What the Commercial Real Estate Industry Must Learn from Sears and Amazon
Rest on your laurels and become a dinosaur, but continue to innovate and your business will grow — clear lessons for the Commercial Real Estate Industry from Sears and Amazon.
Sears just announced it is closing eight more of its namesake department stores and 35 Kmart locations to cut costs and square footage in an effort to return to profitability. The store closings are in addition to the 150 the company announced in January. Once the largest U.S. retailer, Sears has struggled with years of losses and declining sales as shoppers have shifted from the mall to the web. The company said in February that it would cut costs this year by at least $1 billion.
“Many of us saw Sears’ problems coming for a very long time,” says Situs CEO Steve Powel. “Sears pioneered the catalog business, and for our grandparents it was much like Amazon is to us. However, Sears encountered problems when it failed to progress with the times and develop a better e-commerce strategy.”
On the flip side is Amazon, which continues to innovate. Its Prime Day sale on Tuesday was a huge success, kind of a “Christmas in July.” The e-commerce giant launched the discounting event on July 15, 2015, to commemorate its 20th anniversary and to advertise its $99 annual Prime loyalty program. Last year, Amazon reported record sales on Prime Day.
“The CRE Industry must learn to think like Amazon,” says Situs’ Powel. “Amazon is continuing to dominate the retail space by using technology in new and ever-evolving ways. Clearly, the CRE industry is ripe for tech disruption — unless we innovate, the industry risks following the fate of many failing retailers who didn’t.”
The shift to digital retail will also have a long-term effect on malls as retail bankruptcies continue to rise. The most recent bankruptcies come from The Limited, True Religion, Wet Seal, hhgregg, RadioShack, rue21 and Payless.
Situs’ Powel says here is the good news: “About 3,000 store closures have been announced, but there have also been announcements of about 2,000 store openings. I am optimistic about the future of the retail industry, and of the Commercial Real Estate Industry as well.”
Is there room for both Amazon and Walmart?
Ask a techie in Silicon Valley and you might think Amazon is unstoppable — even when its “store of the future” is just a concept, the commerce world pays attention to Jeff Bezos & company’s every move.
But don’t count out that other commerce giant, Walmart, just yet. On the latest episode of “Too Embarrassed to Ask,” Kara Swisher spoke with Recode’s Jason Del Rey about Amazon and Walmart’s ongoing rivalry, which escalated recently: In June, Amazon announced plans to buy Whole Foods for $13.7 billion on the same day that Walmart confirmed it would buy Bonobos for $310 million.
“There’s totally room for both of them,” Del Rey said. “I think you’re going to see Walmart, especially if this Whole Foods deal goes through. … You know, they’ve been making a big push in grocery, I think they’re really going to push that hard.”
Whole Foods gives Amazon a stronger physical presence in urban centers and in well-off suburbs, while Bonobos is one of many recent e-commerce plays Walmart has made recently. Del Rey said that, starting with its $3 billion purchase of Jet.com last year, Walmart and Jet CEO Marc Lore have made it their mission to bringing top digital talent in-house.
“You don’t spend $3 billion on a very young business that had not proven it was sustainable in any way on its own if you feel like you’re in an even average position,” he said. “They’ve made some smaller acquisitions, and a big piece of that is bringing in good digital leadership that probably wouldn’t go to work at Walmart otherwise. Andy Dunn, who’s the co-founder and CEO of Bonobos, would he have gone and worked at Walmart if Marc Lore wasn’t there? He has said publicly, no.”
read more: ReCode
Amazon Threatened to Kill Whole Foods Deal
Amazon has long had a reputation as a hard-ball negotiator. It turns out its negotiations with Whole Foods leading up to its $13.7 billion acquisition agreement were no different, according to an SEC filing outlining a timeline of the talks between the two companies.
On May 23, Amazon made a written offer to acquire Whole Foods for $41 a share, less than a month after the first meeting between senior executives of the companies, the filing said.
Whole Foods came back with a counterproposal of $45 a share, which got Amazon to increase its offer to $42. But Amazon’s bankers from Goldman Sachs then “stressed several times” that the increase to $42 represented Amazon’s “best and final offer.”
Amazon’s bankers “also made it clear again … that Amazon.com would disengage from its efforts to acquire the Company and pursue other alternatives and initiatives if the $42.00 per share price were not accepted,” the filing said, “and that Amazon.com expected that the Company would not approach other potential bidders while the Company was negotiating with Amazon.com.”
Amazon also threatened it would walk away if the talks leaked to the press, which they did not.
read more: ReCode
Fannie Mae Making it Easier for Millennials, First-Time Homebuyers
The largest lenders are finally loosening their standards to make housing more accessible for millennials and first-time buyers, more than a decade after the housing crash.
