Situs Newswatch 8/26

The Beat Goes On: Instability is Creating Stability for CRE

Part 2

In the August 22, 2016 issue of Newswatch, Situs RERC presented data from the current issue of the Real Estate Report regarding return vs. risk in the CRE market. Continuing this series, Situs RERC discusses CRE from a value vs. price perspective and whether it is a good time to buy, sell or hold real estate.

“Overall, CRE is a fair bet where values and prices are not too disconnected from realities and forces of the marketplace based on our research. Ironically, this instability creates some level of stability for CRE—at least for now relative to the alternative investments,” Riggs said.

Although risk is increasing, values vs. prices are deteriorating over time in this unstable climate, as there is concern that prices are beginning to outpace values. Situs RERC’s value vs. price rating for CRE overall decreased to 4.8 in second quarter, which is the lowest rating we have seen since first quarter 2011, and indicates that prices are higher than value for CRE as a whole.

With respect to the individual property sectors, value decreased in the office sector in second quarter, and as such, investors now consider both the office and apartment sectors to be overpriced. Meanwhile, value declined slightly for the industrial sector, although the industrial sector’s value is still higher than price. Value increased slightly for the retail sector such that value and price are now equal; hotel sector value also increased.

According to analysis provided in the second quarter 2016 issue of the Situs RERC Real Estate Report, investors maintained that given still-high CRE prices, the best investment strategy was to sell CRE. As shown below, the sell rating increased slightly to 7.1 on a scale of 1 to 10, with 10 being excellent and 5 representing fair, in second quarter 2016. In addition, the investor recommendation to buy CRE fell to 4.7, the lowest rating since fourth quarter 2007, and the recommendation to hold CRE fell to 5.7, the lowest rating since first quarter 2005.

“Although CRE is especially attractive to sellers given record prices in some markets, holding CRE is also appealing because of the returns available through rents and dividends,” added Riggs. “However, this does not mean that CRE is immune to risk outside its sector.”


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:

U.S. Regulators Step Up Scrutiny Around Swift

U.S. banking regulators are ramping up oversight around financial messaging system Swift, a key intermediary in global payments that faces greater scrutiny following a rash of cyberattacks on its users.

The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have told their examiners to look more closely at the security of banks’ links to the Swift network. The Fed, which is part of a panel of central banks tasked with overseeing Belgium-based Swift, also said it is actively monitoring Swift’s own response to the cyberattacks, which have led to the theft of tens of millions of dollars from banks in Bangladesh and Ecuador.

The steps were disclosed in a letter, reviewed by The Wall Street Journal, that the regulators sent Aug. 17 to Rep. Carolyn B. Maloney (D., N.Y.). The letter was signed by Fed Chairwoman Janet Yellen, Comptroller of the Currency Thomas Curry and FDIC Chairman Martin Gruenberg.

read more: WSJ

CBO Boosts U.S. Deficit Forecast on Tax-Revenue Slowdown

A slowdown in tax receipts, especially from corporate profits, will cause the U.S. federal budget deficit to widen this year for the first time since 2009, while other forces will contain the growth rate of the national debt in coming years, analysts said Tuesday.

The Congressional Budget Office expects the deficit for the fiscal year that ends next month to expand to $549 billion, or 3% of gross domestic product, up from $500 billion, or 2.7%, in its estimate earlier this year. Both are up from last year’s $438 billion deficit, or 2.5%, the lowest since 2007.
At the same time, the CBO made two major changes to its long-term economic forecasts that, taken together, reduce projected deficits by around $700 billion between now and 2026.

First, the nonpartisan budget office said it expects the economy to grow more slowly over the coming decade than it did earlier this year, driven by slower growth in the labor force after 2020. The downward GDP revision reduces government revenues by $400 billion through 2026.
read more: WSJ

Productivity in the U.S. Looks Bad, But It’s Golden Compared With Global Peers

Earlier this month, U.S. economic data-watchers collectively scratched their heads as productivity figures again disappointed, showing that businesses across the country were still struggling to wring out more efficiency from their workers.

U.S. productivity unexpectedly declined for a third straight quarter in the three months through June, Labor Department figures showed. On a year-over-year basis, it fell for the first time since 2013.

