Situs Newswatch 8/7/2017

Apple Poised to Save the Mall
Apple reported fiscal third-quarter earnings that handily beat analysts’ expectations, and revenue that topped estimates, as it sold more iPhones than expected. Despite expectations for a “lame duck” quarter ahead of the iPhone 8 launch, Apple sold 41 million iPhones during the quarter, surpassing 1.2 billion total iPhones sold.

“Just look at the Apple Stores. They are always bustling and filled with people — you get to experience the product and talk to an expert,” says Situs Executive Managing Director Steven Bean. “You may not buy your iPhone there, but they’ll get you eventually.”Bean adds, “Apple is proof retail real estate is not down for the count — it’s catching its breath and adapting to a rapid pace of change as it always has. Like the Apple Store, retailers today need to provide an experience. If retailers aren’t quick enough, willing or able to adapt their business models to a consumer-driven world that is changing every minute, then they are bound to fail.”

Traffic at Apple Stores and ancillary merchants are sure to soar in the near future when the new iPhone 8 is released at a price said to top $1,000.

Situs’ Bean asks, “Is your business ready to profit from that? If not, make it so.”

Situs Executive Managing Director Steven Bean’s Commentary:
Lower taxes would be boon for banks. Except in affordable housing
Is featured in the current issue of American Banker Magazine
Read it here

Trends and Highlights from the NCREIF Summer Conference 2017
Leaders of the Commercial Real Estate industry recently gathered in Washington, D.C., to discuss and learn about trends in CRE and the world economy at the National Council of Real Estate Investment Fiduciaries (NCREIF) Summer Conference 2017.

The Situs and the Situs RERC teams were there to give you the scoop on some of the event highlights:

Dane Anderson, Situs RERC Director, said the closing session of the conference provided a “good, general economic overview” that was useful for people involved in CRE.

Regarding trends in CRE, “daily valuation is attracting increasingly greater attention as fund managers explore ways to diversify their product offering to audiences beyond defined-benefit pension plans,” said Brian Velky, Situs RERC Managing Director.

The valuation committee discussed the size of the cap and discount rate increments in valuation/appraisal; after a lively discussion and an audience poll, there was no consensus about whether the market should be thinking in smaller increments.

To read more, please click here.

U.S. Jobless Rate Falls to 4.3%; 209,000 Added to Payrolls
U.S. employers hired at a healthy pace in July and the unemployment rate fell to match a 16-year-low, a show of lasting vitality for the labor market.

Nonfarm payrolls rose by a seasonally adjusted 209,000 in July from the prior month, the Labor Department said Friday. The unemployment rate ticked down to 4.3% from 4.4% as more people joined the workforce. The July unemployment rate matched May’s reading as the lowest mark since 2001.

Economists surveyed by The Wall Street Journal had expected 180,000 new jobs and a 4.3% unemployment rate last month.

read more: Wall St Journal

Don’t Count Out those Luxury Malls Just Yet
Simon Property Group is increasing its quarterly dividend and increasing its full-year guidance for 2017.

The mall operator said it had net income of $382 million, or $1.23 per share, down from $455.4 million, or $1.45 per share, in the year-earlier period. Analysts surveyed by FactSet had forecast $1.15 in per-share earnings. Rent per square foot was up 3.3% compared to a year ago, the company said, while free funds from operations was $1.87 billion, or $5.20 per share, versus $1.9 billion, or $5.27 per share, a year ago.

David Simon, the company’s CEO, cited new openings and a groundbreaking in Denver as drivers of “impressive” second-quarter results. The company now expects EPS of between $6.20 and $6.28 for the full year, up four cents compared to earlier guidance. The stock is down 34% in the year to date, compared to a 10.3% year-to-date gain for the S&P 500.

Executives Are More Worried About Amazon Than Chaos in Washington 
What keeps corporate leaders up at night?

It isn’t the chaos in Washington or rising worker pay. It’s what Inc. is, or could be, doing to their business models, according to a Bloomberg analysis of earnings conference call transcripts.

The expanding online behemoth has morphed from a retail category killer to a much broader enterprise that now competes with everything from high-end grocers to technology developers. It’s safe to say corporate America has taken notice — and is increasingly concerned about the competition.

