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Real Estate Investment Trusts Get Their Own Sector

By | Commercial Real Estate, Financial Markets

On September 1, 2016 the public real estate investment trusts (REIT) were given their own sector in the S&P sectors. Now there are 11 sectors. Previously REITs were combined with the financial services sector. It is anticipated that this will increase the attention that REITs receive. If you are looking for a way to compare your commercial property against a basket of other properties, this might be an option for you.

The Wall Street Journal reported, “The Global Industry Classification Standard, since its inception in 1999, has grouped companies into 10 industries, such as energy or health care, allowing investors to see and compare broad trends. Real estate will form group No. 11. The new classification from MSCI Inc. and S&P Dow Jones Indices LLC, which manage the indexes, is a recognition of the growth of the listed real-estate sector. With a market capitalization of $1.48 trillion, it now accounts for 3.5% of the global equities market, up from a 1.1% share in 2009, according to the European Public Real Estate Association, or EPRA. The new classification means “there is going to be more money looking at the sector,” said Matthew Norris, executive director for a real-estate fund at London-based property firm Grosvenor Group. “This is going to bring real estate into focus.”

For those of us in commercial real estate, we already know the yields are better than many bonds. The separation should generally help investors more clearly see the opportunity available to them in REITs. The additional investor attention should lead to increased capital being invested in these funds which should bode well for commercial properties, generally. Read the full article here (WSJ).

You can also check out the new index and get additional information on the new REIT index at the S&P Dow Jones site here.

Mortgage Rates for 30-Year U.S. Loans Drop to Lowest Since 2013

By | Uncategorized

Freddie Mac reported on April 14 that the average 30-year fixed-rate mortgage dropped to 3.58 percent during the week from 3.59 percent the prior week, marking the lowest level since May 2013. The average 15-year fixed-mortgage fell from 2.88 percent to 2.86 percent over the same period. “The persistent weakness in the global economy has been a boon to mortgage shoppers,” says Greg McBride, chief financial analyst at Bankrate.com. “It brought rates lower in a year we widely expected them to go higher.” The 30-year rate has been below 4 percent since the start of the year, and experts do not expect mortgage rates to spike anytime soon, as the Federal Reserve announced last month that it would hold interest rates unchanged as it waited to see whether slower growth abroad put a damper on the U.S. economy.

From “Mortgage Rates for 30-Year U.S. Loans Drop to Lowest Since 2013”
Bloomberg (04/14/16) Gopal, Prashant

Fed Sends Signal That April Rate Hike Is Unlikely

By | Uncategorized

According to the minutes of the March policy meeting, Federal Reserve officials signaled an interest-rate increase in April is unlikely. Officials expected headwinds to subside slowly but noted “that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate.” Some officials, however, disagreed, stating that they might want to raise rates as soon as April “if the incoming economic data remained consistent with their expectations for moderate growth in output, further strengthening of the labor market, and inflation rising to 2 percent over the medium term.” The next meeting is scheduled for April 26-27.

From “Fed Sends Signal That April Rate Hike Is Unlikely”
Wall Street Journal (04/07/16) P. A1 Hilsenrath, Jon

Large Banks and Small Banks Are Allies, Not Enemies

By | Uncategorized

JPMorgan Chase Chairman and CEO Jamie Dimon says that in the current economic climate, it is tempting to pit large banks against small banks, but the relationship between financial institutions is more complex. “A healthy banking system depends on institutions of all sizes to drive innovation, build and support the financial infrastructure, and provide the essential services that allow the U.S. economy to thrive,” he says. “In this system, regional and smaller community banks play an indispensable role. They sit close to the communities they serve … are able to forge deep and long-standing relationships and bring a keen knowledge of the local economy and culture. They frequently are able to provide high-touch and specialized banking services.” However, he stresses that regional and community banks depend on large banks for their service offerings, as Chase and other large banks provide vital correspondent banking services to smaller institutions, purchase the mortgages originated by smaller banks, and provide critical investment services to community banks. “The financial-services industry, in short, is a story of interdependence among banks of all sizes,” says Dimon.

