Commercial Real Estate – The Good, Bad and Ugly

Defaults are rising in a key corner of the commercial real estate debt market just as borrowing costs are set to jump, which the Wall Street Journal says is raising the likelihood of a slowdown in the $11 trillion U.S. commercial property sector for next year.

“Going into its eighth year of expansion, the CRE market is getting a little long in the tooth and we are due for a market correction,” says Ken Riggs, President of Situs RERC. “The questions are when and how this correction will occur. Refinancing for many properties is coming due and there is plenty of available capital to meet these needs, however the issue is whether these properties have the values that lenders require to command this capital.”

A financial crisis-era regulation is about to take effect that is expected to make some commercial real estate borrowing more expensive and complicated, analysts say.

At the same time, interest rates have increased since the election of Donald Trump which would further squeeze an industry built on borrowed money.

Situs’ Riggs says, “If President-elect Trump’s policies result in stronger economic growth, that could bring in higher inflation and long-term interest rates will rise. Those higher long-term rates would be detrimental for the CRE market, pushing up cap rates faster than rents can rise.”

Many in the CRE industry applaud Mr. Trump’s plans to cut regulations, but warns Situs’ Riggs, “Be careful what you wish for, you might just get it. Will a strong economy and the uncertainty introduced by the election of Trump ultimately be good or bad for CRE? Only time will tell.”

Will The Fed be the Grinch that Stole Christmas?

Doing little to dispel expectations of a hike as early as December, just in time for Christmas, Federal Reserve Chairwoman Janet Yellen on Thursday said an interest-rate hike could come “relatively soon.”

Ahead of an appearance before the Joint Economic Committee, Yellen said progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year.

Inflation, while still below the central bank’s 2% objective, has increased somewhat, Yellen said.

Yellen added the central bank continues to expect that the evolution of the economy “will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability.”

Current policy was only “moderately accommodative” because the federal funds rate currently is only somewhat below estimates of the neutral rate, Yellen added.

U.S. Housing Starts Surge to near Decade High

Housing starts surged to a more than nine-year high in October as builders ramped up construction of both single and multifamily homes, offering hope that housing will contribute to economic growth in the fourth quarter.

Groundbreaking jumped 25.5 percent to a seasonally adjusted annual pace of 1.32 million units, the highest level since August 2007, the Commerce Department said on Thursday. The percent increase was the biggest since July 1982. Starts increased in all four regions last month.

September’s starts were unrevised at a 1.05 million-unit rate. Economists polled by Reuters had forecast housing starts rising to a 1.16 million-unit pace in October. Residential construction has been a drag on gross domestic product for two straight quarters.

Single-family home building, which accounts for the largest share of the residential housing market, jumped 10.7 percent to an 869,000-unit pace in October, the highest since October 2007.

The housing market is being driven by a tightening labor market, which is starting to drive up wages.

Housing starts for the volatile multi-family segment soared 68.8 percent to a 454,000-unit pace. Starts for buildings with five units or more hit their highest level since June 2015.

Permits for future construction edged up 0.3 percent in October. Single-family permits rose 2.7 percent last month, while building permits for multi-family units fell 3.3 percent.

Euro Crisis: 2017 will be Markets’ Biggest Test Yet

The euro zone has withstood several crises since 2008 that have thrown the 19-nation bloc’s very existence into doubt, centered on its fractured economy, bond market, banking system and, of course, Greece.

But for financial markets, the biggest test may be to come and some investors are dusting off strategies on how to navigate an unraveling of the euro zone – or even the European Union itself – and the turbulence that would unleash.

Elections in France, Germany and The Netherlands next year, as well next month’s Italian constitutional referendum, are flash-points that could ignite brewing political discontent across the continent.

They are among the biggest risks for 2017, according to money managers attending this year’s Reuters Investment Summit, who noted the surge of right-wing populism that went a long way to determining the surprise outcomes of this year’s Brexit referendum and U.S. presidential election.

“Many of our clients are most worried about Europe,” said Mark Haefele, global chief investment officer at UBS Wealth Management, who sets the investment policy that guides more than $2 trillion in invested assets.

“The big concern would be a break up of the European Union if you have these more right wing parties like (Marine) Le Pen in France arguing that they want to pull a large country like France out of the euro zone. That worries people,” he said.

Hedge fund manager Hugh Hendry, however, took a more pessimistic view of the markets’ likely trajectory. He said a growing number of investors are playing the “European blow-up” trade which, if it materializes next year, will center on the French election in May.

“The biggest risk to the global economy is the acute and impending political crisis in Europe, which monetary policy does not have the tools to resolve,” said Hendry, founder and chief investment officer of hedge fund Eclectica Asset Management which has around $200 million under management.

