Situs Newswatch 8/22

The Beat Goes On: Instability is Creating Stability for CRE

Part 1

Despite new stock market highs, uncertainty continues to dominate the investment world. Hints that the Fed will increase short-term interest rates in September, continued sluggishness in the economy and fear of a recession, and anxiety over which political party will win the presidential election and control Congress are taking their toll in creating instability for U.S. investors.

“Clearly this is a time for caution, and during such times, safe-haven investments like commercial real estate (CRE) are particularly attractive. That is why the beat goes on for CRE for now and why instability is creating stability for investment in CRE,” stated Situs RERC President Ken Riggs.

In fact, Situs RERC’s institutional investment survey respondents are starting to price greater risk on CRE where the risk slightly outweighs return for this asset class overall in second quarter. The rating for CRE overall was 4.9 on a scale of 1 to 10, where 10 shows that return greatly outweighs risk and where 5 indicates that return and risk are equal. This decline to 4.9 represents a continued downward trend that began in third quarter 2015, and is the lowest overall return vs. risk rating since fourth quarter 2009. In addition, risk outpaced return for the office and apartment sectors.

rerc-chart-8-22

“However, in comparison to the alternatives of the stock or bond market, CRE is the best investment on a return vs. risk basis. There is no doubt that uncertainty and risk are increasing for all investors. Experts from some of the top investment banks have gone on record stating that it is time to get out of the stock market, and we can’t seem to listen to any of the business channels without hearing about the need to include real assets in our investment portfolios,” said Riggs.

The second quarter 2016 issue of the Situs RERC Real Estate Report, The Beat Goes On, can be purchased as a single issue or by annual subscription at:
RERC Report 

New York Nabs Global Property Crown From London on Brexit Fears

New York has knocked off London as the world’s premier city for foreign investment in commercial real estate.

Cross-border capital flows into London real estate fell 44 percent in this year’s first six months from the same period in 2015.

Property investors feared Britain’s exit from the EU would erode London’s role as a premier financial center and reduce the value of their investments, the majority of which are office buildings.

read more: Reuters

Moody’s:UK Banks Now More Resilient to Weakening Commercial Real Estate

Although Moody’s expects the commercial real estate sector in the United Kingdom to weaken over the coming quarters following the country’s vote to leave the European Union  large UK banks will be better placed to cope with a deterioration in the sector than during the 2008/09 global financial crisis, says the credit maven.

“We estimate that the six largest UK banks have reduced their aggregate gross UK commercial real estate lending exposure by around 40%, to £84.6bn at end-June 2016 from £138.9bn at the end of 2010,” says Andrea Usai, Senior Vice President at Moody’s. “Reduced exposures to UK CRE coupled with stronger capital buffers means that large UK banks should be better positioned to handle a deterioration in the sector than during the 2008/09 global financial crisis.”

RBS and Lloyds had the largest exposure to UK commercial real estate of around £25bn and £20bn at the end of June 2016, respectively, while Santander UK has the largest exposure as a proportion of its fully-loaded Basel III Tier 1 capital at 94%, as at the same reporting date. “Pressures on the UK CRE market mounted in early 2016 amid uncertainty about the outcome of the Brexit referendum,” explains Mr. Usai. “And following the actual vote to leave the EU, we have seen the collapse of some large CRE deals, as well as the suspension of redemptions at some UK property funds — these events signal a sharp change in investor sentiment.”

Although banks may be better placed to deal with a CRE slump than they were a number of years ago, a severe stress would certainly erode capital, and materially in some cases, according to the rating agency.

read more: FTSE Global Markets

U.S. Mortgage Applications Down

Mortgage applications decreased 4.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 12, 2016.

The Market Composite Index, a measure of mortgage loan application volume, decreased 4.0 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index decreased 5 percent compared with the previous week.  The Refinance Index decreased 4 percent from the previous week.  The seasonally adjusted Purchase Index decreased 4 percent from one week earlier to the lowest level since February 2016, but remained 10 percent higher than the same week last year. The unadjusted Purchase Index decreased 5 percent compared with the previous week.

The refinance share of mortgage activity increased to 62.6 percent of total applications from 62.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 4.6 percent of total applications.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.64 percent from 3.65 percent, with points decreasing to 0.31 from  0.34 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  The effective rate decreased from last week.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 3.60 percent from 3.64 percent, with points decreasing to 0.28 from 0.31 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 3.49 percent from 3.52 percent, with points decreasing to 0.28 from 0.33 (including the origination fee) for 80 percent LTV loans.  The effective rate decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 2.90 percent from 2.93 percent, with points decreasing to 0.32 from 0.34 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.

