Situs RERC Q3 Report: Property Sectors
For the fifth straight quarter, the industrial sector offered the best value (or tied for best value) among the property sectors relative to price, according to the Q3 Situs RERC Real Estate Report, the nation’s longest-running and most comprehensive real estate investment report.
The third quarter 2017 industrial’s rating dropped slightly from second quarter 2017, but still tied for first with retail, which jumped in rating for value vs. price from second quarter 2017, according to Situs RERC experts. Despite concerns about the future of certain segments of the retail sector, experts were more optimistic about values supporting prices for the overall retail sector. Relative value vs. price ratings declined for the office and hotel sectors but rose slightly for the apartment sector between second quarter 2017 and third quarter 2017.
While the office sector has been considered fairly priced since fourth quarter 2015, our panel now believes that the sector is becoming overpriced in certain areas.
This rating confirmed some fears that were voiced during the second quarter 2017 survey — several experts commented that they were beginning to see signs of overpricing — even though the rating for the sector was considered in the range of being fairly priced.
The office market has become bifurcated, with a limited supply of trophy assets gaining the most attention, particularly by foreign investors who want to buy property in gateway cities such as Boston; New York; San Francisco; Washington, D.C.; Los Angeles; Seattle; and Miami.
Domestic investors have tightened underwriting criteria, using restraint in both long-term rent growth projections and exit-rate metrics, despite continuation of low unlevered yield requirements. Higher debt costs will hurt cash flow (after tenant improvement costs and concessions are deducted), unless a particular market has pricing power.
From a value vs. price perspective, experts indicated that values supported prices for the industrial sector.
Despite declining quarter over quarter, the industrial sector rating was among the highest ratings since Situs RERC began collecting these data.
Among the property types, the industrial sector and the retail sector offered the most value relative to price for investors in third quarter 2017.
The prevailing sentiment is that the industrial sector will remain a hot market in the near term as demand for warehouse space continues to surpass supply.
Despite the fundamental changes occurring in the retail merchandising industry, experts now believe that the retail sector has become fairly priced, after offering investors less value relative to price in the last few quarters.
Similar to the industrial sector, the third quarter 2017 retail rating was among the highest since Situs RERC began collecting these data.
Investors should be particularly cautious about the retail sector as the industry continues to evolve in order to compete in a digital world. As the sector shakes off the oversupply of retail space, it will be crucial for investors to consider property-level factors such as location, infrastructure and tenant improvement costs to determine where to find the best opportunities.
Retention and quality of the anchor tenant is very important as many traditional mall anchors become obsolete. Investors still want shopping centers, but their preference is straying from the traditional enclosed, two-story centers toward open-air lifestyle centers with theaters, hotels, offices, restaurants and shops that are siphoning tenants from traditional malls.
The majority of experts reported that values are beginning to support prices in the apartment sector in the third quarter.
The apartment sector may be entering a rebound from a value vs. price perspective. For the past three years, respondents have rated the sector as overpriced, but stable rent growth and low vacancy rates have buoyed income expectations.
Certain markets are facing an oversupply, causing an increase in concessions. Longer term, however, predicted rental growth is expected to offset any short-term concessions.
The hotel sector was considered to be overpriced compared to last quarter, but ratings for the hotel sector are historically volatile; rents change daily for the sector.
The hotel sector is by and large driven by economic conditions. Assuming GDP growth continues on a slow but steady trajectory, the hotel sector is likely to perform well moving into 2018.
To purchase your copy of the Situs RERC Real Estate Report, visit store.rerc.com or call 319-352-1500.
Tax Reform: What’s the Impact?
On Monday, the Data & Analytics division of Black Knight Inc. released its latest Mortgage Monitor Report for October 2017.
The report takes an in-depth look at the impact proposed changes to the tax code could have on the housing and mortgage markets — reporting that the tax reform, in its currently written state, could worsen the tight housing inventory, while increasing housing expenses for buyers.
The House tax reform plan proposes doubling the standard deduction while capping the mortgage interest deduction (MID) to the first $500,000 of mortgage debt, while the Senate version also doubles the standard deduction, but leaves the MID cap at $1 million.
Black Knight’s analysis notes that doubling the standard deduction would provide greater benefit to renters than homeowners — while reducing the tax incentive to purchase a home by making the MID less valuable to borrowers.
read more: M Report
Digital-Currency Fever May Spread to Federal Reserve
It is time to start thinking about Fedcoin.
For years central bankers have seen digital currencies as a curiosity to keep an eye on. But now they are increasingly looking at whether they should create their own.
“It’s really very premature to be talking about the Federal Reserve offering digital currencies, but it is something we are thinking about,” New York President William Dudley said on Wednesday.
