“Look at history, a century ago agriculture was the backbone of this nation, followed by manufacturing and then a service economy. We have always been a land of desire for more stuff that retailers sell that drove the sticks and bricks of the retail real estate sector. Change is inevitable,” says Ken Riggs President of Situs RERC. “As robots and AI become more sophisticated, the complexity of tasks that they can perform will increase and trigger human capital to rise to the occasion as we have each major change over our history of the economy.
“Workflow and processes are and continue to be constantly changing. Remember pools of secretaries and teams of data entry professionals. Now text and data can be captured, downloaded and exported automatically. That eliminated secretaries and data entry professionals, but triggered new methods and skills for those professionals able to analyze and interpret the data. Eventually, robots may take over the data analysts job too, but by that time, there will be skill opportunities elsewhere. Total job opportunities have always grown and never declined, but the makeup of jobs are always changing.”
This demonstrates something routinely overlooked in the anxiety about the job-destroying potential of robots, artificial intelligence and other forms of automation. Throughout history, automation commonly creates more, and better-paying, jobs than it destroys. The reason: Companies don’t use automation simply to produce the same thing more cheaply. Instead, they find ways to offer entirely new, improved products. As customers flock to these new offerings, companies have to hire more people.
Our Ken Riggs Has Been Busy — Talking also with NREI
A new report from Situs RERC has provided a ranking of the best markets for industrial real estate from a value vs. price perspective. The rankings are based on second quarter statistics for industrial properties in primary, secondary and tertiary markets.
Industrial real estate currently offers the greatest value compared to price of all commercial property sectors, according to Situs RERC President Ken Riggs. The firm gave the sector a rating of 5.5 on a scale of 1 to 10 in the first quarter of 2017. Industrial properties come with low risk, with little fluctuation in vacancy or return on investment (ROI), he notes. “Everyone is chasing it because rents continue going up, and there is little turnover.”
While the rankings presented in the Situs RERC Value vs. Price Index may be useful to investors, the firm’s researchers do not recommend all highly ranked metros as great investment opportunities, and the rankings are relative, not absolute.
For example, Southern California’s Inland Empire has low vacancy, high demand and growing rents, but prices on assets have been bid up and are now so overpriced that investors buying today would achieve little to no ROI, Riggs notes.
Seattle, Dallas and Washington, D.C. respectively rank at the top of the index for primary markets. All three show positive economic fundamentals, including strong population and job growth
read More: NREI
Fannie, Freddie’s Unhappy Anniversary Remembrance
It was just about nine years ago that the Treasury Department and the FHFA seized control of Fannie Mae and Freddie Mac, declaring the two government-chartered mortgage giants insolvent.
The Collingwood Group Chairman Tim Rood, former Fannie Mae executive says, “Over 600 organizations received some form of government bailout during the financial crisis. The dividends that Fannie Mae and Freddie Mac have paid, on top of repaying the Treasury’s funds invested, are over $80 billion. That means that Fannie Mae and Freddie Mac account for approximately 70 percent of all the profits that the government made on its ‘investments’ during the crisis.”
Less than four months remain before the capital cushions at Fannie and Freddie fall to zero from the current maximum of $600 million. Some sectors of the industry expect FHFA Director Mel Watt to address the capital buffer issue in some form or another, betting he will change the payment schedule of the quarterly dividend they pay to Treasury, which controls their senior preferred stock.
Collingwood’s Rood says there’s a Catch-22 to all of this, “One major difference between the bailouts of Fannie Mae and Freddie Mac are that there is no mechanism for them to ever pay off the investment made by the Treasury Department. The balance owed never drops regardless of how much they have paid.”
The massive cleanup and rebuilding will begin later this morning.
Hurricane Irma roared into Florida with 130 mph winds Sunday, knocking out power to more than 2 million homes and businesses and snapping massive construction cranes over Miami, and destroying countless homes and commercial buildings.
The nearly 400-mile-wide storm blew ashore in the morning in the mostly cleared-out Florida Keys and then began a slow march up the state’s west coast.
“Pray, pray for everybody in Florida,” Gov. Rick Scott said on “Fox News Sunday” as some 116,000 people statewide waited it out in shelters.
Many streets were underwater in downtown Miami and other Florida cities. Appliances and furniture were seen floating away in the low-lying Keys, though the full extent of Irma’s wrath there isn’t clear yet.
Hurricane Irma is forecast to create combined insured losses of between $20 billion and $65 billion, according to a projection from risk modeling software company AIR Worldwide.
The company includes in its estimate both the United States and selected islands in the Caribbean. For the U.S. alone, insured losses are expected to reach between $15 billion and $50 billion, AIR notes.
Although the final costs of Hurricane Harvey are still being tallied, the more-powerful Irma has brought Florida to a standstill and is likely to pack a financial wallop along with its human toll.
Amid widespread disaster preparations, analysts expect that the government will bear the brunt of these losses, with $2 billion to $4 billion expected to fall to private insurance companies.
Hurricane Harvey, which deluged Houston with days of torrential rain and flooding, is expected to be one of the “costliest disasters in post-war U.S. history,” and a likely drag on third-quarter economic growth by a full percentage point, Goldman Sachs said.
