News feed from around the Nation
Commercial real estate can't seem to shake these COVID symptoms
The market's 2021 comeback won't save all the properties that remain beset by debt woes caused or exacerbated by the pandemic.
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Alby Gallun June 25, 2021 Crain's Chicago Business
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The Palmer House Hilton has reopened, but foreclosure looms. Gurnee Mills has won a reprieve from its lenders. The Civic Opera Building is in purgatory.
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After a scary 2020 for commercial real estate investors, the fading pandemic and recovering economy are easing their worst fears of a prolonged and painful slump—and wave of foreclosures. But the market's 2021 comeback won't save all of real estate's long-haulers, the properties that remain beset by debt woes caused or exacerbated by COVID-19.
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The Chicago-area delinquency rate on a key category of debt, commercial mortgage-backed securities, or CMBS, fell to 11.2 percent in May, according to Trepp, a New York-based research and consulting firm. That's an improvement from the peak of 14.0 percent in June 2020, but it could take years for the rate to return to its pre-COVID level of 2 to 3 percent.
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"I don't think we're out of the woods yet," says Tom Fink, senior vice president and managing director at Trepp.
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That statement applies to some of the biggest properties contributing to the area's high delinquency rate. The 1,635-room Palmer House, the city's second-largest hotel, reopened June 17 after being closed due to the pandemic for 15 months. But its future remains a question as its owner, New York-based Thor Equities, tries to resolve two foreclosure suits totaling more than $410 million.
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Gurnee Mills, the area's third-biggest mall, with about 1.9 million square feet, is in a better spot. After defaulting on about $124 million in CMBS debt last year, the mall's owner, Indianapolis-based Simon Property Group, negotiated a forbearance agreement with a loan servicer in December, protecting the property from a potential foreclosure suit.
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In the West Loop, the owner of the Civic Opera building, Nanuet, N.Y.-based Berkley Properties, also is trying to work out a forbearance agreement after stopping payments on about $164 million in CMBS debt, according to public securities filings. Foreclosure is a still possibility.
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The properties represent the three real estate sectors—hotel, retail and office—hit hardest by the pandemic.
Hotels suffered massive losses last year as business and leisure travel came to a halt and occupancies plunged.
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The CMBS delinquency rate for Chicago-area hotels jumped to 57.1 percent in October, largely due to the Palmer House's troubles, and has declined only slightly since then, to 55 percent in May, according to Trepp. Local hotels with delinquent CMBS debt include the W Chicago City Center, the Marriott Chicago River North and the Hilton Orrington Evanston.
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A rebound in tourist and business travel could lift many hotels out of the danger zone. The owners of some, like the Godfrey in River North, have already worked out loan modifications.
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But lenders, after being patient with delinquent hotel owners during the pandemic, also could start demanding that borrowers do more to recapitalize their properties now that the market's improving, says attorney David Neff, a partner at Perkins Coie who specializes in hotel bankruptcies and restructurings. If a hotel owner asks a lender to forgive some of its debt, the lender will require the borrower to invest more equity in the property, he said.
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"I think you're going to see lenders get more aggressive," says Neff, who represents lender Wells Fargo in one of the foreclosure suits against the Palmer House.
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Though he wouldn't make any predictions about the Loop hotel's fate, Neff says the hotel's reopening is a positive step. A Thor spokeswoman declines to discuss the suits but says Thor "looks forward to a lively summer" at the hotel.
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The recovering economy also is a good sign for retail landlords, which were crushed last yearas retailers went bankrupt, closed stores or stopped paying their rent. The CMBS delinquency rate for Chicago-area retail properties rose as high as 29.6 percent in August, according to Trepp.
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In an encouraging sign, retail delinquencies dropped to 11.9 percent in May. Owners of some big properties, like Yorktown Center in Lombard and North Riverside Park Mall, have negotiated loan modifications and averted foreclosure. Rather than seizing a big mall and bringing in another firm to fix it, many loan servicers and lenders would rather work out a deal with a mall owner that has the expertise to turn it around.
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"People are trying to be rational about what they're doing, because the alternative is to be a hard-ass and take a loss," Fink says.
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Still, the long-term outlook for retail is anything but bright. For many housebound consumers, the pandemic merely reinforced the convenience of online shopping, which had been taking big bites out of the brick-and-mortar retail sector for years. Though shoppers are returning to stores, e-commerce will remain a growing threat to shopping malls and other properties, one reason to expect more distress in the future.
