What Tougher Banking Regulations Ahead Mean for CRE
Now that the (U.S.) Political Conventions are history, one thing both the Democrats and Republicans are in agreement on is increased banking regulations.
Both parties are calling for a return of Glass-Steagall, the Depression-era banking law whose repeal in 1999 is blamed by some for causing the financial crisis. The law restricted commercial banks from getting into the investment banking business. Its repeal under President Bill Clinton cleared the way for the big mergers that created banks ‘too big to fail.’
The GOP platform calls for a return to Glass-Steagall, and the Democratic platform includes a call for a modern version of the law.
“Pushing banks back into the framework of only taking deposits and making loans would be a major business model change for today’s global banks, which derive significant return from fee income,” says Situs Managing Director Charles Rierson. “More specifically, deriving earnings from only a regulated lending business, given the current very competitive environment populated by many unregulated lending institutions, likely leaves no significant upside for today’s bank shareholder. While a return to Glass-Steagall is unlikely, it would certainly present a challenge to the banking industry as it has evolved over the last 25 years.”
But Rierson says “The effect on the CRE market may be limited, as CRE lending is already a competitive lending market without a lot of fee income potential for banks.”
Brian Gardner, analyst at Keefe, Bruyette & Woods, said the market may be underestimating the likelihood of a forced breakup of big banks.
“There is an unappreciated risk that Glass-Steagall might be reimposed in 2017 or 2018, especially if Congress seriously looks at changes to the Dodd-Frank Act. We think this is the case regardless of who wins the presidential election,” Gardner says in a note to KBW clients.
European Lenders Walloped by Economic, Political Worries
A lagging economy, messy politics and negative interest rates have combined to brutalize European lenders, few more prominently than Deutsche Bank AG.
The German bank reported steep second-quarter falls in its investment-banking and securities-trading businesses, a potent sign of the bank’s acute struggles and of the deep malaise that has settled over Europe’s financial institutions.
Its shares fell 3.15% Wednesday after it said net income in the second quarter was a mere €20 million ($22 million), down 98% from €818 million a year earlier. So far this year, its shares are off 45%. They now trade around where they did in 1976, according to Thomson Reuters Datastream.
The woeful results pointed to a widening gulf between U.S. banks and their European peers. Deutsche Bank’s revenue from securities sales and trading—the heart of its largest division and the core of a modern megabank—fell 23% from a year earlier. That compared with an average 10% gain in trading revenue at big U.S. banks that reported earnings last week, led by J.P. Morgan Chase & Co. and Citigroup Inc.
Deutsche Bank executives emphasized that the German lender was hit by Europe’s wobbly economy and political uncertainty, while U.S. banks benefited from their more resilient home market. So far this year, the Stoxx Europe 600 Banks index has fallen 27%.
U.S. GDP Grew at a Disappointing 1.2% in 2nd Quarter
The U.S. economic growth sputtered this spring with cautious businesses largely offsetting more robust consumer spending.
Gross domestic product, the broadest measure of goods and services produced across the U.S., grew at a seasonally adjusted annual rate of 1.2% in the second quarter, the Commerce Department said Friday. The figure was well below the 2.6% growth economists surveyed by The Wall Street Journal had forecast.
The gain marks only a slight acceleration from the first quarter, when GDP advanced at a downwardly revised 0.8% pace. The first quarter was previously seen as increasing 1.1% from the prior period.
U.S. Expands Program to Track Secret Buyers of Luxury Real Estate
Convinced that money laundering in high-end real estate is a significant problem, the Treasury Department said Wednesday that it would expand a program it put in place earlier this year to identify and track people who purchase real estate in cash, using shell companies.
The expansion means that there will be increased scrutiny of luxury real estate purchases made in cash by buyers in all five boroughs of New York City, counties north of Miami, Los Angeles County, San Diego County, the three counties around San Francisco and the county that includes San Antonio.
The program is part of a broad effort by the federal government to crack down on money laundering and secretive shell companies. The Treasury Department started the examination — known as a geographic targeting order — in March in Manhattan and Miami-Dade County, and officials said the results so far from those cities had persuaded the department to expand across the country.
