Situs Newswatch 10/24

Don’t Fear the Machines

We read this story, as I’m sure many in our industry will as well, with some trepidation and fear— another example of machines, robots taking over and replacing workers:

One of the world’s fastest-growing trading shops doesn’t have any traders.
XTX Markets Ltd. has emerged as a foreign-exchange powerhouse, relying on programmers and mathematicians to fuel its rise into the global top five earlier this year. Now, after becoming a formidable player in currencies, XTX has its sights set on growing in stocks, commodities and bond markets.

But in a world where the difference between profit and loss can be tiny fractions of a second, XTX says it relies more on smarts than speed. Instead of building microwave networks to ferret out prices a microsecond before anyone else, XTX uses mathematical models that are tuned with massive data sets. It says its technology has computing power comparable to some of the world’s top supercomputers.

(read full story: Bloomberg)

But, fear not, says Situs Executive Managing Director Steven Bean, who by the way has sheets of papers piled on his office desk in New York.  “Machines, for at least the near-future are not going to totally replace the experience and hands-on nature required for Commercial Real Estate.”

Bean, who leads Situs’ U.S. advisory services says, “We are always developing ways to become more efficient.  The machines and databases work for us, but human interaction and interpretation is still key. We have a lot of CRE information so having organized data helps to speed up the due diligence process, saves our clients’ money and makes us better informed to provide a better analysis for clients to make investment choices.”

“Having spreadsheets stored on computers and paper, across wide-ranging locations is clearly not enough for banks in the 21st Century,”  says Bret Williams, President of CJC Technologies, a partner of Situs.

“Believe it or not,” says Williams, “some major banks are still using outdated programs like Microsoft’s Office 2007, even Lotus Notes …many bankers just don’t move quickly.”

Situs’ Bean is a realist who says, “The CRE industry is ripe for disruption, we are slow adopters and either we change or become extinct.”

But the bottom line, says Bean is “better databases makes us better at our job.”

Situs hires Experienced Valuation Expert to lead European Situs RERC Chapter

Situs has announced that it hired European Valuation Expert Taco Brink.  Mr. Brink will join Situs RERC, a wholly owned subsidiary of Situs, as Managing Director and head of Situs RERC Europe. Mr. Brink is responsible for the development and expansion of Situs’ valuation management and advisory services in Europe, as well as playing an executive global role in the expansion of Situs RERC, reporting to Ken Riggs, President of Situs RERC.

Situs RERC’s business is centered around valuation management and advisory services, independent fiduciary services and valuation benchmarking, as well as research and publication offerings to the global commercial real estate industry.

“I am incredibly excited to lead the expansion of Situs’ valuation services into Europe. European markets are increasingly turning to valuation management and related advisory services as banks and funds strive for greater independence under the watchful eyes of regulators and investors demand more transparency in valuation marks,” said Mr. Brink.

Mr. Brink is based in London and has over 25 years of valuation and consulting experience. Prior to joining Situs, he was most recently the European Head of Valuation Management for Altus, and prior to this he was the Head of DTZ Pan-EU International Valuation Coordination Group.

Retail, Hotels Weigh on U.S. CRE

Ten-X reports for the most part commercial real estate prices are rising at a healthy pace, but the retail and hotel sectors continue to lag.  Their All Property index rose 1% in October, bringing it 6.9% higher than a year ago.  Price growth has remained near this pace for much of the year, though it is nearly half the growth rate seen during 2015.  Pricing trends in the office, industrial and apartment sectors remain robust, while the retail sector is experiencing more moderate growth and the hotel sector continues to see prices decline.

The office sector saw prices rise 1.5% in October according to the Ten-X Nowcast, bringing prices nearly 14% higher than a year ago.

Apartment sector prices increased 1.8% from a month ago and are also nearly 14% above their year ago level.

The Ten-X Industrial Nowcast saw prices continue their steady expansion, rising 1.5% in the month and just under 13% from a year ago.

The retail sector continues to lag according to the Ten-X Nowcast, with pricing only increasing 0.7% in the month and just 6.5% from a year ago.

The Ten-X Hotel Nowcast remains in outright decline.  Hotel pricing fell 0.3% in the month and is now more than 8% lower than its year ago level. This is the most severe year over year decline for the sector in the history of the Nowcast. 

Situs survey data shows lowered expectations, as do Google search trends.  The sector is struggling amid an expansion of traditional supply and the rise of technological upstarts such as Airbnb.  This has resulted in occupancy erosion, and a dramatic deceleration in RevPAR growth.

read  more: Ten-X

U.S. Mall Investors Could Lose Billions as Retail Gloom Deepens

The dramatic shift to online shopping that has crushed U.S. department stores in recent years now threatens the investors who a decade ago funded the vast expanse of brick and mortar emporiums that many Americans no longer visit.

Weak September core retail sales, which strip out auto and gasoline sales, provide a window into the pain the holders of mall debt face in coming months as retailers with a physical presence keep discounting to stave off lagging sales.

Some $128 billion of commercial real estate loans – more than one-quarter of which went to finance malls a decade ago – are due to refinance between now and the end of 2017, according to Morningstar Credit Ratings.

