Situs Newswatch 11/8/2017

Situs RERC Finds Commercial Lending Trends Mixed
Situs RERC, one of the longest-running and most well-recognized national research firms, has been monitoring real estate transactions for over 80 years. In preparing its next report, Situs RERC found lending spreads have contracted some in 2017, as interest rates rose from late 2016; however, the lending environment generally remains competitive. Debt is more available in markets viewed as robust than in markets with less liquidity and safety.

Based on data provided by Real Capital Analytics (RCA), Situs RERC finds:

  • Solid CRE fundamentals have resulted in historically low CRE and apartment mortgage rates, despite mortgage rates being either flat or having slight increases over the last year.
  • The apartment sector has led the recovery, but many lenders overindulged on multifamily loans and are concerned about their exposure to the market. As millennials have aged and begun to start families, homeownership rates have started to rise, which may lead apartment lenders to be more cautious. Lenders are watching to see if new supply in the apartment sector will lead to rising vacancies and the need to offer concessions.
  • Availability due to new, stricter regulations on banks and insurers has caused them to lend to predominately primary markets at lower LTVs.
  • Banks pulling back from lending at higher LTVs and in secondary markets has opened up the door for alternative lenders to lend to borrowers who are unable to secure financing from banks.

“A combination of increased regulation and caution in the market, with some wondering if we are at the height of the real estate cycle, is causing lenders to be more cautious and tighten their credit standards,” says Jared Klimowski, Assistant Vice President at Situs RERC.

To learn more about Situs RERC capabilities, click here.

Situs is attending the NCREIF Fall Conference in Palm Beach, FL. If you’d like to set up an appointment, please send us an email.

CRE, Which Fueled Trump’s Fortune, Fares Well in Tax Plan
An industry familiar to President Trump appears to have emerged from the Republican tax rewrite relatively unscathed: commercial real estate.

For months, commercial real estate developers had been concerned that the tax plan in the works would make it more difficult or expensive for them to take out huge bank loans or would damage demand in the property market.

But if the plan unveiled this week by House Republicans comes to pass, developers like Mr. Trump, who made much of his fortune building skyscrapers, hotels and resorts, will have little to worry about.

“The industry was left whole,” said Thomas J. Bisacquino, president of NAIOP, a commercial real estate development trade group. “The provisions we feel are working will still work.”

Developers were fearful that the special tax treatment of “carried interest” — fees that are taxed as capital gains, not income — would be amended, or that they would no longer be able to deduct interest expenses from their taxable profits. They were also concerned that certain exchanges of commercial property, which currently enjoy a tax deferral, would face immediate taxation.

But the bill included no such changes to the industry, and developers are thankful.

read more: NYT

Situs RERC’s Jamie Molloy will be speaking at the Society of Chief Appraisers meeting in NYC tomorrow. To register for the event, click here.

Another 60-plus Sears, Kmart Stores Set to Close in January 2018
The cost-cutting strategy continues at Sears with another 63 stores targeted for closure early next year.

Emblematic of the struggle facing U.S. department stores, Sears Holdings has already closed more than 350 Sears and Kmart stores this year. An additional 45 Kmart stores and 18 Sears stores will be closing in late January 2018, the company said Thursday.

“Sears Holdings continues its strategic assessment of the productivity of our Kmart and Sears store base and will continue to right size our store footprint in number and size,” the company said in a statement. “In the process, as previously announced we will continue to close some unprofitable stores as we transform our business model so that our physical store footprint and our digital capabilities match the needs and preferences of our members.”

The 63 stores will remain open during the holiday season and employees at the closing stores will get severance pay and an opportunity to apply for other jobs within the retail chains. “Liquidation sales will begin as early as November 9 at these closing stores,” the company said.

read more: USA Today

How Banks Can Beat Digital Lenders at Their Own Game
Perhaps it’s time to start acknowledging that banks are no longer taking a back seat to pioneering online lending startups.

Many depositories have learned that if they fail to modernize their lending processes, they risk being left behind. At the same time, many startups have been stymied by certain intractable advantages held by the banking sector, the most notable being significantly lower funding costs.

