Situs Newswatch 11/17/2017

Situs RERC 3Q Preliminary Findings
Each quarter, Situs RERC surveys regional and institutional investors across the country about key investment criteria in their local marketplace and national investment trends. The results are collected, averaged and then included in our quarterly report. The title this quarter is “Reshaping the Landscape.”

This quarter, survey respondents noted an increased level of caution as the recovery lingers, and several markets appear to have peaked. Many investors are taking more risk-averse positions and moving to asset classes such as the apartment and industrial sectors where there is high demand. In addition to the risk of rising interest rates, investors are concerned with political uncertainty, increasing construction costs, labor shortages and potential changes to the tax code.

Despite these challenges, CRE continues to be a preferred asset class. Investors are seeking income yield and CRE has a favorable relative income yield compared to other fixed-income investment options and can serve as an inflation hedge. Although stocks are at new highs, there is less risk of a market correction for CRE than for stocks.

  • Stable demand and severely low vacancies and supply constraints in the industrial sector are pushing rents at accelerated rates.
  • Markets have overreacted to e-commerce’s effect on brick-and-mortar retail, which has created some relative value in the retail space. Pricing for high-quality retail is holding up although the market is quiet on the transaction side.
  • Office sector sales volume continues to be down across the major metros. The decline in sales volume is partly attributable to the fact that much of the institutional inventory has traded hands at least once within this cycle. Survey respondents also noted that investors are being prudent by holding on to these assets until the supply-and-demand pendulum swings more in their favor. Others expressed concern over the widening bid/ask spread between buyers and sellers.

The full report is coming soon; look for more coverage when it is released. To learn more about Situs RERC click here.

House Panel Approval of Rate-Cap Workaround a Win for Online Lenders
A House panel on Wednesday approved legislation that would ensure online lenders can continue to partner with banks to make loans at interest rates that exceed state caps.

The measure, sponsored by Rep. Patrick McHenry, R-N.C., and co-sponsored by two Democrats, passed the House Financial Services Committee by a 42-17 vote. A key legislative priority for the online lending industry, the bill has drawn strong opposition from consumer advocacy groups.

read more: American Banker

Amazon’s Cashierless Store Is Almost Ready for Prime Time
For the past year,  Amazon employees have been test driving Amazon Go, an experimental convenience store in downtown Seattle. The idea is to let consumers walk in, pick up items and then pay for them without ever standing in line at a cashier. Amazon is vague on the mechanics, but the store relies on a mobile app and some of the same sensing technology that powers self-driving cars to figure out who is buying what.

Employees have tried to fool the technology. One day, three enterprising Amazonians donned bright yellow Pikachu costumes and cruised around grabbing sandwiches, drinks and snacks. The algorithms nailed it, according to a person familiar with the situation, correctly identifying the employees and charging their Amazon accounts, even though they were obscured behind yellow polyester.

Amazon Go represents Inc.’s most ambitious effort yet to transform the brick-and-mortar shopping experience by eliminating the checkout line, saving customers time and furthering the company’s reputation for convenience.

The push into groceries is a way for the company to get consumers to shop at Amazon more often. In September, the e-commerce giant acquired Whole Foods Market for $13.7 billion and has been cutting prices at the upscale grocery chain to drive traffic. On Wednesday, Whole Foods began offering deep discounts on Thanksgiving merchandise, including antibiotic-free turkeys, and signaled that the markdowns will get more aggressive as it adopts Amazon’s Prime subscription service. Shares at Kroger and Sprouts tumbled after the announcement.

Amazon unveiled Amazon Go last December, saying it planned to open the store to the public early this year. However, the company encountered technical difficulties and postponed the launch to work out the bugs, The Wall Street Journal reported in March.

read more: Bloomberg

Hudson’s Bay Investors want Debt Reduction, Payouts from Real Estate Proceeds
Corporate America has been giving way for several decades to uncorporate America — pass-through entities that don’t pay corporate income tax and now account for close to 40 percent of the revenue and more than 60 percent of the net income of U.S. business. The earnings of pass-throughs flow to their owners’ individual income tax returns, and the current House and Senate tax plans both include big tax cuts (around $450 billion over 10 years) for those owners. These have usually been pitched as tax breaks for “small business,” which isn’t entirely wrong but is misleading. More than 95 percent of businesses in the U.S. are pass-throughs, and the vast majority of those are small. But most pass-through revenue flows to a small minority of relatively large entities, and most pass-through earnings flow to people in the top 1 percent of the income distribution. There’s another question to ask, especially when proponents of the pass-through tax cut bring up manufacturing as a likely pass-through endeavor: What do pass-throughs do? That is, what industry sectors are they most likely to be in, and how does that compare with conventional “C corporations.

First, a quick taxonomy: The four categories of pass-through are sole proprietorships, partnerships, S corporations and real estate investment trusts. The first two have been around forever, although in recent decades partnerships have taken on new form with the rise of limited partnerships, limited liability partnerships and limited liability companies. The latter two were created by Congress during the Eisenhower administration as alternatives to the C corporation.

read more: NREI

CRE Market Outlook Takes Slight Dip Nationwide
The supply-demand outlook in commercial real estate markets took a slight dip nationwide for the first time since early 2016 and financing for some CRE property types is getting more difficult to arrange.

“For a property type like multifamily there is plenty of financing, but I think if you have a product type such as office and retail it becomes more challenging,” said Mitch Paskover, president of Continental Partners, a company that provides advisory services for real estate capitalizations.

The overall near-term outlook for new construction and space absorption across all commercial property types dipped slightly in the Moody’s Investors Service Red-Yellow-Green report. The CRE benchmarking tool uses a 100-point scale and color coding to assess growth in supply relative to demand and vacancy rates for CRE property types both nationally and within individual markets.

These real estate market supply and demand variables “determine the outlook for the commercial properties that support the majority of the collateral backing commercial mortgage-backed securities,” Moody’s said.

read more: National Mortgage News

We will be on hiatus next week for the Thanksgiving holidays. The Situs Newswatch will return on Nov. 27.

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