Wells Fargo estimates that about $38 billion of these loans were taken out by retailers, bundled into commercial mortgage-backed securities (CMBS) and sold to institutional investors.

Morgan Stanley, Deutsche Bank and other underwriters now reckon about half of all CMBS maturing in 2017 could struggle to get financing on current terms. Commercial mortgage debt often only pays off the interest and the principal must be refinanced.

The blame lies with online shopping and widespread discounting, which have shrunk profit margins and increased store closures, such as Aeropostale’s bankruptcy filing in May, making it harder for mall operators to meet their debt obligations.

Between the end of 2009 and this July e-commerce doubled its share of the retail pie and while overall sales have risen a cumulative 31 percent, department store sales have plunged 17 percent, according to Commerce Department data.

read more: Reuters

Bank Legal Costs Cited as Drag on Economic Growth

A heightened emphasis by banking regulators and law-enforcement officials on financial misconduct may be constraining global growth, some officials warn.

Legal expenses are among the burdens weighing on banks, policy makers say. “The roughly $275 billion in legal costs for global banks since 2008 translates into more than $5 trillion of reduced lending capacity to the real economy,” Minouche Shafik, a deputy governor of the Bank of England, told a New York conference of regulators and bankers Thursday.

Other policy makers have expressed concern that strict crackdowns on banks’ lapses in carrying out anti-money-laundering regulations have led banks to nearly cut off several emerging markets from the global financial system, damping their economies. The International Monetary Fund, in particular, has sounded that alarm repeatedly this year and held a conference highlighting the issue at its annual meeting in early October.

Regulators say the fines and their enforcement actions reflect widespread misconduct in the industry, and that the way to reduce compliance costs is for banks to improve their behavior. Indeed, the event Ms. Shafik addressed—a Federal Reserve Bank of New York conference on “Reforming Culture and Behavior in the Financial Services Industry”—focused largely on new strategies that governments could adopt to further pressure banks to alter practices to better comply with existing laws.

Ms. Shafik blamed the high fines, and resulting costs to the economy, on “the wave of misconduct which has emerged in the aftermath of the financial crisis” and explained the BOE’s strategy for “better regulation” to “improve standards and ethics in financial markets.”

“There are certainly public costs” when banking culture falls short of regulatory expectations, William Dudley, president of the New York Fed, said at the conference. “To the extent we don’t have trustworthiness in banking…that actually undermines the effectiveness of the financial community.”

read more: Wall St Journal

Existing Home Sales

Sales of previously-owned homes rebounded solidly in September, a signal that the housing recovery remains on track after a summer lull.

Existing-home sales ran at a seasonally adjusted annual rate of 5.47 million, the National Association of Realtors said. That was a 3.2% increase from a slightly revised 5.30 million pace in August and a 0.6% increase compared to September 2015.

The median sales price of $234,200 was 5.6% higher than a year ago, marking the 55th straight month of yearly price gains.

Sales stumbled in July and August after touching a 9-year high in June. Dwindling inventory and surging prices have been constraining the market, and together with a pullback in mortgage applications, the Realtors worried that the two months of declines marked a turning point in the recovery.

“Even with the affordability challenges, people want to buy,” NAR Chief Economist Lawrence Yun said.

In September, sales rose in all four regions, ranging from a 5.8% gain in the Northeast to a 0.9% rise in the South. First-time buyers made up 34% of all transactions, the biggest share in four years.

Still, inventory tightened again. At the current sales pace, there were 4.5 months worth of unsold homes in September, well below the 6 months that historically marked a balanced market.

Is it better to buy or rent your home?

This is a somewhat silly personal finance trope that assumes a reader is a) living under a bridge and b) has a suitcase full of enough cash to afford a down payment. The reality is that most homeowners start out as renters, and the decision to buy is more likely to be driven by personal circumstances than by the relative value of rental and for-sale housing.

But relative value is fun, and the comparison makes a useful point about the advantages to home ownership baked into the U.S. tax code.

The conclusion: On a bang-for-your-buck basis, it’s better to buy in all of them.

Some markets are more advantageous than others. In Miami, it’s 53 percent cheaper to buy than to rent a home of similar size, the biggest discount among the metropolitan areas included in the report. In Honolulu, it’s 17 percent cheaper to buy, the smallest discount.

In 58 of 100 metros, including such diverse cities as Chicago, Houston, Long Island (N.Y.), and Nashville, mortgage rates would have to top 10 percent—a level they haven’t reached since 1990—before renting became a better deal. In 26 of 100 metros, including Detroit and Dallas, home prices would have to double to make renting look like a good financial move.

Trulia’s calculations are based on March 2016 median rent and for-sale prices in each of the 100 largest metros; they’re designed to account for inflation, price appreciation, one-time costs (including down payments, security deposits), and the opportunity cost of using money to buy a house instead of investing it in another asset.

read more: Bloomberg

Week Ahead

Just over two weeks to go before the Presidential election and it promises to be another rough-and-tumble week as Donald Trump and Hillary Clinton take off the gloves (wait, they haven’t yet?).  There are also a number of key numbers for our industries including New Home Sales for September, coming after we learned last week that sales of previously-owned homes rebounded solidly last month.