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Market Report: Questioning the Fed’s decision on interest rates

In the wake of the Federal Reserve’s decision to keep interest rates unchanged, here’s a roundup of how the development is being digested across the real estate and financial markets.

Nikki Vasco

Vasco

“Some are questioning the decision of the Fed to keep borrower rates unchanged due to global concerns. With employment and inflation near targets, if the Fed would have raised rates, it would have given a level of confidence to the market that would likely have led to a rally. Instead, the market fell flat and volatility continues.” — Nikki Vasco, Chief Investment Officer at FullCapitalStack.com.


Jeff Lee

Lee

There was a lot of speculation over the rate decision and many of our clients wanted to avoid closing in and around the Fed announcement.  Many accelerated closings for last week or earlier this week, while some chose to push off into next week and roll the dice post rate decision and post digestion of Fed Chairman Janet Yellen’s commentary. We did have a few defeasances that priced on Thursday and the clients who elected to buy defeasance securities in the morning were rewarded with higher yields/cheaper defeasance costs.” — Jeff Lee, Chief Operating Officer, Commercial Defeasance LLC


Rehling

You had a window, and you risk that between now and December you have things deteriorate, or you have some new and unexpected source of volatility. If something happens and they are not able to go in December, there is a credibility issue.” — Brian Rehling, fixed-income strategist at Wells Fargo Investment Institute. 


Paul Krugman

Krugman

“The Fed did the right thing last week: nothing. And the howling of the bankers should be taken not as a reason to reconsider, but as a demonstration that the clamor for higher rates has nothing to do with the public interest.” — Paul Krugman, New York Times columnist


Jeffrey Lacker

Lacker

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Further delay would be a departure from a pattern of behavior that has served us well in the past. The historical record strongly suggests that such departures are risky and raise the likelihood of adverse outcomes.” — Jeffrey Lacker, President of the Federal Reserve Bank of Richmond (the sole dissenter in the Open Market Committee’s recent vote)


Bringing more transparency to commercial real estate investing

Transparency. Accountability. Accessibility. These are all traits commercial real estate investors want, and they are qualities the best sponsors consistently display.

When investors and sponsors don’t see eye-to-eye on these crucial elements, it can lead to trouble. That lesson has come front-and-center here in North Carolina.

Pittenger Land Investments, the land investment firm founded by U.S. Congressman Robert Pittenger (R-N.C.), recently was the subject of a Charlotte Observer article that questioned whether his family’s company properly disclosed markups on land it purchased and then sold to investors who hoped to eventually flip the assets to developers. Some investors told the paper they didn’t know Pittenger sold them stakes at marked-up prices. The FBI is reportedly investigating the firm, though there have been no official allegations of any wrongdoing.

Pittenger Land Investments told the newspaper it has always fully complied with all rules and regulations. It also appears the firm disclosed the necessary information in documents sent to investors.

Why then are some investors still unhappy? I believe technology has changed our expectations. Investors now demand more information, with more context and at a faster pace than ever before. Conducting investor relations the same way it has always been done is no longer enough.

Granted, dust-ups such as the Pittenger dispute boil down to how much information was disclosed properly and how much relevant information was not shared. In Pittenger’s defense, many investors only hear (or read) what they want to hear. However, the debate serves as an important reminder that exceeding expectations with investor communications is paramount.

At our portfolio company Investor Management Services, we’re seeing more and more how important this issue can be. Our clients have told us the most valuable items we can provide are the tools to attract, engage and manage their investors in the 21st century.

Years ago, receiving a paper credit card statement in the mail was an appropriate and acceptable method of staying up-to-date on account balances. Keeping an investment prospectus in a filing cabinet for future reference was standard practice.

Today, any card issuer that only communicates with paper mailings won’t stand a chance in the marketplace. Very few people believe paper filings in a storage room are the best way to access investment records.

Customers now expect and demand real-time updates on their mobile phones. Transactions are documented instantaneously. Legal disclosures and investment details should be available from almost anywhere with a user name and password.

For commercial real estate professionals, this is a game changer, and frankly, we have been slow to adapt. Too often, paper statements with arcane language are mailed to investors with little other communication. That doesn’t cut it anymore. Investors want their real estate holdings and relationships to be as accessible and transparent as their online banking and brokerage accounts. They want all the available information at their fingertips, not just the required minimum mailed periodically in a legal document.