Costs from the storm that hammered Texas last month will eclipse those associated with 2012’s Hurricane Sandy, the bank’s analysts wrote in a research note. Using a model that examined the 35 largest hurricanes to strike the U.S. in the aftermath of World War II, Goldman found that major natural disasters correlated closely with a “temporary slowdown” in key economic gauges.
“Modeling these effects, we estimate that hurricane-related disruptions could reduce 3Q GDP growth by as much as 1 percentage point,” Goldman’s analysts wrote, adding that the main impact would be felt in consumer spending, business inventories, housing and the energy sectors.
Situs CEO Steve Powel says, “Based on past experiences from major storms in the U.S. and Caribbean, aside from the hardships experienced by so many families, rebuilding efforts will no doubt be a stimulus to the U.S. economy.”
Both The Collingwood Group Vice Chairman Brian Montgomery, former Assistant Secretary of HUD and FHA Commissioner in Houston, and Powel add, “Our thoughts and prayers go out to the people in the hurricane zones; stay strong!”
The Next Hurricane-Related Shortage: Construction Workers
A severe shortage of construction workers is expected to cause widespread delays and push labor costs sharply higher as Texas begins to rebuild from Hurricane Harvey.
The labor squeeze could get worse still in the wake of Hurricane Irma.
Already, an estimated 30,000 homes in Houston were destroyed by Harvey, more than this city was expected to build in all of 2017, according to the Greater Houston Builders Association. Tens of thousands more were damaged.
The spike in construction demand comes at a time when contractors say they already are facing delays of one to two months to find workers for their projects. Now those wait times to could grow to many months, they said.
Wages and material prices also are expected to rise, potentially by double-digit percentages, based on the historical example of Hurricane Katrina in 2005, according to real estate tracker John Burns Consulting.
read more: WSJ
Lodging REITs Could be Slammed by Hurricane Irma
A number of hotel owners with exposure to Florida and the Caribbean islands could be affected by Hurricane Irma, a category five storm that hit the islands Wednesday and made landfall in Florida over the weekend.
Officials in the Florida Keys ordered mandatory evacuations starting Wednesday, and hotels could face immediate losses from canceled trips, though those owners that have business-interruption insurance might have some coverage.
Among lodging real estate investment trusts, Sotherly Hotels Inc., Ashford Hospitality Prime Inc., Hersha Hospitality Trust , DiamondRock Hospitality Co. and RLJ Lodging Trust have more than 10% of their rooms in areas that could be adversely affected by the storm, according to Wells Fargo Securities analysts Jeffrey Donnelly and Dori Kesten. Among hotel companies, Hyatt Hotels Corp. has the largest exposure, with 7% of owned rooms in the potential impact area, they said.
LaSalle Hotel Properties, which has two hotels in Key West with a total of 354 rooms, would face an immediate hit to revenue as visitors evacuate and scheduled inbound business declines, said BTIG Equity Research analysts James Sullivan and Ami Probandt in a research note. While the two hotels are insured for property damage and business interruption, there are uncertainties over the extent of the coverage, said the BTIG note.
read more: WSJ
Hurricane Harvey Shatters Houston Real Estate Market
Houston area Realtor Shad Bogany had five closings scheduled for the week of Aug. 28.
And then Hurricane Harvey happened, drowning Houston with 51 inches of rain and paralyzing the city for nearly a week. All of those closings were put on pause, Bogany said, and he expects some of those deals will never happen.
“A lot of Realtors are probably having a loss of income,” Bogany said. “Imagine you had a bunch of listings in a certain neighborhood that flooded — you’ve lost all of that.”
Almost overnight, Harvey brought Houston’s robust real estate market to a screeching halt. Closings were postponed or canceled. New listings all but disappeared. Realtors found themselves inundated with calls from clients seeking temporary housing.
“For the last week or so it has really ground to a halt,” said Real Estate Broker Andy Taylor. “Other than rentals, which are on fire, the sales market is slow.”
Houston had one of the healthiest real estate markets in the country before the hurricane, according to the National Association of Realtors. Then came Aug. 25, with Harvey and its aftermath wreaking havoc on more than 50 Texas counties. The Federal Emergency Management Agency estimates that almost 800 homes were wiped out in Harris County and more than 119,000 were damaged.
Lawrence Yun, chief economist for the National Association of Realtors, expects a “pause in activity” — a slowdown in pending contracts and sales — in the Houston region in the coming months due to Harvey, and thus has downgraded his national home sales forecast for the rest of the year.
“The devastation caused by the hurricane and flooding could be enormous, and this will certainly have a negative impact on local housing markets in the short term as the focus shifts to recovery and residents get back on their feet,” Yun said last week, adding that “it’s too early to say what the long-term consequences will be to the area housing market and economy.”
read more: Austin American Statesman
Self-Storage Locker Biz Flourishes After Hurricane Harvey
Self-storage lockers are filling up as Hurricane Harvey victims seek a place for their belongings while they rebuild or prepare to move.
