Situs Newswatch 7/20

Welcome to the first edition of the Situs NewsWatch

Three times each week we’ll provide what you need to know to prosper in Commercial Real Estate and to stay ahead of your competition.

Since 1985, Situs has been the premier, global provider of end-to-end commercial real estate, loan advisory services and integrated solutions, offering customized services to leading financial institutions, investors, owners, and developers.  Our experience and know-how are second to none.

We want to share our knowledge with you, our clients and partners, to help you manage business risk, while driving efficiencies and growth.  Please let us know what you think  and what you’d like to see covered in the future.  We hope you find it informative, provocative and even entertaining.

Steve Powel, CEO

Bonding Experience

If money makes the world go round, then cheap cash for extended periods of time makes it spin faster and faster – but hitting the breaks creates new, uncharted risk.

The 10-Year Treasury Yield hit an all-time low of 1.37 percent on July 8, making borrowing a no-brainer as rates stay lower longer than originally forecasted.  While the Federal Reserve Board and Federal Open Market Committee reassess their plan to increase short-term rates due to ‘post-Brexit’ fears rippling throughout the world, U.S. inflation remains stagnant.

“Few, if any, forecasted long-term rates to go this low and stay there for this long,” said Ken Riggs, President of Situs RERC.  “Investment in commercial properties at today’s cap rates become more attractive – properties had already reached peak levels – as rates continue to fall below expectations.  The longer rates stay low, the higher property prices go and there is a greater likelihood of a future market correction.  Situs RERC’s 10-year rate forecast has been low for the past several years, but now we’re looking even lower.”


“Cheap money looks like it is going to be the norm for a while, with borrowing rates remaining low for the foreseeable future,”said Situs CEO Steve Powel. “In the overall CRE debt markets, the disruption in the CMBS market in 4Q2015 and 1Q2016 has extended the need to deal with the wall of maturities coming due, and created a positive environment for balance sheet lenders such as insurance companies. The impending risk retention rules which go into effect in December of this year are further enhancing the balance sheet lenders position, allowing them to capture the best transactions while dictating loan deal terms. In particular, the banks are now participating in this balance sheet phenomenon because of the opportunity to avoid aggressive lending competition, and have adjusted traditional asset liability management principals due to the low rate environment to enter into the long term CRE lending space.  The CMBS market should remain tentative and somewhat volatile for the next year as the major players figure out the new issuance methodology, but once the rules are reestablished, this segment of lending capital should reemerge.”

Powel added, “despite those low rates, commercial real estate values are likely to remain stable, with the exception of properties in markets where you have fundamental supply and demand challenges, such as Texas, with its dependence on the oil industry. Gateway cities will likely still outperform, especially in markets like Florida, New York and Chicago, which have not overbuilt.”

There are fears that these historically low rates are fueling the next real estate bubble – an increasingly likely scenario emerging in the commercial property market. The Office of the Comptroller of the Currency’s (OCC) semi-annual risk report singled out commercial real estate (CRE) as an area of concern, specifically because banks have loosened lending standards and are amassing too much CRE in their portfolios.

“In light of rapid CRE growth, supervisory reviews completed in 2015 raised concerns over the quality of CRE underwriting, portfolio-level stress testing and sufficiency of concentration risk management practices at banks,” the OCC said. “The regulator has observed an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods and limited guarantor requirements as examples of risk layering.”

A Morgan Stanley report concluded that banks increased CRE loans by 44 percent in first quarter this year compared to a year ago, according to Financial Times.  Putting cheap debt on CRE is a good way to juice the return.

Taking the Fifth

Fifth Avenue is not usually a New York City laggard, but it’s been a decade since a major development has gone up on the tony stretch. Back in 2006, the Midtown-based Stawski Partners built the 325,000-square-foot tower at 505 Fifth Avenue (at the corner of 42nd Street). That building is home to the private equity firm American Capital and Norges Bank on the office floors and H&M’s more upscale brand COS on the retail levels. Before that, you’d have to go back a few more decades to the boom of the 1980s, when a certain developer (who is now running for president) built the 58-story Trump Tower at 725 Fifth Avenue. ‘The reality is that Fifth Avenue is kind of a tired block,’ said Eric Anton, an investment-sales specialist at the commercial brokerage HFF.

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More U.K. Real Estate Funds Stop investors Withdrawing Cash

The U.K. market for commercial property has just been hit with another massive Brexit aftershock.

Four more big asset management firms have halted trading in commercial property funds in the past 24 hours, the latest sign of turmoil since the U.K. voted to leave the European Union on June 23.

A total of seven funds have been frozen this week and more than half of the £25 billion ($32 billion) held in investment products of this type is now under lock and key.

The funds are heavily exposed to offices and other prime commercial property in the U.K. that can’t be unloaded quickly enough when nervous investors want their money back.

Henderson Global Investors, Columbia Threadneedle Investments and Canada Life are the latest to suspend operations. A fourth investment firm, Aberdeen Fund Managers, slashed the value of its fund by 17% and temporarily halted withdrawals so investors would have a chance to reconsider decisions to pull their money.

Henderson said it decided to pull the plug on its £3.9 billion ($5.1 billion) fund because of “exceptional liquidity pressures” caused by uncertainty following the referendum.

Uncertainty in the property market has helped push the pound as low as $1.28. Shares in house building companies have also been slammed, with Barratt Development and Taylor Wimpey (TWODF) plummeting more than 35% since the U.K. referendum. Berkeley Group shares have lost about 30% over the same period.

