Fed Rate Hike Brings New Impetus to Quicken CRE Deals in Pipeline
Federal Reserve officials raised interest rates for the first time this year and forecast a steeper path for borrowing costs in 2017, saying inflation expectations have increased “considerably” and suggesting the labor market is tightening.
Yellen and company increased key interest rate by 0.25% raising the target for short-term interest rates by 0.25 percentage points to a range of 0.50% and 0.75%.
“The party is not over for Commercial Real Estate,” says Situs CEO Steve Powel. “Interest rates are still near historic lows, and there are still great buying opportunities.”
But, this rate hike could be the first of more. Some economists believe the Fed will need to raise rates more often — and perhaps at higher levels — if President-elect Donald Trump spends big on infrastructure.
Ten-X researchers conclude:
CRE valuations face an uphill climb. Cap Rates have been aided this cycle by the steady decline in interest rates across the globe triggering a search for yield. While cap rate spreads in most sectors still measure above their historical averages, rising interest rates will at the very least be a headwind to valuation growth. This concern becomes more acute in sectors such as multifamily and hotel, which due to supply additions are seeing decelerating NOI and RevPAR gains. Trophy markets and assets, which due to their liquidity were being used as alternative safe-haven assets will struggle as well as cap rates in this markets and assets got to extremely low levels. Conversations with industry participants point to higher financing costs since the increase in rates following the election, already stalling and potentially derailing deals that were already in place, as the higher financing costs alone, not even factoring in adjustments to potential exit cap rates, seriously changes the economics of deals.
Ten-X goes on to say: As interest rate policy normalizes, property valuations will become more closely linked than they have been this cycle to fundamentals, as the rising tide that lifted all boats will be removed. Commercial property investors should take note of the shifting winds and make sure their holdings don’t have any undue interest rate risk and that deal assumptions factor in the changed landscape
Fed Chairman Janet Yellen indicated that the Fed’s role in the economy is starting to recede and that Congress will start taking over that job of helping stimulate the economy.
Fiscal policy is “not obviously needed to provide stimulus,” she said.
Yellen clarified that it didn’t mean she was “trying to provide advice to the new administration or Congress,” but said that her staff has been in touch with transition team of President-elect Donald Trump.
Most Fed officials now project three or more additional rate hikes in 2017.
Steve Powel says, “Keeping future potential hikes in mind, we at Situs advise clients to consider picking up the pace of potential deals to get in before rates move out of reach.”
Banks Fight to Block Crisis-Era Lawsuits From Continuing
Big banks are fighting tens of billions of dollars of potential legal costs linked to at least a dozen pending lawsuits arising from the financial crisis.
Now they want the Supreme Court to weigh in, arguing that regulators took too long to file their claims.
A handful of banks, including Wells Fargo, Credit Suisse and Deutsche Bank, have asked the Supreme Court to review a lower court decision that said the regulators filed their claims on time despite a Depression-era securities law that gave them only a three-year window.
The Justice Department is pushing back. In a brief submitted last week, it says the banks’ argument lacks merit and asked the court not to take up the case.
Damages related to some $37.5 billion in securities are at stake in the pending lawsuits, the banks say, in addition to billions of dollars in disputed prejudgment interest. That sum includes nearly $32 billion for cases in the Court of Appeals for the Second Circuit, which most commonly decides securities cases. The banks say these lawsuits should have been barred under the strict three-year window and extensions should not have been allowed. The Second Circuit voted 2-to-1 against the banks last May.
“In terms of financial crisis litigation, the stakes are enormous,” said Robert Giuffra, a partner at Sullivan & Cromwell and lead attorney for the banks. “If there’s a future downturn and the federal banking agencies want to start bringing lawsuits, they would get the benefit of this favorable decision.”
read more: NY TIMES
Neiman Marcus Reignites Mall, Brick-and-Mortar Worries as Sales Plummet
One of America’s largest upscale department stores isn’t feeling so luxe these days heading into Christmas.