Opinion polls suggest the most likely scenario is a duel between conservative Alain Juppe and far-right National Front leader Marine Le Pen, who analysts say has been emboldened by the Brexit vote and Donald Trump’s U.S. election victory, both of which surveys failed to predict.

read more: Reuters

House Foe of Dodd-Frank Says Overhaul Will Face Test in Senate

A prominent Republican lawmaker on Wednesday laid out his agenda for restructuring the financial system in the next Congress, including his plan to roll back major portions of the Dodd-Frank Act.

Representative Jeb Hensarling, Republican of Texas and chairman of the House Financial Services Committee, has long been a vocal opponent of the 2010 financial reform law. But he now has an ally in President-elect Donald J. Trump, who has repeatedly called for taking apart Dodd-Frank, and he has Republican majorities in both chambers of Congress.

Mr. Hensarling introduced his blueprint for reform, the Financial Choice Act (“Choice” stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) last summer, and he said he was “cautiously optimistic” that a version of the bill could come up for a vote on the House floor early next year.

“There has been a fairly constant dialogue with the Trump transition team about the Choice Act,” he said on Wednesday during a lunch meeting of the Exchequer Club in Washington. “There’s also been dialogue with our speaker and our leader in the House.”

Mr. Hensarling’s remarks came on the same day that Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, proposed new rules for banks and nonbank lenders to end “too big to fail.”

Mr. Trump’s transition team has said on its website that it “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage growth and job creation.”

Mr. Hensarling’s bill seeks to revamp the oversight of financial institutions and how big banks are wound down in times of trouble, as well as make structural changes to the Consumer Financial Protection Bureau and the broader rule-making process. It would also repeal the Volcker Rule, which is intended to stop banks from making risky bets with their own money, and call for stronger penalties for bankers who break the law, among other provisions.

But whether Democrats will offer support is another matter.

Senator Elizabeth Warren, Democrat of Massachusetts, one of the most outspoken supporters of Dodd-Frank, has already vowed to protect core tenets of the law, including her brainchild, the Consumer Financial Protection Bureau.

read more: NY Times

Auditor’s Report Faults Fed on ‘Stress Tests’

A congressional auditor found technical faults with the Federal Reserve’s annual “stress tests,” but avoided sweeping indictments of the program in a widely anticipated report .

The Government Accountability Office credited the stress-testing program for improving oversight of the banking system, but said the Fed should better evaluate the tests’ impact on credit in the economy, be more transparent about the reasons banks fail the tests, and improve its oversight of the mathematical models used in the program.

The Fed, in a letter responding to the report, defended the program and said it would consider the recommendations.

The stress-testing program was created during the financial crisis as a way to gauge the health of large U.S. banks. The 2010 Dodd-Frank law made the tests a requirement for big banks, and the Fed built on that by designing an annual testing system where banks must prove they are meeting certain risk-management standards, or face curbs on the amount of money they can return to shareholders through dividends and buybacks.

The report was requested by House Republicans who have proposed legislation that could exempt some banks from the tests’ restrictions on returns to shareholders if they meet certain criteria, such as maintaining equity capital equal to 10% of their total assets. The legislation would also force the Fed to solicit public input on parts of the tests.

House Financial Services Committee Chairman Jeb Hensarling (R., Texas), the bill’s chief proponent, has said moving the proposals forward would be his top priority in the next Congress. He is also under consideration for the post of Treasury secretary, according to people familiar with the matter, which would increase his influence over regulatory policy.

“The GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings,” Mr. Hensarling said in a statement.

The GAO findings could play an important role in the debate over changes to the tests. From the Fed’s perspective, the report could have been worse. It is broadly supportive of the stress-testing program as a way to improve financial stability.

On the other hand, the report provides fodder for the Fed’s critics. It faults the Fed for not thinking hard enough about whether the tests could hurt the economy by being too severe. “The Federal Reserve also has not explicitly analyzed how to balance the choice of severity—and its influence on the resiliency of the banking system—with any impact on the cost and availability of credit, which could limit its ability to avoid undesired economic effects,” the report says.

read more: Wall St Journal

Where Finance and Technology Come Together

The hub of the technology industry is Silicon Valley. In finance, the world capitals have long been London and New York.

But in the emerging industry that combines finance and technology, often called fintech, the center of activity is less obvious.

The traditional centers, London, New York and San Francisco, are attracting substantial investment, but so are less-established capitals like Berlin, Singapore and Sydney, Australia.

The lack of a clear winner has been apparent to executives like Chris Larsen, chief executive of the San Francisco company Ripple, which offers international payment processing services to banks. Mr. Larsen fields a steady stream of calls from representatives of foreign cities hoping to lure him and his company to their shores to bolster their fintech credentials.

“Everybody recognizes that the capital of fintech has yet to be determined,” said Mr. Larsen, who founded the fintech companies Prosper and E-Loan.

