US Sales

Big Banks Are Lending to Bigger Small Businesses

When JPMorgan Chase released its fourth quarter earnings for 2013, it announced that it had provided $19 billion of credit to U.S. small businesses. The figure sounds impressive, but it pales in comparison with the $589 billion of credit that it provided to big corporations.

This should not surprise anyone. The country’s biggest banks ($10 billion+ in assets) actually prefer to provide capital to “small businesses” that average $10 million in revenue or more. While, it is encouraging that the spigot has opened and big bank loan approval rates for small businesses reached 17.6 percent, according to the December 2013 Biz2Credit Small Business Lending Index, many of them are primarily interested in lending to large “small businesses.” (Yes, that is an oxymoron.)

For many of the big banks, small loans are paper intensive and thus cost more to process. This is a reason why they prefer to offer non-SBA loans, which typically require more forms and documentation and, as a result, take longer to process.

Small banks, which typically do not have the same type of brand recognition, cannot afford to be as choosy. Often, they are a secondary choice as consumers tend to go to the names they know first. Further, because of the amount of advertising that big banks have invested in advertising to promote their small business loan-making, entrepreneurs are going to the bigger players.

Unfortunately, although big bank lending approval rates are currently at post-recession highs, they do not approach the percentage of loan applications granted by small banks (almost 50 percent). Alternative lenders, comprised of microlenders, cash advance companies, are approving more than two-thirds of their requests.

Here Is How Things Can Change:

1) As they continue to be thwarted by big banks, borrowers will continue to comparison shop and seek alternatives to the big banks. Many will use the Internet to find the best deals. Small business owners will secure capital from community banks, alternative lenders, and increasingly, institutional investors that are hungry to make deals.

2) Big banks can improve and upgrade technology. It is still astounding that many of the biggest financial institutions in the country do not allow for online loan applications or eSignatures. What makes this so perplexing is the fact that the large, name brand banks have more vast resources to invest in upgrades.

One can look at the mercurial rise of alternative lenders as proof that when there is a void in the marketplace, the hole is quickly filled. Accounts receivable and cash advance lenders used their technological advantage and made capital more readily accessible. In many cases, speed is often more important to borrowers than low interest rates.

For instance, if you need working capital to make payroll, you cannot wait three months for an SBA loan. Employees want to be paid in a timely fashion and likely won’t wait around for a long period of time without payment.

A number of the large banks, such as TD Bank, Union Bank and others, are investing in upgrades and becoming more active in small business lending. Look for others to follow suit in 2014.

Source: Smallbiztrends Jan 26, 2014 by Rohit Arora

1717 Park St

Naperville office building sells for 5.7 million

A 114,016-square-foot office building in Naperville owner Omaha, Neb.-based Quarter Circle Capital LLC sold for more than $5.7 million. DuPage County records show the buyer of the property at 1717 Park St. was a venture of a Farida Tazudeen, a local real estate investor who could not be reached. The venture financed the Jan. 15 purchase with a $4 million loan from New York-based Garrison Realty Finance LLC, according to county records. It was the last remaining building owned by an approximately eight-year-old fund that also had included 1755 Park, which previously sold for $2.5 million to Riverwoods-based Podolsky Circle CORFAC International, Quarter Circle Principal John Martin said.  A Podolsky venture also agreed to buy 1717 Park, but Quarter Circle sued the venture in December, saying it failed to close on the deal. The lawsuit is still pending, Mr. Martin said.

Source: Chicago Real Estate Daily January 28th, 2014

 

Real Estate Forecasts See CRE Recovery to Accelerate in 2014

Commercial real estate firms are moving into the New Year with a renewed sense of optimism – a positive outlook not seen for the past seven or eight years.

While many in the industry predicted a recovery in 2013, they did so with a sense of nagging worry over slower than expected job growth and concerns that the political brinkmanship in Washington could threaten the nation’s credit rating and pitch the economy into stagnation or, even worse, recession.

Much of those concerns have ebbed as the two parties came to terms in December over next year’s budget. In addition, the Federal Reserve has established a clear path for rolling back the so-called quantitative easing steps taken in years past to bolster the economy. By spelling out its path for reducing debt purchases, the Fed has taken out much of the guesswork for when those financial supports will end.