Texas-based Neiman Marcus Group, which also operates Bergdorf Goodman, reported quarterly results well below expectations as traffic slowed and a major computer upgrade backfired.
“It’s hard to cast these results in a positive light,” Chief Executive Karen Katz said in an investor call. “They are very disappointing.”
Revenue declined 7.4 percent, to $1.08 billion, in its first fiscal quarter ended Oct. 29 — with comparable store sales declining a jaw-dropping 8 percent.
The red ink oozing from its aisles deepened to $23.5 million from $10.5 million.
Over the same period, same-store sales at its closest competitors — Saks Fifth Avenue and Nordstrom — were down 4 percent and 4.5 percent, respectively.
However, Saks and Nordstrom saw online sales grow by double digits, while Neiman Marcus saw no growth in online sales.
“There’s no question that our core customer is visiting us less frequently,” Katz said, adding that Neiman’s troubles are compounded by its exposure in Texas, which is hard-hit by low oil prices and where Neiman has six stores, and by its exposure in Florida, which has seen a falloff in foreign tourists and where Neiman has seven stores out of a total of 42.
But Neiman was also largely to blame for some of its pain.
The company converted to a new merchandising system that cost it up to $35 million in lost sales because it was executed so poorly.
read more: NY Post
BOOM: Average Manhattan Apartment Price Tops $2 Million for First Time
The average sales price of an apartment in Manhattan is expected to top $2 million this year for the first time, but prices are seen leveling off in 2017 after nearly doubling over the past decade.
Prices were pushed higher by a jump in sales of condominiums valued at $10 million or more, which skewed results, CityRealty, a real estate listings and data website for New York City, said on Wednesday.
The opening of 432 Park Avenue, a 96-story tower marketed by developers as the tallest residential building in the Americas, had an outsized effect on prices, said CityRealty research director Gabby Warshawer.
Fifty-two of the 75 units sold at the tower overlooking Central Park fetched more than $10 million, she said. Some units are priced at more than $40 million.
An increase in new developments and a rise in the price of existing units also lifted the market, Warshawer said.
Prices have climbed every year since 2011 but are expected to flatline next year. A lack of expensive, large new buildings will act to keep prices in check in 2017, CityRealty said.
read more: Reuters
BUST: Warning: Before Moving to NYC
An idea from de Blasio’s former spokeswoman Karen Hinton, in the Daily News: New York City leaders should consider a public awareness campaign that lets people know that staying put, moving to a city with more affordable housing or doubling up with relatives may be a much better solution than entering a housing shelter system bursting at the seams.
read more: NY Daily News
America’s Best and Brightest Are Headed to Boulder
The industrial city of Cumberland, Maryland, tucked in the Appalachians, illustrates the economic despair that helped Donald Trump win the U.S. presidency — as well as efforts to alleviate it.
Cumberland tops the Bloomberg Brain Drain Index, which tracks metropolitan areas with the greatest loss of advanced-degree holders, white-collar jobs and earnings generated by employment in computer, engineering and science occupations. Once a thriving coal-mining and manufacturing center — two sectors of the economy Trump pledged to revive — Cumberland has struggled to draw new businesses.
“We are no longer defining ourselves as what we used to be,” said Shawn Hershberger, executive director of the Cumberland Economic Development Corp., which has worked to attract technology and tourism employers.
At the other end of the spectrum, Boulder, Colorado, a tech incubator and home of the University of Colorado, leads the 2016 Bloomberg Brain Concentration Index. It measures per-capita concentration of residents working in science, technology and engineering occupations or who have science and engineering college degrees or post-graduate degrees. Key industries in the metro area include aerospace, bio-science and renewable energy, along with information technology and software. It also is home to federal laboratories such as the National Institute of Standards and Technology.
“The public-sector presence contributed to the brains,” said Clif Harald, executive director of the Boulder Economic Council.