Specifically, more than 25 percent of the buyers paying in cash and using shell companies have been people who have also been involved in suspicious activity reports, which banks file to the Treasury, Treasury officials said in a call with reporters.
‘Like’ FaceBook As Your Next Landlord?
Facebook could be your next landlord. In an effort to drum up support for the controversial expansion of its headquarters, the social media giant is trying to give back to the community by building at least 1,500 housing units that can be rented by the general public—not just Facebook employees.
But there’s a catch. As Facebook slowly wades into the real estate development business, the company is pushing an aggressive PR agenda to convince people that Facebook does not exacerbate income inequality in areas where it develops real estate. Facebook has pledged that 15 percent of the new units it creates will go to low- or middle-income families. Which is great until you realize that 85 percent of the building will probably be ridiculously expensive and probably populated by local tech bros.
Facebook has been embroiled in a fiery debate about income inequality for years. This January, the World Bank published a 330-page report showing how the largest technology companies are increasing income inequality rather than helping it. “Some of the perceived benefits of digital technologies are offset by emerging risks,” the report said. “Many advanced economies face increasingly polarized labor markets and rising inequality—in part because technology augments higher skills while replacing routine jobs, forcing many workers to compete for low-paying jobs.”
Yellen and Company Send a Signal
The Federal Reserve left interest rates unchanged earlier this week while saying risks to the U.S. economy have subsided and the labor market is getting tighter, suggesting conditions are getting more favorable for an increase in borrowing costs.
“Near-term risks to the economic outlook have diminished,” the Federal Open Market Committee said in its statement Wednesday after a two-day meeting in Washington, before repeating language from June that the panel “continues to closely monitor” inflation and global developments. Job gains were “strong” in June and indicators “point to some increase in labor utilization in recent months,” the Fed said.
Some see it as a signal of a possible rate increase at the next meeting in September, but markets remain skeptical that Yellen and company will be able to push rates higher.
3D printing the future of real estate?
The potential of 3D printing is continually pushed to the edges of imagination and possibility in almost every industry to which it is applied. At a glance, 3D printers will eventually become as common as an oven in a kitchen, as standard as a 2D printer in every office building and as important as a forklift at a construction site. According to a recent press release, Global Futurist Jack Uldrich is set to give a keynote speech in Charlotte, NC, in which he will address several revolutionary trends in the real estate and evolutionary industries. Among these trends, additive manufacturing – more commonly referred to as 3D printing – continues to yield some of the most tangible and groundbreaking results. Watch Uldrich below at a conference in 2015, as he speaks about previous technologies’ revolutions in the industry.
Throughout his speech, Global Futurist Jack Uldrich highlights many important developments in the technology including WASP’s exciting progress with BigDelta, their 12-meter-tall 3D printer, built as a potential solution to affordable housing issues in developing countries. With BigDelta, the team at WASP is making significant advances at their “technological village” in Italy, where they are printing adobe homes using raw materials such as clay and mud. Innovative projects like the one at WASP’s technological village are exemplary displays of the real impact 3D printing is having and continues to have on a global scale. In the future, it seems as though housing and poverty crises will potentially be solved at the click of a printer – certainly a major success. For the construction and real estate industries, this means quicker, cheaper and more precise projects that can change landscapes and change how companies within these industries do business. Because the products manufactured on 3D printers are concrete, physical manifestations of the technology’s potential, it isn’t hard to imagine a foreseeable future in which additive manufacturing technology becomes an essential component of development.
Pokemon Go’s AR Technology: Implications for Commercial Real Estate
The release of Pokemon Go, a location-based augmented reality game, this month brought with it an entirely new dimension for the commercial real estate business.
The game is an emerging technology blend of augmented reality (or AR, which superimposes digital information onto a real environment) and more fully immersive virtual reality. Both virtual and augmented reality are expected to grow to an $80 billion market by 2025, according to the July report by commercial real estate services CBRE, “Pokemon. So? How Will Augmented Reality Technology Impact Commercial Real Estate?”
