$400 billion in CRE refinancing may be coming: can the banks handle it?

Federal Reserve Bank in San Francisco, Califor...

The wave of lending for commercial real estate development that arose after the 2008 financial meltdown is secured by offices, shopping centers, multifamily and industrial properties all over the US. But worries about regulatory pressure intended to tamp down systemic risk  — risk of the same kind that caused 2008 — are sparking concerns that a wave of refinancing made necessary by closer looks at underwriting standards could cause a new crisis in lending.

The Joint Regulatory Statement of December ’15

In December of last year, the Federal Reserve set the stage for placing CRE lending under a microscope. In a press release named “Statement on Risk Management in Commercial Real Estate Lending” (download full PDF here), federal regulators had this to say about CRE lending:

The agencies have observed that many CRE asset and lending markets are experiencing substantial growth, and that increased competitive pressures are contributing significantly to historically low capitalization rates and rising property values. [Footnote 2 – For example, between 2011 and 2015, multi-family loans at insured depository institutions increased 45 percent and comprised 17 percent of all CRE loans held by financial institutions, and prices for multi-family properties rose to record levels while capitalization rates fell to record lows. Sources: Consolidated Reports of Condition and Income, Costar Property Price Index, and CBRE. End of Footnote 2.] At the same time, other indicators of CRE market conditions (such as vacancy and absorption rates) and portfolio asset quality indicators (such as non-performing loan and charge-off rates) do not currently indicate weaknesses in the quality of CRE portfolios. Influenced in part by the continuing strong demand for such credit and the reassuring trends in asset-quality metrics, many institutions’ CRE concentration levels have been rising.

The agencies’ examination and industry outreach activities have revealed an easing of CRE underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements. The agencies also have observed certain risk management practices at some institutions that cause concern, including a greater number of underwriting policy exceptions and insufficient monitoring of market conditions to assess the risks associated with these concentrations.

Regulators advise that lenders review their portfolios and “maintain risk management practices and capital levels commensurate with the level and nature of their CRE concentration risk.”

Wave of Refi?

A topic of concern in the wake of regulatory scrutiny is the extra burden placed upon lenders causing a credit crunch as banks struggle to comply with new capital requirements and more stringent underwriting standards.  Some, like Morgan Stanley’s analyst Richard Hill, quoted in Bloomberg, believe that the new standards will affect smaller banks unduly. “”Given [regulators’] increasing concern about banks with high CRE exposures and years of loosening underwriting standards, we see a scenario where the most exposed banks will be unable to satisfy the CRE market’s financing needs.” he said.

Here Hill references the smaller banks — much smaller than Morgan Stanley with its 60,000 employees operating in 42 countries — characterizing them as “stepping into the void” left by a decline in bond issuances, aka commercial mortgage backed securities, which Hill says have declined to levels not seen in a decade.  The small bank’s exposure to CRE, according to Hill, places them on a collision course with imposed federal standards, leaving the smaller banks outgunned in a regulatory fight.

One Writer’s Thought

In my experience, it’s not common to find the voice of a huge bank worrying much about the fate of smaller banks, even in the wake of regulatory adjustments. Such a position suggests that reading between the lines is called for. Is Morgan’s harrumphing here about how heightened lending standards will affect smaller banks really a backdoor sales pitch to hype its own CMBS offerings or its own refi absorption potential? Is it grist for the mill against how heightened standards will burden Wall Street? Or is it what it appears: a reasoned observation of the entire sector’s capital allocation ecosystem?

Time may tell.

22. July 2016 by Wayne Grohl
Categories: Government | Tags: , , , , | Leave a comment

Target Shifts To Smaller, More Urban Store Footprints

Illinois Target Store

Recent new store layouts at Target are leading some to ask: has the big box retail model finally come full circle, understanding that the local retail flavor and small operations it so often replaced might be the secret sauce it needs to survive?

The average size of a Target store has fallen, possibly for the first time in the company’s history. The New York Post reports:

With 20 smaller stores already open, the Minneapolis-based chain expects to roll out 14 more this year — including one in the New York City neighborhood of Forest Hills, Queens, which will open on Wednesday.

The store is 21,000 square feet.

There will be only one large-format store opened in 2016.