But for those:
• marking the end of robust productivity gains (here’s to you, Robert Gordon), or
• warning of the doom of sluggish productivity elsewhere in the economy (calling Alan Greenspan), or
• predicting the Internet Age gains are still on their way (Erik Brynjolfsson), or
• simply wishing we knew we were measuring it appropriately,
…you might find some solace in looking internationally. The U.S. still blows other nations out of the water, at least in terms of manufacturing productivity by both foreign and domestic firms, according to data compiled by the Boston Consulting Group.

read more: Bloomberg

Scottish Economy to see 2-11 Billion pounds Brexit Hit, Government Says

Leaving the European Union will sap Scotland’s economy by between 1.7 and 11.2 billion pounds ($14.76 billion) by 2030, depending on which new trade relationship Britain chooses, the Scottish government said on Tuesday.

Presenting the figures, Scotland’s First Minister Nicola Sturgeon said she was seeking “in good faith” to negotiate the Scottish chapter of the terms under which Britain leaves the EU, but would keep Scottish independence from the UK as an option.

“The old argument that the UK somehow delivers financial security for Scotland no longer holds water,” she told a news conference.

The economic estimates were based on studies by think-tanks and Britain’s finance ministry, looking at the different trade agreements Britain might select after its vote to leave the EU, as well as the uncertainty facing the economy until its choice is clear.

read more: Reuters

August Ten-X CRE Nowcast Marks Strongest Monthly Valuation Increase This Year

Ten-X, the nation’s leading online real estate transaction marketplace, has released its latest Ten-X Commercial Real Estate (CRE) Nowcast. The pricing index, which combines Google Trends data, Ten-X’s proprietary transaction data and investor surveys to forecast CRE pricing trends in real time, reveals that commercial valuations increased by 1.9 percent in August despite slowing deal volume, marking the strongest monthly increase this year and a 6.4 percent year-over-year gain.

“The recent string of monthly increases in commercial real estate valuations confirms that pricing remains on the upswing following the weakness seen earlier this year,” said Ten-X Chief Economist Peter Muoio. “The strength displayed across our nowcasts this summer is an important signal to real estate investors that despite the array of global challenges and the heightened uncertainty brought about by the US presidential election, commercial real estate’s pricing growth remains on track.”

In addition to August’s strong overall gain, pricing increased across all property segments for the first time since late 2015. The Ten-X Office CRE Nowcast posted the strongest gain for the third consecutive month, rising 5.8 percent from July and 13.3 percent above its year-ago level. Strong pricing of Office deals transacted on the Ten-X platform contributed to this gain.

“The strength in office pricing is oddly juxtaposed against still tepid fundamentals,” said Muoio, noting that office vacancies remained flat in the second quarter and the pace of effective rent growth slowed. “Office pricing has now fully climbed out of the hole it fell into early this year and is at a level where it would have been if growth had continued at its pre-swoon pace.”

read more: Ten-X

Can Clinton Deliver Reg Relief to Small Banks? Don’t Bet On It

Regulatory relief is arguably one of the most popular ideas in Congress — embraced by most Republicans and plenty of Democrats — but it has also proven to be frustratingly difficult for lawmakers to enact.

Democratic presidential nominee Hillary Clinton again pledged Tuesday to grant relief to small banks and credit unions if elected president, making her most high-profile commitment to the idea yet.

Yet analysts and industry representatives were skeptical of her ability to help get it over the finish line. Trapped between Republican lawmakers who are likely to push further than Clinton wants to go and progressive Democrats like Sen. Elizabeth Warren, D-Mass., who appear skeptical of the need for relief, a Clinton administration doesn’t have much leeway.

“They don’t have a lot of wiggle room,” said Ed Mills, a financial policy analyst and managing director at FBR. “We’ve gone eight years without really differentiating between the size of banks. In D.C., they think banks are bad. We have a liberal wing of the party that views [Clinton] with skepticism in reference to banks. … I don’t see anything legislatively happening.”

read more: American Banker

Drop in 10-year Treasury Gives Real Estate Pricing a Lift

Industry experts who have been sounding the death knell for cap rate compression received a temporary reprieve thanks to a further drop in the 10-year Treasury.

For the past year, signs having been pointing towards decelerating price appreciation. The Moody’s/RCA CPPI was relatively flat between August 2015 and April 2016, rising just 1.0 percent over that eight-month period.

“To us, the price run-up seemed a little bit overheated, and the pause was an opportunity to let prices catch up with fundamentals and with inflation,” says Tad Philipp, director of commercial real estate research at ratings firm Moody’s.

Yet price appreciation got an unexpected second wind this summer. The Moody’s/RCA CPPI surged ahead 2.6 percent in June. The 10-year Treasury has declined about 50 basis points since the end of April, making financing costs cheaper.

read more: NREI Online