Given the overhanging sense of dread seems to have disappeared from most forecasts, experts are predicting a better year in 2014.

CoStar News has encapsulated Following 14 outlooks for 2014 from forecasts offered by respected industry participants and observers. We’ve sorted them alphabetically by the firm making the forecast.

Cassidy Turley: Impact from Rising Rates
If the big economic story of 2013 was policy vs. housing, this year doesn’t promise much in the way of variety. Policy vs. Housing, Part II will see the same threats to economic growth as we continue to struggle with dysfunction in Washington and, most likely, more political brinksmanship that may undermine confidence in the economy. But, while the challenges will be the same, the underlying fundamentals will be slightly stronger. Perhaps the biggest difference is that by the middle of 2014, economic growth should be strong enough for inflation to start to be a possibility once again. This is actually a good thing. The timetable could vary, but we anticipate the Fed raising interest rates by the end of the second quarter-likely in May or June. So long as interest rates don’t move too far too fast, the impact on the overall economy will be minimal. But there will be one. This could slow the housing recovery and it will certainly have an impact on commercial real estate pricing as the price of borrowing becomes more expensive. But that is assuming the underlying economic fundamentals have heated up to the point of warranting such a move-which is ultimately a good thing. A stronger economy may bring higher interest rates, but it will also bring higher earnings, lower unemployment, greater consumer spending and-for landlords-better rental rate growth and NOI. In the meantime, look for the first big political squabble (over the debt ceiling once again) to start up again in late January.

CBRE: Office Market Recovery Poised To Accelerate
The office market recovery is poised to accelerate in 2014, as an improving economy should result in increased office-using employment according to CBRE, the world’s largest commercial real estate services and investment firm. The growth in office-using occupations, particularly in high-tech industries, is expected to increase demand for office space. The U.S. office market vacancy rate will continue to decline next year, falling by 80 basis points (bps) to 14.3% by the end of 2014, Steady improvement in the office market is expected to continue in 2015, with the vacancy rate forecasted to dip another 80 bps to 13.5%. CBRE forecasts that office rents will increase by 3%, on average, in 2014, and rise another 4.4% in 2015, as vacancy levels fall steadily toward the “equilibrium” level over the next two years.

Cornell Univ. and Hodes Weill: Big Money Will Continue To Rule
Institutions are significantly under-invested in real estate and are poised to allocate significant capital to new real estate investments. The weight of this capital can be expected to have broad implications for the industry, including transaction volumes, fund raising, lending activity and property valuations. The supply of capital may sustain current valuation and financing metrics (including capitalization rates and the cost of debt capital), according to Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, which co-sponsor the Institutional Real Estate Capital Allocations Monitor.

Deloitte: Steady Growth but Not Enough To Spur Much New Development
CRE fundamentals continue to improve across all property types, including vacancy, rent, and absorption levels, according to Deloitte’s real estate forecast. However, demand is yet to increase enough to drive development activity, except for multifamily and hotel construction, which continues to be robust. These same sectors, which were the first to grow and recover after the recession, may see some tapering off in fundamentals as new supply comes to the market. Overall, it appears that fundamentals will continue to improve at a moderate pace, in line with the macroeconomic situation.

DTZ: Business Tenants Keep Bargaining Clout
The U.S. economy will continue to expand at a moderate rate, which will lead to more job growth and a related increase in demand for occupational space, reports global property services firm DTZ. However, with the expected moderate job growth, vacancy will only trend down slowly. Occupiers will remain in good bargaining positions over the next two years and occupancy costs will increase in line with inflation. They will continue to receive concessions as landlords compete to increase their properties’ net operating income. Occupiers will gravitate to the most affordable markets and continue to reduce their costs through more efficient internal space build-outs.