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The future is uncertain for the office market, too. The CMBS delinquency rate for local office properties has edged up but is still relatively low, just 3.8 percent in May. The question is what happens in the coming years: Will demand for office space decline as more professionals work from home in the post-pandemic era? No one knows right now, but Fink is bracing for higher delinquencies.
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"Office is going to be a slow burn," he says.
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Just one big downtown property, a 487,000-square-foot office building at 401 S. State St., fell into foreclosure last year, and its owner handed the building over to its lender. Rialto Capital, the loan servicer overseeing the Civic Opera Building, has not ruled out a foreclosure suit against the 915,000-square-foot tower at 20 N. Wacker Drive, according to public filings.
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Though Berkley, the owner of the Civic Opera Building, stopped making mortgage payments, the property's problems are mostly temporary, says Brian Whiting, president of Chicago-based Telos Group, the building's leasing agent. Two co-working tenants, Bond Collective and TechNexus, had a hard time making rent payments as people stopped coming into the office, but their business is coming back, Whiting says. He's confident Berkley will be able to work out an agreement with Rialto.
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"There are amicable discussions going on between the lender and the landlord," he says.
Investors that seek out distressed properties could find some compelling opportunities in the future. The volume of distressed deals has been pretty low so far, but it's still early, says Jim Costello, senior vice president at Real Capital Analytics, a New York-based research and consulting firm.
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But the deals will require different skills than those employed after the recession of 2008-09, he says. Many properties that ran into trouble then suffered from financial distress: They were simply carrying too much debt that financial pros restructured.
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This time around, more properties are suffering from operational distress—not enough cash flow. It takes a different person to solve those problems, Costello says.
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"It's not the financial sharpshooter," he says. "It's the people who understand the cost of rebar."
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Homeowners get clobbered by county property tax appeals board
The Board of Review has largely reversed moves by the Cook County assessor to shift the tax burden from homeowners to businesses. So says a new report from the assessor himself.
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Gerg Hinz January 05, 2021 Crain's Chicago Business
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An effort to shift much of the property tax burden in Cook County’s north and northwest suburbs from homeowners to commercial properties was largely undone by the Board of Review, a new report issued by Cook County Assessor Fritz Kaegi asserts.
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The report says billions of dollars in higher assessments that Kaegi wanted to impose on business properties were nullified by appeals to the board, which legally has the power to overrule Kaegi. That means the taxes involved—at least tens of millions of dollars a year—instead will be paid by homeowners, not apartment developers, shopping mall operators and the like.
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An effort to shift much of the property tax burden in Cook County’s north and northwest suburbs from homeowners to commercial properties was largely undone by the Board of Review, a new report issued by Cook County Assessor Fritz Kaegi asserts.
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The report says billions of dollars in higher assessments that Kaegi wanted to impose on business properties were nullified by appeals to the board, which legally has the power to overrule Kaegi. That means the taxes involved—at least tens of millions of dollars a year—instead will be paid by homeowners, not apartment developers, shopping mall operators and the like.
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In every one of the 13 townships, Kaegi proposed to increase the share of the total tax load on commercial properties, usually by at least 6 or 7 percentage points. But in every township, most of that was reversed.
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In Barrington Township, for instance, Kaegi proposed to increase the share of non-residential properties collectively from 34 percent of the total to 51 percent, a shift of $217 million. But the board reversed the shift and cut another $3 million.
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Similarly, in Evanston, the commercial share of valuation went from $600 million (40 percent) proposed by Kaegi to $402 million, or 32 percent, by the board.
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In Schaumburg Township, Kaegi’s proposed $1.32 billion in proposed non-residential assessments became $942 million.
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Overall, according to Kaegi’s office, the $10.17 billion in property valuations Kaegi proposed for non-residential properties was reduced to $7.19 billion, a reduction of about $3 billion. That means the actual tax bills will have to be levied on the remaining valuation, most of it “residential property owners,” according to Kaegi spokesman Scott Smith. The board’s action “significantly reduced the potential tax burden on commercial owners,” Smith added.
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Neither Smith nor the report itself takes a direct shot at the board. Smith said Kaegi was releasing the report because taxpayers have a right to transparency. Kaegi has one view of what commercial property is worth, but the board “saw it differently,” Smith said.
