Situs Newswatch 9/28

After First Debate Candidates Need to Get Serious About CRE

Donald Trump and Hillary Clinton are celebrating what each saw as their debate wins.  Both are back on the campaign trail.

The economy, as always, is playing a key part in each candidates arsenal.

In their first presidential debate Monday, Clinton cast Trump as a man who put his own business interests ahead of the welfare of average Americans.

“Donald was one of the people who rooted for the housing crisis,” Clinton said. “He said back in 2006, ‘Gee, I hope it does collapse because then I can go in and buy some and make some money.’

“That’s called business,” Trump replied, bluntly, and both continued to trade barbs about the economy.

Situs Executive Managing Director Steven Bean says, “The candidates need to get serious about problems in both residential and commercial real estate which are playing a key role in the latest economic recovery.  For financial institutions, regulations are hurting the industry and significantly impacting shareholder value. For Freddie Mac and Fannie Mac, someone needs to have a plan.”

During the debate Trump warned viewers that the economy is in a bubble. “A big fat ugly bubble” is how he put it.

When interest rates rise, “we will see some very bad things happened,” he warned.

The reason for the bubble, he said, was that the Federal Reserve “is doing political things.”

Clinton shook her head and moved on.

Fitch: CMBS loan prepayments jump

More commercial real estate borrowers are prepaying commercial mortgage-backed securities loans, according to a new report from Fitch Ratings. The agency, which saw a big jump in this strategy in the third quarter, expects this to continue through year-end as borrowers aim to lock in low rates prior to an expected increase.

Fitch tracked about $18.2bn of 2006 and 2007 legacy conduit loans paid off during the third quarter. About 73% of these loans totaling about $13.2bn were prepayments, the agency reported. By comparison, the agency tracked prepayments of 60% ($7.2bn) and 50% ($7.7bn) in the first and second quarters. There is about $15bn of CMBS slated to mature in the fourth quarter.

The bulk of the prepayments – or about $12.6bn – happened during the open period of loans, which means that there were no prepayment penalties. About $589m of these loans required a premium or yield maintenance. “Borrowers are still taking advantage of the current low interest rate environment. The weighted average coupons on recently issued conduit transactions rated by Fitch in 2016 have been averaging 4.69%, compared to WACs of 5.66% and 5.76%, respectively, for the 2006 and 2007 vintages,” the report stated.

read more: RealEstateFinanceInvestment

U.S. Bond Market’s Biggest Buyers Are Selling Like Never Before

They’ve long been one of the most reliable sources of demand for U.S. government debt.

But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market.

Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields.

For Jim Leaviss at M&G Investments in London, that’s cause for concern. A continued retreat could lead to painful losses in a market that some say is already too expensive. But perhaps more important are the consequences for America’s finances. With the U.S. facing deficits that are poised to swell the public debt burden by $10 trillion over the next decade, foreign demand will be crucial in keeping a lid on borrowing costs, especially as the Fed continues to suggest higher interest rates are on the horizon

read more: Bloomberg

76% of U.K. CEOs Consider Leaving Britain After Brexit

The majority of chief executives at major U.K. companies are considering moving their headquarters or some operations outside Britain because of the Brexit vote and the accompanying uncertainty, a survey by accounting firm KPMG has found.

Polling 100 CEOs from companies with annual revenue from £100 million ($129.7 million) to more than £1 billion, 76% said they were considering saying goodbye to the U.K. as a result of the referendum outcome.

“CEOs are reacting to the prevailing uncertainty with contingency planning,” said Simon Collins, U.K. chairman at KPMG, in a statement out on Monday.

“Over half believe the U.K.’s ability to do business will be disrupted once we Brexit and therefore, for many CEOs, it is important that they plan different scenarios to hedge against future disruption,” he added.

Ahead of the June 23 vote on whether the U.K. should remain or leave the European Union, many British business leaders were publicly campaigning against a Brexit. They argued that cutting off from the bloc would hurt trade ties with Britain’s biggest trading partner, complicate recruiting processes and overall hurt the economy.

read more: MarketWatch

Banks Stressed Over Tests

Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Federal Reserve’s annual stress tests that could also scrap some provisions that lenders have criticized.

As the Fed has signaled for months, it is considering changes that would raise the minimum capital that the biggest banks need for a passing grade, Fed Governor Daniel Tarullo said Monday. But the Fed is also mulling concessions that Wall Street has sought, such as eliminating its assumption that lenders would continue to pay out the same level of dividends and buy back shares during periods of financial duress, he said.

The plan shows that even after a litany of new rules and capital demands imposed on the biggest banks in response to the financial crisis, regulators still aren’t satisfied that Wall Street is safe enough to endure another economic tsunami. Tarullo, the Fed’s point person on regulation, conceded that the proposal “would generally result in a significant increase in capital requirements” for the largest lenders.

The overhaul tries to incorporate all the new capital requirements into the stress tests, which already represent the highest hurdle that U.S. banks must clear to show they can survive a hypothetical crisis. A particularly heavy mandate for Wall Street giants is an extra surcharge each firm has to maintain based on their size and complexity.

read more: Bloomberg

Loans R US

Toys “R” Us Inc. received a tentative offer for an $88 million financing deal that requires the toy retailer to raise as much as $512 million in the commercial mortgage-backed securities market.

