Situs RERC ValTrends: 3Q 2017
Situs RERC surveyed a panel of some of the nation’s leading CRE valuation experts in order to provide a thorough and high-level analysis of CRE valuation trends. Most of those surveyed have been through several recessions and business cycles, have worked through several CRE crises, and have seen prices pressure values in the past. Situs RERC uses the insight provided by our expert panel to supplement the holistic and qualitative view of the markets we craft in our report. We thank them for their insights into today’s market.
ValTrends survey respondents did not predict much change in CRE values in the next year as 80 percent said CRE values would remain the same, and 20 percent predicted they will increase, but only with minimal gains of 1.0 percent. There was greater consensus about future valuations, however, significantly more respondents felt that the tremendous CRE price growth witnessed over the past recovery cycle will hold in 2018 and that the eventual correction in values will be minimal.
Regarding underwriting criteria, Situs RERC’s ValTrends experts indicated that cap and discount rates were moving from being supportable during the second quarter to being on the aggressive side for certain property types in the third quarter of 2017. It appears that this might be reversing a trend over the past two years in which, on average, experts felt that cap and discount rates were supportable and consistent with capital market expectations. The current capital market environment (both debt and equity) is exceptionally competitive, which is likely to drive underwriting criteria more toward the aggressive side. As one expert put it, “there are 20 bidders for every deal.”
In general, experts predicted that cap and discount rates will remain generally flat over the next year, though rates might inch up, especially if interest rates continue to rise. Regarding specific challenges to valuation, the majority of Situs RERC’s ValTrends experts focused on the impact of interest rate hikes on rent growth and geopolitical events. As in first quarter and second quarter 2017, rent levels continued to be seen as reasonable for overall CRE in third quarter 2017. Ratings for rent growth and tenant improvement costs increased to some of the highest since Situs RERC began collecting these data, indicating that underwriting criteria are becoming aggressive. Expense level ratings moved up slightly, but were still considered reasonable and leasing costs were rated the highest since 2014, moving toward being aggressive.
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Mall Stocks Rally on Holiday Sales Optimism
Call it the holiday comeback.
Retail stocks, and mainly those of department store operators, were climbing at a rapid clip Wednesday morning, on the heels of upbeat reports regarding a strong start to the holiday season.
Among them, preliminary results from the National Retail Federation (NRF), indicated more people shopped both at stores and online over Thanksgiving weekend.
Macy’s shares were up about 9 percent, Dillard’s stock was climbing nearly 10 percent, Nordstrom’s stock spiked more than 7 percent and Kohl’s shares were up 5 percent.
Sears Holdings, which is set to report fiscal third-quarter earnings before the bell Thursday, also watched its stock climb over 7 percent, while J.C. Penney shares were up about 3 percent Wednesday afternoon.
read more: CNBC
Shoppers Hit the Mall, but More Tapped Their Phones Than Ever
E-commerce’s unrelenting march toward domination of the retail industry accelerated during the Thanksgiving holiday, as Americans spent billions more shopping online than they did last year.
Crowds still flocked to stores to scoop up deals on televisions, toys and clothing. But the big driver of America’s five-day shopping spree that starts on Thanksgiving was the mobile phone, not the mall.
Americans spent $19.62 billion shopping online over the five days, about $2.6 billion more than they spent during the same period last year, according to Adobe Analytics, which has tracked online shopping for years. .
While the shift away from stores has been happening for years, the evolution continues to accelerate. About 81 million people shopped online on Monday, a day of big internet sales known as Cyber Monday, according to the National Retail Federation.
Brick-and-mortar retailers were aided over the five days by good weather across much of the country and strength in the economy, including low unemployment and a rising stock market.
read more: NYT
Regulators To Clarify Which Real Estate Loans Are Considered Dangerous
A proposed rule on how banks should calculate the amount of equity they need to hold to compensate for construction loans and other precarious debt could bring transparency to a years-old regulatory tangle, according to a report by EY.
The rule, known as high volatility acquisition, development and construction, or HVADC, “clearly achieves its purpose of clarifying the definition” of volatile construction loans, wrote the author of the report, Joseph Rubin, a principal at EY. Even so, Rubin warned the clarification might force banks to treat a yet wider swath of loans as risky, raising their costs of compensating for the potential downside.
Though it will be implemented by the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department’s Office of the Comptroller of the Currency, the regulation’s logic stems from an international review of banking practices that played out in Europe after the financial crisis.
In 2013, concerned about how quickly construction and development loans had rotted on banks’ balance sheets during the financial crisis, the Basel Committee on Banking Supervision updated its model regulatory guidelines with the Basel III standard, nudging banks to account for their debt assets more conservatively.
read more: Commercial Observer
Tax Break Could Help Small Shops Survive Manhattan’s Rising Rents
New York is a booming city somehow plagued by vacant storefronts, pockmarks on the streetscape that are casualties of urban evolution: Higher rents are forcing smaller shops out of business, and in their place follow a series of ubiquitous banks, chain drugstores and coffee shops.
On Thursday, the City Council is expected to pass a bill that tackles a little-known facet of the multipartite problem: the commercial rent tax, which affects only businesses in Manhattan south of 96th Street that pay at least $250,000 a year in rent.
The threshold for the tax was last changed in 2001, when it was raised to $250,000 from $150,000. Since then, commercial rents have exploded in most of Manhattan; in SoHo, for example, those rents have gone up an average of 431 percent between 2001 and 2016, according to data collected by the Real Estate Board of New York.
The bill, introduced by Councilman Daniel Garodnick, a Democrat who represents the Upper East Side and Central Manhattan, would raise the rent threshold to $500,000 a year, a move that would free some 2,000 businesses of the tax.
read more: NYT
Powell, Sounding a Lot Like Yellen, Promises Little Policy Change
As if markets needed any more persuading that the Federal Reserve is about to raise rates, the likely next Fed chief provided a little more ammunition.
During his Senate confirmation hearing Tuesday, Jerome Powell did not commit definitively to a December rate hike, but strongly hinted that the likelihood is growing. In doing so, he also indicated that markets can expect more of the same from Fed leadership, even though there will be a new person in the chair position.
“The case for raising interest rates at our next meeting is coming together,” the current Fed governor told the Senate Banking Committee. “I think the conditions are supportive of doing that.”
For Powell, it was an opportunity both to lay out his own vision for the future of monetary policy and to assure senators, many of whom spoke warmly about outgoing Chair Janet Yellen, that the status quo is likely to prevail going forward. In turn, the hearing offered little acrimony from senators who repeatedly sought — unsuccessfully — to get Powell to wade into the current political battle in Congress over tax reform.
read more: CNBC
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