Situs Newswatch 4/5/2017

CRE & The Trump Anti-Regulation Agenda

President Donald Trump came into office vowing to cut back on regulations. While he has failed to overturn Obamacare, he has succeeded in cutting some red tape (see list below).

“Mr. Trump’s anti-regulation ‘wins’ are clearly good for the Commercial Real Estate Industry,” argues Situs Executive Managing Director Warren Friend. “Stopping regulatory creep is all we needed to happen to reverse fortunes in CRE. The Bush-Obama ideological warfare, and the targeting of the financial industry, is clearly over.”

In fact, says Friend, “President Trump may actually be able to reach across the aisle and work with Democrats to get even more red tape eliminated. Mr. Trump really doesn’t care about party affiliations; he got elected to ‘drain the swamp’ and doesn’t care whether he needs to reach out to Republican or Democrats to do it.”

President Trump’s Anti-Regulation ‘Wins’

  • His Jan. 30 executive order requiring agencies to identify two existing regulations to kill each time they promulgate a new one.
  • His Feb. 24 executive order instructing each agency to appoint a regulatory reform officer who will head a task force that suggests regulations to euthanize.
  • His nomination to the Supreme Court of Neil Gorsuch, a judge most famous for his criticism of excessive deference to regulators.
  • His appointments to the Cabinet of critics of and reformers to the departments they now head, including Education’s Betsy DeVos, Energy’s Rick Perry, Transportation’s Elaine Chao and Health and Human Services’ Tom Price.

“Most importantly,” says Situs’ Friend, is “Mr. Trump’s real estate background.” Remember, Friend advises, “how real estate developers think — ‘if I can’t build it this way, I’ll build it that way’ — that’s who our president is, and it will serve to continue to push the ‘Trump Rally.’ More money will be spent, and Commercial Real Estate will continue to grow.”

CRE: Surprise Winner from Trumpcare’ Debacle

When the effort in Congress to pass a health-care bill – the American Health Care Act, designed to replace the much maligned Affordable Care Act – failed, no one apparently breathed a bigger sigh of relief than the over-indebted and teetering Commercial Real Estate sector. Investors, including the largest asset managers in the world, had experienced the rich benefits of a multi-year mega construction boom of hospitals, medical office buildings, and other health-care facilities to accommodate the ballooning industry that is taking over the US economy and provides 16% of its private-sector jobs.

Property prices had soared over the years as part of the overall commercial real estate bubble. It has gotten so huge that if it deflates, it risks taking down the banks, particularly smaller banks where CRE lending is heavily concentrated.

Even Federal Reserve governors admit its policies since the Financial Crisis have helped fuel this bubble, and it admits that it is a bubble, and references to it keep showing up in their statements and speeches as the fretting has begun. Among them, Boston Fed President Eric Rosengren, a Fed “dove,” is now worried that the commercial real-estate bubble in the US has once again become a risk to “Financial Stability.”

Just how relieved are commercial real estate investors really? Chris Muoio, Senior Quantitative Strategist, Ten-X Research, of online CRE platform Ten-X, put it this way:

“We noted at the beginning of the year that the new presidential administration in D.C. potentially increased risks for certain commercial real estate sectors as proposed regulatory and legislative changes could alter the growth trajectory of industries and with that the demand for certain types of commercial real estate.

“One of the sector’s that faced the most acute possible changes was medical office/retail as the new administration proposed sweeping changes to health care legislation. Hospitals and medical offices faced the prospect of lower demand for health care services as the proposed legislation would have reduced the number of insured patients and the growth pace of federal spending on health care.”

Which sums up what the sector has been expecting year-in and year-out: endless growth in revenues, paid for by government entities, insurers, and the flow of premiums. Throw doubt on these endless growth stories, and health-care focused real estate quakes in its foundations. The note goes on:

“Following the withdrawal of the proposed American Health Care Act, real estate investors in the medical and health care space can breathe easier as it appears this risk has dissipated.

“The proposed legislation was scuttled late last week as it became clear it lacked the votes to pass the House. The current rhetoric out of Washington signals a desire to move off of the issue and towards other policy initiatives.