Looking at the last 90 days of earnings calls and other corporate events such as investor days, a trend emerges. Amazon comes up a lot. It was mentioned a staggering 635 times over that time frame, while President Trump came up just 162 times and wages were discussed 111, the earnings call data show. It’s become even more pronounced over the past 30 days, with Amazon garnering 165 mentions compared with 32 for Trump and 22 for wages.

The trend holds over the past 12 months, which encompasses the period when Trump pulled off his surprise election victory. Yet, Amazon was mentioned 1,800 times on earnings calls over that span, compared with 1,000 for Trump and 406 for wages.

Amazon typically comes up in discussions about efforts to expand into new business lines in a shifting retail landscape. For instance, on the McDonald’s Corp. second-quarter earnings call this month, Chief Executive Officer Steve Easterbrook pointed to Amazon’s purchase of the upscale grocery chain Whole Foods Market Inc. as an example of how rapidly the food industry is being transformed.

“It just demonstrates how disruptive the business world is and how quickly it moves,” he said.

Executives are also quick to point out partnerships they have with Amazon. Mark Parker, the CEO of Nike Inc., highlighted the shoe manufacturer’s pilot brand-registry program with the retailer on his June earnings call.

“As we do with all of our partners,” he said, “we’re looking for ways to improve the Nike consumer experience on Amazon by elevating the way the brand is presented and increasing the quality of product storytelling.”

read more: Bloomberg

First the ‘Amazon Effect,’ Now Supermarkets Face a Growing Problem: Too Much Space
Never before in America has so much retail square footage been devoted to selling food — and it is too much.

A massive build-out by retailers has left the country piled up with grocery shelves as consumers are shifting from big weekly shopping trips to more snacking and to-go meals. The mismatch has flattened retail sales and leaves the industry vulnerable to a wave of closures that some executives, bankers and industry experts think is coming soon.

Commercial square footage of retail food space per capita last year set a record, with 4.15 square feet of food retail per person, according to CoStar Group, a commercial real-estate firm, nearly 30 times the amount of space allocated to groceries at major chains in 1950.

To be sure, major grocery chains weren’t as numerous decades ago, with many Americans shopping for food at mom and pop stores.

But the growth in groceries has extended across many types of retailers in recent years. Part of the expansion comes from grocers, who accelerated their store openings as a way to drive sales growth after the 2008 recession. At the same time, club chains, dollar stores, pharmacies — and even gas stations — increased their fresh food offerings to drive traffic and boost profits.

“Everybody is getting into the grocery business,” said David Hirz, chief executive of Smart & Final Stores Inc., a California-based warehouse grocer.

While shopper loyalty to conventional chains lifted same-store sales for food retailers by at least 3% annually since 2013, that metric was flat in 2016 and is projected to remain static this year as competition grows, according to FactSet. “There’s only so much food we can buy,” said Suzanne Mulvee, director of research for CoStar.

The food-retail sector has become even more saturated at a time when competition is only getting fiercer, particularly at the two ends of the shopping spectrum. Growing European deep-discounters Aldi and Lidl are vying for U.S. market share, hoping their prices will win over the budget-conscious shopper while internet companies like Inc. are trying to lure higher-income grocery shoppers online. Regional supermarkets and conventional ones such as Kroger Co. and Albertsons Cos. are the most likely to get squeezed in the process, according to analysts.

“We’ve hit that critical moment where traditional supermarkets have realized they can’t keep opening new stores to solve their problems,” Kantar Retail analyst Diana Sheehan said.

read more: Wall St Journal

Staples May Spin Off Retail Stores
A merger between Staples and Office Depot may finally be in the cards — but it won’t be the kind that company brass had longed for, or that regulators had feared.

Staples, which agreed a month ago to be acquired by private-equity firm Sycamore Partners for $6.9 billion, has also lately held talks to spin off its 1,500 retail stores to longtime rival Office Depot, sources told The Post.

Such a deal, which would have to be cut
by Staples’ new owner Sycamore, would create the nation’s only big-box office-supplies chain, with thousands of locations coast to coast under the Office Depot name.