As a result, the average size of a Target store fell last year — to 133,700 square feet — for probably the first time in its history.

The store in Forest Hills, along a busy commercial strip, opened in a space previously occupied by a Barnes & Noble.

Target is looking beyond its core customers in the burbs and scooping up attractive real estate abandoned by other struggling retailers like grocers, Barnes & Noble and OfficeMax, a Target rep said.

“We can get into great locations now that we have smaller prototypes,” said Tony Roman, senior vice president of Target and head of the greater New York market area.

Neighborhood Niches

The big-box giant is relying on understanding of local community makeup to tailor its offerings; in its new smaller-format store in the majority-Jewish enclave of Forest Hills, products catering to local tastes include local sports jerseys and food that carries the kosher mark.  New smaller Target stores whose operations are similarly tuned to local needs are coming in Tribeca, downtown Brooklyn and Elmon, Queens are in the pipeline.

The big may be hearing the call of the small after all.


21. July 2016 by Wayne Grohl
Categories: Retail | Tags: , , , | Leave a comment

Board The Bus: Transport Infrastructure Touted As Key Real Estate Value Driver

Metropolitan Transportation Authority (New Yor...

The presence and solid performance of commercial real estate is a sign of a healthy surrounding transportation infrastructure. The fate of the former is ever-increasingly is linked to the fate of the latter. That’s the message Tishman Speyer President and CEO Rob Speyer had for the assembly at the Urban Land Institute’s Asia Pacific Summit in Shanghai.

“The time may be coming when transportation has a greater effect on real estate than interest rates,” he said. “So, move over banks; here comes the bus!”

Speyer emphasized the importance of city leadership in driving public transit initiatives, which will in turn drive real estate values.

“That leadership will have more of an impact on the real estate we own than even developers and architects,” he said. “We need mayors with energy, confidence, and a sense of destiny. Mayors are often in a better position than national leaders to work together and get things done.”

A common obstacle mayors face is traffic and pollution, he said, which will get worse as a predicted 2.5 billion people move to cities between now and 2050.

“We all talk a lot about connectivity; it is about much more than mobile phones and wi-fi. Connectivity is about where we go on the ground and how we get there,” Speyer said. “In the past, sometimes we built transportation after real estate, and sometimes we built it before real estate. But now, finally, we are building transportation and real estate at the same time.”

Partnerships Between Developers And Transportation Systems Cited

In addition to touting the plans of Los Angeles Mayor Eric Garcetti to add 32 miles of subways to the city over the next two decades,  Speyer went on to discuss new and novel partnerships between transportation system providers and real estate developers, where developers acquire land over planned subway stops, trading significant company equity in turn to the state-owned transit provider.

Shenzhen, [China]’s Mayor Xu Qin has a city of 12 million people, which is set to see a 20 percent increase in population in the medium term. To cope with this, Xu plans to build the longest subway in the word.

State-owned transit company Shenzhen Metro has signed a landmark deal with developer China Vanke in which Vanke has acquired property above ten metro stations in Shenzhen, and Shenzhen Metro has taken a 20 percent stake in Vanke.

“So, Vanke gets prime development land, and Shenzhen Metro gets a share of the profits,” said Speyer. “This is a deal that all of us in this room should learn from. What works for Vanke and Shenzhen Metro could work for all of us.

Property and transportation will increasingly become a single deal. We have 2.5 billion people moving to cities, and as much as they need somewhere to go, they also need some way to get there.”


20. July 2016 by Wayne Grohl
Categories: Future Trends | Tags: , , , , | Leave a comment

Commercial Connections Special Edition: Legislative Meetings Recap


Get highlights of the NAR Commercial Governance meetings in Orlando, and the Economic Issues and Trends forum with this special edition of Commercial Connections.

And speaking of legislative action, be ready to jump into action on behalf of your colleagues and your industry. Download the REALTOR® Action Center mobile app today!  You’ll be able to respond to any Call to Action, review your REALTOR® Party engagement level and learn how your state and local associations are using the tools and program NAR provides.

To download  REALTOR® Action Center, text “App” to 30644.

15. July 2016 by Wayne Grohl
Categories: Government | Tags: , , , , | Leave a comment

Can A Text Message Can Create a Binding Contract?

