Inadequate Data Quality: A Pre-Existing Condition for Lenders
Just as many Americans who want to buy health insurance have pre-existing conditions, many U.S. banks and other institutions that own loans, such as private-equity firms, have pre-existing conditions of their own. A large number of these institutions do not have a strong or even adequate understanding of their own loan portfolios because their underlying data points are in the wrong place, incomplete or are missing altogether.
“This is an extremely dangerous pre-existing condition, especially at this stage of the business cycle, where data is the only way to determine the health of a loan portfolio,” says Ed Robertson, Co-Head & Managing Director, Situs Financial Institutions Group (FIG). “Institutions are in critical need of better information to make good portfolio decisions so they can weather the next downturn or take advantage of the next upswing.”
Robertson cites last year’s collapse in energy prices. As the price of oil fell below $50 a barrel, some institutions responded by looking at their entire energy portfolios and performing total portfolio stress testing and reserving. These institutions may have gotten some indication of their problems, but these simplistic analyses completely overlooked the fact that some parts of their portfolios were in much worse shape than others.
“A financial institution cannot prosper, or even survive, with incomplete loan-level information,” Robertson says.
Some of the largest banks in the U.S. began to develop and implement rigorous data quality standards a few years ago under pressure from regulators. They invested substantial time and money to these efforts and looked for ways to leverage the work so it would not be merely an exercise to satisfy government regulations. As a result, these institutions now incorporate their new systems into all of their decision-making processes, as they recognize the critical value of high-quality data in portfolio management.
At the peak of the business cycle, dependable data points are more crucial than ever. Institutions need to have a granular understanding of the characteristics of each of their loans to accurately quantify the amount of stress their portfolios can withstand given their existing positions in commercial lending, housing, construction loans or other riskier assets. The data points will also be able to help financial institutions adjust their underwriting criteria by product so as the business cycle declines, they can take advantage of new opportunities.
Getting an institution’s data points to an adequate level is not simple and should not be taken lightly. Most institutions do not even have all the necessary data in an accessible format. Commercial loans, for example, are not standardized and data points are often difficult to find. An institution probably needs about 175 data points for each loan to reach an acceptable analytical level but may have only 75 data points in its servicing system, meaning 100 pieces of data are missing before the process even begins.
Situs has the experience and expertise to handle this type of project. Since 1985, Situs has been the premier global provider of end-to-end commercial loan advisory services and integrated solutions. We have helped institutions review and rectify their databases to comply with the Federal Reserve’s Comprehensive Capital Analysis and Review examinations and other regulatory data quality reviews.
To download Ed Robertson’s full white paper “Data Quality: A Pre-Existing Condition,” click here.
The largest banks survived a hypothetical “stress test” and could continue lending even during a deep recession, the Federal Reserve said in a strong statement that could bolster the industry’s case for cutting back regulations.
The banking industry’s performance on the stress tests has improved in recent years as the country has recovered from the financial crisis and firms have implemented the new rules. Today (Wednesday), banks are scheduled to receive the results of the second part of the stress tests, in which regulators can fail banks that they see as too risky and prevent them from paying dividends to investors.
Meanwhile, the Trump administration has promised major relief for banks, both through legislation and through administrative changes.
With the Republican effort to change Dodd-Frank rules in the background, four Democratic senators emphasized their opposition to relaxing regulations. Joining Sherrod Brown of Ohio were Jack Reed of Rhode Island, Robert Menendez of New Jersey and Elizabeth Warren of Massachusetts, who said that passing a stress test “is the minimum a big bank can do” and that the effort to use the good results from last week to push for regulatory relief “is pure lobbyist spin.”
Home Prices Higher and Higher
Home-price gains pulled back slightly but remained robust early this year, according to S&P/Case-Shiller.
The S&P/Case-Shiller 20-city index rose 5.7% in the three-month period ending in April compared to a year ago, down two ticks from the 5.9% annual gain notched in March. Economists had expected the 20-City index to increase 5.9% for the year.
Despite those decelerations, prices continued to reflect sturdy demand. Only one metro in the 20-city index, Cleveland, saw a monthly decline, while in Seattle, prices surged 2.6% for the month.
Seattle also led the annual increases, rising 12.9% compared to a year ago. Portland, Dallas and Denver were right behind it.
In April, Case-Shiller’s broader national index also decelerated, rising 5.5% for the year, compared to 5.6% in March. Adjusted for seasonal fluctuations, the 20-city index rose 0.3% for the month, while the national index rose 0.2%.
Meanwhile, according to Black Knight Financial Services, home prices hit an all-time high in April.
House prices increased a total of 3.6% in April since the start of 2017 to the firm’s Home Price Index’s all time high of $275,000. This is an increase of 1.2% from the previous month and 6% from last year.