“Commercial real estate investors should continue to monitor the machinations in Washington carefully, as the administration could revert to the issue at a later time, but for now it appears the existing fundamental story underlying health-care based real estate, which has produced uninterrupted growth in health care services, should remain intact.”

CRE investors are among the biggest beneficiaries of the health care monster that has been draining consumers, businesses, and governments for years, starting way before Obamacare was even a word. And for as long, this health care monster has been cannibalizing other sectors of consumer, business, and government spending.

So it makes sense that commercial real estate investors, at the peak of this bubble, are dreading any little thing that might possibly derail that gravy train.

Booms and busts have historically been driven by speculation and over-borrowing, often triggering recessions. This time, the health care sector, after years “of unsustainable growth,” has become the biggest “systemic recession risk” to the US economy, as the debt binge that funded it, hits its limit.

read more: Business Insider

Situs Poll: 79% See Negative Impact from Brexit on CRE

An unscientific Situs poll of our Newswatch readers finds an overwhelming majority believe Britain’s exit from the European Union will have a negative impact on Commercial Real Estate.

British Prime Minister Theresa May formally began the withdrawal process last week.

“The markets have been factoring in the delivery of the ‘Brexit Notice’ for some time, hence the relatively calm reaction of the FTSE and currency markets to the news,” says Situs Europe CEO Christian Bearman. “I don’t think anyone on this side of the pond is under any illusions as to just how politically challenging the Brexit process will be and no one can yet predict the final picture, but the short-term fundamentals remain stable enough to allow the UK and Europe generally to remain attractive investment propositions.”

We thank all our NewsWatch readers who took time out to offer their opinion.

Frankfurt Is Cheapest Brexit Option for Bankers

Brexit bankers fleeing London take note: Frankfurt is the cheapest major financial center in the European Union to live and work, according to property broker Savills Plc. The combined annual cost of renting an apartment and the per-employee office space expense totaled just under 30,000 euros ($33,000) in the German city, less than half that of Paris. Frankfurt is emerging as the favored destination for investment banks such as Goldman Sachs Group Inc. that need hubs within the EU after Britain withdraws from the bloc.

read more: Bloomberg

Europe’s New Safe Haven: German Real Estate

Last fall, when a planned €3.3 billion initial public offering of a German office-building company was pulled due to weak demand, market observers expected private-equity giant Blackstone Group LP to move in for the kill.

Blackstone had previously expressed interest in OfficeFirst Immobilien AG, which owns about 100 properties in Frankfurt, Berlin and other German cities. When the IPO was shelved, “I was expecting Blackstone to look them deep into their eyes and say, ‘What is the discount?’” said Peter Papadakos, an analyst with real-estate research firm Green Street Advisors, who tracked the deal closely.

Instead, Blackstone last week closed on its purchase of OfficeFirst in a deal valuing the company at roughly the same €3.3 billion ($3.5 billion) price tag that caused IPO investors to balk. The firm felt the price was fair given rent and occupancy trends in Germany, according to people familiar with the matter.

Blackstone and some other investors also increasingly see Germany as a haven in a turbulent Europe, where risks include a disintegration of the euro.

read more: Wall St. Journal

Apartment Market Slumps as Supply Surges

Apartment landlords across the U.S. struggled through a tough first quarter as a slowdown in the rental market grew worse.

Rents in the first quarter declined or were flat in 28 of the 79 metropolitan areas covered by Reis Inc., including New York, Portland, Denver, Boston, Los Angeles and Washington, D.C. That was up from 14 markets with lower or flat rents in the fourth quarter.

Average rents nationwide, meanwhile, increased 3.1% in the first quarter compared with a year earlier, down from the more than 5% growth they posted a year ago, according to Reis.

Apartment occupancy declined to 94.5% from 95.1% at the end of the third quarter as supply increased, according to separate data from apartment tracker Axiometrics Inc. released Thursday. Across the U.S., apartment developers delivered 100,000 more new units than were leased in the quarter.

“We didn’t get a lot of demand and at the same time we got a lot of supply,” said Greg Willett, chief economist at RealPage Inc., which recently acquired Axiometrics.

Mr. Willett said the mismatch is especially pronounced at the high end, where rent growth is flat or negative in most metro areas.