Texting on a qwerty keypad phone

Before we get started, let’s bring out the standard disclaimer: Never, ever take anything you read here at The Source as legal advice, and always seek qualified counsel with respect to any issue or problem that arises in your business.

Law blog JDSupra writes this week about a fascinating case in Massachusetts where two commercial brokers, one representing a buyer and the other a seller, were negotiating the sale of a commercial building in a MA industrial park. After a round of negotiations, the buyer’s broker emailed the seller’s broker a letter of intent that was unsigned.

The seller’s broker then texted the buyer’s broker with a request for a signature and for a check, indicating the seller would then countersign upon receipt of these.  The buyer’s broker complied, dropping these off with seller’s broker, but that day, the seller accepted an offer from a third party and declined to countersign the first buyer’s LOI.  The jilted buyer then sued.

From the JDSupra post:

The essential issue the court focused on was whether the emailed LOI and the text message, together, constituted a writing sufficient to satisfy Massachusetts’ Statute of Frauds and therefore create a binding contract enforceable against the seller for the sale of land. The court held that, between the LOI, which set out the terms of the deal in sufficient detail, and the text message “signed” by Tim, the seller’s broker, there could be an enforceable contract.

Take note.  This court was deciding only a motion to dismiss. So it didn’t hold that there was an enforceable contract, only that, viewed in the light most favorable to the non-moving party (i.e., the buyer) there could be an enforceable contract and therefore the motion to dismiss was denied. (It will be interesting to see whether this case settles, goes to trial, or comes to some disposition in between.) Some might also be wondering how signing the LOI created an enforceable contract, since letters of intent usually disclaim any binding effect. In this case, the parties pretty clearly intended to make the LOI binding: the document was titled “Binding Letter of Intent.”  Your Basic Oxymoron.  Also, the LOI did not contain any of the disclaimers you might typically see in a term sheet for a large commercial real estate deal.  Finally, because the buyer and the seller stipulated that their brokers were duly authorized agents acting on their respective behalves, the court found that the broker’s signature was sufficient to bind the seller.

The entire post gets into the reasoning behind the court’s interpretation of broker’s behavior and customs when using texts — including the interesting notion that there can be a difference in legal weight of a text message that is appended with a “signature” — an entry closing a message with the name of the sender — as opposed to one that is not.

Check out the post  Text on the Dotted Line: A Text Message Can Create a Binding Contract | Dechert LLP – JDSupra

(Photo credit: Wikipedia)

And once again, remember: never, ever take anything you read here at The Source as legal advice!


14. July 2016 by Wayne Grohl
Categories: Broker | Tags: , , , , | Leave a comment

Oil Prices Continue To Fall, Effects Felt In CRE Sectors


As reporting about the world’s oil markets increasingly features terms like “glut” and “supply overhang,” property prices directly related to US oil extraction are widely taking a beating. At the same time, other indirectly related property sectors such as retail are benefitting from low gas prices.  In the wake of the latest drop in oil prices, here’s a quick roundup of the recently reported ripple effects in commercial property:

11. July 2016 by Wayne Grohl
Categories: Energy | Tags: , , , , , | Leave a comment

Adaptive Reuse: From Newspaper Printing Plant To Data Center

picture of QTS Chicago data center

QTS Chicago Data Center.

Gail Kalinoski’s piece in Commercial Property Executive focuses on a big adaptive reuse story in Chicago. At 317,000 SF, the Chicago Sun-Times newspaper built for the future, but not the future of newsprint.  Its printing presses fell largely silent and its need for logistics fell away as demand for daily news printed on paper was obliterated by the world wide web.

Built in 1999 and shuttered twelve years later, the facility is seeing new economic life ironically by giving shelter to the very technology that closed the property at first. The plant is now a thriving data center, still dedicated to distributing information, albeit bits and bytes.

Owned by QTS Realty Trust, an international operator of data centers, the building went through a reported $80M retrofit to make the conversion from distributor of dead trees to modern computing marvel:

The first phase has been completed and features 48,000 square feet of raised floor and associated critical power. When fully developed, the building will support a total of 133,000 square feet of raised floor encompassing 24 megawatts of power. QTS said it has the ability to add 213,000 square feet of raised floor and 32 megawatts in Building 2 for a total of 346,000 square feet of raised floor and 56 megawatts of power within the campus at 2800 S. Ashland Ave.

