TGIF, ahead of a long Presidents’ Day Weekend for many of us.
Low Interest Rate Party Over
Fed Chief Janet Yellen says make no doubt about it, the FOMC does intend to raise rates three times this year, possibly as early as next month.
Bonds sold off and their yields jumped as traders reacted to the Fed Chair’s Senate testimony that the central bank will likely need to raise rates at an upcoming meeting and that “waiting too long for accommodation would be unwise.”
If job gains and rising inflation continue to progress as the Fed expects, an increase in the benchmark federal funds rate would likely be appropriate “at our upcoming meetings,” Yellen said in prepared remarks.
“The potential for an interest rate rise does not come as a surprise. The Federal Reserve announced at its December meeting that rates were likely to increase several more times in 2017,” says Ken Riggs, President of Situs RERC. “As we know, this relates to short-term interest rates, which will ripple through the market, but we do not see long-term rates shifting because of this Fed decision. This Fed move has been on the radar long in advance and is baked into the market. For now, the Commercial Real Estate market is positioned for these increases. There are new wild cards, such as global capital flows shifting from U.S. Treasuries and President Trump’s political moves. These new realities need to factored into today’s capital market expectations.”
The Fed Chair did not directly mention CRE in Congressional testimony but Yellen cited commercial real estate prices as “high” in a speech at Stanford University on January 19th. That message has been echoed by Fed Governor Jerome Powell, who warned “low rates may lead to a reach for yield,” as well as Boston Fed President Eric Rosengren, who cited luxury housing in his city.
Situs Executive Managing Director Warren Friend joined the Jim Bohannon Show to talk leadership and business. You can listen to part 1 here, look for part 2 next week.
Netflix, Amazon Fuel L.A. Office Demand
Netflix Inc., the streaming service that’s home to the political drama, last month leased an entire five-story office building in Hollywood, less than three months after signing a decade-long deal for adjacent stages and production offices, bringing its total space in the Sunset Bronson Studios complex to more than 500,000 square feet (46,500 square meters) — roughly the size of five Wal-Mart stores.
The surge in online television viewing is spurring a wave of big real estate deals, as companies such as Netflix, Amazon.com Inc. and Google snap up space to cope with increased production demands. The amount of office space the entertainment industry occupies in Los Angeles County has climbed to the most this decade, with media tenants in 25.5 million square feet, up 2.99 million square feet from five years earlier, according to brokerage CBRE Group Inc. The space the streaming companies lease has evolved from the small offices of a few years ago to the giant production facilities typically associated with traditional Hollywood studios.
“The sort of boom around those marketplaces has been specific to the digital media and the entertainment world converging with the technology world,” said Victor Coleman, chief executive officer of Los Angeles-based Hudson Pacific Properties Inc., Netflix’s landlord at Sunset Bronson Studios.
The surge in leasing by entertainment companies reaches from downtown L.A. and Hollywood to Playa Vista, once a stretch of marshland between Los Angeles International Airport and Venice that’s become known as “Silicon Beach” because of an influx of media companies and digital startups. Entertainment-industry growth has helped an office market hurt by a years-long exodus of traditional users of corporate space, including hotel operator Hilton Worldwide Holdings Inc. and defense contractor Northrop Grumman Corp., both of which moved to Virginia.
read more: Bloomberg
Why Amazon is World’s Most Innovative Company
Picture your ideal neighborhood. What does it look like? Is it manicured, with buildings set in a pattern so that everything flows together, designed for perfection? Or is it gritty and spontaneous, the kind of place where a restaurant might move into the space that used to house a dry cleaner? Boxes bearing the Amazon logo can arrive at doorsteps in either of these environments, of course, but Amazon’s founder and CEO, Jeff Bezos, prefers the second type.
“I think neighborhoods, cities, and towns that have evolved are more interesting and delightful than ones that have been carefully top-down planned,” he tells me when I meet him at Amazon’s Seattle headquarters in November. “There’s just something very human” about them, he says.
“Our customers are loyal to us right up until the second somebody offers them a better service,” CEO Bezos says. “And I love that. it’s super-motivating for us.”
