Commercial Real Estate’s Trump Bump
Stock Markets are on a tear and that’s good news for Commercial Real Estate.
The Dow on Wednesday blasted through the 21,000 mark for the first time after President Trump in his first speech to Congress lifted optimism. Though, the Dow did retreat from those new highs as it dropped over 100 points yesterday.
Mr. Trump said he wanted to boost the economy with “massive” tax relief and make a $1 trillion push on infrastructure, bets that have helped Wall Street scale fresh records since the election.
“It’s all about consumer confidence,” says Situs Executive Managing Director Warren Friend, “and President Trump is making consumers feel better.”
The Conference Board’s consumer confidence index surged last month to its best reading since July 2001. February’s reading topped the 15-year high set back in December after Donald Trump’s election victory.
And confidence among small business, in the upswing since the election, in January reached its highest point in more than a decade, according to the National Federal of Independent Business.
“President Trump is cutting regulation and unleashing small businesses. This is clearly good for Commercial Real Estate,” says Situs’ Friend. “It could even lead to the revival of the suburban office where these firms prefer to locate.”
The National Federation of Independent Business’s small-business optimism index edged up to 105.9 in January, the highest point since December 2004 and follows December’s largest month-over-month increase in the survey’s history.
The number of Americans filing for unemployment benefits fell to near a 44-year low last week. Typically, this would have inflationary concerns except for the fact that the last 8 years have had record low employment participation rates, according to the Federal Bureau of Labor Statistics.
Investors are conflicted by a looming interest rate hike in March. It will make it more expensive to borrow money but it would also signal policymakers’ growing confidence in economic expansion after nearly a decade of tepid growth; low labor participation rates will keep inflation in check.
Friend says, “While nobody likes paying higher rates to borrow, this hike will make it more profitable for banks to resume lending for Commercial Real Estate projects which in the recent past they questioned.”
Further says Friend, “Trump’s plans to eliminate many regulations that have given the banks second thoughts, makes the future for Commercial Real Estate look even brighter.”
Ben Carson Approved for HUD Secretary
The Senate has approved President Trump’s nomination of Ben Carson, who now gets to work as Secretary of Housing and Urban Development.
The 58-41 vote came as a rare show of bipartisanship. Unlike other cabinet members chosen by President Trump, Carson, did not face much pushback from Democrats during his confirmation process.
Collingwood Group Chairman Tim Rood, interviewed on Fox Business’s Cavuto said, “Dr. Carson is an intelligent, impassioned, and empathetic individual.” As for his lack of experience in the housing arena that may be a positive, Collingwood’s Rood says, “Sometimes the very best policy makers are those who listen; and sometimes, good leaders who are not steeped in the subject matter are better listeners than those who believe they have all the answers.”
Collingwood Group Vice Chairman Brian Montgomery tells Westwood One’s First Light radio show, “There is little doubt President Trump greatly admires and respects Dr. Ben Carson and felt strongly about him joining his Cabinet. Having spent almost eight years in the Executive Office of the President, I speak from experience in saying a Cabinet Secretary who has the ear of the President is a positive for that agency and individual. In this instance, I think Dr. Carson will be able to “elevate” the issue of Housing within the Trump Administration. The fact Dr. Carson is a household name I believe will provide him a larger platform to articulate his vision for how best to help tackle any number of issues within the housing arena: shortage of affordable rental housing, the impact of new regulations which have constricted the mortgage market, and the growing senior population and how best to address their housing need.”
Collingwood Group Partner Meg Burns says, “I anticipate that Ben Carson will be an excellent HUD Secretary. He has all of the right characteristics – he’s extremely intelligent, compassionate, well-attuned to the needs of the constituency he’ll be serving, and he appears to have good standing with President Trump, based on a strong relationship of mutual respect. Equally important, he has signaled that he plans to call on the expertise of HUD’s career officials for insight and guidance, and to listen to the perspectives of key external stakeholders. The very best leaders at HUD devote a great deal of time and attention to listening. Based on my 20+ years of experience in government, I have found that those who bring an open mind to the task and who really hear the various opposing views regarding how to address critical social policy issues are the most capable of making a real difference.”
“Dr. Carson’s nomination was an indication of the tremendous respect that President Trump has developed for his former rival,” says Ten-X EVP Rick Sharga. “Carson has spoken out in the past about the need to revitalize many of the country’s urban areas, so it wouldn’t be a surprise if he focuses on doing that, and trying to find solutions to the growing problem of affordable housing. Since Dr. Carson has also discussed the unintended consequences of over-reaching government regulations, it’s possible we may also see some streamlining, or regulatory relief as well.”