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Lloyds and RBS Most Exposed to Falling Commercial Property Prices

Lloyds Banking Group and Royal Bank of Scotland are most at risk of being hit by plunging prices of commercial real estate, according to analysis of their lending to the sector.

Shares in the two banks dropped on Wednesday after a number of commercial property funds were forced to stop investor withdrawals earlier this week, raising further fears about a fall in values in the sector.

The UK’s two state-backed banks have the highest exposure to the commercial property market in the banking sector, analysts said on Wednesday, leaving them most susceptible to a fall in property prices.

Shares in RBS were trading almost 5 per cent lower at £1.51 during lunchtime trading, while Lloyds was 2 per cent lower at 49p.

Fears over a crash in commercial property have deepened in recent days since a number of asset managers stopped customers from withdrawing cash in the wake of the Brexit vote.

Commercial property funds in total account for about 7 per cent of investment in the UK market, which means that forced sales of real estate to raise cash to cover redemptions could add to pressure on values in the market.

The Bank of England said in its stability report that the vote to leave the EU might push commercial property prices down if foreign investors pull out. Overseas money investing in commercial real estate halved in the first quarter of the year.

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Brexit Unlikely to Roil U.S. Real Estate Sector

The turmoil roiling the United Kingdom real estate market since the surprise Brexit outcome is unlikely to trigger similar impact for the U.S. real estate sector, industry experts predict.

In fact, some predict U.K pain ultimately could mean U.S. gain.

The June 23 referendum in favor of breaking ties with the European Union has raised uncertainty about some U.K real estate prices. UBS analysts tentatively project commercial property values could fall 20% for London offices, 15% for U.K. retail and 5% to 10% for London retail and U.K. industrial locations, FTAlphaville reported Friday.

The Brexit fallout also prompted a wave of redemption requests at U.K. property funds. Unable to sell properties immediately to raise cash, at least six of the funds blocked retail investors from withdrawing their money amid a wave of redemption requests.

The decisions represent a nearly one-month lock on an estimated $12 billion in U.K. commercial real estate investments.

“There’s no indication of anything like that happening in the U.S.,” said Jim Costello, senior vice president of Real Capital Analytics, a data firm focused on commercial real estate investment.

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Oil Price Rout Slams Houston’s Commercial Real Estate Market

The prolonged slump in oil prices has slammed the office market in the U.S. energy industry hub of Houston, where more than 10 million square feet is available and vacancy rates are at their highest in 20 years, the real estate firm CBRE reported.

Thousands of energy industry employees have lost jobs and companies have slashed their capital budgets during the steep slide in crude prices, which are still down more than 50 percent since 2014.

CBRE found that 10.2 million square feet of commercial real estate was available to sublease at the end of June, as companies sought to shrink their footprint and get others to cover the terms of their leases.

That was roughly 19.8 percent of total available office space in Houston, CBRE found, a level not touched since low oil prices during the mid-1990s.

“When a healthy, growing, energy-driven market is hit with a sudden drop in oil prices, demand will slow,” CBRE said in its quarterly report.

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Senators Call for Investigation of #Airbnb Impact on #Housing Markets

Three Senators have asked the Federal Trade Commission to investigate the impact of Airbnb  and other home-rental websites on housing markets.

Senators Elizabeth Warren of Massachusetts, Dianne Feinstein of California and Brian Schatz of Hawaii  wrote a letter to FTC Chairwoman Edith Ramirez requesting the agency “study and quantify” the prevalence of commercial renters using Airbnb, HomeAway Inc., VRBO and other short-term rental services. The letter said activity on those sites can result in housing shortages and drive up prices.

As one of the most visible proponents of the sharing economy, Airbnb has been dogged by questions about who is listing homes on its site. The company has booked 100 million guest nights and became a Silicon Valley darling in the process. Airbnb has been seeking investors for a round of financing that would value it at $30 billion, a person familiar with the matter said last month.

While many people use Airbnb to list rooms or entire homes for short periods to supplement their income, some hosts are companies or full-time landlords renting out multiple residences year-round. Local regulators have long sought more information about the number of renters who are running the equivalent of illegal hotels, and the company has shared data with some cities.

“The vast majority of our hosts in Massachusetts, California, Hawaii and across the county are middle class people who depend on home sharing as a way to address economic inequality,” Chris Lehane, a spokesman for Airbnb, wrote in an e-mail. “We welcome any opportunity to work with lawmakers and regulators who want to learn more about how home sharing helps the middle class address the issue of economic inequality.”

Betsy Lordan, a spokeswoman for the FTC, declined to comment.

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What are We(Work) worth?

Sporting a Nehru jacket and addressing an audience that included Indian Prime Minister Narendra Modi, Adam Neumann made it clear he didn’t want his company to be thought of as a number. Even if that number was $16 billion.

“For such a spiritual country, I’m surprised from the amount of talk I heard about valuation, and raising money, and bubbles, and building big companies — that is not the goal,” Neumann, the co-founder and CEO of WeWork, said in January at the launch of the Startup India initiative in New Delhi. “The goal is finding something you truly love. Make sure it has intention behind it. Make sure it’s going to make the world a better place. Put those two things together, and I swear to you, success will follow, the money will follow and you will change the world.”

WeWork provides flexible office and communal living space. But that’s not what you hear from Neumann. His fundamental business, he told the New York Times in 2014, is creating “a community that empowers people everywhere to do what they love.”

It’s easy to dismiss all this lofty talk as Adam Neumann being Adam Neumann – a dreamer with a penchant for the grandiose. But WeWork’s claim of enabling a “We Generation” (the wording changes) isn’t just a shtick. It’s a key reason why investors pumped $1.4 billion into the company.

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