As in the Case-Shiller report one city stood out above the rest as it led its state to the highest monthly appreciation for the third consecutive month. Seattle home prices increased a full 8.4% since the start of the year.
All the largest 20 states and the 40 largest metros saw an increase in home prices in April, and the top 10 best-performing metros all increased by 2% or more.
Here are the top 5 metros with the most increase in home prices from March to April:
Now is a Good Time to Sell
Existing housing inventory has declined year over year each month for two straight years, but new consumer findings from the National Association of Realtors offer hope that the growing number of homeowners who think now is a good time to sell will eventually lead to more listings.
In addition, the survey finds that fewer renters think it’s a good time to buy a home, and respondents are less confident about the economy and their financial situations than earlier this year despite continuous job gains.
The HOME survey shows an increased share of homeowners who believe now is a good time to sell their homes. This quarter, 71% of homeowners think now is a good time to sell – up from last quarter (69%) and considerably more than a year ago (61%). Respondents in the Midwest (76%) surpassed the West (72%) for the first time this quarter to be the most likely to think now is a good time to sell.
Lawrence Yun, chief economist for NAR, says there’s a mismatch between homeowners’ confidence in selling and actually following through and listing their homes for sale: “There are just not enough homeowners deciding to sell because they’re either content where they are, holding off until they build more equity, or hesitant, seeing as it will be difficult to find an affordable home to buy,” he says.
“As a result, inventory conditions have worsened and are restricting sales from breaking out while contributing to price appreciation that remains far above income growth.
“Perhaps this notable uptick in seller confidence will translate to more added inventory later this year. Low housing turnover is one of the roots of the ongoing supply and affordability problems plaguing many markets,” Yun adds.
However, confidence among renters that now is a good time to buy a home continues to retreat. Fifty-two percent of renters think now is a good time to buy – down both from last quarter (56%) and from a year ago (62%). Conversely, 80% of homeowners (unchanged from last quarter and a year ago) think now is a good time to make a home purchase. Younger households and those living in urban areas and in the costlier West region are the least optimistic.
The surge in economic optimism seen in the first quarter of the year appears to be short-lived. The share of households believing the economy is improving fell to 54% in the second quarter after soaring to a survey high of 62% last quarter. Homeowners, and those living in the Midwest and in rural and suburban areas, are the most optimistic about the economy. Only 42% of urban respondents believe the economy is improving, which is a drastic decrease from the 58% a year ago.
Dimming confidence about the economy’s direction is also leading to households not having strong feelings about their financial situations. The HOME survey’s monthly Personal Financial Outlook Index showed respondents’ confidence that their financial situations will be better in six months fell to 57.2 in June after jumping in March to its highest reading in the survey. A year ago, the index was at 57.7.
“It should come as little surprise that the confidence reading among renters has fallen every month since January (64.8) and currently sits at its lowest level (53.8) since tracking began in March 2015 (65.7),” Yun says. “Paying more in rent each year and seeing home prices outpace their incomes is discouraging, and it’s unfortunately pushing homeownership further away, especially for those living in expensive metro areas on the East and West Coast.”
read more: MortgageOrb
The U.S. Needs More New Housing
Existing homes are in short supply for both buyers and renters, from bustling coastal metropolises to smaller inland cities. Home seekers are bidding up prices and historically low ownership rates mean more people are renting, triggering fierce competition for leases. There are signs that rent growth is slowing — it’s just not slowing quickly enough.
A new report published by the National Multifamily Housing Council and the National Apartment Association — two trade groups for landlords — seeks to quantify just how much rental housing is really needed in cities across the U.S. — as well as how difficult it is for real estate developers to actually deliver.
Here’s some past and prologue: Between 2000 and 2015, New York has added 212,000 rental units in buildings that have at least five units, according to the report. While less than what the city needs between now and 2030, it’s at least in the ballpark. Dallas, however, has built 144,000 such units over the same period. This means the metro will have to almost double the pace of construction to meet estimated demand.
In seven out of 10 cities where it’s hardest to build, more than two-fifths of renters spend at least 35 percent of their income on rent. The worst on that count is Miami, where 54 percent of renter households spend more than one-third of their income to pay for housing.
read more: Bloomberg
Buffett’s Bet on Store Capital Shows Not All Retail Real Estate Is Equal
Warren Buffett is betting that some types of brick-and-mortar real estate will hold up better than others in the age of Amazon.
His Berkshire Hathaway Inc. took a 9.8 percent stake in Store Capital Corp., sending shares of the real estate investment trust surging Monday. Unlike other retail landlords that have come under pressure as consumers shop more online, Store focuses on what it calls service properties: preschool facilities, health clubs, dine-in movie theaters and pet-care sites. Less than a fifth of its portfolio is invested in traditional retail – and even those it calls “internet resistant,” including furniture stores, hobby and craft centers, and hunting, fishing and camping shops.