From “Large Banks and Small Banks Are Allies, Not Enemies”
Wall Street Journal (04/05/16) Dimon, Jamie

New Risk of Weakness In The Commercial Property Market

By | Uncategorized

Wall Street Journal reports there is commercial property market weaknesses in the certain markets. Markets mainly tied to the energy industry.

“New signs of weakness are surfacing in the commercial-property market, ending a half-decade run of improvement with steadily climbing values. Amid global shifts like the sluggish Chinese economy and a new era of low oil prices, defaults on loans are popping up in areas that were considered overheated, occurring in small numbers for now, but stoking fears that more could be on the way.

This comes as there is a growing view that the best days are in the past for this property cycle, which benefited strongly from low interest rates and demand by global investors from regions like China and oil-dependent economies in the Middle East.

“We’re at the top of the market,” said Kenneth Riggs, president of Situs RERC, a real-estate research firm that advises investors on property values and market direction. “There’s going to be a market correction.”

If there is a downturn, few expect it to be severe because the economy is still creating a healthy level of jobs and lending has been far less aggressive than in past booms like 2007, when highly leveraged developers defaulted as the market slowed. Developers back then were routinely able to secure debt for more than 90% of the value of a building, compared with less than 80% today.”

Read the full article in the Wall Street Journal (here)

Manage Cash Flow to Improve Your Business Credit Score

By | Commercial mortgages, Financial Markets, Lenders

By better managing cash flow in your business you can utilize both your capital and credit in a more efficient way– which will improve or maintain a strong business credit score. Cash flow becomes very important if you have a line of credit that you are drawing on. If you have a line of credit, it is to your advantage to show that you have the ability and capacity to repay the line on a consistent basis. Ideally, the balance should be paid down to zero for each billing cycle. If it is a commercial mortgage loan, whatever you do, don’t make a late payment and plan ahead for the balloon payment by seeking a replacement loan well in advance to give enough time to correct any weaknesses.

Here are some ways to improve cash flow and therefore improve your business credit score.

  • Know what your credit terms and conditions are and live by them. Do all you can to prevent violating those loan covenants.
  • Review your credit terms to ensure you are receiving competitive terms. Look at the whole relationship. Shop around find out what others are paying to give you leverage to negotiate better terms and fees.
  • Improve incoming cash by giving your customers incentives to pay you early.
  • Don’t out spend your growth by trying to grow too fast.
  • Control your costs associated with advertising, sales and administration.

At the end of the day, the more cash you report on your financial statements the better!

Banks Are Far Better Prepared For Next Downturn

By | Economy, Financial Markets, Lenders

In a recent interview with American Banker, Comptroller of the Currency Thomas Curry acknowledged the challenges facing the banking industry but said recent reforms have made the U.S. banking system more resilient. “I do think that this is an unsettled environment currently,” Curry remarked. “I think our focus as prudential regulators is really on making sure that our supervised entities are prepared for all environments. … Whatever happens with the economy, we have a much stronger banking industry.” He cited higher industrywide capital levels, improved liquidity, and more robust loss provisioning as reasons to be confident that the industry is better prepared for the next downturn. Curry also discussed efforts by the Office of the Comptroller of the Currency to warn about asset classes where banks are weakening their standards, such as subprime auto loans. He added that cybersecurity is a “constant worry,” indicating that a massive enough security breach could threaten the solvency of a smaller bank, and incidents at major banks could undermine confidence in the entire banking industry. “The first step is to have the banks be the first line of defense,” Curry said. “Then the value of the regulatory system, at least in the banking sector, is to be able to supplement that and get a horizontal view of what’s going on in the entire industry.”

