mixed employment report is leaving economists wondering if the Fed will cut rates sooner than expected. Fed Chair Powell testifies before Congress today, and he may begin to lay the groundwork for a September cut. Some are calling for a July cut, but I expect the Fed will use this month's meeting to indicate a cut at the next meeting. The FOMC wants to be transparent and not catch markets off guard. Check out this week's Radix Rent and Operating Trends report for more details on the state of the macro economy and your local multifamily markets!

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"Attribute misreporting and appraisal bias" by Mike Eriksen, Chun Kuang and Wenyu Zhu is now available in Review of Finance, Volume 28, Issue 5. "We identify a specific channel through which appraisers introduce bias in the estimated values of some individual properties. Virtually all appraisers of residential property are required to first select comparable transactions (or “comps”) of properties with similar attributes, then document differences in attributes between the subject property and selected comps to reach their opinion of value. By constructing a database of over 28 million sets of property attributes reported by appraisers associated with 4.6 million loan applications gathered by a large secondary market financial institution from 2013 until 2017, we test whether appraisers consistently misreport attributes of subject properties and the comparable transactions used to anchor their estimates. Appraisers have an incentive to misreport property attributes to justify higher appraised values to ensure associated mortgage loans are approved. We focus on property transactions with multiple sets of attributes reported by the same appraiser and find evidence consistent with an intent to inflate valuations through attribute misreporting. In particular, some appraisers appear to strategically under-report the same comp when the contract price of the subject property exceeds its Automated Valuation Model (AVM) estimate. We interpret this as evidence consistent with under-reporting comp attributes being a strategy that some appraisers use to inflate appraised values for subject properties when they would otherwise be below contract prices and therefore jeopardize the transaction. We also find that highly leveraged borrowers whose appraisals had inconsistently reported attributes were 9.8% more likely to become seriously delinquent in their loan payments. Strategic misreporting of attributes appears prevalent across markets. Figure 1 illustrates the distribution of appraisers by the share of appraisals with at least one significant reporting inconsistency. We only look at attributes reported for the same property by the same appraiser, with the dark grey bars representing the subject-comp comparisons and the light grey bars representing the repeated-comps comparison. Only 11.5% (19.4%) of appraisers for the subject-comp (repeated-comps) comparisons did not have a single instance of misreporting and are indicated by the bars left of 0. Almost one-third (31.2%) of appraisers who have reported attributes for the same comp across multiple appraisals significantly under-state at least one comp attribute on more than 10% of their appraisals." Keep reading the digest: https://lnkd.in/eYp9FSnj or dive straight into the article: https://lnkd.in/eWa9qu7S

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My update for #USNews on the most overvalued housing markets based on local incomes has just been published: > The most overvalued markets to purchase a home tend to be located along the California coast, as well as in tourist-popular Hawaii, tech-heavy Seattle and holdover “Zoomtowns” in Colorado, Idaho and Utah. > The most overvalued markets to rent a home are led by MSAs in Hawaii, California, New York, South Carolina and Florida. > You’ll pay the most to buy a median-priced home versus renting in the San Francisco Bay Area and on the Hawaiian island of Maui as well as elsewhere in California, Washington, Utah and Oregon. #housingmarket #overvaluedhousingmarkets #realestate #economy #homeprices #incomes #mortgagerates

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Good insight from Jay Tanjuan, CCIM regarding the IE and the cost to remain competitive with Las Vegas and Phoenix. The question I have is what will happen when the Union Pacific intermodal rail yard is completed later this year and how will that impact drayage costs out of Long Beach/LA harbor? It could be a game changer for PHX at the expense of the IE.

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Great webinar yesterday presented by Jeffrey W. Adler of Yardi Matrix. Some Portland specific notes- - YoY Rent Growth Year-End 2024 - 0.3% - YoY Rent Growth Year-End 2025 - 4.5% High level/national notes- - "Overall, the multifamily market is performing well, as demand continues to soak up supply" - "The supply shortage of U.S. housing is likely to last at least 5-10 years..." - "Rental growth in the next two years will be stronger than this year, as it will take some time for the Fed’s eventual rate cuts to meaningfully impact consumer demand" https://lnkd.in/gnpUW2VZ

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