Bottom Fishers Eyeing the Mortgage Servicing Market?

Thanks to rising prepayment speeds and large, recent writed-downs on the value of mortgage servicing rights, bottom fishers are starting to make inquiries about buying MSRs, according to market watchers.

In a recent interview with IMFnews, MIAC Capital Markets Managing Director Steve Harris said because of the blood in the streets, his firm has received at least three request for proposals from investors who see value in the lower prices being discussed today.

It feels like were getting to a floor, Harris said. The executive, however, could not identify the parties making the inquiries because of promises of confidentiality.

The bulk MSR market has begun to pick up steam the past few weeks with offerings from MIAC, Incenter Mortgage Advisors, MountainView Mortgage Servicing Group and others.

read more: Inside Mortgage Finance

Kegs, Climbing, Kombucha: Are You Ready for the NEW Office

It’s around 1 o’clock on a recent Monday afternoon, and I walk 30 seconds from my desk to a locker room, change into leggings and a sweatproof tank top, grab a yoga mat, and start meditating in a studio with three other women. “Forget about deadlines,” the instructor tells us. “Forget about the looming appointments and assignments.” I’m trying, but it’s hard: My desk is so close, I could hear my phone if it rang. After an hour of stretching, posing, and not forgetting about deadlines, I put my work clothes back on; soon I’m tapping away again at my laptop. It’s a normal afternoon at Primary, a new co-working space in downtown Manhattan. For $300 a month, I can grab a $10 green juice after a midday vinyasa flow class just feet from where I manage the flow of my in-box.

This is what co-working looks like in 2016, half a decade after the first shared spaces popped up. WeWork, which popularized the model, opened its first location in SoHo in 2010 to fill commercial buildings in the recession. Now it’s worth more than $16 billion (an internal financial review in April slashed 2016 profit and revenue forecasts). Deskmag yes, the industry has its own trade magazine—estimates there will be 10,000 co-working spaces worldwide by year end: If you live in a second- or third-tier city, and there’s no yoga at yours yet, stay tuned. Manhattan alone devotes more than 5 million square feet to the collectives, according to real estate services firm Cushman & Wakefield; and in San Francisco, there’s been 300,000 sq. ft. of co-working space leased since mid-2014, reports JLL, another real estate services company. “The industry has gone crazy. Co-working used to be an office phenomenon. Now it’s tech shops, makerspaces, bio labs, community kitchens, and car-fixing places,” says Steve King of small business consulting firm Emergent Research in Lafayette, Calif. “You can find shared workspaces for almost any kind of work.”

read more: Bloomberg

Can #Tech Make #Apartment Hunting Affordable?

Moving to Manhattan? Here’s a listing for a three-bedroom apartment in a doorman building in the East Village, offering 900 square feet for the low price of $3,384. It would be a steal, if only the houndstooth rug and surfboard art shown in the photos didn’t so closely resemble the décor seen in this listing for a one-bedroom across the river in Brooklyn.

This kind of thing is old hat in the hectic world of New York real estate, where demand outpaces the supply of units and where rental agents outnumber would-be clients—but a new crop of tech startups here aims to ease such apartment-hunting pains.

In the all-too-common scheme, a broker’s first move is to publish a fictitious listing that seems (and is) too good to be true. The next is to inform the earnest nest-seeker that the (fake) listed apartment has just been rented and offer a guided tour of apartments that are smaller, or more expensive, and farther-flung.

That works out to an average broker fee of $5,600, according to Julia Ramsey, chief executive at Joinery, another startup tackling apartment-hunting pains.

“There are a couple ways that renters are getting screwed,” Ramsey said. “The sheer amount you’re paying a broker is probably the biggest one.”

Ramsey co-founded Joinery last year with Vianney Brandicourt, her former colleague at Google, to apply some sharing-economy idealism to ease the broker-fee burden. The idea is to give tenants tech tools to help them find their own replacements.

Those conditions have made New York fertile ground for startups trying to upend the rental industry. (There are also rental startups with national ambitions, including Apartment List, RadPad and Zumper; they tend to be focused on publishing listings and processing digital payments.) In addition to Joinery, companies like Flip Lease and Padspin offer platforms to help renters cut brokers out as the middleman in rental transactions.

read more: Bloomberg