EY: Private Equity Funds Getting Hands Dirty
Having emerged from the global recession and its aftermath, the real estate private equity sector is finally positioned for growth in 2014, according to a global market trends outlook in real estate private equity published by EY (Ernst & Young). Strategies being deployed by different PE firms and even funds to take advantage of this growth opportunity differ, as fund managers seek to differentiate themselves in a hotly competitive fundraising environment. But EY sees fewer opportunities in the future for fund managers to capitalize purely from the financial structuring side of their investments. The funds that come out ahead of the competition in this next phase of growth will have one thing in common: an ‘old school’ asset management approach that realizes maximum investment value by working closely with service providers to fill buildings and manage real estate.

Freddie Mac: The Emerging Purchase Market
Led by a resurgent housing sector, 2014 should shape up to be better than 2013 with a quickening recovery pace leading to more job creation. Freddie Mac expects single-family home sales and housing starts to be at their highest levels since 2007, and expect multifamily transactions and construction to post gains as well. The big shift ahead will occur as the single-family mortgage market begins transitioning from a rate-and-term refinance-dominated market, to a first purchase-dominated market. The emerging home-buyer purchase market should gather momentum in the coming year.

Grant Thornton: Huge Boost Ahead for Industrial Markets
U.S. companies will bring production, customer service and IT infrastructure back home, reports tax-advisory firm Grant Thornton. The reshoring trend is real and about to dramatically reshape the U.S. economy. More than one-third of U.S. businesses will move goods and services work back to the U.S in the next 12 months, which means that as much as 5% overall U.S. procurement may return home. The Grant Thornton LLP “Realities of Reshoring” survey found that even IT services, one of the first business functions to move offshore, are likely to return within a year. The trend could provide an enormous boost to domestic manufacturers, retailers, wholesalers/distributors and service providers.

Jones Lang LaSalle: Pent Up Retail Demand Will Drive Investment
Total retail investment is expected to increase upwards of 20% in 2014, according to Jones Lang LaSalle, as pent up demand that was not satisfied in 2013 fuels investments and investors look to balance their portfolios. The retail market will continue to turn around despite store closings and consolidation. Vacancy rates are projected to inch downward driven by power center popularity, while rents are expected to increase albeit slightly for the fourth consecutive quarter. JLL also expects the number of retail property portfolios coming to market, which combine a broad spectrum of B and C retail assets, will increase as REITs look to sell assets and recycle capital in the year ahead.

Kroll Bond Ratings: Multifamily Resurgence in Conduit CMBS
The Federal Housing Finance Agency (FHFA) has begun to implement strategies to reduce the multifamily footprints of the two GSEs it oversees. As a result, Kroll Bond Rating Agency expects we will see a gradual decline in Fannie and Freddie’s securitized market share, which could revert to levels not seen since before the run-up to the CMBS market peak. At the peak of market in 2007, the conduit market’s share of the $36 billion securitized multifamily loan market was just over 78%. As the financial markets spiraled, that trend reversed and the GSEs became the primary source of loan production, dominating securitized new issues with more than a 95% market share.

Nomura: Muted CMBS Loan Maturity Risk
Based on the performance of loans maturing in 2012 and 2013, the investment bank Nomura estimates that 84% of loans maturing in 2014 will pay in full, a decline of just 3% from 2013 levels. Similar to 2013, Nomura expects the balance of loans rolling to delinquency to decline over the coming year, influenced by muted maturity risk and fewer term defaults resulting from improving CRE fundamentals. Most of the loans maturing in 2014 have 10-year terms and were underwritten prior to the sharp rise in property values that began in 2005. However, 15% of maturing loans have 7-year terms and were underwritten at the market peak. This set of loans has an increased risk of default at maturity.

PKF: U.S. Hotel Investors Poised To Do Well in 2014/2015
After a slight deceleration in growth during the last half of 2013, PKF Hospitality Research, LLC (PKF-HR) is forecasting very strong gains in revenues and profits for the U.S. lodging industry in 2014 and 2015. PKF projects national revenue per available room (RevPAR) to increase 6.6% in 2014, followed by another 7.5% boost in 2015. Concurrently, hotel profits should enjoy growth of 12.8% and 14.5% respectively over the next two years.

