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Mogul Minute 5/11/2016
May 11 | 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:

Staples, Office Depot Call Off Merger (Globestreet)

  • The potential $6B merger is being called off after the companies agreed to part ways after the US District Court ruled in favor of the Federal Trade Commission, which sought a preliminary injunction to block the deal on antitrust grounds. Staples will pay a $250M break-up fee to Office Depot as a result of the fall out
  • Staples CEO Ron Argent expressed disappointment with the court’s ruling but was optimistic about the future of the company, “We believe that it is in the best interest of our shareholders, customers and associates to forego appealing this decision, terminate the merger agreement, and move on with our strategic plan to drive shareholder value. We are positioning Staples for the future by reshaping our business, while increasing our focus on mid-market customers in North America and categories beyond office supplies”

Weathering the Next Investment Cycle (Globestreet)

  • Some great tips for real estate investing at this point in the cycle from guest writer Shaun Riley, the senior managing director at Faris Lee Investments, a prominent retail brokerage firm
    • Don’t Be a Yield Chaser – chasing yield is not as important as value preservation during a market correction
    • Sell Non-Strategic Assets – spreads between A and B assets are extremely narrow right now. There is typically a “flight to quality” during a market correction and selling a non-strategic asset before the correction occurs may be a prudent strategy
    • Refinancing Can Be Accretive – even if this involves paying some prepayment, consider refinancing and taking advantage of the extremely low interest rate environment to hedge against future spikes in interest rates
    • Shift Investment Paradigm - a changing cycle is inevitable and new strategies will be needed to preserve value and generate upside from one’s portfolio. The author presents the changing retail landscape as an example. Previously, grocery anchored retail centers were thought to be a “must have”, but changing customer tastes have shifted toward more non-traditional anchor tenants such as newer food concepts and fitness centers

Innovation that Matters (1776)

  • 1776 compiled a ranking of the top 25 cities “most ready to capitalize on the inevitable shift to a digital economy.” The study focused on six main themes for identifying cities: talent, capital, industry specialization, density, connectivity and culture. The top five in order: Boston, San Francisco/Bay Area, Denver, Raleigh-Durham, San Diego
  • While the San Francisco Bay Area is the clear leader in total startup activity, its lack of a cohesive community and declining quality of life for residents helped move Boston to the top spot. Denver and Raleigh-Durham were surprise stars: They have fewer startups than larger cities like New York and Los Angeles but stronger ties between the startups and institutions in the community. San Diego performed well thanks to its strong talent and capital base, dense community and growing specializations in health and IT
  • Also of note is some of the emerging unlikely cities. “Baltimore, Pittsburgh and New Orleans are not major drivers of the digital economy yet, but they are attracting educated young people, building collaborative innovation communities and creating the right cultural foundation to rise beyond recent challenges to stay relevant. Baltimore topped the connectedness survey. Pittsburgh best connected startups to local universities. New Orleans recorded the fastest increase in educated millennials”
  • A list of the full top 25 cities is below. See Appendix A for more details on the rankings:

New Regulations Create Additional Challenge for Non-Traded REITs (National Real Estate Investor)

  • FINRA 15-02 officially went into effect in early April and its goal is to provide greater transparency to investors in attempting to require non-traded REIT’s to show a more accurate asset value. Statements are now required to either a) list the purchase price less any fees or commissions or b) sponsors can list a value of the security. “Previously, it was common for statements to show a gross purchase price, such as $10.00 per share, even though front-end commissions and fees may have reduced that price to $8.50 or $9.00. Likewise, that purchase price could sit on a statement unchanged for up to seven years. Sponsors can no longer do that. They have to show the net price immediately, and sponsors can only show that price for a max of about 2.5 years before switching to value. Specific to statements that show the value, that number also needs to be updated at least once a year. In addition, that value has to be based on third party valuation of the underlying assets”
  • The regulation change is also inadvertently putting pressure on sponsors to reduce fees and/or change fee structures as greater transparency is required. The shift to lower fee structures is already underway in the mutual fund industry and William C. Miller, president and CEO of Cole Capital, believes that this change will fuel growth and innovation in the real estate sector. “I think you will see evolution and future product design that has been afforded to us, because of this FINRA regulation change. The evolution of the mutual funds business is a nice track record for us to try and follow”

