Situs Newswatch 9/23

Fed’s Lack of Action Fuels CRE 

A divided Fed left its policy rate unchanged for a sixth straight meeting.  Yellen and Company saying they would wait for more evidence of progress toward their “goals,” while projecting that an increase is still likely by year-end.

It comes as no surprise to Situs Executive Managing Director Warren Friend who was quoted last month in this News Watch saying, “The Fed never raises rates in the year leading up to a Presidential election.”

Friend now goes even further, “With 60% of the G-20 central banks in negative rate territory, it may be a long time before a rate hike. I give future hikes a less than 50% chance until Europe returns to positive rates.  And low rates will continue to fuel investment in CRE.  The next question is once all real estate has been financed, does the low rate environment create a construction bull market – watch for growth in speculative building.”

“Near-term risks to the economic outlook appear roughly balanced,” the Federal Open Market Committee said after a two-day meeting in Washington. “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”

“Every time the Fed gets close to raising rates, the owners of investable capital register their leverage by reducing the stock of wealth and threatening to stop the mediocre U.S. economy,” says Situs’ Friend. “Until all central banks move back to a positive rate position, the control of interest rates will remain in the hands of those with investable capital.”

The Fed has not raised rates this year despite signaling that four rate hikes were coming in 2016. That number has since been scaled back due to a global growth slowdown, financial market volatility and tepid inflation.

BH Properties Buys Land UNDER 3 NY Hotels

BH Properties, a Los Angeles-based commercial real estate investment firm, is breaking into New York City in a big way. The company is finalizing a $300 million-plus deal to acquire the land beneath three hotels from Lexington Realty Trust, The Real Deal has learned.

The company is in contract to buy the fee interest for a portfolio of hotels, sources said, including the 39-story, 411-key Element New York Times Square West at 311 West 39th Street; the 21-story, 369-key Sheraton Tribeca New York Hotel at 372 Canal Street; and the 40-story, 399-key DoubleTree Financial District at 8 Stone Street.

Together, the hotels, which opened in 2010, hold 1,179 rooms and span more than 480,000 square feet.

The properties are net-leased to tenants under 99-year ground leases, which are set to expire in 2112.

Just three years ago, Lexington, a Midtown-based real estate investment trust, bought the three parcels from Magna Hospitality Group for $302 million. At the time, initial annual rents under the leases totaled about $14.9 million, according to a Lexington earnings call.

read more: Real Deal

Blackstone Bets Big on Logistics

Blackstone Group LP has cut a deal to pay $1.5 billion for a portfolio of logistics centers, in the latest sign that this e-commerce-driven business is one of the hottest areas in the commercial-property industry.

Blackstone, the world’s largest private real-estate owner, has signed a contract to buy the 12 million-square-foot portfolio of mostly West Coast property from LBA Realty LLC, an Irvine, Calif.-based investment company with properties in the western U.S., according to people familiar with the matter.

Once closed, the deal will mark Blackstone’s biggest purchase of U.S. distribution centers since it exited from the U.S. logistics business in 2015 by selling IndCor Properties for $8.1 billion.

Logistics properties typically include warehousing and distribution facilities for moving goods from manufacturers to stores and customers.

Investor demand for such real estate has shown unusual resilience during what many analysts and investors consider to be a late stage of a bull market for commercial property. Prices keep rising even as those in other commercial-real-estate sectors, such as office buildings and malls, have shown signs of cooling.

read more: Wall St Journal

Diamond (District) in the Rough

The ongoing feud between developers and construction unions over wage mandates, which peaked with the expiration of the 421-a property tax break, has expanded to include groups that negotiate labor deals on behalf of contractors.

A top official at New York City’s real estate trade group told POLITICO the president of the Building Contractors Association admitted to supporting a multi-million-dollar campaign to promote the position of unions battling developers over the extension of 421-a last year.

The problem, according to the Real Estate Board of New York, is the Building Contractors Association and similar firms that handle collective bargaining between contractors and unions should be impartial in such a politically charged fight.

The leaders overseeing management funds that paid for the pro-union lobbying campaign disagreed.

James Whelan, executive vice president at REBNY, said Paul O’Brien, president of the Building Contractors Association and a board member of two labor management funds, acknowledged he supported the pro-union advertisement blitz and lobbying effort called UP4NYC, which has since ceased operations.

O’Brien is on the board of the New York City and Vicinity Carpenters Labor Management Cooperation Trust Fund and the Greater New York Laborers-Employers Cooperation and Education Trust. Those groups paid for the campaign, which proved at least temporarily successful when Gov. Andrew Cuomo refused to sign an extension of 421-a last year without an agreement between REBNY and construction unions on wage mandates.

The sides never struck a deal and the tax break, which had been temporarily extended, expired in January.

read more: Politico

Baltimore Funds Under Armour CRE
Baltimore’s city council gave final approval for a $660 million public financing package to help fund a $5.5 billion project for Under Armour Inc Chief Executive Kevin Plank’s real estate company.

The council voted 12-1 with two abstentions to back Plank’s Port Covington project, a mixed-use development on industrial waterfront, the spokesman said.