It’s a surprising answer from a man known for his disciplined adherence to Six Sigma–style processes and data-driven decision making. But it’s also revealing. Over its nearly 22 years, Amazon has moved into one sector after another and gentrified it, even if that meant tearing down its own existing structures. Amazon’s Echo smart speaker rose on the lot where its Fire Phone flamed out. The latest version of Amazon’s streaming music service, Amazon Music Unlimited, was constructed on top of its initial music store, Amazon MP3, which opened nine years ago. Amazon Studios’ Emmy Award–winning original TV shows are built upon a crowdsourcing platform that the company first introduced in 2010 for aspiring scriptwriters. Even the company’s fashion business—Amazon is now the second-largest seller of apparel in the U.S., according to Morgan Stanley—evolved from brand experiments in outdoor furniture (2004), home goods (2008), electronic accessories (2009), diapers (2014), and now perishables such as organic, fair-trade-certified coffee.
Why is Amazon suddenly so interested in opening physical retail stores?
Bezos’s strategy of continuous evolution has allowed the company to experiment in adjacent areas—and then build them into franchises. The website that once sold only books now lets anyone set up a storefront and sell just about anything. The warehouse and logistics capabilities that Amazon built to sort, pack, and ship those books are available, for a price, to any seller. Amazon Web Services, which grew out of the company’s own e-commerce infrastructure needs, has become a $13 billion business that not only powers the likes of Airbnb and Netflix, but stores your Kindle e-book library and makes it possible for Alexa to tell you whether or not you’ll need an umbrella today.
read more: FastCompany
We are pleased to announce that Colony has selected Situs as the loan servicer on a major loan portfolio. You can click here to learn more.
Toll Brothers to Pay Taxes on Manhattan Condos to Lure in Buyers
Luxury developer Toll Brothers Inc. has a deal for those shopping for a condo in Manhattan: buy something soon, and we’ll pay the taxes on your purchase.
The publicly traded homebuilder is offering to pay the city transfer tax and the New York state “mansion tax” — an effective discount totaling almost 2.5 percent — on deals made at three of its developments by Feb. 20, the company said in a statement Wednesday. The closing incentives apply to any apartment bought at Toll’s under-construction projects at 100 Barrow St., in the West Village, and 55 West 17th St., in Chelsea. The deal is also being offered at the Sutton, a development in the East 50s, where sales began in early 2015.
Toll’s offer comes as Manhattan developers contend with a market brimming with costly condos and buyers tepid about committing. Builders hoping to boost sales in their projects are doing what they can to attract interest without officially lowering their prices — everything from offering gift cards and upfront commission to brokers, as well as payment of transfer taxes that, in a healthier market, are passed on to buyers, said Joshua Stein, a Manhattan real estate lawyer.
“Developers like to pretend that values haven’t gone down,” said Stein, who’s not involved in the Toll Brothers projects. “Eventually you’ll see discounting off the face price. But this is a form of denial.”
Contracts for luxury homes — those at $4 million or higher — are seeing a spark of revival in the early months of 2017 as sellers fine-tune their asking prices, according to data from Olshan Realty Inc. In the first seven weeks of the year, there were 154 luxury deals, a 33 percent jump from the same period of 2016. Those properties, however, spent an average of 412 days on the market before finding a buyer. Their median asking price was $6.3 million, down 6 percent from a year earlier.
read more: Bloomberg
Race to Revamp Shopping Malls Takes a Nasty Turn
As mall owners scramble to redevelop aging properties, they are being hamstrung by arcane agreements signed decades ago with department stores that govern how the centers are used—right down to the number of parking spaces.
The contracts require anchor stores to get permission from landlords before changing the configuration of the stores, but they also prevent landlords from modifying malls without the anchors’ consent.
Now some department stores are exercising their right to block landlords’ ability to carry out much-needed modifications. While compromises are usually reached, a handful of high-profile cases have landed in court, stymieing redevelopment for years.
The legal squabbles come as online shopping is battering traditional department stores and apparel retailers, and forcing many of the country’s 1,100 malls to reimagine themselves. Green Street Advisors, a real-estate research firm, expects several hundred low-quality malls to either close or become irrelevant over the next decade.
“There is recognition on everyone’s part that malls need to adapt,” said William Taubman, chief operating officer of Taubman Centers Inc., a regional shopping-mall owner. “But [landlords] don’t necessarily have the same agendas as the anchors.”
Lord & Taylor is embroiled in litigation against the owner of a Maryland mall. Sears Holdings Corp., meanwhile, sued the owner of The Gardens Mall in Palm Beach Gardens, Fla., for attempting to block the retailer from subleasing space in its store to Dick’s Sporting Goods Inc. The litigation is ongoing.
read more: Wall St Journal
Brexit Sparks U.K. Inflation
U.K. consumer prices rose in January at the fastest annual rate in two-and-a-half years, highlighting how the pound’s fall since June’s Brexit vote is increasingly weighing on the cost of everyday living.