PwC US and ULI: Investor Activity Continues To Expand Beyond Core Markets
The U.S. real estate recovery is set to continue into 2014, with investors increasingly looking beyond some of the traditionally popular markets to secondary markets in search of higher yields, according to the latest Emerging Trends in Real Estate 2014, co-published by PwC US and the Urban Land Institute (ULI). The predicted growth in secondary markets will be driven by investors searching for returns as opportunities in core markets become harder to find and the most sought-after properties become more expensive. The move into secondary markets is underpinned by the anticipated increase in both debt and equity capital during 2014.

Transwestern: More Opportunities in Sale-Leasebacks and Net Lease
The cost of capital for owner occupants is on the rise, thanks to increasing interest rates. To cope with higher costs, owner-occupants are increasingly looking at selling their owned real estate as one strategy to generate funds for operating expenses, company expansion or retiring debt. This scenario presents an excellent sale-leaseback opportunity for investors looking to acquire real estate that comes with a long-term tenant in place. The lending environment is expected to bring more net-lease properties to market, as well. As interest rates increase, a larger number of office, industrial and retail buildings are projected to be marketed for sale.

That’s 14 predictions for 2014. We look forward to covering these and many other major trends in commercial real estate in the year ahead. Here is a bonus prediction from CoStar’s Property and Portfolio Research group:

CoStar: 2014 Best Year of Office Occupancy Gains in Recovery Cycle
Heading into New Year, office employment has been growing at the fastest rate since the start of the recovery, with the sole exception of early 2012. But there are two key differences between today’s market and that of the past few years. First, the office market now has far less under-utilized “shadow” supply space, which will drive a higher level of net absorption as more office-using tenants expand. Second, with the demand outlook improving and new construction still at bay in most markets, the 2014 occupancy gains in US office markets should be the best of the entire recovery and should tip the scales toward greater rent growth during 2014 than in the past few years. However, developers have already shown their willingness to break ground at the first sign of improvement. This has already happened in Boston, Houston, Silicon Valley and most recently, San Francisco. As developers ramp up new supply, the office occupancy gains are likely to slow in 2015 and certainly by 2016. Investors should enjoy the benefits of occupancy gains in 2014, which are expected to be the best in the current recovery cycle.

Source: CoStar Mark Heschmeyer December 31, 2013

Center Main

Vacancies for U.S. strip malls improve slightly

The average vacancy rate for a U.S. strip mall improved slightly in the fourth quarter from the third quarter, as consumer sentiment and retail sales ticked up, according to a preliminary report released on Tuesday from real estate research firm Reis Inc.

“Consumers appear to be acting more aggressively in response to improvements in the labor markets,” the report said.

The national vacancy rate for strip malls was 10.4 percent in the fourth quarter of 2013, down from 10.5 percent in the second and third quarters.

The report noted a growing rift between “have” and “have-not” markets as income inequality worsened. “In these ‘have-not’ areas,” the report said, “demand remains enervated, rents continue to fall even as the macroeconomy and labor market improve, and new development activity is virtually if not completely nonexistent.”

Reis said it expects this “two speed” recovery to continue in 2014.

Source: Reuters Michelle Conlin Jan 7th, 2014

One-Financial-Center-Boston

Investors Flirt with Riskier Real Estate Strategies in 2014

Other trends predicted for the new year include that multifamily properties might fall off of investors’ must-have lists, construction investment could pick up and foreign investors are expected to continue to scoop up trophy properties in the U.S.

“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.

Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”

As for the real estate markets, Jim Sullivan, managing director, REIT research, of Green Street Advisors Inc., a Newport Beach, Calif.-based research firm, said real estate market projects are “tied at the hip with any investor’s view of interest rates.”

One camp’s view is that interest rates might go up because the economy will be recovering at a robust pace, Mr. Sullivan explained.

“A higher cost of capital is bad for real estate investing but a robust economy is great for real estate,” he said. Another view is that if interest rates go up unaccompanied by strong economic growth, it will be bad for real estate because it is an industry that is capital intensive, Mr. Sullivan said.

Multifamily is out, malls are in

Meanwhile, multifamily real estate investments may no longer be the darling of real estate investment community in the coming year.

Apartments — and the multifamily sector as a whole — have been extremely strong for several years, but it won’t be as hot going forward, Mr. Morrow said.