The nonbinding letter of intent covers a five-year mezzanine facility for the Toys “R” Us Property Company II unit, according to a regulatory filing Friday. Negotiations for a definitive agreement are in progress, the company said.

Propco II owns fee and ground leasehold interests in 123 U.S. properties covering 5 million square feet, Toys “R” Us said. For the 12 months ended July 30, the Propco II stores operated by the Toys-Delaware subsidiary generated revenue of $958 million and operating earnings of $113 million, according to the filing.

read more:  Bloomberg

Luxury property sales soften, but here’s why it’s not all bad

In the luxury real estate market this year, the headlines have been dour if not outright grim, with the message unmistakable: High end homes prices are clearly losing altitude all around the country.

Last month, the National Association of Realtors reported that homes priced above $1 million dipped four percent from the previous month. While far from being a correction, the downturn has been noticed by more than a few real estate market observers. In certain markets such as New York, Miami and San Francisco, frothy prices are beginning to give way to gravity.

That said, not all real estate professionals are in a panic about the current state of the market. There’s a definitive chill in the segment of the ultra high-end market priced for homes above $10 million, yet there is still a “great deal of activity” in others, Philip White, president and CEO of Sotheby’s International Realty Affiliates, told CNBC in a recent interview.

“Some markets are seeing a slowdown in the high end but some aren’t,” White said, whose company cranked out $80 billion in U.S. sales volume in 2015. “It is sort of a mixed bag and obviously there is some slowing,” he said, even as he cautioned that ultra-high end sales were a much smaller slice of overall real estate turnover in the U.S.

read more: CNBC

Instant Lending Made This College Dropout a Billionaire

There’s a contractor in your living room, pitching a $15,000 home-improvement job.

You want to do it, but you don’t have that kind of cash just lying around. Then he dangles cheap financing: He asks for your driver’s license, flips it over and scans the bar code. Forty seconds later, you have a loan—not just pre-approved, but actually approved. No interest and no payments for the first 12 months. You sign the contract.

This is the business model of GreenSky LLC, a $3.6 billion company that helps merchants close sales by matching customers with lenders at the point of sale. The Atlanta-based company recently came out of nowhere to rank third in the U.S. by valuation among financial technology companies that are privately held and backed by venture capitalists. That ranking is according to CB Insights, a database that puts only Stripe and SoFi, two much better-known companies, ahead of GreenSky on its list of “fintech unicorns.”

The majority owner of GreenSky, David Zalik, has appeared on the media radar just as suddenly. He moved from Israel to Alabama with his family at age 4, skipped high school, enrolled in Auburn University (where his father worked) at 14, and then dropped out to focus on a computer-assembly company he had founded. Despite his unique personal history and precocious business success, he’s managed to dodge almost all attention. It took me eight attempts—via phone calls, e-mails, social media, and communications with people who know him—to get a call back.

read more: Bloomberg

Atlantic City Told to Abide by State Loan Terms or Risk Default

Atlantic City has just a few days to remedy its breach of the terms of a $73 million state loan to keep the troubled resort town operating or risk having New Jersey terminate the agreement and withhold additional aid.

The city was notified that it had 10 days to comply after failing to adopt a resolution to dissolve the Municipal Utilities Authorities by Sept. 15, according to state Department of Community Affairs spokeswoman Tammori Petty. The loan agreement made assets of the Municipal Utilities Authority collateral if the city can’t repay the loan.

According to the agreement, Atlantic City’s failure to comply could trigger a default. Petty via e-mail declined to “speculate on next actions” should the city not come into compliance.

Atlantic City mayor Don Guardian said last week that the city would miss the deadline, and that the city asked the state for a “reprieve.” City council president Marty Small said that the council hasn’t identified any other forms of collateral to take the place of the water authority.

read more: Bloomberg

West Elm to Launch Its Own Boutique Hotels

Furniture retailer West Elm is worried about following other chains down the rabbit hole of opening too many stores. So the company has another plan to sustain its growth: launching a chain of boutique hotels.

West Elm will design, furnish and market the hotels, the first of which will open in Detroit and Savannah in late 2018, and its partner DDK, a hospitality management and development company, will operate them. Guests will be able to buy the room furniture and other décor online.

“Where many retail brands have put the nail in their coffins is by opening too many stores,” said Jim Brett, West Elm’s president. The chain has about 100 stores and Mr. Brett said he doesn’t envision opening another hundred.

The hotel project thrusts West Elm, part of Williams-Sonoma Inc., into a fast-growing, but crowded field. Most of the major hotel chains have launched boutique hotel brands in recent years as travelers have come to crave unique experiences rather than the standardization that was once their biggest selling point.

Companies from outside the hospitality industry are jumping into the space, including Restoration Hardware Holdings Inc., which is planning to open a hotel in New York City, and Equinox Holdings Inc., the gym operator, which has launched a hospitality brand and will open its first hotel in 2018.

read more: Wall Street Journal