Britain’s Office for National Statistics said Tuesday that annual inflation in the U.K. quickened to 1.8% in January from 1.6% in December, marking the fastest rate of growth in prices since mid-2014. This was slightly below the consensus for a rise of 1.9%.
The gain puts the Bank of England within reach of its 2% inflation goal, which it last hit in December 2013, and comes as Prime Minister Theresa May prepares to formally begin two-year withdrawal negotiations with the European Union.
Economists expect accelerating inflation in Britain to weigh on consumer spending in 2017. The European Commission said Monday it expects economic growth this year to slow to 1.5%, from 2% in 2016, as a consequence of weaker household spending, though it said the weaker pound should aid exports.
read more: MarketWatch
Chinese Investors Pile Into London Property
While commercial real-estate deals in London have declined since Britain voted to leave the European Union, one group of investors has become increasingly active: the Chinese.
Investors from China and Hong Kong bought more than £3 billion ($3.75 billion) of central London real estate in 2016, less than U.K. investors but more than those from the U.S. or Europe, according to real-estate broker JLL.
While the yuan has lost value against the dollar in recent months, it has appreciated by 12% versus the British pound since last June’s referendum vote, making assets there a bargain for Chinese investors. At the same time, the hunt for yield, as well as economic and political pressures at home, are helping to drive the acquisition spree, analysts said.
Deals have continued into this year. CC Land Holdings, backed by Hong Kong property tycoon Cheung Chung Kiu, recently bought an office building in Paddington for £292 million from TH Real Estate, a London-based investment manager owned by investment-management firm Nuveen, the group said.
A subsidiary of Hong Kong conglomerate Emperor Group in January said it bought a building with offices and shops in the hip London neighborhood of Soho for £260 million.
The influx from China and Hong Kong stands out because other overseas real-estate investors have taken a step back from London. Commercial real-estate transaction volume in the U.K. capital was £21.5 billion last year, down 45% from 2015, according to Real Capital Analytics.
read more: Wall St Journal
Italy Approves $21 Billion Fund to Shore Up Its Troubled Banks
Italy’s parliament approved a law to plow as much as 20 billion euros ($21 billion) into Banca Monte dei Paschi di Siena SpA and other troubled lenders as part of the nation’s efforts to revamp its banking industry.
The lower house gave its final approval to the legislation Thursday, converting the decree law passed by Prime Minister Paolo Gentiloni’s cabinet in December. It includes emergency liquidity guarantees and capital injections for struggling lenders in compliance with state aid rules. Banks will be able to request precautionary recapitalizations that would see some bondholders take a hit.
Monte Paschi was the first bank to seek funds under this new program after it failed to raise fresh money from investors in December. The European Central Bank said the Siena-based lender must raise 8.8 billion euros to bolster its balance sheet under a precautionary recapitalization plan that Monte Paschi itself requested. Talks are underway on a new business plan for the bank that must be approved by European authorities.
Italy’s banks are struggling under the weight of a 360 billion-euro mountain of bad loans, a plight that has eroded profitability and undermined investor confidence. Taking Monte Paschi into public ownership, which would be Italy’s biggest nationalization since the 1930s, could be followed by rescues of lenders including Veneto Banca SpA and Banca Popolare di Vicenza.
Italy’s Treasury may take stakes in the two lenders for a limited period, Quaestio Capital Management President Alessandro Penati was quoted as saying earlier this month. His firm runs the fund that rescued the banks last year.
read more: Bloomberg
Boom Time Again for Banks
Shares in America’s banks are booming again, with Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Bank of America Corp. hitting fresh trading milestones Tuesday that seemed unreachable during the crucible of the financial crisis.
Investor expectations of higher interest rates, lower taxes, lighter regulation and faster economic growth under the Trump administration have added $280 billion in combined market value to the nation’s six largest banks since Nov. 8.
Shares of Goldman hit a record high, passing a bar first set in 2007 before the financial crisis. J.P. Morgan also hit an all-time closing high.
Meanwhile, Bank of America traded in line with its net worth—or the difference between its assets and liabilities—for the first time since late 2008. The bank had been trading as low as 15% of this level in March 2009.
Bank stocks overall have outperformed broader stock markets since the election. The roughly 27% gain since Nov. 8 for the KBW Nasdaq Bank Index is around three times that of the S&P 500. Markets rose further Tuesday; the Dow Jones Industrial Average climbed 92.25 points, or 0.45%, to close at 20504.41.