The result is an incipient contest between fintechs and banks that until quite recently were widely dismissed as too slow to adapt.

read more: American Banker

New Industrial Construction Hits Decade-High
Strong demand from e-commerce and logistics users continues to drive the Chicago region’s industrial market, which saw developers deliver 8.3 million square feet of new product in the third quarter, according to Avison Young research. That was the most seen in the Chicago area industrial market since 2008. Developers have delivered through the end of the quarter 18.3 million square feet.

The amount of new industrial product under construction has started to slow, however, dropping to 12 million square feet during the quarter, from a high of 21 million square feet at year-end 2016. And although the market in general retains a remarkable amount of strength, here and there a few strains have begun to show.

“I think some submarkets are going to be oversaturated with new space,” Greg Rogalla, senior research analyst with Avison Young’s Chicago office, tells Specifically, the popular I-80 and I-55 submarkets, where developers have launched a number of speculative projects, should see new supply outpace tenant demand, at least for a short time. The I-55 and I-80 corridors accounted for 75% of all new product in the Chicago market, according to Avison Young research.

But with “the growth in e-commerce and logistics,” Rogalla says, the demand should be sufficient to soak up that new space relatively fast. “I don’t foresee anything drastic.”

The largest project delivered in the third quarter was the I-80 Corridor’s 1023 E. Laraway Road, in Joliet, IL, a more than 1-million-square-foot spec building developed by Core5 Industrial Partners. Rounding out the top three were two build-to-suits: Uline’s 1-million-square-foot facility at 12508 38th St. in Kenosha, WI; and the 1-million-square-foot fulfillment center developed by Seefried Properties, Inc. for Amazon at 6605 W. Monee Manhattan Road in Monee, IL.

read more: GlobeSt

GOP Tax Plan Carries Benefits for the CRE Industry, with the Exception of Affordable Housing
The new tax reform proposal unveiled by the House of Representatives appears to bode well for the commercial real estate sector.

The legislation, which still must work its way through Congress and could change, maintains many of the existing provisions that benefit the commercial real estate industry. For example, the bill continues to allow the deduction of interest expenses. While businesses currently can deduct interest expenses on commercial loans, the House bill seeks to cap this amount for some industries — except for commercial real estate, according to The New York Times. It preserves IRS Section 1031 like-kind exchanges, one of the main areas of concern for industry experts prior to the bill’s release. It also slashes the maximum tax rate for pass-through entities — private businesses organized as sole proprietorships, partnerships (including limited liability companies) and S corporations — to 25.0 percent from 39.6 percent. Many commercial real estate investors, including the Trump family, turn to LLCs and partnerships to conduct their business. Some real estate economists have previously predicted that a dramatic cut in the taxation rate for pass-through entities would vastly increase their popularity in the industry. It would especially serve as a boon for private equity real estate firms and real estate fund managers.

“We’re encouraged to see that the tax bill released preserves the current tax treatment for commercial real estate finance,” said Lisa Pendergast, executive director of the CRE Financial Council, an industry advocacy group, in a statement. “We look forward to working with Congress as it debates tax reform to ensure it remains on the right path toward maintaining a vibrant commercial real estate finance industry.”

The Investment Program Association (IPA), an advocacy group, also supports the proposed legislation. In addition to maintaining the 1031 exchange provision, the legislation excludes real estate from immediate expensing and from the net interest expense limitation. The bill recognizes the importance of commercial real estate for the national economy, says Dan Cullen, a senior tax partner at global law firm Baker McKenzie and an IPA board member. The group does not anticipate that Senate will make big changes to any of the provisions impacting the real estate industry, but it is looking for further clarification on some of the bill’s technical aspects, Cullen says.One sector of the commercial real estate industry the current plan may hamper is affordable housing, says Emily Cadik, director of public policy at Enterprise Community Partners, a national affordable-housing non-profit. While the organization is pleased that the bill does retain the low-income housing tax credit (LIHTC) mechanism, which provides affordable housing developers tax credits for building new affordable housing units, production may be cut as the current bill takes away the tax exemption for private activity bonds.

read more: NREI

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