The country’s two priciest markets were particularly sluggish. Rents in San Francisco fell 1.3% in the first quarter compared with a year earlier, while New York rents dipped 0.6%, according to Reis.

“To some degree it looks like operators have panicked in the Bay Area and New York,” Mr. Willett said.

Real-estate agents in the Bay Area said tenants renewing leases there have been able to convince their landlords not to raise rents. Those moving into newer buildings often receive two months free rent and six months to a year of free parking—incentives potentially worth thousands of dollars.

“There are very good deals to be had,” said Ron Stern, chief executive of Bay Rentals.

Houston also has been sluggish, as supply swelled and the economy softened on the energy-market slump.

“Houston, you are experiencing concessions or just flat-out adjustments of the effective rent,” said Brad Taylor, managing partner for the central region at JPI, an Irving, Texas-based real-estate developer. “The amount that someone has been writing their rent check for has been dropping.”

read more: Wall St Journal

Amazon/Walmart at War 

Last month, Walmart gathered some of America’s biggest household brands near its Arkansas headquarters for a tough talk.

For years, Walmart had dominated the retail landscape on the back of its “Everyday Low Price” guarantee. But now, Walmart was too often getting beaten on price.

So company executives were there, in part, to reset expectations with Walmart’s suppliers — the consumer brands whose chips, sodas and diapers line the shelves of its Supercenters and its website.

Walmart wants to have the lowest price on 80 percent of its sales, according to a presentation the company made at the summit, which Recode reviewed.

To accomplish that, the brands that sell their goods through Walmart would have to cut their wholesale prices or make other cost adjustments to shave at least 15 percent off. In some cases, vendors say they would lose money on each sale if they met Walmart’s demands.

Brands that agree to play ball with Walmart could expect better distribution and more strategic help from the giant retailer. And to those that didn’t? Walmart said it would limit their distribution and create its own branded products to directly challenge its own suppliers.

“Once every three or four years, Walmart tells you to take the money you’re spending on [marketing] initiatives and invest it in lower prices,” said Jason Goldberg, the head of the commerce practice at SapientRazorfish, a digital agency that works with large brands and retailers. “They sweep all the chips off the table and drill you down on price.”

But this time around, Walmart’s renewed focus on its “Everyday Low Price” promise coincides with Amazon’s increased aggressiveness in its own pricing of the packaged goods that are found on supermarket shelves and are core to Walmart’s success, industry executives and consultants say.

The result in recent months has been a high-stakes race to the bottom between Walmart and Amazon that seems great for shoppers, but has consumer packaged goods brands feeling the pressure.

The pricing crackdown also comes in the wake of Walmart’s $3 billion acquisition of and its CEO Marc Lore. Lore now runs and has said one of his mandates is to create new ways for the retailer to beat everyone else on price, including Amazon.

The pricing pressure has ignited intense wargaming inside the largest CPG companies, according to people familiar with discussions at Procter & Gamble, Unilever, PepsiCo, Mondelez and Kimberly-Clark. There is no one-size-fits-all solution.

read more: Recode

Staples Explores Sale

Staples exploring a sale, less than a year after its effort to merge with rival retailer Office Depot Inc. failed on antitrust grounds.

The Framingham, Mass., office-supplies seller is in talks with a small number of possible private-equity bidders, according to people familiar with the matter. The talks are early and it is possible they won’t lead to a deal, the people cautioned.

Should there be one, given a typical takeover premium, it could value the retailer at roughly $7 billion or more.

read more: Wall St Journal

Sears and Its Hedge Fund Owner, in Slow Decline Together

Hedge funds have been failing over the last year at the fastest rate since the financial crisis in 2008. Some crashed and burned after sudden reversals. Others quietly liquidated.

Then there’s Edward S. Lampert’s ESL Investments. It hasn’t failed, but may be setting a benchmark for slow, painful declines thanks to its outsize, long-term bet on two venerable retailers, Sears and Kmart.

Last week, Sears Holdings, the parent company, said what was becoming increasingly obvious to most investors, not to mention anyone who’s been in a Sears store lately: “Substantial doubt exists related to the company’s ability to continue as a going concern.”

Sears said that the statement reflected a new, more stringent accounting rule, and that the company was in no imminent danger of bankruptcy. “We are a viable business that can meet its financial and other obligations for the foreseeable future,” said Jason Hollar, Sears’s chief financial officer.