Mayor Stephanie Rawlings-Blake will sign the financing deal next week, said a spokeswoman for her.

The 260-acre project includes an expanded headquarters for Baltimore-based Under Armour, the No. 2 U.S. sports apparel maker, as well as restaurants, stores, housing and manufacturing space.

Plank’s company, Sagamore Development, has called Port Covington one of the biggest urban renewal projects in the United States.

The $660 million city subsidy will pay for infrastructure, such as roads, parks and sewers. Sagamore will pay back the bonds through taxes, a practice known as tax increment financing.

read more: Reuters

Oh Canada!

On the far eastern edge of Canada sits Little Bay Islands, a beautiful, dying village divided by crisis. The fish plant was shuttered half a decade ago, and most supporting businesses—as well as the school—have closed with it. Perry Locke is among the tiny population that’s left. He served as the mayor, the fire chief and now runs the power-generating station. His son was the last student enrolled in town.

Fishing villages like this one built Newfoundland and Labrador, a coastal province sent into a tailspin by a fishery collapse, oil-price slump and mounting debt that left it with Canada’s most severe fiscal and demographic crisis. The provincial government now is pushing to close places like Little Bay Islands altogether rather than service them, offering Locke and his neighbors at least C$250,000 ($189,000) each to leave—and spurring a bitter, three-year fight over whether to cash out or endure.

read more: Bloomberg

Small Businesses Cash Poor

A new study lays bare the extent to which many small firms are pressed for cash.

Most small businesses are operating on very small margins,” Diana Farrell, CEO of the JPMorgan Chase Institute, an in-house think tank that uses data from the bank to analyze the economy. “The small business sector is less full of future Googles and Ubers and tons and tons of very small operators living month to month,” she said in a phone interview.

The companies in question may be small, but they represent an outsized share of the U.S. economy. According to the Small Business and Entrepreneurship Council, they account for roughly 50 percent of gross domestic product and more than 50 percent of new job creation — a metric that’s closely watched by the Fed in determining whether the economy can withstand a constriction in financing conditions. Yet even though they’re contributing a great deal to the economy there remains ignorance about their financial health, Farrell added.

On average, the companies surveyed have just 27 days worth of cash reserves — or money to cover expenses if inflows suddenly stopped — according to the JPMorgan study, which analyzed 470 million transactions by 570,000 small business last year. Restaurants typically hold the smallest cash buffers, with just 16 days of reserves, while the real-estate sector boasts the biggest, at 47 days.

read more: Bloomberg

House-Flippers Turn to the Crowd for Quick Cash. What Could Go Wrong?

Alex Sifakis never raised this much money this fast.

The house flipper from Jacksonville, Florida, crowdfunded nine deals totaling more than $9 million through RealtyShares over the last two and a half years. A July deal for $1 million took him just 12 hours.

“Generally, raising money takes so much time,’’ said Sifakis, 33. “This offers so much flexibility and time savings. It’s so much better than going to family offices, banks or Wall Street firms.’’

House flippers and property developers are increasingly crowdfunding — tapping the virtual wallets of anonymous internet backers on platforms such as RealtyShares, LendingHome, PeerStreet and Patch of Land. For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they’re finding quick financing can be easier to get online than from banks. That’s contributed to an increase in home flipping. In the second quarter, 39,775 investors bought and sold at least one house, the most since 2007, according to ATTOM Data Solutions.

The crowdfunding sites are part of the multibillion-dollar ecosystem of marketplace lenders, like LendingClub Corp. and Prosper Marketplace Inc., that match users who need money with people who want to provide it for anything from debt consolidation to elective medical procedures.

That business hasn’t always run smoothly. LendingClub is going through a rough stretch after years of rapid growth. In May, its founder and chief executive officer resigned amid an internal probe into a botched loan sale, sending LendingClub’s shares tumbling.

read more: Bloomberg

Don’t Fear the Robots

When Target Corp. decided to revamp one of its biggest California distribution centers, it had a choice. It could build a new warehouse, it could install established technologies for picking products off shelves or it could take a risk on a new breed of robots from a reclusive billionaire.

Target went with the billionaire’s bots.

Target’s new automatons are from Symbotic LLC, part of a grocery empire run by New England billionaire Rick Cohen. Mr. Cohen, through his own national distribution network, and deals with some of the nation’s biggest retailers, aims to show that robots can overturn the business of storing, handling and hauling the cases of goods that retailers truck to their stores by the millions each year.

His sales pitch to grocery chains and retailers, including Target, Coca-Cola Co. and Wal-Mart Stores Inc. is simple: Symbotic’s automation system includes autonomous robots that can travel untethered among storage racks in a distribution center. They can move up and down aisles to stack and retrieve cases. They coordinate with more-conventional robots that perform simpler tasks.

That is in contrast to many other warehouse-automation systems, in which the robots tend to be bolted down or limited to fixed routes or tracks and are less flexible in what they can do.

“What we’re doing with autonomous bots is not that dissimilar from what Google is doing with autonomous cars,” Mr. Cohen said in an interview at Symbotic’s Wilmington headquarters. “I think within five years, it’ll change distribution.”

read more: Wall St Journal