Archives for December 2020

Regulator Worries US CRE Markets Could Collapse

December 7, 2020 by CARNM

The FSOC is concerned that the cash flow declines for CRE assets in the last year could become permanent.

he Financial Stability Oversight Council has just issued its annual report on the risks to the US’ financial stability. One of the dangers it is concerned about is a collapse in the US commercial real estate market.
The picture it paints is a dire one for CRE and not necessarily reflective of the view of many industry research teams.
The FSOC notes, for example, “The shock to CRE has been large, with the hotel and retail sectors suffering the most significant near-term losses. Considerable uncertainty remains regarding the long-term recovery prospects for a wider range of property types.”
Potential losses in CRE could well spill over into the larger economy, the FSOC went on to say. “Stress in CRE markets can exacerbate economic downturns because CRE debt represents a large source of credit exposure for the financial system–about $4.7 trillion as of the second quarter of 2020.”
The FSOC says that certain features of the current CRE financing environment may raise the potential for spillovers. One potential concern is that hotel and retail loans are concentrated in non-agency CMBS. Servicing frictions could drive distressed property sales, which may trigger price declines, according to the report.
Another concern is that small and mid-sized regional banks are highly exposed to CRE, according to the report. If there are losses on CRE loans at these banks, it could drive a broader contraction in credit. The spillover effects of CRE loan exposure could hit areas that are more dependent on local sources of funding much harder.
These small- and mid-sized banks are more exposed to CRE than the stress-tested banks on average. In the second quarter of 2020, CRE accounts for about 40% of non-CCAR banks’ loan portfolios and about 10% of CCAR banks’ loan portfolios.
These smaller banks are also an essential source of credit to small business and retail borrowers. If they suffer losses on CRE-backed loans, it could drive a broad contraction in credit, particularly in the sectors of the economy that rely on local sources of financing, according to the report.
For large banks, the picture is a little brighter, but there are still concerns. Over the Federal Reserve’s stress tested large banks with a scenario involving a sharp contraction in the values of retail and lodging properties. It found the banks had enough capital to maintain the flow of credit, assuming a V-shaped recovery.
However, under a more severe U or W-shaped scenario, several lenders would approach minimum capital ratios, which might result in a sustained tightening of underwriting standards or contraction of credit.
Permanent Declines in Cash Flow
The FSOC also is concerned that the cash flow declines for CRE assets in the last year could become permanent.
The FSOC says that there is considerable uncertainty about which CRE sectors may recover completely following the pandemic and which sectors face permanent shifts in demand. It notes that the pandemic may have shifted trends toward online shopping, which could hurt the retail sector.
The long-term trends for apartments and offices are unclear, according to the FSOC. It notes that a permanent shift toward teleworking may reduce demand for office space and drive economic activity away from city centers where many apartments, retail, restaurants/food outlets, and offices are located. If there is a permanent shift to teleworking, demand could shift from apartments to single-family homes, according to the FSOC.
But the FSOC notes that there may be a reversion to pre-pandemic business practices, which could reverse recent vacancy trends in apartments and offices. Downward changes in cash flows will lead to permanent declines in valuations in specific sectors. That will lead to losses for holders of CRE.
In this scenario, though, the risk is mostly limited to the CRE industry, the FSOC says, “As long as these losses accumulate gradually, they are unlikely to trigger large disruptions to the financial system,” it concludes.
Source: “Regulator Worries US CRE Markets Could Collapse”