The two indexes illustrate the difficulty cities such as Cumberland face in creating new jobs, with modern manufacturing and mining driven more by technology than human muscle. A brain drain also reduces a city’s tax base, needed to maintain infrastructure, education and services to lure new businesses.
read more: Bloomberg
U.K. Employment Declines
U.K. employment fell for the first time in more than a year in the three months through October as the labor market showed some signs of weakness.
The number of people in work fell by 6,000 to 31.76 million people, the Office for National Statistics said on Wednesday. While the decline was small, and the jobless rate was unchanged at 4.8 percent, the statistics office said the labor market “appears to have flattened off in recent months.”
“This is the first genuine disappointment we have seen in the hard data since the Brexit vote,” said Alan Clarke, an economist at Scotiabank in London. “This has been a gradual deterioration” and “is bad news for spending growth next year.”
Single-month data showed that the unemployment rate rose to 4.9 percent in October from 4.6 percent in September. Unemployment fell over the three-month period, by 16,000 to 1.62 million, as the drop in the number of people in work was more than offset by those leaving the labor force. There was a 22,000 decline in the economically active population during the period.
In a worrying sign, full-time employment dropped by 51,000 between August and October. Jobless claims, a narrower measure of unemployment, rose for a fourth month in November.
read more: Bloomberg
NYC Improperly Taxing Property Owners
The streets of Riverside South are not paved with gold, but City Hall is making property owners, including the tony Collegiate School, pay millions of dollars for streets that should already be city property.
Collegiate, which is planning a new school at West 60th Street, and other building owners and investors in the Riverside South neighborhood have not only paid $6.4 million over the last decade for the actual streets, but also still owe another $4.6 million yet are improperly addressing the bills, according to City Hall.
Records show the northern swath of Riverside Boulevard, from West 64th to West 72nd streets, along with portions of West 64th, West 66th, West 68th and West 70th streets, owe the bucks because the street work is yet to be completed on the development site that was once just an old rail yard.
While payments are being made on five of the eight street lots, records of the city’s Finance Department and registrar have the wrong owner and address for the three lots that owe $4.6 million.
Records show the eight lots are owned by Hudson Waterfront Associates, a successor to the original Donald Trump-led group that developed the northernmost buildings.
read more: NY Post
NY Taxpayers Could Lose $68B Under Trump Tax Reform
New York taxpayers stand to lose about $68 billion that they now deduct from their federal taxes if President-elect Donald Trump and House Speaker Paul Ryan move forward with their tax reform plans next year, according to state officials and tax experts.
Trump and Ryan have proposed scaling back or eliminating the deduction for state and local income and property taxes as part of one of the most sweeping changes to federal tax code in more than 100 years. If enacted, New York would be among the hardest hit states in the nation, costing an average of $4,500 for taxpayers who file itemized returns, according to economists and an analysis by state tax officials. The average federal tax bill would increase 30 percent. New York taxpayers are second only to California ($97 billion) in the total amount claimed as IRS deductions for state and local taxes — mostly because income and property taxes in the two states are generally higher than the rest of the nation.
read more: Post Standard
Next Hot Office Market: Stockholm
Stockholm is emerging as the next hot spot for property investors, a fresh signal that central bank campaigns to push interest rates below zero are driving commercial real-estate markets.
Commercial property investment in Sweden is on pace to hit a new annual record in 2016, surpassing the previous high from 2014, according to broker JLL. Office rents in Stockholm’s central business district rose nearly 30% in the past year, JLL data show.
Yields on some Stockholm office properties are now on par with those of London’s West End, historically one of the most expensive markets in Europe, according to data from brokerage CBRE.
Sweden’s central bank in February set its benchmark interest rate at negative 0.5%, among the lowest in the world. The Riksbank has said it expects to wait until late 2017 to lift borrowing costs.
Commercial property across the world has benefited from the flood of money central banks have been pumping into economies. Because of shrinking returns on other assets like bonds, real estate became increasingly attractive to investors.
But with values in Stockholm already high and rising at an escalating rate, caution among investors is increasing.
read more: Wall St Journal
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