From “OCC’s Curry: Banks Are Far Better Prepared for Next Downturn”
American Banker (02/11/16) Wack, Kevin

Fed Seeing More Cause for Pause on Rates

By | Bond Market, Economy, Federal Reserve

Minutes show officials grappling with growing threats from market volatility, China slowdown; inflation concerns

Federal Reserve officials appear increasingly reluctant to raise short-term interest rates at their March policy meeting, and possibly beyond, amid market turbulence, China’s dimmed outlook and indications that inflation could stay at low levels longer than expected.

Officials struggled with uncertainty about these developments at their January policy meeting, according to minutes of the gathering released by the central bank Wednesday. Since the meeting, some officials have started speaking out about their desire to wait to raise interest rates again until they’re sure the U.S. economic outlook isn’t deteriorating and inflation isn’t stuck below their 2% target.

At the January 26-27 gathering, officials “agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook,” said the minutes, which were released with their regular three-week lag.

The Fed in January held its benchmark short-term interest rate steady at between 0.25% and 0.5%. The central bank increased that rate by a quarter percentage point in December and penciled in four more rate increases for 2016, driven by a view that inflation would start rising as hiring and the economy continued to expand.

The Fed’s next policy meeting is March 15-16. Traders in futures markets see a 94% chance it won’t raise rates then, an 83% chance it won’t move before midyear and about a 50% chance the Fed won’t move rates at all in 2016, according to the Chicago Mercantile Exchange.

“Inflation is not likely to pick up substantially until the second half of the year,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said at the University of Delaware on Tuesday. “It might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike.”

Fed Chairwoman Janet Yellen expressed uncertainty about the outlook in testimony to Congress last week without taking a March move off the table. She did emphasize that Fed policy is not on a set course and would be responsive to new developments.

“If inflation is slower to return to target, monetary policy normalization should be unhurried,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said Tuesday. “A more gradual approach is an appropriate response to headwinds from abroad that slow exports, and financial volatility that raises the cost of funds to many firms.”

Of course nothing is yet set. Markets can quickly reverse and the Fed will have a chance to look at more data on inflation and jobs before making a call next month.

Stock markets have already shown some signs of stabilizing. Moreover, economic data haven’t been all bad. The Federal Reserve Bank of Atlanta estimates economic output is expanding at 2.6% annual rate in the first quarter, up notably from a 0.7% pace in the fourth. Moreover wage growth shows signs of accelerating as the jobless rate falls.

The Fed’s policy statement in January was striking because officials decided not to make a judgment about what they call the “balance of risks” to the economy—whether they believed the economy was likely to perform more poorly than their forecasts or exceed their expectations.

The balance of risks matters because it is an indication of whether they are inclined to raise rates again, hold steady or cut them. Some officials already concluded the economy risked underperforming, but other wanted to withhold judgment. Their unwillingness to make any declaration about the balance of risks underscored their hesitance about raising rates.

“Most [officials] were of the view that there was not yet enough evidence to indicate whether the balance of risks to the medium-term outlook had changed materially, but others judged that recent developments had increased the level of downside risks or that the risks were no longer balanced,” the minutes said.

Peter Hooper, chief economist at Deutsche Bank Securities, said he expected the Fed to lower its growth and inflation forecasts when officials next meet in March. That would be a precursor to moving interest-rate plans into neutral.

Mr. Hooper started the year projecting three Fed rate increases this year. He has now downshifted to one later in the year.

The minutes showed the Fed’s own staff economists saw a risk that economic growth and inflation would underperform expectations and unemployment could be higher than forecast, “mainly reflecting the greater uncertainty about global economic prospects and the financial market turbulence in the United States and abroad.”

Expected inflation is an important wild card. Bond-market measures and survey measures of expected future inflation are dropping. Fed officials don’t want to see inflation expectations drift lower. Inflation has already been running below the Fed’s 2% target for more than 3½ years.

Further declines in inflation expectations indicate investors and households might be losing confidence in the central bank’s ability to drive inflation up to target. Undershooting it is an indication of an economy’s lack of vitality, like low blood pressure in a hospital patient.