Salesforce Moves Regional HQ to Indiana’s Tallest Building, Adds 800 Jobs (Commercial Property Executive)

  • As part of a significant expansion, Salesforce will take the naming rights at 111 Monument Circle in downtown Indianapolis, the tallest building in Indiana. Indy already serves as the company’s regional headquarters and employs more than 1,100 people
  • The company is planning to spend $40M over the next 10 years to expand its regional headquarters. The move will add 800 jobs over the next five years

Anbang Said to Face Inspection by China’s Insurance Regulator (National Real Estate Investor)

  • Anbang has emerged as one of China’s most prominent overseas acquirers in the past two years, buying the iconic Waldorf Astoria hotel in New York and getting into a $14 billion bidding war for Starwood Hotels & Resorts Worldwide Inc. before dropping out at the last minute. Now, China’s Insurance Regulatory Commission is assembling a team to inspect Anbang after the agency has vowed to step up scrutiny regarding insurer’s investments in real estate and unlisted equities. It is not clear which part of their business would be inspected
  • Anbang’s main life insurance unit gets the bulk of its premium income from short-term policies sold through bank branches that clients can typically redeem after as little as two years, according to its 2015 annual report. Chinese regulators in March told insurers to rein in their short-term life insurance sales, saying worsening investment returns could undermine their ability to repay maturing policies

 

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:

Press Release – (Board of Governors of the Federal Reserve System)

  • As expected, the Fed held rates steady on Wednesday marking the third consecutive meeting that rates have not budged.  Among reasons for the lack of movement, the Fed cited improved labor market conditions, but moderating economic activity as inflation continues to run below the Fed’s 2% long-run objective.
  • In March, the Fed revised the number of expected rate increases downward from four to two. A fair amount of skepticism remains that such raises will become effective in the near future as the Fed expects economic activity to expand at a moderate pace with inflation continuing to remain low due in large part to declines in energy and import prices.

Alphabet’s Next Big Thing: Building a ‘Smart’ City (WSJ)

  • Alphabet, the parent company of Google, is putting the final touches on a proposal to get into the business of city building and developing giant new districts of housing, offices, and retail within existing cities. The group that is running this proposal is Sidewalk Labs, Alphabet’s urban technology-focused subsidiary. The group was formed by Alphabet executive Larry Page and Daniel Doctoroff who worked in New York’s economic development department during the first six years of Mayor Michael Bloomberg’s term
  • Sidewalk would potentially identify economically struggling municipalities and partner with them to build up the districts which would have a tech focus and hold tens of thousands of people. The aim would be to “create proving grounds for cities of the future, providing a demonstration area for ideas ranging from self-driving cars to more efficient infrastructure for electricity and water delivery”
  • Details are vague and the proposal will likely encounter several obstacles, but Sidewalk would be hoping to develop these cities without restraint from city regulations

Core may not be the answer – (PERE)

  • Global total returns for real estate investing totaled 10.7% last year, its highest levels since 2007. The figure has been rising for each of the past four years. Capital growth accounted for more than half of the total return during 2015, the highest portion since 2006
  • With concerns of a market correction coming, one traditional investment strategy is to flock to assets in core market where returns are more income driven rather than capital appreciation. However, the author argues that core assets may not necessarily be the answer as concerns over a significant correction may be overblown as interest rates remain low, significant capital is still awaiting deployment in real estate, and construction levels are still below the long-term average
  • The author also cautions investors on taking opportunistic-level risk given moderating rental rates and anticipated cap rate depression in the coming years. At this point in the cycle, investors can no longer expect to generate returns based on the ‘rising tide’ of a rebounding real estate market. Instead, strong opportunistic returns will now depend on active asset management rather than passive market timing

Department Stores Need to Cull Hundreds of Sites, Study Says (WSJ)

  • Research from Green Street advisors suggest about 1/5th of all anchor space in US malls would need to be closed if stores wanted to match the productivity they had from a decade ago. Sales at the nation’s department stores averaged $165 a square foot last year, a 24% drop since 2006. Over the same period, the stores reduced their physical footprint by 7% in aggregate
  • Below is a chart showing the number of estimated store closings that would need to occur by chain:
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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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