The net operating income might start to come down as new multifamily development projects that are in the pipeline are completed, he said. Indeed, there might be oversupply of multifamily properties in certain markets.

“I don’t see the growth opportunity we’ve seen in the past,” Mr. Morrow said. “Apartments might become less desirable.”

It could be a completely different story in the apartment real estate investment trust sector, Mr. Sullivan said.

Apartment REITs were red hot in 2011 and 2012, but underperformed the rest of the public markets in 2013, he said.

“Our view is the market overreacted to the decelerating growth,” Mr. Sullivan said. “Apartment REITs look cheap going into 2014.”

There will be a similar story with mall REITs, he added. In 2013, the mall sector significantly underperformed as investors anticipated a decline in consumer spending and a tax increase.

As a consequence, high-quality malls look cheap in the public real estate market, Mr. Sullivan said.

“Investor angst in relation to investor spending is legitimate but the mall sector was overly discounted,” he said.

One really big-picture item in 2014 is that the pace of new construction is starting to pick up.

“The commercial real estate party … usually ends not because of the lack of demand but because of excess new supply,” Mr. Sullivan said.

New construction, which had been at generational lows, is starting to change “in a pretty meaningful way,” he said.

The pace is picking up the quickest in multifamily, industrial and niche strategies such as student housing and data centers.

“The good news is that there is demand to meet the new supply,” he said.

The increasing supply is not enough to ring any alarm bells, but it is the first time in two or three years that observers will be watching out for oversupply.

Fundraising

One trend that sprouted in 2013 and might take firm root in 2014 is an increase in co-investments in real estate. While co-investments are fairly common in private equity, real estate deals have not been large enough for co-investments.

Real estate managers that can’t raise a large blind pool closed-end fund are looking to new ways to raise capital including seeking co-investments.

Managers may be more open to it in 2014 as fundraising continues to be a challenge, said David M. Sherman, president and co-chief investment officer of Metropolitan Real Estate Equity Management, Carlyle’s newly acquired real estate fund-of-funds business, and head of the real estate fund of funds group in Carlyle Group’s solutions subsidiary.

“Managers that need to stretch the remaining equity in a fund may co-invest, even if their deal sizes are manageable, during the latter half of a fund’s lifecycle,” Mr. Sherman said. “A manager of a new fund may seek co-investment because fundraising is going slowly. Some managers utilize co-invest in between fund raises.”

A big theme in 2014 is expected to be continued investment by foreign investors in U.S. real estate, said P.J. Yeatman, head of private real estate for CenterSquare Investment Management, a Plymouth Meeting, Pa., real estate manager. In a flight to quality, foreign investors have been buying up trophy assets in the U.S., leading to the overpricing for these properties, Mr. Yeatman said.

“We (the U.S.) became the flight-to-quality market,” he said.

These investors consider U.S. core real estate to be akin to fixed income, Mr. Yeatman said. What’s more, many of these buyers purchase properties on the basis of “perception,” he added. “The perception is that New York is a fortress and it is worth paying anything for New York real estate,” Mr. Yeatman said.

He added: “I don’t expect (foreign purchases of U.S. property) to stop” in 2014.

Astute investors will begin investing in value added and opportunistic real estate in order to sell into the overheated core market.

“The smart money will recognize the arbitrage opportunity between creating income streams to sell into the overheated market vs. buying income streams,” Mr. Yeatman said.

Another huge investment opportunity will be European real estate debt, said Joe Valente, managing director and head of real estate research and strategy in the London office of J.P. Morgan Asset Management (JPM).

Some €400 billion ($546.7 billion) of distressed European assets will be coming to the market, Mr. Valente estimated. “Half will be in core European markets where investors don’t have to take macro risk,” he said.

As for the year just ended, one of the big surprises was that the capital markets rebounded stronger than many real estate investors expected.

“I expected it to be strong, but it was stronger than I had expected,” said Gary M. Tenzer, Los Angeles-based principal at real estate investment banking firm George Smith Partners Inc.

Even though prices were at very high levels, in many cases around the pre-financial crisis levels, cap rates were very low, he said, noting that investors were chasing yield.

Source: PIOnline Arleen Jacobius, January 2nd 2014