This shift is driving growth at our company. We have added new clients weekly, even in the traditionally slow summer months, and we’re investing in technology updates to deliver the tools sponsors need to provide a top-shelf experience for their investors.

IMS clients are sharing documents and disclosures with online investor portals, granting their investors access anytime and anywhere. Investors are monitoring investment dashboards to track performance. All parties can process transactions with the click of a mouse or the tap of a touchscreen.

In the modern economy, “We didn’t know,” is no longer a good excuse. The tools to manage investor-sponsor relationships are delivering transparency, accountability and accessibility we all should enjoy.


Robert J. Finlay is CEO of QuietStream Financial.

By Robert J. Finlay | Chief Executive Officer | QuietStream Financial

 

Market Report: ‘Falling knife’ or ‘buy on fear’?

It’s hard to even look at the numbers right now. 

After a sharp slide to end last week, investors woke to more disturbing news Monday as international market declines sent the Dow Jones Industrials into a 1,000-point tailspin to start the day. Even a big late morning rebound eventually gave way to a sell-off later in the day.

So, let’s stay away from the absolute and instead, focus on the differential. Despite the massive rally in the Treasury market, refinance rates moved about 10 basis points lower. In other words, spread widening significantly muted the Treasury run. Typically in a bearish environment, credit becomes tight and financing more difficult. However, the numbers are showing a bottom to the correction.

Although credit products blew through support levels, the quick bounce on Monday indicates a probably near term correction and potentially continued strength in the CRE market.


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Bankruptcies, weak sales not slowing retailer growth

The retail industry may be tussling with some high-profile bankruptcies and weak sales growth, but demand for retail properties remains strong, according to a recent report from RBC Capital Markets.

Analyst Rich Moore’s research shows retailers have increased plans to expand and open new stores over the next 24 months compared to the outlook earlier this year. Planned store openings over the next 24 months have increased by 3.8 percent year-to-date, based on RBC’s retailer database of nearly 80,000 retailers. Those growth plans are in spite of sales growth that checked in at a meager 0.6 percent for the month of June.

“Media headlines have recently painted a difficult picture for the retail sector amid a backdrop of sputtering retail sales growth, struggling retailers, and high-profile bankruptcies. Despite the apparent headwinds, bad debt expense at the REITs remains below the historical norms, and strong retailer demand continues to drive occupancy and rental gains,” Moore says in his National Retail Demand Monthly report.

The “increasingly competitive” retail environment as shoppers have more choices that ever, including online stores, is expected to fuel more bankruptcies in the months ahead, RBC says.

In July, Anna’s Linens, a specialty houseware retailer, and A&P, the supermarket chain, filed for protection. RBC says retailers operate a combined 564 stores nationwide with 268 Anna’s Linens locations and 296 A&P locations.

“We expect that the increasingly competitive retail environment will lead to further bankruptcies which is likely to push bad debt expense back to historical norms,” Moore writes in his report. “Although bankruptcies may be disruptive in the short run, high quality retail space is limited, and retailer demand for vacancies due to bankruptcy appears solid as evidenced by the climbing number of planned store openings.”

Retailers in the crafts and supplies category, activewear, childcare, and salons showed the largest positive changes in planned store openings year-to-date through the first half of the year. Meanwhile, toys and hobby stores, laundromats, bookstores, and car care service centers slowed their growth plans the most, RBC says.


Top 30 Retailers 24-Month Growth Projections (as percentage of existing stores)

  1. Children’s Orchard (200 stores, 200% growth rate)
  2. Five Guys Famous Burgers and Fries (1,200, 160%)
  3. Penn Station – East Coast Subs (300 stores, 146%)
  4. Bed Bath & Beyond (140, 140%)
  5. Smashburger (200, 133%)
  6. Complete Nutrition (200, 129%)
  7. Subway (5,000, 122%)
  8. Quality Oil Company (145, 121%)
  9. Fresh and Easy (200, 114%)
  10. Aveda (200, 100%)
  11. Urban Outfitters (120, 100%)
  12. Menchie’s Frozen Yogurt (450, 90%)
  13. Robeks Fruit Smoothies & Healthy Eats (100, 83%)
  14. Golden Krust Caribbean Bakery & Grill (100, 83%)
  15. Villari’s Family Centers (400, 80%)
  16. Famous Famiglia (100, 80%)
  17. Sandella’s Flatbread Café (100, 80%)
  18. Crazy8 (160, 73%)
  19. Wing Zone (70, 70%)
  20. Mini Melts (200, 67%)
  21. Dunkin’ Brands Combo Stores (200, 64%)
  22. Torrid (90, 62%)
  23. Lee Nails & Spa (90, 60%)
  24. Charming Charlie (120, 60%)
  25. Red Mango (120, 57%)
  26. Kool Smiles (60, 57%)
  27. Five Below (110, 57%)
  28. lululemon athletica (80, 56%)
  29. Crocs (100, 55%)
  30. Francesca’s Collections (152, 54%)