Mr. Dudley was speaking in the shadow of bitcoin, an electronic form of money that has soared in value this year, fueling an investment mania. Bitcoin is created privately, unlike national currencies such as the U.S. dollar and British pound that are issued by governments, typically through their central banks.
Since central banks rely on their control of the money supply to guide their economies and electronic payment methods are rising in popularity, officials have begun pondering whether they might need to get in the game.
The Fed and its foreign counterparts already create money electronically, working directly through private banks, which in turn loan money electronically to businesses, households and others. But the U.S. government also turns some of that into paper dollars and metal coins. The Fed issues no separate currency that exists only on the internet, without any tangible cash form.
read more: WSJ
Office Towers Beef up Amenities to Lure Picky Tenants
Office leasing in New York City remains balanced with healthy concessions but good rents. Large tenants continue to firm up new locations, while smaller ones are actively making deals for a plethora of sizes, shapes and terms. Geography is less focused as tenants seriously consider space in all neighborhoods.
Lower Manhattan is continuing to attract diverse firms. “The initial primary motivator was price, and now the decisions are being made because of the neighborhood,” says John Wheeler, managing director of JLL.
Many companies are also exploring Brooklyn. “It’s all about attracting and retaining good talent,” says Mitti Liebersohn, president of NYC operations for Avison Young. “And they are looking at the amenities.”
Pre-built office spaces are offered everywhere. But now these ready-to-move-in offices can be leased for shorter terms. Firms are also taking a larger role in the redesigns of their next offices. While plenty opt for an open plan design, they’re carving out private areas like “phone booths” and mini meeting spaces as well as open pantries for co-worker collaborations.
read more: New York Post
Private Equity Opportunities Rise in High-Net-Worth Sector
Access to private plays for accredited investors have increased in recent years, and some financial advisors are using this as a point of differentiation for their practices.
“This is just the beginning,” said Eric Mancini, certified financial planner and wealth advisor with Traphagen Financial Group. “It’s only in the last couple of years we’re seeing any sustained push from [private equity] companies.”
In fact, according to Bloomberg, “private equity is trying to cut out the middleman — namely, the brokers at big money-management units at large banks [and] … could potentially automate a lot of the paperwork and tax documentation.”
Mancini sees it as a growing trend for several reasons, such as emerging technology platforms that facilitate the extensive paperwork, client tracking and communication specific to private investments. In addition, there is greater interest from advisors due to anticipated low returns from public investments and concerns about valuations, and private equity companies are now starting to understand how to package deals for accredited retail clients.
read more: CNBC
Walmart and Amazon are Locked in a Bitter Retail War — But They’re Becoming Clones of Each Other in the Process
If you want to know what the Walmart of the future looks like, it’s best to look at Amazon for a rough sketch.
The same goes for the reverse.
As Walmart and Amazon become fiercer competitors, they’re starting to look more and more like each other. Walmart continues to move its business online as Amazon moves offline, and they’re becoming the first two truly omnichannel retailers in the process.
Walmart is still the indisputable leader offline as the largest retailer in the US — and possibly the world — by sales, while Amazon still dominates online.
As businesses start to think about an equilibrium between online and brick-and-mortar, there’s no better time to consider what America’s biggest retailers will look like in the future.
One of the most obvious recent examples is the development of in-home delivery programs. Walmart was first to the punch, launching its limited pilot program with August Home in September. Then, in October, Amazon leapfrogged it with a nationwide rollout of its own program, which it called Amazon Key.
Though it’s unclear who started developing the ideas first, the fact remains that both retailers were working on what amounted to the same service at exactly the same time.
read more: Business Insider
Moody’s Warns Cities On Climate Change: How Will This Impact Property Owners?
The threat of rising sea levels within cities on the Atlantic and Gulf coasts is not lost on property owners and investors in coastal markets.
Even credit rating agency Moody’s Investors Service said cities on the coast will need to take climate change into account if they do not want to lose access to cheap credit, Bloomberg reports.
In a recent report to clients, Moody’s said it now considers a city’s climate change provisions when it issues credit ratings for state and local bonds. Those markets that do not have plans in place risk default if they are hit with rising water or intense storms.
The risks are not limited to municipalities.
“The effects of climate change on commercial real estate are real and being factored in and considered by most major real estate investors and tenants today,” San Francisco real estate consultancy The Muldavin Co. President Scott Muldavin said.
Topping Moody’s list of the states most at risk are Texas, Florida, Georgia and Mississippi. Others, like Miami Beach, are ahead of the game and have already implemented plans. Miami has invested approximately $500 million in infrastructure projects intended to prevent flood damage.
Read more: BisNow