Situs Newswatch 8/31

Real Estate Stocks Get a Starring Role Beginning September First

Real estate makes its debut as the newest S&P 500 sector tomorrow, which all but assures a boost in share prices as these stocks play a more prominent role in investors’ portfolios. S&P 500 funds will most likely boost share prices since they may be required to buy this sector under their investment rules.

“This is an important development for all real estate, both public and private, as it shows the continued maturation of real estate in the asset mix, and pulling away from the pack in terms of being viewed as just another ‘alternative’ asset,” says Brian Velky, Situs Managing Director.

Real estate is the first new S&P sector since 1999, when the Standard and Poors’ 500 Index was carved into 10 broad sector slices

“The sector classification will allow public real estate investment to stand on its own performance merits and not be blended as part of a broad classification. This will reinforce the case that real estate provides diversification and is a needed component of an investment portfolio,” says Ken Riggs, President Situs RERC. “When a few REITs were added to the S&P index around 2000, it was a big deal for real estate, and today’s REIT sector classification perpetuates the notion that real estate is an important investment sector and a viable investment for individual investors.”

Real Estate Investment trusts or ‘REITs’ are vehicles that allow investors to buy into real estate and receive special tax considerations. REITs also traditionally boast high-dividend payouts. They trade individually (like stocks) and through index funds on the major exchanges.

Their elevation should bring more attention to a dividend-rich sector that has outperformed this year.

This new S&P sector points to real estate’s growing importance to major world economies. It now has a $596.28 billion market cap in the S&P 500 alone.

Real estate yielded 3.09% and gained 10.1% in 2016 through Aug. 10, according to S&P Dow Jones Indices. By comparison, the S&P 500 as a whole yielded 2.11% and gained 6.4% over the same period.

Data is the Foundation for Successful Stress Testing

Federal stress testing is a complicated process that boils down to one word: Data.
Banks have developed predictive models that have achieved or exceeded the Fed’s requirements. However, without accurate data, even the most efficient model will not be adequate.

Data remediation and population is no small feat; each loan typically has between 120 to 250 core data elements, and some of these data points come from multiple financial institution; which has been exacerbated by the consolidation of the banking industry.

• Situs has vast experience dealing with data for CCAR projects.
• In the past two years, we have validated and populated over 10 million data points with an accuracy rate of 99.998%
• We utilize a 3 step quality control process to ensure accurate results

If you’d like to learn more about data and stress testing, click here for a one page brief on the topic.

When Economic Doomsayers Stumble: Cautionary Tales From Brexit

It’s early, but data so far suggest the British decision to leave the European Union could be another example of a recurring phenomenon: expert predictions of dire consequences to political decisions that end up proving overheated.

Economists are good at digging into the forces behind inflation or productivity, or exploring the downsides of wealth inequality. But they face steeper challenges in extrapolating from political events, especially ones with few or any past corollaries.

“Forecasters often feel incentivized to pump up the probability of worst-case scenarios” said Philip Tetlock, an expert in political forecasting at the University of Pennsylvania. Forecasters may inflate the probability of disasters, as a way to increase the salience of a warning, or because they believe that proving prescient will be something they can boast about, while proving mistaken will be something most people forget. “Over time, this has some corrosive effect on trust in the expert community,” he said.

There’s a rich recent history of cataclysms that didn’t happen.

It’s now been two months since British voters on June 23 cast their ballots to exit from the European Union, and it’s becoming unclear if the recession so many feared will materialize—at least in the near term.

read more: Wall Street Journal 

Goldman Sachs, Morgan Stanley Reinventing Themselves

In the darkest days of the financial crisis, Goldman Sachs Group Inc. and Morgan Stanley became bank-holding companies to shore up confidence and gain the implicit backing of the Federal Reserve.

But few believed the Wall Street powerhouses would fundamentally change—that they would don the banking cloak until their trading and investment-banking businesses came roaring back.

Things haven’t played out that way: Trading revenues globally have shrunk, more stringent regulation has forced the firms out of once-lucrative businesses, and higher capital requirements have kept returns in check. Goldman’s 2015 return on equity was 7.4%, while at Morgan Stanley it was 8.5%. That is below the firms’ theoretical 10% cost of capital and a far cry from pre-crisis peaks of 32.8% and 23.6%, respectively.