Still, its price tag would be dwarfed by the value of Staples’ pending buyout as doubts about the prospects for brick-and-mortar stores grow, according to insiders.

If Staples got out of the retail business, “It would be the end of an era,” says Craig Johnson, president of retail consultancy Customer Growth Partners. “This is a company that helped create the idea of a superstore. Unfortunately, the concept of a superstore has come and gone.”

Staples revealed in a public filing last week that on June 5, a bidder it called “Party A” offered between $625 million and $700 million for Staples’ North American retail locations.

“Party A” was Office Depot, which was angling to rebrand the Staples locations under its own name, according to a source close to the situation. Staples shunned the bid, agreeing instead on June 28 to go private under Sycamore in a buyout valued at 10 times the price of Office Depot’s retail deal.

Indeed, Sycamore Partners paid a premium not for Staples’ stores, but rather to control the company’s lucrative business selling paper, pens and ink cartridges to mid-size and big corporate clients.

As such, sources say Sycamore has signaled a willingness to offload the stores which, like much of the retail sector, are struggling as shoppers increasingly shift their buying to online rivals led by Amazon.

read more: NY Post

More People Buying Homes Without Visiting Them
One in 3 people who bought a home in the last year said they made an offer without seeing it in person.

Millennials were even more likely to have made an offer sight-unseen, with 41 percent saying they had done so. That’s according to a survey of recent home buyers commissioned by Redfin.

“Advances in technology, the speed of the market and fact that many millennials would rather not talk to sales people are clearly contributing to this trend,” says the Collingwood Group Chairman Tim Rood. “Websites like offer one-stop shopping. People can view and buy the home and apply for a mortgage all in one place. Of course if they want to see the home, a real estate agent can be consulted as well.”

Says Rood, “This is the kind of needed, innovative thinking that will move the housing and mortgage business into the 21st century.”

The abundance of listing photos — including interactive 3-D photography that lets people virtually walk through listings and “drive by” the home on Google Maps — and other information made available about homes for sale online helps buyers feel comfortable bidding on a home they haven’t set foot in.

Mix in the severe shortage of homes for sale that is failing to keep up with strong buyer demand. In June, the national supply of homes for sale fell year over year for the 21st consecutive month. The median sale price for a home rose in June by 7.3 percent from last year. Serious buyers feel they must act quickly and decisively.

The typical home that sold in June went under contract in 36 days, the fastest pace since 2010. But the market was even faster in some metro areas. In Denver, Seattle and Portland, Ore., homes were on the market for just a week. In the Washington, D.C., area, the typical home sold in June found a buyer in 16 days.

In this market, the pattern is clear. Homes are often listed on Thursday or Friday, an open house is Sunday, and the home may be under contract by Monday or Tuesday (if it lasts that long).

Indeed, online may be the only way to get that home.

Real Estate, Mortgage Industries Ripe for Tech Disruption
A strong debut as a public company by Redfin Corp. signals that investors believe the real-estate brokerage industry is ripe for disruption, with shares soaring in their debut.

Redfin’s growth has been moderate compared to many venture-backed startups because the real-estate industry proved resistant to disruption and the company grew slowly since it started in 2004. But it has heated up recently as the housing market has sprung back to life. Redfin’s revenue jumped 43% to more than $267 million in 2016, up from $187 million in 2015.

Redfin has faced pushback from more traditional real-estate brokerages because it pays agents a salary and discounts commissions.

Redfin was founded before the real-estate crash in 2008 and struggled through many of the years that followed. But it has a head start over a slew of startups that have sought to disrupt the real-estate industry more recently.

The company has faced pushback from more traditional real-estate brokerages because it pays agents a salary and discounts commissions. Like many upstarts, it relies heavily on technology, providing home valuations and other data on its website.

“What [investors] saw is a company that is really hard to replicate,” said Glenn Kelman, the company’s chief executive. “The Street gave us credit for time served.”

Redfin remains a bit player in the residential brokerage industry, with 0.58% U.S. market share. But investors appear to be betting that a sector can’t forever remain immune to the technological upheaval that is roiling other industries.

read more: Wall St Journal

Rising Mortgage Risk 
Rising interest rates for loans and tight inventory of homes for sale have triggered a rise in mortgage risk, according to the Loan Application Defect Index from First American Financial.  This is the seventh month in a row that mortgage defect risk has risen.

The frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications increased 1.2% from May to June. That’s an increase of over 16% from this time last year. Despite this increase, the risk level is still down 17% from its peak in October 2013.

“The dynamics of ‘reach’ when borrowers make a legitimate effort to qualify for the mortgage that is necessary to purchase a home tend to become more worrying as the ‘reach’ becomes more pronounced,” says the Collingwood Group Managing Director Tom Booker. “If wages and home prices continue to diverge, this Loan Application Defect Index will be an interesting measure to watch.”  

The highest risk for mortgages are in these markets, according to First American:

“Raleigh, N.C. is currently the riskiest market in the country, with a high level that is growing quickly. In fact, all of the markets in this list are in the South,” says First American Chief Economist Mark Fleming. “Combining the levels of risk and rate of change rankings of loan application defect, fraud and misrepresentation risk reveals that major markets in North Carolina and Florida are high risk and the risk in these markets continues to grow at a strong pace. The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk.”

Mortgage Applications Tumble
Mortgage applications fell 2.8 percent last week compared with the previous week, according to the Mortgage Bankers Association. Volume was 22 percent lower compared with the same week a year ago.

Rates are currently hovering around their lowest level in five weeks:

  • Interest rates for 30-year fixed-rate mortgages remained unchanged at 4.17 percent.
  • 15-year fixed-rate mortgages remained unchanged at 3.45%.
  • Interest rates for 5/1 ARMs increased to 3.30% from 3.29%.

“It was an up and down time for rates last week in response to mixed economic news coupled with the Fed’s FOMC statement,” said Joel Kan, MBA’s associate vice president of industry surveys and forecasting. “The statement outlined a mostly healthy outlook, with a slight concern over inflation and the news that balance sheet reduction could begin ‘relatively soon.'”

Mortgage applications to purchase a home, which are far less sensitive to weekly rate moves, fell 2 percent for the week. That is the second straight decline and the lowest level since last March. Purchase applications were 9 percent higher than the same week one year ago.

Home Sales Forecast for Summer Cool-down
Ten-X forecasts a cool down for existing home sales for July when the final numbers are tallied. According to the Ten-X Nowcast, sales for last month will hit a seasonally adjusted annual rate between 5.32 and 5.68 million with a targeted number of 5.50 million. That’s down 0.4% percent from NAR’s reported June sales, but up 2.0 percent from July last year.

“Extraordinarily low levels of both new and existing home inventory appear to finally be catching up with the housing market,” says Ten-X Executive Vice President Rick Sharga. “This is especially a problem in some of the high-demand metro areas like Coastal California and the Pacific Northwest, and there’s virtually nothing available for entry-level buyers, which is why first-time homebuyer numbers continue to lag behind historic norms.”

Last month, the Ten-X Nowcast projected home sales to take a slight step back, aligning with the recent the National Association of Realtors release, which showed a minor downtick in home sales from the month prior. NAR reported that existing-home sales in June declined to 5.52 million units, a 1.8 percent decrease from May’s 5.62 million number and 0.8 percent down from a year ago.

Last month’s Ten-X Nowcast also predicted another solid year-over-year gain in existing home prices, which was confirmed by the NAR report, as the median existing home price for all housing types rose 6.5 percent year-over-year to $263,800 in June. This marks the 64th consecutive month of year-over-year price gains. The July Ten-X Residential Real Estate Nowcast predicts that median existing home prices will continue to make annual strides to between $251,219 and $277,663 with a target price point of $264,441, up 0.2 percent from June and a 8.3 percent gain from last year.

“U.S. home sales continue to zig zag month to month as strong demand clashes with persistently low supply. The resulting price gains are beneficial for existing homeowners, but restrain prospective buyers,” said Ten-X Chief Economist Peter Muoio. “While there are concerns around declining home affordability and its impact on potential buyers, the housing market should remain on solid footing thanks to a firm labor market and rising wages.”