“Store doesn’t compete on the beaten path,” said Haendel St. Juste, an analyst at Mizuho Securities USA Inc. “They are targeting more experiential retail, trying to provide a buffer against risk.”
Retail REITs have taken a beating from investors as Amazon.com Inc. and other online sellers make it easier for consumers to buy clothing, toys and other items from their computers or smartphones and not have to step foot into a physical store. Buffett, for his part, has long expressed confidence in property investments to generate income for extended periods of time, and to provide a cushion should the dollar lose value. He has said such bets, whether in buildings or agricultural land, are often safer than gold or bonds.
“Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment,” Buffett wrote in a letter to shareholders in 2012. Farms, real estate and businesses such as Coca-Cola Co. “meet that double-barreled test.”
As an owner of single-tenant buildings, Store manages its properties differently than many retail landlords. Tenants cover the costs of operating the real estate, including taxes, maintenance and insurance. Scottsdale, Arizona-based Store essentially acts as a finance company for middle-market tenants without access to affordable capital, St. Juste said.
“They get mom-and-pops’ capital on much better terms by monetizing their real estate,” he said.
read more: Bloomberg
Tallest in the West
The tallest building west of the Mississippi River opened its doors on Friday in once-stodgy downtown Los Angeles, which is sprouting a crop of new skyscrapers.
Here are some things to know about the Wilshire Grand Center:
HOW TALL IS TALL?
The 73-story building has a huge spire that brings its height to 1,100 feet (335 meters), topping the nearby U.S. Bank Tower by more than 80 feet. The Bank Tower had held the height record since 1989.
Critics might argue that a spire rising nearly 200 feet above the top of the building should not count, but it meets the criteria of the Council on Tall Buildings and Urban Habitat, which lists the world’s tallest buildings based on the “architectural top of the building.” A 2-foot lightning rod at the very top, however, doesn’t count.
The skyscraper is still dwarfed by buildings on the East Coast and overseas. In the United States, One World Trade Center is 1,776 feet tall, making it the sixth-largest completed building in the world. The tallest building, the Burj Khalifa in Dubai, rises 2,717 feet, or more than a half-mile high.
NO FLATTOP, PLEASE
The tower features a 100-foot-tall, sail-shaped crown built of glass and steel. It is the first modern high-rise in Los Angeles without a flat roof. Since 1974, high-rise buildings had to have helicopter pads in case of fires or other emergencies. The Wilshire Center obtained Fire Department permission to use other safety features, including a special landing platform and a dedicated elevator for firefighters. The city ended the flat-roof requirement in 2015.
LIGHTS, ACTION, ENTERTAINMENT
The building’s spine and sail have programmable LEDs that can provide colorful illumination and visuals.
Ripples of rainbow illumination glowed and flowed all the way up the building’s 73 stories on Friday night in its inaugural lighting.
The tower also includes an 889-room InterContinental hotel where rooms will go for about $400 a night; some 350,000 square feet (32,516 square meters) of office space; a shopping mall and an observation deck.
Restaurants range from the open-air, rooftop Spire 73 offering “chic fire pits” and signature cocktails to La Boucherie, with stratospheric steak prices and a wine list with 1,200 selections.
The building, located in the Financial District, cost about $1.2 billion to build. Construction began in 2014.
It reached a milestone that year when 21,200 cubic yards (16,208 cubic meters) of concrete, weighing 82 million pounds (37 million kilograms), were poured over a span of 18 hours to create the foundation. That broke the Guinness World Record for a continuous pour set during the 1999 construction of The Venetian hotel and casino in Las Vegas.
The record was eclipsed again this April when a foundation for a mall was poured in the United Arab Emirates.
Construction work on the tower was shut down for two days last year when an electrician killed himself by jumping from the 53rd floor.
The tower includes a massive, stabilizing central core and braces designed to act as shock absorbers to withstand gusty Santa Ana winds and earthquakes. Southern California has dozens of faults, and the building is designed to withstand about a magnitude-7.5 temblor.
read more: AP News
Brewing CRE Deals
There are more than 5,200 craft breweries in operation in the United States.
To say there has been a craft beer explosion in the United States during the 2000s would be an understatement. In the past 10 years, craft breweries leased some 55.6M SF in both retail and industrial properties in the U.S., according to a recent Cushman & Wakefield report. While craft breweries do occupy retail space, more than 80% of that growth is concentrated in the industrial space, where upward of 45M SF has been brewed by craft beer makers, according to the report.
To put it plainly: The number of active craft breweries has tripled in a decade, from 1,409 breweries in 2006 to 5,234 last year, according to data compiled by the Brewers Association. That means from 2012 to 2014, some 1.3 new breweries opened in the U.S. per day. By 2015, that rate jumped to 2.3 breweries per day. Players active in the field range from home-brew enthusiasts turned thriving businessmen, to big-beer and venture capital entities entering the fray by buying out independent brewers or competing with their own craft brands, C&W officials state in the report.