The market is further constrained because some storage facilities suffered flood damage as well.
“Before the storm, there just wasn’t that much product on the shelf to begin with,” said Aaron Swerdlin, a vice chairman with commercial real estate firm Newmark Knight Frank who specializes in self-storage properties.
The surge in demand could last beyond the three- to eight-month burst in business that typically follows a natural disaster. It depends on how long it will take people to fix their homes or whether they downsize to smaller places and maintain their storage units for the long haul.
“Katy to Baytown and The Woodlands to Galveston and very few places in between didn’t have an impact,” Swerdlin said.
read more: Chron
It’s 9/11 and we will never forget…
Collingwood Group Vice Chairman Brian Montgomery, former Bush administration official, joins the Jim Bohannon Radio Show at 11 p.m. ET today with his remembrance of that awful day. We Invite you to tune in.
Cohn Apparently Out as Next Fed Chairman
President Trump is unlikely to nominate Gary Cohn, his top economic adviser, as the next Federal Reserve chairman, indicating that he is open to considering additional names for a pick he has said he would like to make by year’s end, according to people familiar with the president’s thinking.
This shift inside the Oval Office was largely due to Cohn’s reaction to Mr. Trump’s response to the violence in Charlottesville, Va., in which the president at times blamed both white supremacists opposing the removal of a Confederate war statue and counter-protesters.
Cohn joined the Trump administration early on, leaving his position as the second-in-command at Goldman Sachs, where he was long considered to be Goldman CEO Lloyd Blankfein’s eventual replacement.
President Trump named Cohn as a possible replacement for Yellen back in July, telling the Journal in an interview that Cohn was a Fed chair candidate.
But Cohn had told associates that he was disgusted by Mr. Trump’s performance immediately after the president’s combative news conference on Aug. 15 about the Charlottesville events, according to a person familiar with the matter. Mr. Cohn stood near Mr. Trump at the news conference in the lobby of Trump Tower, which White House officials intended to focus on the president’s push for investment in infrastructure.
Cohn, who is Jewish, also reportedly went so far as to draft a resignation letter and told the Financial Times that the Trump administration “must do better” about condemning white supremacists and the like.
read more: Wall Street Journal
Bankruptcy ‘R’ Us
Toys R Us has hired a law firm to help restructure its roughly $400 million in debt due in 2018, a move that could include the marquee toy store filing for bankruptcy protection
Addressing the retailer’s debt load prior to the crucial holiday season could give its major vendors such as Mattel and Hasbro clarity into the company’s long-term viability to help ensure the toymakers continue to stock its shelves throughout the holidays.
Toys R Us has hired restructuring lawyers at Kirkland & Ellis to help address the looming payments, sources said.
Hiring a law firm like Kirkland is not indicative of a bankruptcy filing, and many companies work with law firms to successfully refinance or restructure their debt without filing for protection.
The company has already announced it is working with Lazard to help address its debt load, and it successfully refinanced some of its debt just a year ago. Still, it has become increasingly difficult for leveraged retailers to tap the refinancing market, as lenders have become spooked by the increasing number of retail bankruptcies.
The New Real Estate Sector Playing Offense and Defense
As the real estate cycle churns on, it’s getting harder to find good ways to invest. Prices in many segments of the market are high, many metro areas are oversaturated with supply of homes, and too many long-term concerns dog other types of real estate, like malls.
But real estate investment trusts focused on renting out single-family homes are appealing to experts interviewed by MarketWatch, all of whom describe it as a great investment for the short and long term.
“It’s my favorite of the REIT sectors,” said David Corak, an analyst with FBR.
Corak’s reasoning: the major REIT sectors, from office to industrial to retail, “all have some sort of identifiable headwind. With single-family, it’s kind of the opposite.”
The single-family-rental model has grabbed headlines recently, after two of the largest players, Starwood Waypoint and the Blackstone Group’s Invitation Homes, announced plans to merge. The new company will have over 82,000 properties, making it far and away the country’s biggest landlord in a market traditionally dominated by mom-and-pop owners.
Big institutional investors like Blackstone started snapping up single-family houses after the financial crisis, when such homes were available for a fraction of what they would have been in a normal market, and Americans increasingly turned to renting rather than homeownership.
Now, according to Doug Harter, an analyst with Credit Suisse, the companies are in a sweet spot: they can use their large scale to drive down expenses like property maintenance, as well as attract higher occupancy rates at a moment when demand for rental properties is likely to remain strong for some time.
read more: MarketWatch
Mortgage Rates Down, Applications Up
Mortgage applications moved higher last week, spurred by refinancers, as interest rates moved decisively lower.
Total mortgage application volume increased 3.3 percent, from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted report. Volume remains 23 percent lower than the same week one year ago, when rates were even lower.
After pulling back for the last few weeks, more homeowners applied for a refinance, sending volume 5 percent higher for the week. Refinance volume has been relatively stagnant, even as rates edged lower, but last week rates took a bigger step backward.
The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.06 percent, its lowest level since November. That’s down from 4.11 percent the previous week.
Have a prosperous day and great week ahead.
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