Several cities around the world are competing to become the capital, or at least one of the regional capitals, of fintech. If the young financial technology industry has the transformative effect that some have imagined, the contest could also determine the future capitals of finance as a whole.

read more: NY Times

With Construction Workers Scarce Builders turn to Prefab Homes

A persistent shortage of construction workers across the U.S. is prompting some of the nation’s largest home builders to experiment with a model they once derided: factory production.

KB Home last month unveiled a model home equipped with an energy-efficient kitchen and a rotating audiovisual wall that serves either as a television or video-conferencing system for two adjoining rooms. The high-end, high-tech components all were built in a manufacturing plant and meant to be assembled at the home site, requiring far fewer workers in the field.

KB’s concept home represents the latest technological evolution in the residential construction industry, one of the U.S.’s last bastions of manual labor performed in the elements.

“Automobiles, airplanes and others have been able to utilize these same techniques,” said Dan Bridleman, senior vice president for sustainability, technology and strategic sourcing at KB Home. “Ultimately this is about cost, it’s about efficiency and it’s about speed.”

In the U.S., only about 2% to 3% of homes built in recent years are classified as modular, according to the Census. In other parts of the world, that share is significantly higher. More than a third of all homes in Austria and Sweden are built using off-site methods, and in Japan more than three-quarters of all detached homes are pre-assembled, according to industry research.

read more: Wall St Journal

Higher Mortgage Rates Due to Trump Election Mean Fewer Takers

A huge jump in mortgage rates following the election of Donald Trump is resulting in fewer people applying for new home loans.

Mortgage application volume fell 9.2 percent last week compared to the previous week, according to the Mortgage Bankers Association.

It comes as 30-year fixed-rate mortgages increased to 3.95 percent, from 3.77 percent,.

”Following the election, mortgage rates saw their biggest week over week increase since the taper tantrum in June 2013, and reached their highest level since January of this year,” said David Stevens, president and CEO of the Mortgage Bankers Association.

Refinance loans fell 11 percent last week compared to the previous week.

”It is no surprise that refinance volume has fallen, as the long boom has meant that there are fewer borrowers with any incentive to refi,” said Stevens.

Major Retailers Focus on Brooklyn

Brooklyn’s Court Street could soon resemble Third Avenue — not the one in the Borough of Churches, but rather the one on the other side of the East River, predicts Cushman & Wakefield retail specialist Diana Boutross.

National chains are increasingly staking out locations along low-key Court Street, Boutross says — mostly near its Cadman Plaza northern end, but also south to the Gowanus Expressway.

“The whole market down toward Carroll Gardens is going to resemble Third Avenue on the Upper East Side,” Boutross said.

With stores like Sephora and Trader Joe’s, “Court Street turned a corner,” Boutross said. “What will follow are retailers that cater to millennials who came from Manhattan and are living in the neighborhood.”

Although it might sadden residents who cherish Court Street’s cozy continuity of local institutions like Italian restaurant Queen and numerous small bars, bookshops and locally owned boutiques, national chains have made steady inroads over the past five years.

They include Chipotle, Rag & Bone, Neiman Marcus Last Call, It’s Sugar, Jacadi, Barnes & Noble, American Apparel, LensCrafter, Super Runners Shop and GameStop.

The national names are still a minority in the roughly 24 blocks of Court Street north of Red Hook, but more are coming.

J. Crew signed a lease at 151 Court, between Pacific and Dean streets, although it has yet to move in.

Now, according to Boutross, more big names in retail are “kicking tires” up and down the street — Dr. Martens, Steve Madden, Bluemercury, Warby Parker and Kiehl’s among them.

read more: NYPost

NYC’s Trump Place Apartments  Drops Name Amid Tenant Outcry

The Trump Place apartment complex on Manhattan’s Upper West Side is dropping the president-elect’s name after an outcry by residents.

The three rental buildings — at 140, 160 and 180 Riverside Blvd. — will be renamed for their street addresses, landlord Equity Residential said Tuesday in an e-mail. “We are assuming a more neutral building identity that will appeal to all current and future residents,” the Chicago-based company said. The Trump Place name is emblazoned on the apartment buildings in gold letters, which are set to be removed this week.

Almost 600 people had signed an online petition urging the landlord to “Dump the Trump Name.” Equity Residential spokesman Marty McKenna said Tuesday that the company had a contractual obligation regarding the use of the name, and that the period of the contract has ended. The landlord has never paid the Trump Organization for use of the name, McKenna said in an e-mail.

“We’re very pleased, people felt really good that they could do something,” Linda Gottlieb, one of the petition’s authors, said in a phone interview. “It was an empowering way to protest. It wasn’t a random protest, it was a very specific protest.”

Donald J. Trump was elected 45th president of the U.S. on Nov. 8. During the campaign, the Republican candidate offended groups including Mexicans, Muslims, the disabled and veterans. A video from 2005 that showed him bragging about making lewd advances prompted women to say he’d harassed them — claims he has strongly denied.

read more: Bloomberg

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