Cinemas Join the Internet Makeover of American Cities: Conor Sen

December 7, 2020 by CARNM

Going to a movie will become a big deal akin to going to a sports game or a concert.
(Bloomberg Opinion) — As cities struggling with a surge in apartment and commercial vacancies think about their post-pandemic futures, one disruption that’s likely to benefit them is the shift happening now in the movie industry.
There have been signs for awhile that Hollywood was experimenting more with direct-to-streaming for big budget movies, but Warner Bros.’ announcement that it would release all of its films on HBO Max in 2021 at the same time they go to theaters shows that the new era is here. This may represent the end of the movie theater industry as we’re used to it, but represents an opportunity for cities.
To imagine what a hybrid distribution model for movies might be like, we can look at other industries that have been disrupted by the internet. Book stores still exist, but there are far fewer of them than before, and the ones that survived get by on a mix of scale — a handful of Barnes & Nobles in big cities — and niche offerings, like special events or independent book stores that cater to bibliophiles. For everyone else interested in purchasing books there’s e-commerce, where both physical books and e-books are available for sale.
The music industry has figured out its own hybrid model to replace the dominance that compact discs had a generation ago. While CDs and other formats of recorded music still exist, most of the music industry’s revenues are generated through a mix of live events like concerts and festivals plus streaming services like Spotify and Apple Music.
The future of movie distribution will probably have some parallels to what we’ve seen in books and music. Most people are focused on the growth of streaming services like Netflix Inc. and Warner’s HBO Max, and to be sure, a bigger share of movies will probably be distributed on platforms like that. We’ll still have movie theaters — or at least, physical spaces where we can pay to watch movies — but to make the economics work the business model will have to change.
Rather than blockbuster movies being released in 4,500 theaters across the U.S., there may be only a fraction of that to cater to the smaller number of consumers still interested in the big-screen experience when streaming options are readily available. To draw people into theaters, plush seating, large screens and state-of-the-art sound systems will be essential. And that spells doom for theaters unable to keep up with the arms race or located in communities where consumers are unwilling to pay the kinds of ticket prices needed to justify those investments.
Going to a movie will become a big deal akin to going to a sports game or a concert. And most likely, these venues will be in cities or large metro areas with a big enough customer base to support these types of venues.
And then there will probably be room for niche, smaller venues like the Alamo Drafthouse chain that caters to a more affluent crowd, where the food and beverage program becomes a differentiator the way it is at upscale restaurants. These, too, are more likely to be located in affluent communities and large metro areas rather than middle-class suburban ones.
The big idea here, of which movie distribution is just the latest example, is how the internet is at once both great for stay-at-home consumption options — it’s never been easier to watch a sports game, listen to music, purchase goods or watch movies from the comfort of your home — while still leaving space for higher-end experiential consumption at physical venues. And that’s a change that benefits cities, which have both the wealth and population to make those business models work.
Consumers are the ultimate beneficiaries in this new world. Tens of millions of people will be able to watch new-release movies from the comfort of their own homes. For those still inclined to watch movies on the big screen, the experience will continue to improve — if they’re willing to pay top dollar and travel to destination venues. The losers here are those businesses and consumers invested in the way things used to be; yet more casualties in the disruption caused by the internet.
Source: “Cinemas Join the Internet Makeover of American Cities: Conor Sen“

E-commerce hiring booms as traditional retail sheds jobs into holiday shopping season

December 4, 2020 by mcarristo

The warehousing and transportation segment added 145,000 jobs last month on a seasonally adjusted basis, according to the Labor Department, including 82,000 for couriers and messengers.
Traditional retail, however, shed 35,000 jobs on a seasonally adjusted basis last month.
“What we’re seeing is really the acceleration of a longer run trend,” said Adam Ozimek, chief economist at Upwork

The November jobs report showed that the pandemic-induced surge in e-commerce spending is spilling over into holiday hiring trends.

The warehousing and transportation segment added 145,000 jobs last month on a seasonally adjusted basis, according to the Labor Department, including 82,000 for couriers and messengers. Those sectors include many jobs held by e-commerce companies like Amazon, with workers packing and delivering online orders.

Traditional retail, however, shed 35,000 jobs on a seasonally adjusted basis last month.

Those numbers show that a ramp up in employment for the holiday shopping season is occurring faster than normal in jobs associated with e-commerce but lagging for mainline retail.

“What we’re seeing is really the acceleration of a longer run trend,” said Adam Ozimek, chief economist at Upwork, pointing out that segments associated with e-commerce have been growing jobs more than retail for several years.

The changes in the makeup of the holiday employment surge are backed up by company announcements. Amazon has been on a hiring spree all year, saying it would hire 100,000 seasonal staff after already adding hundreds of thousands of jobs earlier in the year.

Meanwhile, several big box retailers have filed for bankruptcy this year, and many others have cut jobs.

The Labor Department’s non-seasonally adjusted numbers showed that retail trade jobs did grow in November, but was down by roughly 600,000 jobs compared with the same period last year. By the same measure, employment for couriers and messengers was up by 216,000 year over year.

Source: “E-commerce hiring booms as traditional retail sheds jobs into holiday shopping season”

The Apartment Amenity Race Adapts to COVID-19

December 3, 2020 by CARNM

Multifamily buildings with the right mix of features for attracting renters could deliver the most appetizing returns for investors.
Even before the coronavirus stalled the U.S. economy and scrambled the lives of apartment renters, property owners were already building and renovating apartments to include amenities that range from extra sound insulation to super-fast wireless Internet connections.
Living through the pandemic has led renters to value many of these amenities even more highly. The most important amenities for apartment renters in 2021 are likely to include access to outdoor spaces and space inside the apartments for people working at home—in addition to fancy technologies like smart locks and smart thermostats and even simple technologies like garbage disposals and sound insulation.
The value renters put on these features go right to the bottom line of how much these properties earn—and how much investors are willing to pay for them.
“The pandemic has caused an acceleration of trends that we saw coming anyway,” says John Helm, partner and founder RET Ventures, a venture capital firm specializing in property technology based in Park City, Utah.