Another Big Deal In Single-Family Home Rental Market
Tricon Capital Group Toronto-based investor and asset manager focused on residential real estate, agreed to acquire single-family rental (SFR) firm Silver Bay Realty Trust Corp. (NYSE: SBY) in a deal valued at $1.4 billion.
Silver Bay owns single-family properties in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, South Carolina and Texas. The acquisition will more than double the size of Tricon Capital’s Tricon American Homes unit and create the fourth-largest, publicly owned SFR company in the US.
Following the acquisition, Tricon American Homes will own more than 16,800 rental homes in 18 markets, including more than 1,000 properties in six markets and at least 500 homes in 10 markets. Tricon said the increrased scale and market density is expected to drive meaningful operating cost savings.
“We believe that the transaction will result in significant operating and overhead synergies creating immediate value for our shareholders,” said Gary Berman, Tricon Capital’s president and CEO. “In conjunction with the acquisition, we also intend to exit our smaller non-core businesses and take a meaningful step toward simplifying our overall corporate business model by focusing on scale, industry leadership, enhanced disclosure and operational integration across our investment verticals.”
Under its new business simplification strategy, Tricon plans to divest its Tricon Lifestyle Communities manufactured housing land lease business after completing its existing value-add business plan, and sell all its multifamily development assets in the US after the properties reach stabilization.
“We have continually evaluated the most prudent way to drive sustainable, long-term capital appreciation and we believe this transaction is the best opportunity to return maximum value to our stockholders,” added Silver Bay CEO Thomas W. Brock.
To partially finance the acquisition, Tricon intends to use net proceeds from one or more public offerings and has obtained a commitment from Royal Bank of Canada to increase its existing corporate revolving credit facility from $235 million to $350 million. Tricon expects to draw $70 million on the facility to finance a portion of the acquisition price.
Invitation Homes’ Fannie Mae Deal May Have Implications for the SFR Market
The strength of the single-family rental housing business was clearly on display over the last month as Invitation Homes raised billions in the capital markets, both through its initial public offering and a billion dollar loan deal with Fannie Mae.
“These two deals together certainly signal that the single-family rental space is here to stay for the foreseeable future,” says Daren Blomquist, vice president with data firm RealtyTrac.
Invitation Homes is an affiliate of Blackstone, the private equity giant. Its deals in January provide even more institutional validation for the business of operating single-family houses as rental properties. Until a few years ago, this segment of the market was almost exclusively operated by mom-and-pop investors with small portfolios. More recently, big institutional owners like Invitation Homes have been scaling back their purchases of new properties in the space.
Invitation Homes received a 10-year loan for $1 billion from Fannie Mae and Wells Fargo. The loan will be used to refinance earlier bond offerings from Invitation Homes to get a lower interest rate that will improve the performance of the firm’s existing investments. “They are trading their debt for better debt,” says Dennis Cisterna, chief revenue officer with Investability Real Estate Inc.
All of this new capital could potentially change the REIT’s buying habits. “That activity has slowed down very dramatically in the past year,” says Blomquist. “Blackstone and other continue to buy homes very sparingly.”
Investors in single-family homes scaled back their purchases as prices for single-family houses rose. For Invitation Homes, those purchases were always restricted to newer homes in a few markets like California’s Inland Empire, Nevada, Arizona, Florida, Georgia and Illinois, according to Realty Trac’s analysis of 23,000 houses owned by the REIT.
The money raised in the IPO is helpful in itself. But lower interest debt could widen the circle of deals that make sense for Invitation Homes.
“This could potentially change the calculus of what they are looking to purchase,” says Blomquist. “If their cost of capital is lower they could operate on tighter margins on the yield side.”
That means the REIT could afford to buy homes that have higher prices compared to their income. Invitation Homes could also take a chance on buying homes that earn less in operating income relative to their purchase prices, venturing into lower rent housing.
The same strategy could be available for other investors if Fannie Mae offers this kind of loan to the rest of the single-family rental housing sector. “The other big guys can potentially go this route. I don’t think anyone in the industry is looking at this as a one-and-done for Fannie Mae,” says Cisterna. “I’m sure they have their meetings scheduled with Fannie Mae already.”
read more: NREonline
Developer Plows Into Affordable Housing
New York developer Jonathan Rose Cos. is set to purchase a $500 million portfolio of affordable-housing properties from Forest City Realty Trust, in a transaction that will double the size of Jonathan Rose’s portfolio and help turn it into a more significant player in the industry.