The company is planning an open house on July 15 to showcase the Phase One completion.

“We are pleased to formally open our new Chicago data center that extends our platform delivering a broad selection of integrated IT infrastructure services for Chicago and nationally,” Dan Bennewitz, COO of sales and marketing at QTS, said in a prepared statement. “We are focused on a collaborative, high-touch enterprise approach serving the dynamic needs of today’s agile enterprises seeking a partner that can right-size flexible and scalable IT solutions for today and tomorrow.”

08. July 2016 by Wayne Grohl
Categories: Data centers | Tags: , , , , | 1 comment

Beauty Battles: Sephora And JCPenney Deepen Partnership

Rows of lipstick

With revenue expected to exceed $62 Billion in 2016, the US cosmetics industry is a retail powerhouse. While $17B of that amount generated online in 2013 suggests this brick-and-mortar retail segment is susceptible to online pressures just like most retail sectors are, the growth in the overall market segment — plus the product discoveries customers need to make — seem to ensure that foot traffic and customer time spent with new product offerings will remain a key factor driving space needs going forward.

In fact, one struggling anchor retailer is doubling down on the power of the makeup counter to help address its own foot traffic declines. This November, JCPenney’s flagship store in Salinas, CA’s Northridge Mall will open 3,000SF of its space for a new Sephora store-inside-a-store. 3KSF comes in at double the usual space outlay for Sephora stores within JCPs. As Donna Mitchell at NREI writes:

Larger than the typical 1,500-sq.-ft. location, the store is one of 60 new Sephora inside JCPenney locations that are set to open this year. The move is big because it marks 10 years since the Plano, Texas-based fashion retailer began opening Sephora units inside JCPenney stores in 2006. It means expansion in one of the few retail categories that post consistent sales increases through bricks-and-mortar locations, and it exploits an important competitive advantage over Amazon.com, according to industry observers.

“Take companies like Ulta Beauty or Sephora. They are insulated from Amazon.com,” says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm headquartered in New York City. “Amazon can’t put makeup on you. They are doing something Amazon can’t do. That is a very big deal.”

Both Ulta, which plans to open 100 stores in fiscal year 2016, and Sephora pamper shoppers with complimentary consultations and mini-makeovers. Those services are not just tertiary in the battle to stay competitive. Ulta Beauty, for instance, posted a same-store sales increase of 15.2 percent for stores and e-commerce, along with a 23.7 percent increase in net sales.

Beautiful Numbers

The U.S. make-up market is expected to maintain positive growth through 2018, with an anticipated compound annual growth rate of 3.8% for the five-year period of 2013-2018, reaching $8.4 billion. Similarly, the global fragrances and perfumes market is expected to experience positive growth through 2019, with a compound annual growth rate of 2%.

The largest category in the cosmetics industry is skin care, accounting for nearly 35.3% of the global market in 2014. The products in the global skincare segment create a $121 billion industry. Hair care products represent a large segment of the beauty market too, with sales reaching $11.6 billion in the U.S. in 2014.

05. July 2016 by Wayne Grohl
Categories: Retail | Tags: , , , , , | Leave a comment

Video: Commercial Economic and Regulatory Update

NAR’s Director of Quantitative and Commercial Research George Raitu and Stephanie Spear of NAR Government Affairs have turned in a clear and concise clip outlining the state of regulatory update in the commercial property sector, including thoughts on potential adjustments by the Fed to interest rates.

Don’t forget to subscribe to NAR’s YouTube Channel here.

You can also keep up with George Raitu at NAR Economist’s Outlook blog and Stepahie Spear at Realtor.Org.

28. June 2016 by Wayne Grohl
Categories: Government | Tags: , , , , , | 1 comment

Brexit Vote: Commercial Real Estate Implications

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With Britain’s vote yesterday to leave the European Union, what are the implications for the “Brexit” in the commercial real estate markets?  A quick collection of viewpoints — from before and after the vote — is below.

24. June 2016 by Wayne Grohl
Categories: International Markets | Tags: , , , | Leave a comment

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