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Philadelphia Metropolitan Area Real Estate Law Blog

Fall is bargain season for residential real estate

The residential real estate market in Pennsylvania is most active during the spring and summer months, but there are a number of reasons why those looking for a new home might be wise to wait until the fall to begin their searches. The real estate information company RealtyTrac studied 15 years' worth of data and more than 30 million American home sales, and they found that houses sold for prices about 2.6 percent lower than their estimated market values when transactions closed during October.

The real estate market is influenced by supply and demand, and house prices plummet during the fall months largely because there are far fewer buyers around and sellers face far stiffer competition. Some house hunters who fail to find their dream homes during the summer months choose to put their searches on hold as soon as temperatures start to dip, and this can leave the field wide open for savvy and patient buyers. The fall is also a time when frustrated sellers, who have spent months opening their homes to strangers, may become more flexible and willing to negotiate.

Investors buying real estate in out-of-state markets

Pennsylvania real estate investors might be interested in learning about a trend for those who live in high-priced markets along the East and West Coasts. Investors are increasingly purchasing properties in areas with low home prices but competitive rents in other states using firms.

A number of start-up companies allow residential real estate investors to purchase homes through them. The companies then charge fees averaging around 3 percent for acquisition costs and between 7 and 10 percent for property management services. The investors still must worry about things such as vacancies and broken appliances, but the companies take care of most of the hassles. This allows investors to purchase properties and to rent them without ever having to see them.

CRE investors may have to forego small bank lending

Pennsylvania commercial real estate developers could discover that their funding options are increasingly limited. The Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation have cautioned CRE lenders multiple times on the grounds that their loan terms weren't sufficiently rigorous. This has resulted in fewer small lenders wanting to originate new loans.

Another side effect of the FDIC and OCC warnings is that small banks are also selling off their existing loans. This has resulted in financial institutions like private equity funds having to provide more lending. It also means that certain types of CRE deals, such as those having to do with construction and redevelopment, are less highly sought after.

Pennsylvania CRE projects may see more high-wealth funding

Experts say that commercial real estate, or CRE, has grown increasingly attractive to investors with cash to burn. Individuals with a high net worth are using CRE investing to heighten yields and generate significant amounts of income as opposed to simply trying to maintain their existing capital. Their readiness to invest in markets that other institutions shy away from means that in smaller cities and secondary markets, private investors are becoming important sources of funding.

Individual CRE investors prefer various forms of property, such as facilities that have high cash flows although they charge low rents. Others seem to favor properties where single tenants take out leases over extended time frames.

Economic factors that could affect CRE prices in 2017

Commercial real estate markets in Pennsylvania can be affected by economic factors in the state, the nation's economy as a whole and world events. Investors that want to stay up-to-date on current market trends should look at a variety of news sources to understand what's coming in 2017.

One of the factors that may have an impact on real estate prices in the United States next year is global economic and political uncertainty. For example, the United Kingdom's decision to leave the European Union has led to uncertainties in U.K. real estate markets. If the U.S. property market remains stable, more foreign investors will put their money here. In recent years, there has been more foreign investment in U.S. real estate than ever before, and many real estate analysts expect foreign investments to continue to increase in 2017.

Loans for commercial real estate projects

Commercial real estate development is booming in Pennsylvania and around the country. Big cities like Philadelphia, Miami and New York are seeing a surge in the construction of office buildings and luxury rental properties, while other areas are experiencing a demand in shopping centers and warehouses. However, the Federal Reserve has repeatedly issued warnings about a potential bubble, and the Office of the Comptroller of the Currency has increased its scrutiny of CRE lending practices of commercial banks and forced some banks to increase their reserves. This has caused many financial institutions to cut back on their portfolios.

As a result, lenders that are not subject to these regulations, such as hedge funds and buyout firms, have stepped into the breach. It has been estimated that these entities, often referred to as "shadow banks", are poised to invest more than $30 billion into commercial real estate projects. One research company has noted that the amount of financing provided by these entities increased by nearly 40 percent in July 2016 over that invested by them a year earlier. While the interest rate charged by these firms to developers is usually higher than that charged by a bank, the upside to a developer is that a project is often given the green light in a shorter period of time.

The Deutsche Bank fine and its possible effects

Pennsylvanians who are involved in the commercial real estate market might want to follow Deutsche Bank. The U.S. Department of Justice has announced that it is fining the bank $14 billion for its role in issuing residential mortgage-backed securities leading up to the mortgage crisis in 2008.

Deutsche Bank is one of the biggest overseas originators of commercial real estate loans and one of the largest issuers of commercial mortgage-backed securities in the U.S. The German bank reportedly has $6 billion in reserves for litigation, far below the amount needed for the fine. A bank spokesperson indicated that the bank intends to negotiate with the federal government to secure a settlement far below the amount of the fine that was announced.

Commercial real estate sales increasing in medium-sized cities

Pennsylvania commercial real estate investors may have heard about the recent $150 million sale of the Datran Center in Miami. The deal, which was made jointly by Acre Valley Real Estate Capital and ABS Partners Real Estate, reflects the trend of investors moving from major to medium-sized cities.

Because properties in many major cities such as San Francisco and New York are rising in price, a lot of investors are focusing on smaller, more affordable commercial real estate properties found in places such as Dallas, San Jose and Miami. For this reason, Acre Valley and ABS have purchased other properties in medium-sized cities including garden apartments in Cary, N.C. and office facilities in Charlotte, N.C.

Some commercial real estate markets may be approaching oversupply

Pennsylvania investors might look to current real estate trends to determine whether there are certain areas that may be approaching oversupply. This can indicate that some markets have become overbuilt due to continued expansion in certain locations.

One area of interest would be office construction. During the first half of 2016, deliveries on this type of construction equaled 24.3 million square feet, and reports indicate that there is another 98.9 million square feet that is currently under construction. Some market leaders are concerned that there may be overbuilding in New York City, Dallas and Houston. San Francisco was also showing signs of overbuilding. However, recent advances in the tech and life-science markets have increased demand.

Food trucks offer a way into the lucrative hospitality sector

The hospitality sector has become increasingly interesting to commercial real estate investors throughout Pennsylvania and the U.S. in recent years. However, backing a restaurant can still be an extremely risky proposition. Studies show that 60 percent of new restaurants fail within three years of opening, and a quarter fail to even make it through their first year before shutting their doors for good.

Food trucks can offer commercial real estate investors a less expensive way to test the waters of the hospitality sector. Americans spend more than $1 billion each year on street food, and the amount they spent at food trucks increased by more than 9 percent between 2010 and 2015. While opening a traditional restaurant often costs as much as $500,000, getting a food truck operation off the ground can generally be done for an outlay of between $15,000 and $100,000.

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