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Michael Cabonargi, one of two Democrats on the three-person board, said the report "continues to show how significantly runaway assessments increase property taxes. . . .Predictably, many property owners were concerned and appealed their property taxes because they are seeking relief, and because it is their right. We believe and support taxpayers in their right to appeal their property tax assessment—and to make sure they pay their fair share, and not a penny more. . . .We will never shy away from being an open and transparent avenue for taxpayers to seek a fair review of their assessments and to obtain property tax relief."
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Smith said Kaegi attempted to use actual market values as much as possible in reaching proposed assessments, but the board takes other factors into account, including the actual tax load.
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Says the report itself: “The office revised its approach . . . in order to better reflect what buyers and sellers experienced in the market. The office believes its approach is more accurate than its past approach and more closely tracks the market.”
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Some commercial owners have argued the market can and does fluctuate from year to year, and a property ought to be valued on how much value it can spin off.
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Single-family home and small apartment-building owners already get a tax break, with their property supposed to be assessed at 10 percent of its market value. Commercial property, including large apartment buildings, are assessed at 25 percent of market value.
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Virus Siphons $2.5 Billion in N.Y.C. Property Tax Revenue
The value of office buildings and hotel properties, which have all but emptied out since the pandemic began, is expected to take a nosedive.
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By Dana Rubinstein and Jesse McKinley Jan. 14, 2021 New York Times
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As New York City officials fight to control the coronavirus by this summer, it is becoming clear that the economic fallout will last far longer: The city’s property tax revenues are projected to decline by $2.5 billion next year, the largest such drop in at least three decades.
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The anticipated shortfall, which Mayor Bill de Blasio announced on Thursday, is largely driven by a sharp decline in the value of office buildings and hotel properties, which have all but emptied out since the pandemic began.
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City Hall officials said that the market value of the tax class that includes hotel, retail and office properties has fallen by 15.8 percent, putting the city’s budget in a precarious position for the foreseeable future: Roughly half of the city’s tax revenue comes from real estate.
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For now, the city will partially offset the loss with increased revenues from income taxes: The “rich got richer,” according to a slide from the mayor’s presentation.
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But the city will still have to substantially cut spending, although officials gave no clear indication what services might be at risk. Mr. de Blasio said that since last January, the city had already cut 7,000 jobs through attrition and a hiring freeze; he now plans to reduce the city’s head count by another 5,000.
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“This is just a total economic dislocation for certain industries,” the mayor said. “We’ve never seen anything like what’s happened to the hotel industry. We’ve never seen Midtown in the situation it is now.”
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New York has been devastated by the pandemic’s dual paths of destruction: The virus has killed nearly 26,000 people in the city, while hundreds of thousands of jobs and billions of dollars in tax revenue have been lost.
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At the height of the pandemic, unemployment exceeded 20 percent; today, a half million New Yorkers remain unemployed. And although some businesses remain open, many workers are staying at home rather than using mass transit to commute to densely packed office buildings in Midtown and Lower Manhattan.
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Mr. de Blasio and Gov. Andrew M. Cuomo, who have battled with the Trump administration for more federal aid, have expressed optimism that President-elect Joseph R. Biden Jr., together with a Democratic-led Congress, will bring substantial assistance.
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Indeed, just before Mr. de Blasio’s announcement, the incoming Senate majority leader, Chuck Schumer, said that he and Mr. Biden had reached a deal for the federal government to cover the full cost of state and city expenses related to a disaster declaration from last March, when the virus was first discovered in New York. The city had been on the hook for 25 percent of the expenses eligible for federal emergency reimbursement.
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The move is expected to save the state and city about $2 billion, money that Mr. Schumer’s office said can be used to “tackle Covid-related budget gaps.”
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On Thursday, Mr. Schumer was promising more to come.
“This is just prelude of better days ahead out of Washington for New York,” he said. “With Biden as president and me as majority leader, it’s going to get better.”
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A $1.9 trillion proposal unveiled on Thursday by the president-elect contains $350 billion to help state and local governments. Still, few expect the federal government to be able to fully meet their budgetary needs, especially with the economy in such flux.
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In November, the city projected that the budget for the next fiscal year, which starts in July, would include $31.8 billion in property tax revenue. On Thursday, the city said it was recalibrating those expectations downward by $2.5 billion.
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“This is an unprecedented drop,” said Thomas P. DiNapoli, the New York State comptroller. “We have not seen property tax collections decline in more than 20 years and never at these levels.”
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Even if normal economic activity resumes in New York City, it will not necessarily result in the full-scale return of office workers to office buildings, now that so many have become acclimated to working from home.