The 48 affordable-housing communities the company is purchasing in a deal expected to close Wednesday are sprinkled throughout seven states from Ohio to Kentucky, with a total of nearly 8,500 units.
By the end of 2017, Jonathan Rose is set to own more than 15,000 units, up from 6,500 before the Forest City acquisition.
Many of the buildings are more than 30 years old and made from prefabricated concrete in need of an upgrade. The company plans to do $1 million to $15 million of improvements per property, which could include energy-efficient lighting, exercise rooms and medical-screening rooms, as well as renovations to individual apartment units.
The developer aims to go well beyond the typical affordable-housing renovations, which often are limited to sprucing up kitchens and bathrooms and fixing up lobbies.
Jonathan F.P. Rose, president of the company, said the additional improvements bring financial benefits in the form of local property tax abatements as well as access to tax-exempt bonds and low-income housing tax credits. The moves also help the company buy developments at a lower cost from long-term owners who want the buildings to remain a positive part of the community.
“I’m not the only one who has figured out that affordable housing is a great investment and frankly there is a very competitive market. The … work that we’re doing gives us a bidding advantage,” Mr. Rose said.
read more: Wall St Journal
Investors Go to School, Cash-In On Student Housing
The fall semester may be months away, but developers of student housing are already cramming for the next academic year.
They’ve been busy pre-leasing apartments while working feverishly on new projects, especially those that must be completed by summer. At the same time, they are lining up additional building sites or acquisition targets to help meet rising demand for new residences in college communities across the country.
“I’d say we’re in the bottom of the third inning or the top of the fourth,” said Bill Bayless, the chief executive and a founder of American Campus Communities, using a baseball analogy to describe the sector’s growth trajectory over the next few years.
American Campus Communities, a publicly traded real estate investment trust based in Austin, Tex., is the nation’s largest owner of student housing. Like many of its competitors, it has been on a building spree.
Last year, the company delivered seven new properties, both on campus and off, at seven universities. These included Mr. Bayless’s alma mater, West Virginia University. The projects added a total of 3,200 beds (which is how the industry measures supply and how leasing is done) in fully furnished apartments. By the end of the decade, it expects to complete 15 more ground-up projects with around 11,300 beds, according to Mr. Bayless.
But the bulk of construction for American Campus Communities is happening this year, with 7,500 beds being added. “It’s a very big year for us,” Mr. Bayless said. “We have 10 new developments — $603 million in development. It is the most we’ve ever had in one year.”
The student-housing sector — largely made up of private developers, public REITs and private equity firms — is still considered a relatively new asset class when compared with other property types. But with its growth prospects, steady revenue stream from rents and comparatively high capitalization rates, it has already become a popular investment vehicle for big institutions
read more: NY Times
Brexit Bank Exodus Could Be More Like a Trickle
Depending on who you talk to, 232,000 U.K. jobs will be headed out the door after Britain withdraws from the European Union. Or it could be as few as 4,000.
The range of forecasts — from the apocalyptic vision of London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet to the conservative estimate, from management consultants Oliver Wyman — often says more about the interests of the people making them than the likely fallout from Britain’s divorce with the EU. As details of the banks’ contingency arrangements become clearer, the initial people moves they are planning are said to be more in the hundreds than the thousands.
The truth is no one knows how many jobs will leave the City of London and Canary Wharf, the two main financial districts. What the U.K. capital will look like after Brexit, and which services banks will be able to provide EU clients from bases in the city, depends on what deal Prime Minister Theresa May wrings from her 27 EU partners. Filling the information void in the meantime are finance executives, lobbyists and politicians jockeying for influence over the makeup of that final agreement.
Bank bosses with their European headquarters in London are among the most vocal. They have the most to lose if U.K.-based firms are stripped of their passporting rights — the ability of companies authorized in one EU country to sell their products freely throughout the $19 trillion economic bloc.
“They are a bit like dogs backed into a corner and barking — it’s just noise,” said Jason Kennedy, chief executive officer of Kennedy Group, a London-based recruitment firm for the finance industry. “This is all about applying as much pressure as possible on the government to get the best deal. What have the banks have got to lose? Scream the house down and see what happens.”