Fannie Mae, the largest source of mortgages, is making it a little easier for people with all kinds of existing debt — including student loans — to qualify for mortgages. The change will come on July 29 when the debt-to-income ratio (DTI), a measure of a borrower’s capacity to make payments, rises to 50 percent from the current 45 percent.
To understand what the updated standard would look like, let’s say a household earns $5,000 a month and makes monthly debt payments totaling $2,250. The household DTI, debt payments divided by income, would be 45 percent. That’s right at the current ceiling, and a lower DTI is preferred by lenders.
It comes at the same time that FICO scores have reached all-time highs. For the first time, the average national credit score has reached 700, according to FICO, the developer of one of the most commonly used scores by lenders. FICO scores range from 300 to 850. Average credit scores most recently bottomed out at 686, during the housing crisis when there was a sharp increase in foreclosures. They have steadily ticked higher since then; now, average scores are higher than ever.
“Unfortunately, the credit models that the government uses to gauge creditworthiness are very outdated and don’t do a satisfactory job of identifying qualified borrowers who don’t bank or use credit the way previous generations have in the past,” Collingwood Group Chairman Tim Rood told Fox Business’ Maria Bartiromo. “There’s a big disconnect. It’s kind of like the government is using Atari consoles while millennials are using Pokemon Go and Instagram applications. As a result, there are 50 million of these people who are ‘unscorable’ and completely invisible to the current mortgage system.”
According to the Make Lemonade web site, student loans are the largest source of debt in the US apart from mortgages. And so, this eased requirement could benefit millennials who are looking to buy their first homes. Amid tight housing inventories, income and wage stagnation, and escalating home prices, the homeownership rate for Americans under 35 — and the rest of the population, in fact — is at its lowest level in five decades.
Concludes Collingwood Group’s Rood, “This will certainly give the mortgage business, housing and the economy a needed shot in the arm.”
Can Washington Fix the New Housing Crisis?
Donald Trump campaigned on restoring the “American dream,” a 1931 metaphor for economic success that has become political shorthand for homeownership. But as president, Trump faces a unique challenge delivering on that promise: The country is in the grip of a new kind of housing crisis that Washington has virtually no power to solve.
The crisis is a shortage of houses. Nationally, the inventory of homes for sale has been shrinking for 24 straight months, stoking bidding wars for even the lowliest fixer-uppers. In January, a measure of supply hit its lowest in history, according to the National Association of Realtors. That scarcity has helped push the homeownership rate to a near 50-year low. As 83 million millennials approach home-buying age, the shortage is expected to get only worse.
The president claims to have the problem well in hand. “Homebuilders are starting to build again,” he told a cheering crowd in Iowa last month. But that’s wrong: Construction is at an eight-month low and builder optimism is waning. There were so few houses for sale in May that buyers pushed prices to a new record high. The scarcity has helped push homeownership among young adults to its lowest in at least a generation, according to Bank of America. Today’s millennials are less likely to be homeowners than their parents or grandparents were at their age.
But Washington, which has a centurylong track record of goosing the market to encourage buyers, has almost no leverage when those buyers have nothing to buy. The Trump administration has offered few plans for tackling the problem beyond rolling back a clean-water regulation that raised builders’ cost of doing business. Housing and Urban Development Secretary Ben Carson has said building codes need to be updated to pave the way for inexpensive modular homes and other construction innovations, although he hasn’t gotten more specific.
The problem they’re facing is that American housing policy has always pointed one direction: encouraging people to own their own houses. Subsidized mortgages, tax breaks and, lately, crazy-low interest rates are all designed to boost the market for housing. And the market has usually cooperated: With the government juicing demand, builders swooped in and a steady supply of new houses typically followed.
read more: Politico
Americans Who Can’t Afford Their Homes Up 146 Percent
Over 38 million American households can’t afford their housing, an increase of 146 percent in the past 16 years, according to a Harvard housing report.
Under federal guidelines, households that spend more than 30 percent of their income on housing costs are considered “cost burdened” and will have difficulty affording basic necessities like food, clothing, transportation and medical care.
But the number of Americans struggling with their housing costs has risen from almost 16 million in 2001 to 38 million in 2015, according to the Census data crunched in the report. That’s more than double.
And despite the overall economic recovery, it’s only a small improvement from 2014, going down by about 900,000 households.
When people can’t safely afford to pay their mortgages and rent, it isn’t just a problem for those with a lower income or people who bit off more house than they can chew.