Late Credit-Card Payments Stoke Fears for Banks
Credit-card losses are mounting, a reversal from a six-year trend that could be a warning sign for markets and the broader economy.

The average net charge-off rate for large U.S. card issuers — the percentage of outstanding debt that issuers write off as a loss — increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., Capital One Financial Corp. and Discover Financial Services had increases for the quarter.

The trend, which accelerated in the first half of this year, has started to suppress bank earnings. If consumers’ budgets get more stretched, a pullback in spending could pressure both growth and corporate profits.

While losses are rising, they remain low compared with historical levels and the 10% net charge-off rate they hit in early 2010. Lenders say they aren’t expecting a return to crisis-level losses and the increases are largely a return to normal after a period of abnormal lows.

Still, other bankers have noted the change in direction, a new string of losses in the industry after 24 quarters in which they fell. “The overall environment is deteriorating,” said David Nelms, chief executive at Discover in an interview. It is “not quite as favorable as it was over the past few years.”

read more: Wall St Journal

Hotel Boom Unfettered by $15 Minimum Wage
When SeaTac, Wash., became the first city in the nation to pass a $15-an-hour minimum wage in 2013, Jeff Robinson, the city’s director of community and economic development, said critics warned him that it would scare away businesses.

But the higher minimum wage hasn’t done that at all. The hotel industry is a prime example: Nine hotels are in development, which will increase the available rooms by 25 percent, to 7,000.

SeaTac is home to Seattle-Tacoma International Airport, now the ninth busiest in the nation, and a new light rail line links the airport to Seattle. Nearby are the corporate headquarters of Amazon, Microsoft, Starbucks, Costco and Nordstrom, and Seattle’s unemployment rate has been hovering around 3 percent, according to the Bureau of Labor Statistics.

Michael H. Mahoney, president of the Dallas-based development company Western International, said his company had not built anything in the Seattle area for more than 10 years, but it was drawn to SeaTac because some available property there bordered a lake and the light rail system had just been built. Business travelers can stay near the airport where it is a bit less expensive than in downtown Seattle, he said, “and close to their flight home,” but they still have easy access to downtown for meetings or entertainment.

He said he considered the $15 minimum wage before deciding to go ahead with a 176-room Residence Inn by Marriott that is scheduled to open next spring, but it was not the determining factor. “We are competing for quality people seeking the best jobs, so would likely have been at that threshold anyway,” he said.

“There’s a lot of noise” about higher minimum wages, he said, but he decides whether to enter an area based on an overall favorable economic outlook. If the area is not doing well, “we’re not going in there,” he said, so wages are not generally a factor.

Sylvia A. Allegretto, an economist and co-chairwoman of the Center on Wage and Employment Dynamics at the University of California, Berkeley, said she and her colleagues had studied 30 years of wage and employment data and found that higher minimum wages had not reduced employment.

read more: NY Times

O.J. Simpson’s Kids Juice Up on Real Estate
O.J. Simpson’s children have gone on a real-estate spending spree over the past two years — and the families of murder victims Nicole Brown Simpson and Ron Goldman want to know where they got all the dough.

Sydney Simpson, 31, and her brother Justin, 28, have built a mini-real estate empire in St. Petersburg, Fla., scooping up 13 properties since 2015, according to documents reviewed by The Post.

The homes and apartments are in low-income areas and total about $500,000. All but two appear to have been bought with cash.

Where the kids got the money for the properties could lead to a legal battle between O.J. Simpson and the families of Goldman and Nicole Brown Simpson, who was the former football great’s ex-wife and is the children’s mother.

Sydney and Justin were asleep upstairs on June 12, 1994, when their mother and Goldman, her friend, were slashed to death outside the family’s condo in the Brentwood neighborhood of Los Angeles.

O.J. Simpson was acquitted of the murders a year later but found liable for the pair’s deaths in a civil proceeding in 1997.

Simpson, who will be released from prison in October after doing time for an armed robbery, still owes almost all of the $33.5 million civil judgment against him.

David Cook, a lawyer for Goldman’s father, Fred, said he would seek bank records and depositions to follow the kids’ money trail and see if any of the homes were bought with their dad’s cash, which could make them eligible for a claw-back.

read more: NY Post

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