One reason for such investor optimism: After years of hacking away at expenses—shedding businesses, cutting staff and investing in technology that can be ramped up and down cheaply—expenses are near all-time lows across Wall Street. That means that if revenue does grow as many investors expect, the payoff could be especially big.
read more: Wall St Journal
Murdoch’s News Corp. Rises Most in 18 Months on Real Estate Gain
News Corp., the Wall Street Journal publisher controlled by billionaire Rupert Murdoch, gained the most in 18 months in New York trading after digital real estate listings helped second-quarter profit beat analysts’ estimates. Earnings excluding some items fell to 19 cents a share in the quarter ended Dec. 31, according to a statement from the New York-based company. That topped the 18-cent average of analysts’ estimates. Sales of $2.12 billion matched the average projection of analysts compiled by Bloomberg. The results show that News Corp. is relying less on the declining print newspaper and more on new digital sources. … In 2014 News Corp. agreed to buy the owner of Realtor.com for $950 million, expanding its digital real-estate listings to compete with sites such as Zillow.com.
read more: Bloomberg
First Big Real Estate IPO of the Year
BGC filed a confidential statement with the Securities and Exchange Commission and will offer Class A common stock in a new subsidiary holding its real estate services business. BGC posted record earnings last year — $108M — and in this week’s earnings call, chairman and CEO Howard Lutnick attributed that in part to the highest revenues ever generated from NGKF’s real estate capital markets business. According to an official statement from BGC, the IPO is part of the firm’s plan to separate its real estate services business into a separate public company. The number of shares to be offered and the price range have not been determined. After the offering, “BGC may, subject to market and other conditions, distribute the shares that BGC will hold of the newly formed subsidiary pro rata to BGC’s stockholders in a manner intended to qualify as tax-free for U.S. federal income tax purposes.” Stifel, Nicolaus & Co.’s John Guinee — a noted REIT analyst — said the biggest benefit of taking NGKF public is that it gives executives a liquid vehicle to compensate top performers and brokers with shares. A commercial real estate brokerage firm is only as good as its team members, or “elevator assets.”
read more: BisNow
Small Business, Big Confidence
A measure of small-business sentiment maintained its post-election surge as business owners remained optimistic about better economic prospects under the Trump administration.
The National Federation of Independent Business said its closely-watched survey ticked up 0.1 point in January, to a reading of 105.9. Economists had expected a decline to 104.5 after December’s 7.4-point surge, the biggest in the four-decade history of the survey.
“Small business owners like what they see so far from Washington,” NFIB said in a release. The industry group compared the recent jump in sentiment to a surge in 1983, which, as it noted, “was followed by years of economic prosperity.”
Some economists have pointed out the divergence between post-election measures of sentiment and hard data, most of which continues to suggest an economy that’s plodding along at the same tepid pace it’s held for most of the eight-year recovery.
read more: MarketWatch
This $6.9 Million Villa Comes With Its Own Private Island
Sometime in 2014, French-born, Dubai-based, real estate developer Blaise Carroz decided to buy his own island. “Since I was a kid, I dreamed of owning an island,” he said. “And it was the perfect spot for family vacations.”
The spot, Melody Key, is a small patch of land in the Florida Keys. Over his career, Carroz has been adept at developing high-end properties for the international wealthy, but the island he found needed almost no intervention. It was previously owned by Nick Hexum, lead singer of the band 311. In 2011, Hexum sold it to a British developer, who made extensive updates to the property before selling it to Carroz. By then, the only things it really needed were a few touches to the interior décor.
Sometime in 2014, French-born, Dubai-based, real estate developer Blaise Carroz decided to buy his own island. “Since I was a kid, I dreamed of owning an island,” he said. “And it was the perfect spot for family vacations.”
Still, Carroz has put the island on the market, offering it with Engel and Völkers for $6.9 million. “I now have five children, and it became a bit small for us,” he said. “When I purchased the island, it wasn’t from a professional point of view. Selling it for a profit wasn’t my aim at all.”
Will he buy a larger island to accommodate his family? “I’m not planning to purchase another island,” he said. “But I have a lot of other projects.”
read more: Bloomberg
Week Ahead
Monday- Presidents’ Day
U.S. Markets Closed
The Collingwood Group Chairman Tim Rood on FBN’s Maria in the Morning 7:50AM ET
Wednesday
Existing Home Sales 10:00 AM ET
Fed Minutes 2PM ET
Friday
New Home Sales 10:00 AM ET
Have a prosperous day and great (long) weekend, our next NewsWatch will be sent to you on Wednesday.
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