Source: RBC Capital Markets July 2015 National Retailer Demand Monthly


Adam O'DanielBy Adam O’Daniel | Editor | QuietStream Insights

 

Guess Who Just Plowed $3 Billion Into Farmland?

While retail investors hold their hats watching markets swing back and forth this summer, the world’s deepest pockets are seeding a new fund that will buy stakes in a rather boring asset-class: Farmland.

TIAA-CREF, a multibillion-dollar investment manager, this week announced it has exceeded its $2.5 billion goal and raised $3 billion for a new agriculture fund. TIAA-CREF Global Agriculture II LLC is the asset manager’s second global agriculture investment partnership. The first fund, closed in 2012, raised about $2 billion.

The new fund will invest in “high-quality farmland assets across numerous geographies spanning North America, South America and Australia,” TIAA-CREF says. The pool has capital commitments from U.S. and international institutional investors, with numerous return commitments from the firm’s first farmland investment. TCGA II has 20 investors, including AP2, Cummins UK Pension Plan Trustee Ltd., Environment Agency Pension Fund, Greater Manchester Pension Fund, New Mexico State Investment Council and the TIAA general account.

“With its low correlation to traditional asset classes like stocks and bonds, farmland offers excellent portfolio diversification benefits for investors and a hedge against inflation,” says Jose Minaya, senior managing director and Head of Private Markets Asset Management at TIAA-CREF Asset Management.

“The macroeconomic fundamentals for investing in farmland are very positive and we view the launch of this new strategy as a testament to the ongoing potential and attractiveness of this asset class.”

The oversubscribed fund underscores a trend that has become clear in recent months. Wealthy investors are looking for more alternative assets to offset the volatility of the stock and bond markets.

“Smart money is investing in hard assets,” FullCapitalStack Chief Investment Officer Nikki Vasco says. “Whether its farmland or another form of real estate, many investors are looking for asset classes that can hedge against inflation and shield some of the market volatility we see today.”

TIAA-CREF, which has $500 billion in assets under management from top institutional investors worldwide, currently manages approximately $8 billion in farmland assets and commitments around the world. It has been investing in agriculture since 2007.

A recent Wall Street Journal report on farmland investing pointed to hopes among investors — both institutional and individuals — that the asset class will gain value as food consumption increases amid rising global populations. In addition, farmland often generates income from rent paid by farmers.

Several firms have also recently created REITs for retail investors to own pieces of farmland investments, including Farmland Partners, which went public last year.

It is obvious that some institutional investors believe the benefits of owning hard assets outweighs the risks, despite the recent appreciation and lack of liquidity.

“Farmland is the tortoise in a tortoise and hare race,” Paul Pittman, chief executive of Farmland Partners, told the Wall Street Journal.


Adam O'DanielBy Adam O’Daniel | Editor | QuietStream Financial Insights

 

Is your portfolio prepared for drive-thru grocery stores?

The retail grocery industry — a crucial commercial tenant — is facing a new disruptive force: Amazon.

The e-commerce giant has plans for a drive-thru grocery store in Sunnyvale, California, according to a report in the Silicon Valley Business Journal. If expanded, the concept could bring new turmoil to a retail grocery business already in upheaval from consolidation and changing consumer habits.

The Silicon Valley Business Journal reports a real estate developer there has submitted plans for a new 11,600-square-foot building and grocery pickup area. Amazon isn’t specifically named in building documents. However, the Silicon Valley Business Journal cites real estate sources who say Amazon is behind the project and plans a rollout of the concept that could eventually encompass multiple sites in Silicon Valley.

For several years, many companies, including Amazon’s AmazonFresh, have attempted to deliver groceries on a same-day or next-day schedule, to varying degrees of success. A common problem has been delivering fresh food to a doorstep and leaving it in a non-climate-controlled and unsecured environment.