Few are more outspoken than JPMorgan Chase & Co.’s CEO, Jamie Dimon. Before the June 23 referendum he told U.K. staff that as many as 4,000 of them could be relocated in the event of Brexit. In January, he said that number could be even higher — or lower — depending on how the Brexit negotiations played out.
While he’s repeated the claim often since, the bank has yet to contact any of the affected employees, Gulliver said last week.
read more: Bloomberg
London Homeowners Are Desperately Slashing Prices
More London home sellers are having to cut the asking price of their homes, and they’re offering deeper discounts as political uncertainty and high values dampen demand.
“Price cuts seen in prime central London in the immediate aftermath of Brexit are now filtering through to outer boroughs,” said Savills Plc residential research director Lucian Cook. “Affordability issues are now a problem after a decade of house-price growth, and buyers are finding they increasingly come up against mortgage-lending limits.”
London home prices have surged about 86 percent since 2009, meaning it now costs buyers 14.2 times their annual gross salary to purchase a property, the highest level on record and more than double the rate for the U.K. as a whole, according to Hometrack. As a result, the number of mortgages advanced to first-time buyers in London has dropped 12 percent in the two years through September, data compiled by the Council of Mortgage Lenders show. That’s impacting boroughs on the fringes of the U.K. capital as applicants need to borrow more than banks are prepared to lend under rules set out by regulators in 2014.
read more: Bloomberg
Companies Retool the Workplace to Suit Millennial Majority
PricewaterhouseCoopers, the auditing and professional services giant, is among the world’s older enterprises, tracing its roots to mid-19th century London. Its network of firms has a notably young workforce, though. More than half its 47,000 U.S. employees were born roughly between 1980 and 2000, and their influence on PwC culture is unmistakable.
PwC is just one example of a company in which millennials are shaping corporate culture, particularly in the critical area of technology.
“We have many employees who have only ever worked in an internet-enabled economy,” said Sigal Zarmi, chief information officer at PwC, in an email. “That raises expectations for how we use technology.”
At the end of 2016, there were 58.1 million millennial workers in the U.S. labor force, according to the Pew Research Center. For the first time last year, millennials had eclipsed the 52.9 million Generation X workers between the ages of 36 and 51 by a significant margin.
The millennial stamp is nowhere more evident than in the way PwC develops and deploys digital collaborative tools for the 3,000 people who work at the company’s site overlooking Boston Harbor, notable for its 40-foot tall windows, casual common spaces and rooftop deck. The average age of employees at the office, which opened in 2015, is 27.
Annual performance reviews have been replaced by a proprietary app that gives employees real-time feedback on how they’re doing. Assigned offices and cubicles are increasingly replaced with a “hoteling” mobile app that workers use to reserve a temporary workspace that suits their needs for the day, regardless of where they are traveling in the PwC system. If they need to use a printer, they can secure access to the device by swiping their ID badge across a reader. In conference rooms, they can stream a document from their phone to a large screen via an Apple TV.
These innovations are designed to suit the needs and temperament of workers such as 24-year-old Elaine Florentino, a Boston-based associate in PwC’s assurance services division.
The digital tool that recently replaced paper-based annual reviews and allows workers to be reviewed by their managers at any time, even when they’re in the middle of a client audit, makes sense to her. “I’ve been in situations (before) where I’m like, I don’t even know if I’m doing OK. Am I on track?” said Ms. Florentino, who joined the firm full-time in 2015 and has a master’s degree in taxation from Bentley University.
Through the app, employees can see a visual representation of their reviews in the shape of a spider’s web, with the outer rungs showing areas where they’re excelling.
read more: Wall St Journal
Michael Jackson’s Onetime ‘Neverland’ Ranch Gets $33 Million Price Cut
Nearly two years after it first went up for sale, the California ranch that served as the late pop star Michael Jackson’s “Neverland” retreat is returning to market for $67 million—$33 million off its original asking price according to the Wall Street Journal.
Located in Los Olivos, in the Santa Ynez Valley about 40 miles from Santa Barbara, the property was taken off the market in the summer of 2016, according to Joyce Rey of Coldwell Banker Previews International, who now has the listing. The local market has topped out at around $40 million so far, Ms. Rey said. “This price is more in line with values in the area,” she added.
The seller is a joint venture between a fund managed by Colony NorthStar, a real-estate investment trust, and Mr. Jackson’s estate.
read More: Wall St Journal
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