Housing un-affordability also drags down GDP, slowing down overall economic growth for everyone, said Dan McCue, senior research associate at the Joint Center for Housing Studies at Harvard University, which publishes the annual State of the Nation’s Housing report.
“It forces them to constrict spending on other items, which would reduce spending on other parts of the economy. They would buy less, save less, reduce savings,” said McCue.
“It may make it more difficult to venture out and start a new company — or, living month to month, they’re much less likely to go back to school and get additional training; and may not be in the job that makes them the most productive member of the labor market,” McCue told NBC News.
A big factor has been how wages haven’t kept pace with rising housing costs.
“For lower income groups, it’s even worse than stagnation. It’s not keeping up with inflation,” said McCue.
Housing costs are being driven by a limited supply of move-in quality, entry-level housing, said Diane Swonk, CEO of DS Economics.
“In the wake of the financial crisis, so much capacity was taken offline,” Swonk told NBC News. “Much of the existing stock of housing is still underwater. Many of the entry level houses are in disrepair.”
And what building is happening is happening upmarket.
“Builders are less able to downscale and build smaller volumes of smaller homes,” said Swonk. “It’s restricting supply well below demand, so of course it shows up in price.”
read more: NBC News
Trump to Appoint Randal Quarles as Fed Bank Regulator
President Donald Trump plans to put his first mark on the Federal Reserve by nominating Randal Quarles, an investment-fund manager and former Republican Treasury official, to be the central bank’s top official in charge of regulating big banks. That job was never filled during the Obama administration, although former Fed governor Daniel Tarullo filled the role de facto.
The choice of Mr. Quarles, expected for months and confirmed by a White House official, would put a more industry-friendly voice in perhaps the most powerful U.S. financial regulatory post: Fed vice chair of supervision. If confirmed by the Senate, Mr. Quarles would take a leading role in carrying out the Trump administration’s goal of rethinking many financial regulations adopted during the Obama era.
read more: Wall St Journal
Attention Bankers: Say Au Revoir to the U.K.
The French government has unveiled new measures to attract bankers to Paris after Brexit, pledging to cut taxes and labor costs and provide more international schools for expatriates’ families, as competition for London’s jobs heats up.
French Prime Minister Édouard Philippe, at a Friday conference in Paris, said the government would scrap the highest bracket of its payroll tax, and cancel a planned extension of a tax on financial transactions. Some bonuses of traders and banking executives classified by the European Banking Authority as “risk takers” won’t be included as a part of severance packages, he said.
“Our government’s ambition is to reinforce France’s attractiveness and competitiveness,” said Mr. Philippe. “Companies must want again to set up and develop their business here,” he added.
Paris has stepped up its efforts to win business from financial firms currently based in the U.K. since the election of pro-business Emmanuel Macron as French president in May.
read more: Wall St Journal
What Brexit Means for Britain, It Also Means for Breakfast
The U.K.’s legendary morning feast may be a perfect metaphor for how Brexit will make British life more expensive.
Politicians including Scottish First Minister Nicola Sturgeon and Labour Party leader Jeremy Corbyn who have confused “Brexit” with “breakfast” are on to something more than a phonetic mistake. Ultimately, it’s what the U.K.’s departure from the European Union means for the island nation, served up hot on a plate, according to analysis from KPMG.
British consumers could see the price of a fry-up — a classic English breakfast with ingredients like bacon, sausages, orange juice, baked beans and mushrooms — increase by almost 13 percent. Tariffs would hike up the cost of imports of many breakfast staples under WTO rules if the U.K. quits the bloc with no free trade arrangement or transitional agreement in place.
While a year has passed since the U.K. voted to leave the EU, Prime Minister Theresa May’s mantra that “Brexit means Brexit” hasn’t helped clarify what the future relationship with the bloc will look like. May has until March 2019 to secure a deal with European leaders, and negotiations are off to a rocky start, with the EU’s chief negotiator Michel Barnier warning last week that a “frictionless” trade relationship won’t be possible.
Orange juice and olive oil from Spain and Italy would likely have the biggest price increases at 34 percent and 30 percent respectively, according to the report.
Regardless of the trade deal the U.K. eventually brokers, households are already experiencing a squeeze as the pound’s fall since the Brexit vote lifts the cost of all imports, from clothes to computers. Economic growth is starting cool as wage growth fails to keep up with inflation.
“Our analysis does not even reflect the steep costs consumers and retailers are already facing as a result of the pound sterling’s devaluation or the costs of any new non-tariff barriers,” said Bob Jones, a director at KPMG.
read more: Bloomberg
Have a prosperous day ahead and enjoy your breakfast!
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