The recent announcement regarding a sponsored retailers capability signals the advent of a new trend in both engaging potential customers and driving foot traffic to physical locations.
Brexit Shock Subsiding in Markets
If there is one thing the global marketplace does not react well to, it’s uncertainty—which is exactly what Brexit incited. But on the (roughly) one-month anniversary of Great Britain’s vote to withdraw from the European Union, markets are finally stabilizing—particularly in the U.S. The global financial services industry and commercial real estate sector were genuinely surprised when the June 23 results were tallied and 78% of the UK’s population turned up to vote—52% in favor of leaving the EU. The initial reaction? Uproar. Stocks plummeted and the British pound dropped to a 31-year low as the future looked bleak and the economic effect on a global scale remained uncertain. But the turmoil didn’t last long. “To me the reaction the next day in the markets was an overreaction,” Georgia State University economist Rajeev Dhawan tells Bisnow. “The markets didn’t think Brexit would happen so they were shocked and they overreacted. But, as time has gone by, the US stock market seems to have settled and moved on, while the rest of the world is still digesting it.”
Chinese CRE Investment Overseas Hits $17B in First Half of the Year
Chinese outbound property investment reached $17 billion during the first five months of 2016, according to a report released by Cushman & Wakefield. This placed China in second place behind the United States, which invested $19 billion in other countries.
China moved up three spots from the end of 2015, passing Canada, Hong Kong and Singapore. Chinese investors funneled approximately $10 billion into the United States, with New York City receiving $3.5 billion of those funds.
“Chinese investors’ presence in cross-border real estate is forecast to achieve 50% growth this year,” said James Shepherd, managing director, research, Greater China at Cushman & Wakefield. “With the expectation that the dollar will continue to strengthen and the U.S. economy will maintain steady growth, the prospect of even stronger Chinese interest in the U.S. market in the remainder of 2016 is viable.”
Manhattan’s Dev Sites, Rental Buildings get a Price Boost
Demand for Manhattan investment properties fell in the first half of 2016, although buyers were willing to pay a higher price per square foot for multifamily buildings and development sites, according to a mid-year report from Ariel Property Advisors.
Buyers shelled out $19.3 billion for 361 investment properties in the borough, down 13 percent and 24 percent, respectively, from the same period last year. Manhattan saw its lowest number of transactions, with 304 deals inked, since the first half of 2013.
The multifamily market showed strength in pricing, despite a fewer number of sales in the first six months. Dollar volume totaled $4.2 billion, a 12 percent increase over the first half of 2015, while property volume slipped from 239 to 179 this year. Despite a decline in the number of sales, the average price per square foot rose from $936 to $960 year-over-year.
Office buildings and development sites were hit hardest by the drop in property volume. The number of sales for those types fell by nearly 50 percent year-over-year, although office buildings received a major boost in dollar volume from the sale of four properties each priced over $1.4 billion.
Out is Out, and In is In
To become more inclusive, The Out Hotel is being sold to Merchants Hospitality and will likely change its name.
Sources said as more gays feel welcome at other hotels, the hotel has experienced declining occupancy and revenues — despite special events that have included recent concerts by Barbra Streisand and Cyndi Lauper. Instead of more “kinky boots,” the hotel will get a reboot to keep it going.
Merchants signed an approximately $40 million contract earlier this month to take over the long-term lease for The Out, which sits on land owned by Richard Born on the far western end of The Deuce at 510 W. 42nd St. between Times Square and Hudson Yards.
The Out Hotel was designed and created in 2009 as the city’s first gay-themed hotel by Ian Reisner’s Parkview Developers. The 105-room facility includes 7,500 square feet of restaurant and lounge space, some of the city’s newest conference and meeting spaces and a 14,000-square-foot night club that currently houses XL Nightclub, the largest such venue in the Hudson Yards and Times Square areas.
There is also another 50,000 square feet of as-of-right development rights with preliminary plans.
Leased by Chief Executive Abraham Merchant, Merchants Hospitality now intends to raise another boutique flag, bring in one of the city’s premier night club groups and reposition all the restaurants with celebrity chefs and lounge operators.
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