Still, coming after seven straight years of huge losses, the announcement seems a milestone on a road that has only one likely end.

“It takes a retailer like Sears a long time to die,” said Greg Melich, senior managing director and head of consumer research for Evercore, and the last Wall Street analyst still covering Sears. “It’s been burning through over a billion dollars in cash every year. That’s not sustainable.”

Sears Holdings has long been ESL’s largest investment, along with other Sears assets Mr. Lampert spun off, such as the struggling Lands’ End. (The two holdings accounted for nearly half the fund’s holdings at the end of the year, according to its most recent securities filings.) Sears Holdings shares were $162 in 2006; this week they were barely above $11.

Few hedge fund managers have been as celebrated as Mr. Lampert in his heyday, which now appears to be the mid-2000s. Mr. Lampert was a Wall Street wunderkind, a Goldman Sachs intern whose intellect, ingratiating personality and prodigious work ethic attracted the patronage of some of America’s most prominent and successful investors: Robert Rubin, Mr. Lampert’s mentor at Goldman; Richard Rainwater, who invested for the billionaire Bass brothers before starting his own firm; and David Geffen, the billionaire entertainment mogul.

read more: NY Times

Homebuilder Stocks have Best Quarter in 2 years

Shares of the SPDR S&P Homebuilders ETF (XHB) tracked for their best quarter in more than 2 years Friday, amid a leap in homebuilder sentiment to its highest in 12 years.

As of Friday, XHB closed the day up nearly 10 percent for the first quarter of 2017, on pace for but not reaching its best quarter since the fourth quarter of 2014, when it gained 15.31 percent.

Top performers in the ETF include:

TopBuild — up 32 percent quarter to date, on pace for its best quarter ever since it went public in June 2015.

PulteGroup — up 28 percent quarter to date.

DR Horton — up 22 percent quarter to date, nearly matching its best quarter set in the fourth quarter of 2014 at 23.25 percent.

and Lennar — up 19 percent quarter to date.

read more:  CNBC

Kushner Leaving Brooklyn — Fugheddaboudit

Jared Kushner won’t cash out of Brooklyn’s Dumbo Heights (or out of much else, for that matter),” by The Real Deal’s Will Parker: “White House senior adviser Jared Kushner will continue to hold personal stakes, possibly worth more than $150 million, in at least 40 New York City real estate entities, including some connected to Kushner Companies’ Dumbo Heights properties, new White House ethics disclosures show.”

read more: Real Deal

Lord & Taylor May Build Skyscraper To Top Fifth Avenue store

Lord & Taylor is weighing a plan to build a luxury tower on top of its 103-year-old flagship on Fifth Avenue, The Post has learned – even as it shells out a fortune on remodeling and expanding a half-dozen stores elsewhere. The high-flying project could result in a steel-and-glass skyscraper that houses offices and residential units, while still preserving the original, 11-story department store and its business, according to sources. Further details couldn’t immediately be learned, but real estate insiders note that nearby skyscrapers stretch as high as 60 stories or more.

read more: New York Post

Ron Howard Lists $12.5 Million Spread 

Director Ron Howard is listing his longtime home at Manhattan’s the Eldorado for $12.5 million.

Built around 1930 on Central Park West, the Art Deco-style co-op building is well known for its two towers and for attracting celebrity owners like Alec Baldwin and Bruce Willis. Mr. Howard’s unit occupies the 26th floor of the north tower, with views of the Jacqueline Kennedy Onassis Reservoir in Central Park. It has three bedrooms and a library, said Robin Kencel of Douglas Elliman Real Estate, who has the listing with colleagues Lyn Stevens and Ann Cutbill Lenane.

The apartment also has a living room with a wood-burning fireplace, a formal dining room, an eat-in kitchen and a laundry room. In addition to a doorman and concierge, the Eldorado has a gym, children’s playroom and a mini basketball court.

The Howards bought the unit in 2004 for $5.575 million, according to public records, then did “a complete renovation,” said Ms. Kencel. The Howards said in an email that they are selling because they are planning to move farther downtown, closer to Mr. Howard’s editing and post production facilities.

read more: Wall St Journal

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