“A number of participants indicated that, in light of recent developments, they viewed the outlook for inflation as somewhat more uncertain or saw the risks as being to the downside,” the minutes said. “Several participants reiterated the importance of monitoring inflation developments closely to confirm that inflation was evolving along the path anticipated” by the Fed.

The Fed used the word “uncertain” or “uncertainty” 14 times in the January minutes, compared to seven times in December when the central bank raised rates, and six times in October when it telegraphed that a rate increase could be coming.

via (wsj)

Multifamily Housing Supply Unfavorable to Lower-Income Renters

By | Commercial mortgages, Commercial Real Estate, Multifamily housing, New Construction

Lower-income households that are looking for affordable multifamily rental housing are faced with significant challenges. With little new stock affordable to them, many lower-income households are renting apartments that are beyond their financial means, leaving them less money for food, healthcare, transportation to work, and other necessities.

If changes to the stock of multifamily housing in the U.S., broken down by tenure, affordability, and assisted rental housing status. The results show that lower-income renters have lost ground recently. The average monthly rent of a unit lost from stock was $600 while the average monthly rent of a unit added was $1,000. In addition, while the number of units lost has decreased, lower-income renters experienced a disproportionate amount of those lost units, and that units added were affordable to higher-income renters. Only one-quarter of the units added (approximately 38,000 annually) were affordable to Very Low Income renters, further highlighting renter affordability challenges.

The results of this analysis show that both units added to and units lost from the multifamily housing stock experienced a slowdown between 2005 and 2013. In both cases, lower-income renters lost ground. Most of the multifamily rental stock lost was affordable to lower-income renters, with a median monthly rent of $600 in 2011 for these lost units compared with a $750 median rent for units remaining in the stock. By contrast, little of the new stock added was affordable to lower-income renters, with a median rent of $1,000 in 2013 for these new units compared with a median rent of $780 for units remaining in the stock. These trends show the challenge facing lower-income households that are looking for affordable multifamily rental housing.

Read the full report here

Commercial mortgage loans less available as Bank mergers increase

By | Commercial mortgages, Commercial Real Estate, Lenders, Regulation

One in Six Banks Will Have to Merge: CBA Chief Hunt

Thanks to the Dodd Frank Act bank mergers and consolidation in the banking industry continues. The reasons cited below certainly are driving the trend at an accelerating rate. The impact to commercial property owners is that they will not have as many commercial mortgage loans choices among traditional banks. As a result, it could be harder for commercial property owners to obtain the financing that best meets their needs. The American Banker article summary below explains the probable cause for this trend.

In a recent interview, Consumer Bankers Association President and CEO Richard Hunt said consolidation will keep community banking viable in the face of such persistent threats as the economy, technology, and regulation. He expects mergers and acquisitions to pick up among banks with $10 billion to $100 billion in assets. “We have been saying for some time there are three great disruptors in the marketplace today — the economy, the evolution of technology, and the burdensome new regulatory environment,” he said. “Any one of those would have a dramatic effect on banking, but to have all three happen simultaneously creates the perfect storm. We expect more [mergers] to continue throughout 2016 and years beyond.” Hunt said there are more than 6,000 banks currently, and even if 1,000 to 1,500 were lost, the industry would still be competitive. However, he noted that “the definition of competition will become greatly different. You don’t have to have a branch in a hometown in order to be competitive because of the Internet.” Hunt said consolidations ultimately will benefit consumers because “by combining forces and achieving the economies of scale, the technological platforms will be better.”  From “One in Six Banks Will Have to Merge: CBA Chief Hunt” American Banker (02/12/16) Stewart, Jackie

We have many lender relationships outside of traditional banking that are actively funding commercial mortgage loans. We have established relationship with wholesale lenders, private equity firms, conduit lenders or life insurance companies that rely upon third parties to introduce borrowers to their commercial lending products. The bottom line is we have lender relationships that the typical commercial property owner does not have access to or possibly even knows that such lenders exist. If your local bank is not able to provide the commercial mortgage loan that you need, we would be happy to work with you and our lender network to find the commercial mortgage that fits you and your property.