Renters chose extra space

After months of working out of their homes, renters increasing choose to lease apartments that include room for a home office or a place for children home from school to attend virtual classes.

“Apartments with these spaces are more quickly leased and more highly occupied than in the past,” says Louis DeVos, vice president of property management at Woodmont Properties, based in Fairfield, N.J.
These spaces will probably be valuable to renters long after the pandemic ends. Economists expect a significant number of workers to labor at home several days out of the workweek for the foreseeable future.
Renters are also highly interested in apartments that include some access to the outdoors.
“Outdoor space could move up significantly on the list of desirable amenities,” says Rick Haughey, vice president of industry technology initiatives for the National Multifamily Housing Council (NMHC), based in Washington, D.C. “A lot of people who rented a place without a patio probably really regretted it.”

A desire for peace and quiet

Sound insulation is increasingly important to renters trapped at home day in and day out. “There have been a lot of noise complaints since the pandemic started,” says Haughey.
Even before the pandemic, sound insulation was already one most of the most important features for renters, second only to air conditioning. Nearly all renters (94 percent) said they were interested in soundproofed walls or wouldn’t consider renting an apartment without them, according to the 2020 NMHC / Kingsley Apartment Resident Preferences Report. Sound insulation is relatively inexpensive to install when a building is first constructed, and more complicated to add later, once the walls and ceilings are built out.
Broadband internet service is even more important
Renters sheltering at home also needed fast Internet connections to handle video conference calls and streaming movies. That need is unlikely to totally go away, even after the pandemic is gone. At the minimum, apartment owners should make sure their local telecom companies have enough infrastructure to consistently provide a minimum of 150 magabytes per second in upload and download speed to all the apartments at their properties.
“At least get the specifics on the what kind of bandwidth they can delivery to the building as a whole and compare that to a bid from a pure Internet service provider like [technology companies] GiGStreem or a GigaMonster,” says RET’s Helm.
Even before the pandemic, nearly all renters (92 percent) were interested in access to high-speed Internet service or wouldn’t consider renting an apartment without it, according to the 2020 NMHC/Kingsley report. About three-quarters (75 percent) were interested in or wouldn’t consider renting an apartment that didn’t have high-speed Internet service “pre-installed.”
“Broadband has always been near the top of the list,” says Haughey, speaking of the last several years of results from the Kingsley survey. “The pandemic has highlighted how much capacity you need.”
More developers are spending to install wireless Internet connections for entire apartment buildings, similar to the wireless Internet service available in many hotels, says Helm. This wireless service can provide connections to hardware like smart locks and water sensors. “The building owners want it everywhere because they are adopting more systems that need it,” says Helm.

Smart gear for contactless leasing

Many building owners installed new technologies to lease apartments safely during the pandemic. Newly-installed gear like electronic smart locks allow potential renters to take self-guided tours, in which they can visit apartments without ever meeting a member of the leasing staff in person.
These technologies will continue to be important, even after the end of the pandemic. “Contactless leasing and virtual touring—that is here to stay,” says Zach Aarons, co-founder and general partner at MetaProp, a property technology incubator based in New York City.
Contactless leasing allows potential renters to shop for apartments when the leasing office is closed. “That will help with people who have different schedules,” says DeVos. “It’s a great way to provide flexibility.”
Renters often pay $25 more in monthly rent for apartments outfitted with gear like smart locks and smart thermostats. “At a cost of $700 to $1,000 per apartment, that’s just a two or three-year payback on the investment in smart technology,” says Helm.
Smart technology was also important before the pandemic, according to the 2020 NMHC/Kingsley report. More than three-quarters (77 percent) wanted a smart thermostat, almost three-quarters (72 percent) wanted smart lighting; two-thirds (67 percent) wanted smart locks and half (51 percent) wanted an Internet-enabled refrigerator.
Smart locks and access technologies can also help provide access for package deliveries. “The vast majority of multifamily housing stock in the U.S. is in buildings with no doormen,” say MetaProp’s Aarons.
“Owners and developers were probably already thinking about package lockers,” says Haughey.

Inexpensive garbage disposals a top amenity

The humble garbage disposal is also a hugely important, low-tech amenity—especially since many renters began to eat three meals a day in their homes while they sheltered in place from the coronavirus.
“You are seeing an extraordinary amount of food waste,” says Aarons. Even before the pandemic, nearly all renters (92 percent) that they were interested or wouldn’t consider renting an apartment without a garbage disposal, according to the 2020 NMHC / Kingsley report.
Source: “The Apartment Amenity Race Adapts to COVID-19“