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Mogul Minute 10/12/2016
October 12 | 2016

Here at RealtyMogul.com, we keep our finger on the pulse of all things real estate, from finance to technology and everything in between. We make a point of sharing interesting articles and think pieces among RealtyMogul.com staff to help our team stay abreast of the market, and ahead of the curve.

So we thought, why not share some of these insights with you, our partners?

Got A Minute? Here’s some recommended reading with key points from the content:

For-Profit College Accreditor Fails Out; $401 Million in CMBS Potentially Affected (Morningstar)

  • For-Profit schools have recently been under fire from the federal government for dismal career placement and high student loan defaults, and now the federal government has terminated the recognition of its largest accreditor for this sector, the Accrediting Council for Independent Colleges and Schools. If the schools cannot find a new accreditor in 18 months, the allotted window, the schools are likely looking at a steep drop in demand as students will no longer be able to use federal student aid to pay for classes. This drop in demand could result in future school closings and a negative sign for demand for Class B office space.
  • Morningstar highlighted these CMBS deals as those with the highest risk of default given their exposure to For-Profit schools:

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Apartment Building Prices Continue to Rise, Surprising the Market (NREI)

  • A drop in early 2016 in sales volume suggested a disconnect on pricing, however prices have continued to rise over the past six months in the multifamily sector.  “The thing that surprised me a bit about the last six months was the robustness of pricing in the apartment market,” says James Costello, senior vice president for RCA. The average cap rate on sales of midrise and high-rise apartment buildings was just 4.9 percent in August. The average cap rate for sales of garden apartment properties was 5.8 percent. Both of those figures are 20 basis points lower than they were during the same period the year before (RCA).
  • Costello adds they are seeing smaller value-add transactions in a lot of these trades. Some institutional investors are pulling back in larger deals given the glut of high end product and where we are in the cycle.
  • Low interest rates are fueling the demand. The average interest rate for a seven- to 10-year mortgage on an apartment property was just 3.9 percent in August, down from a high of 4.5 percent in January. The 170 basis points spread between mortgage rates and apartment cap rates has increased from the first quarter of 2016 as mortgage rates have fallen faster.

Ross Stores continues aggressive expansion (CSA)

  • Discount retails continues to thrive and Ross is taking advantage as it is planning to open 24 new stores as well as nine dd’s Discounts stores (another brand under their umbrella) across 16 different states in September and October.

Multifamily Developers Expect Millennials to Start Families in Cities, Eventually Move to Suburbs (Bisnow)

  • According to Toll Brothers Apartment Living managing director, Charles Elliot, there is increased demand for larger units as well as 2-3 bedroom units as young families are looking to stay in the city longer. "We're starting to see, as Millennials age and think about having a child or forming a family, they want to stay in the communities they're in. We need to provide that product."
  • Toby Bozzuto, CEO of Buzzuto, believes that while people are renting longer, the moves to the suburbs is inevitable. "I don’t think the American dream is dead, I think the American dream is deferred. I think people still will want to live in the home with the picket fence and the yard, especially when they have children who are school age. They need to make a move to a better school system or private schools, so I think that will be a trigger to get people to buy a home, and they’ll buy more in the suburbs."
  • Conversely, Somerset Development principal Nancy Hooff, argues that Millennials staying in the city will drive demand for improving schools in the city. “It will improve schools if we can keep people in city so the Millennials don’t go out to Gaithersburg (a DC suburb) or something once they start to have children. If they can stay here, there I think there will be a demand for better schools. Schools are already improving in many areas. I think the Millennials want to stay here and they want to grow families here and I think we have to realize that."

Private Investors Double Down on Net Lease Assets as Institutional Buyers Step Back (NREI)

  • Private investors continue to take a larger share of the pie when it comes to NNN single-tenant assets. Asking cap rates for single-tenant net lease retail properties declined 8 basis points quarter-over-quarter, averaging 6.10 percent at the end of the third quarter 2016, according The Boulder Group. Cap rates for net lease office properties declined 17 basis points from the second quarter, reaching 7.08 percent. Meanwhile, asking cap rates on single-tenant net lease industrial properties fell by 12 basis points, reaching 7.14 percent. The following chart shows some pretty remarkable cap rate compression over the last 12 years in the sector:

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Vornado’s LA selloff is part of company’s larger effort to slim down: Analysts (The Real Deal)

  • Interesting moves by Vornado as they are selling off the majority of their non-core (read non-NY based) operations including the sale of their Culver City office building. The asset, located at 800 Corporate Point, is a Class A office building located adjacent to the Culver City Mall. This continues a trend of recent moves including the sale of two other LA assets (Beverly Connection & 520 Broadway) as well as the spinoff of its national strip mall business and their investment in third party companies such as JC Penney. “Roth is trying to simplify the company, make it more manageable, more focused and easier to understand,” said Sandler O’Neill analyst Alex Goldfarb of the company’s CEO Steve Roth. “Having two or three random investments in L.A. doesn’t help that at all.”
  • “They thought cold storage was good, they thought investing in India was good, they thought a bunch of businesses away from their core New York-focused business were good ideas,” Goldfarb said. “What they discovered is that having less equals more. By slimming the company down and focusing on the core Manhattan market, they’ve actually created more value.” - Goldfarb
  • The move comes at a time where Boston Properties, one of Vornado’s closest competitors, is doing the opposite and is just now entering the LA market.

 

Tim Ednoff Headshot
Written by , Associate - Commercial Equity at RealtyMogul.com

Tim evaluates investment opportunities as well as performs due diligence and writes content for various equity and debt transactions. Outside of the office, Tim is an avid sneaker collector, a passionate health and fitness advocate, and a dedicated podcast enthusiast.

 
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