“We’ve seen just an enormous [amount of] growth and huge success across the board. It’s been very difficult to find a brewery that hasn’t been successful, which is incredible over a 10-year run,” CBRE Senior Vice President Jeremy Ballenger said. Ballenger, who has been in the industry for 16 years both as a developer and an industrial broker, said the brewery industry is an incredible real estate driver and niche, particularly in the Denver area. This is not a surprise given that Colorado has 348 active breweries, the second most behind California, according to the website Datafiniti.
That comes out to 6.3 breweries per 100,000 residents in Colorado. Just this past week, Ballenger brokered the sale of 1898 Flatiron Court, a 41K SF flex industrial building in Boulder to Upslope Brewing Co. for $7M. Upslope, which was already operating out of more than 60% of the facility for its beer-making operations, purchased the building from an institutional investor, Ballenger said Not bad for a brewery that started in 2008.
read more: BizNow
Where the World’s Wealthiest Will Spend Their July 4th Weekends
Now that the Hamptons are synonymous with wealth, leisure, and stratospheric real estate prices, it’s no surprise that brokers around the world are eager to associate their own listings with the area.
“What the Hamptons is to New York, wine country is to San Francisco,” said Ginger Martin, a Sotheby’s broker who represents listings in the Sonoma/Napa Valley area, about an hour and a half north of San Francisco. “I’ve been saying that for a long time.”
By that, Martin said, she isn’t quite referring to the wealth that the California locale attracts, but rather its proximity to a city, its destination status, and its role as “a place to get out of Silicon Valley and relax,” she said. “It’s a weekend place.”
That idea is what the real Hamptons have come to embody, although at its most extreme. Roughly two hours outside of New York, the thin strip of traffic-clogged vacation towns on the south fork of Long Island has giant sandy beaches and excellent restaurants and, most important, is accessible by car, plane, and helicopter.
What makes the area particularly worthy of emulation is that it is “very high-end, but very low-key,” said Michaela Keszler, a Southampton-based real estate broker with Douglas Elliman, Anyone who comes out, she said, “can have a big social life if they want, but turn around and be very private and quiet, too.”
Every city with an affluent class has a Hamptons equivalent, whether it’s Sylt, an island on the North Sea favored by Hamburg’s elite; a town like Ojai, a low-key destination for L.A.’s celebrities; or Lake Garda, the go-to for Milan’s industrial titans. Muskoka, a city on Lake Joseph on the rugged gray rock of the Canadian Shield, has been a magnet for wealthy Toronto citizens and beyond. São Sebastião, a three-hour drive east of São Paulo, is a 63-mile stretch of white-sand coastline dotted with the mansions of Brazil’s super rich.
You would think that the Hamptons equivalent for Paris would be the South of France, where the city’s wealthy rub shoulders with a diverse mix of international millionaires, billionaires, and their coteries of hangers-on. But it’s actually the northern coast of Brittany, in a town called Dinard, that “is a completely Parisian place,” said Alexander Kraft, chairman and chief executive officer of Sotheby’s International Realty France-Monaco. “For example, [François] Pinault’s whole family has several houses there.”
The area has been a vacation destination for more than a century, but it’s only in the past 10 or 15 years that “it’s become much more high-end,” Kraft said. “You don’t have huge estates, though. You have seaside villas. It has this village-y feel like the Hamptons used to have a few decades ago.”
In the south of Germany, the Hamptons equivalent is across the border in Austria. “Kitzbühel is the Hamptons of Munich,” said Keszler, the Elliman broker who was born in Munich’s Grünwald neighborhood. “It’s where people in Munich go for the weekend, and it’s the same circus: You load up the kids and the dog in the car on Friday night, sit for one and a half hours in traffic, and then come back Sunday night. The only good thing about it is that we don’t have speed limits in Germany, so you can drive faster.”
The pool at 1777 Inglewood Ave in St. Helena, CA, a vineyard with a six-bedroom mansion on sale for $15 million.
A vacation destination’s proximity to a city is one factor. For the brokers who are making the comparison, its real estate prices are almost equally important. “The Hamptons are a good investment,” said Keszler. “Depending on their location, of course, prices are really holding up.”
Prices in Dinard, Kraft said, range from about €1 million ($1.1 million) to about €3 million. “Parisians don’t spend that much money,” he said. “These are not people paying €20 million for a vacation home.”
In Sonoma or Napa, Martin says prices range from about $4 million for a one-acre property. “Or when there’s new construction on a one-acre property, it will start at $6 million or $7 million,” she said. “It can go up past $10 million.”
read more: Bloomberg
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