Amazon’s drive-thru concept would be a step beyond its AmazonFresh grocery delivery service. With a drive-thru grocery location, customers could order online and pick-up in-person at a scheduled time. The concept could potentially bridge the convenience of grocery shopping online and the need to pick up food and keep it fresh.

“We are seeing the emergence of the next generation of the food distribution system,” says Bill Bishop, chief architect at Brick Meets Click, a retail and e-commerce consultancy, according to the SVBJ.

The exclusive report cites planning documents that include details of the proposed drive-thru grocery store. They include the following:

  • The concept would include both an online shopping platform and traditional brick-and-mortar retail.
  • Customers will pre-order grocery and other items, then choose a 15-minute to two-hour pickup window.
  • The building would be constructed as a warehouse and include loading stalls for eight cars.
  • Shoppers could also arrive on foot or via bicycle and shop inside the store.

Grocery stalwarts such as Wal-Mart and Safeway, among others, have been piloting and expanding curbside pickup for groceries ordered online. However, Amazon’s expertise in e-commerce and automated order-filling could seriously challenge those offerings.

If an Amazon drive-thru service proved successful and the company decides to embark on a major expansion, it could create numerous opportunities for commercial real estate developers and investors.  Of course, a successful neighborhood Amazon grocery drive-thru could also dent the profitability of traditional supermarkets and give their landlords and investors heartburn.

“It would put more competition on (traditional grocers) because now we have a new format,” Kirthi Kalyanam, director of the Retail Management Institute at Santa Clara University’s Leavey School of Business, told the Silicon Valley Business Journal. “Where the rubber is going to hit the road is: Can these new locations be more convenient to customers than a Safeway? If the answer is yes, There will be some restructuring in the grocery industry.”


Adam O'DanielBy Adam O’Daniel | Editor | QuietStream Financial Insights

 

4 Intriguing Ways Drones Will Remodel Commercial Real Estate

Aerial drones are replacing boots on the ground with technology in the air. Will commercial real estate see the same transformation?

The trend of accomplishing more and more with unmanned aerial vehicles presents both challenges and opportunities for owners and investors in commercial real estate.

While military applications have led the way so far, the drone explosion has prompted both large corporations and startups to venture into the private drone business. The use of drones for commercial purposes is expected to expand at a 19 percent compounded annual growth rate between now and 2020. Meanwhile, the Federal Aviation Administration is sorting through a host of issues sure to arise.

A drone flies near an office property.

A drone flies near an office property.

Already, drones have begun to change how commercial real estate owners and investors make decisions. Whether you’re an early adopter or fast follower, now is the time to understand what’s taking off. Here are four areas to watch:

Marketing: Interactive photo galleries and 360-degree virtual tours are old hat. The next trend in marketing properties is to hire a commercial drone to showcase from above. The idea is already catching on in Southern California, where high-end residential Realtors have used drone video to market estates. Expect striking commercial properties to be marketed in similar fashion.

Due Diligence: Inspecting a piece of property curbside gives investors one perspective. Viewing an asset from 100 feet in the sky is another. An investor conducting due diligence on a property hundreds of miles away can now hire a drone to survey the area. Could drone-conducted due diligence someday replace traditional site tours?

“Look at what Google Maps did to help people understand the location of a property. Drones present another clever new tool for analyzing real estate,” QuietStream Financial Chief Executive Robert Finlay says. “However, nothing replaces boots on the ground for due diligence. I’d much rather walk the property than see a drone video.”

Security: Drone surveillance? Not in my backyard. As drones proliferate, security will become a greater issue for commercial real estate operators — on both sides of the issue. Many large office properties use private security officers and video surveillance to monitor a property on the ground. In the future, it may prove cost effective to also secure an asset with an aerial presence. Likewise, property owners are sure to invest in systems designed to keep outsiders from peeping. If property lines are vertical, some owners will do their best to enforce those lines into the air.

Logistics: Amazon founder Jeff Bezos raised eyebrows when he claimed plans to one day deliver packages with drones. Today, the idea is nearing reality as small providers are already experimenting with drone deliveries. Commercial property developers and operators will need to consider how to accommodate commercial drones arriving with packages. Could we one day soon see commercial properties with reserved space for drone landings and drop-offs?

Interest rates: How many increases are on the way?

Yes, investors, interest rates will go up this year.

Here’s the question we really want answered: Will two rate hikes happen before Christmas?

Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.

“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”


source: tradingeconomics.com

Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.

In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”

The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.

“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.