In response, both firms have turned to more basic banking businesses, betting that the cachet of their brand names can overcome relative lack of experience in dealing with the deposits and loans of middle-class Americans.

The moves have surprised many and suggest capital-markets businesses have reached a turning point. “I would never have thought years ago that they would ever be doing this,” says Richard Kovacevich, Wells Fargo & Co.’s former chairman and chief executive. But as regulation and muted client activity hammers trading revenue, “you either shrink, or you try to replace” lost profits.

read more: Wall Street Journal

Empire State Building’s Tall CRE Problems

Qatar now holds a 9.9 percent stake in Empire State Realty Trust, giving it a piece of the Empire State Building, an icon of the New York skyline. But while the office component of the property has had a renaissance over the past few years, nabbing tenants such as LinkedIn and Shutterstock, the retail remains a dud.

The 127,000-square-foot retail component, despite its prime location, has remained largely unchanged since ESRT went public in 2013. While other office complexes across the city, including the likes of One New York Plaza and 650 Madison Avenue, have revamped their retail to cash in on high rents and drive up the value of the office space upstairs, Empire State Building’s tenant list, which includes the Heartland Brewery, Walgreens and women’s fashion brand Bolton’s remain in place, some at well-below market rents, sources said.

Other brands such as Build-A-Bear, Men’s Wearhouse, Perfumania and Bank of America have left, leaving the property with a slew of empty storefronts along the 34th Street corridor. New retailers who’ve inked deals have had mixed success. While a new Starbucks and Chipotle are always packed with tourists and office workers, STATE Grill and Bar, a restaurant concept by chef Octavio Becerra, is sparsely attended, sources said.

“You have to ask why the bank [B of A] made the move,” said Faith Hope Consolo of Douglas Elliman. “ You would think that, as long as you’re on the corridor, what does it matter? But they made the move, so there’s an issue.”

read more: The Real Deal

Six U.S. States With the Biggest Real Estate Bubbles

The typical American might hear the phrase “housing bubble” and pretend to know what it means. They might know it had something to do with the 2007-08 financial crisis, but probably not much else.

The way a housing bubble, or real estate bubble, works is less complicated than it seems. In a bubble, the price of an asset — be it housing, stocks or Beanie Babies — is high because investors believe the selling price will be high or higher tomorrow. So, demand and price for the asset both increase. The problem? Eventually, the supply increases as demand decreases, leading to a decrease in prices and POP — the bubble bursts.

If you’re thinking about buying a home in one of these states, you might want to find out if your city is at risk for a potential bubble. Based on analysis of housing markets and some key economic indicators, here are six states that could be experiencing the effects of the next housing bubble.

1. Tennessee
2. Oregon
3. Nevada
4. California
5. Florida
6. Texas

read more: GoBankingRates

Ready or Not, Real Estate Drones Rules are Here

The first detailed U.S. rules for flights of small commercial drones went into effect Monday, including nationwide licensing requirements for pilots and a ban on nighttime operations.

But the long-awaited move won’t satisfy pent-up demand for more-complex uses of unmanned aircraft—especially at higher altitudes and beyond the sight of operators—or approval of aerial vehicles substantially heavier than the 55-pound limit covered by the regulations.

Capping more than two years of debate, some 4,500 written comments escalating industry turmoil, the rules also won’t resolve growing controversy over privacy protections. On such issues, local governments increasingly are pre-empting Washington by staking out positions before federal agencies reach a consensus.

Recognizing the need for quick action, the Federal Aviation Administration earlier this year established separate registration requirements for all drone users. Agency leaders also have pledged to craft follow-on rules with unprecedented speed, led by regulations due to be released by year-end allowing unmanned vehicles to start flying over crowds.

While stressing the need for caution and adequate deliberation, FAA chief Michael Huerta nevertheless has said the agency can’t afford to “act at the [traditional] speed of government.” Integrating drones into the national airspace “certainly is the number one issue” at FAA headquarters, Terry Biggio, a senior FAA air-traffic-control official, told an air-safety conference in Washington last week.

read more: Wall Street Journal

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