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In early January, only 29 percent of Manhattan hotel rooms were occupied, compared with 69 percent the year prior. More than 230 Manhattan hotels have closed, at least temporarily, during the pandemic.
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The Manhattan retail sector, which was getting battered by e-commerce before the pandemic set in, continues to suffer, too, with rents declining and vacant storefronts increasing.
In 2020, tenants leased just 20.5 million square feet of office space in Manhattan, the lowest level in at least 20 years, according to a recent report from Savills, a real estate services firm.
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It “will still be several quarters before workers return to the office in earnest and the full implication of demand shifts due to work-from-home or new location strategies can be seen,” notes the recent Savills report.
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Landlords have responded by embracing unconventional ideas, like converting large swaths of underutilized Midtown office space into apartments, a notion recently embraced by Mr. Cuomo.
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The agreement with the Biden administration to pay 100 percent of coronavirus-related emergency expenses — similar to one that New York had with the Obama administration in the wake of Superstorm Sandy — will mean about $1 billion for the state and the city each, Mr. Schumer said.
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The Trump administration had previously committed to such an arrangement, the senator said, but had never actually acted on it, leaving the city and state to cover 25 percent of those costs.
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“I asked Trump for this personally two or three times,” Mr. Schumer said. “He said yes, and he never did it.”
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Thanks to the arrival of more aid, the city will be able to put off nearly $200 million in cuts to education funding, including a $44 million cut to the expansion of the mayor’s “3-K for All” preschool program.
Earlier this week, Mr. Cuomo announced that the state government was facing a $15 billion shortfall, which he characterized as the largest in state history, something he, too, said he hoped the federal government would help backfill.
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“We expect basic fairness from Washington,” he said on Monday. “Finally.”
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Mr. Schumer said he had spoken to the president-elect and Nancy Pelosi, the speaker of the House, about the need for direct aid to state and local governments — something that was left out of a December coronavirus relief bill — and both leaders were committed to providing it.
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But as to whether it means a complete bailout for New York, Mr. Schumer was more circumspect.
“We’re going to do everything we can to get the state all the money it needs,” he said.
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Kaegi jacks up assessments on south suburban landlords
Owners of commercial properties in the south and west suburbs of Cook County could face higher property tax bills next year. But homeowners will bear less of the burden.
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Alby Gallun November 5, 2020 Crain's Chicago Business​
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After jacking up assessments on commercial properties in the northern Chicago suburbs in 2019, Cook County Assessor Fritz Kaegi has delivered a repeat performance south and west of the city this year.
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Kaegi’s office assessed all nonresidential property in the south and west Cook suburbs at $5.25 billion, up 56 percent from 2019, according to data from the assessor’s office. The total assessed value of residential real estate in the suburbs rose 8 percent, to $8.42 billion.
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The figures underscore the major shift underway in the Cook County property tax system under Kaegi, who set out to reform the office and improve the accuracy and transparency of its assessment process after he was elected in 2018. He has hit office buildings and other commercial properties with big assessment hikes, drawing criticism from landlords and property tax appeals attorneys that he’s trying to redistribute the county’s wealth by shifting the tax burden onto them.
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Landlords in south and west suburban Cook County most definitely will shoulder more of the tax load next year, when they receive tax bills based on the 2020 reassessment. The new valuations mean nonresidential properties now account for 38 percent of the total assessed value in the area, which stretches from Oak Park to Sauk Village, up from 30 percent last year, according to the assessor’s office.
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That’s good news for homeowners there, many who pay excessively high taxesrelative to the value of their properties. Residential properties now make up 62 percent of the assessed value in the area, down from 70 percent last year.
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Assessed values would have risen more if it weren’t for the coronavirus pandemic. As the virus swept into the Chicago area, Kaegi’s office set out to account for it in the assessment process, assuming it depressed the values of many properties. In Berwyn Township, for instance, the assessor lowered values on single-family homes and condominiums by 9.6 percent to 11.3 percent because of COVID-19.
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Kaegi is in the second year of a three-year reassessment cycle in Cook County, an often opaque process that determines who pays what in property taxes used to fund schools, police and fire departments and other local government functions. His office assessed the north and northwestern suburbs last year and will tackle the city of Chicago in 2021.
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Higher assessments don’t automatically result in higher property taxes. What matters is the relative change in assessed value. If a single-family homeowner’s assessment rises, but everyone else in the neighborhood receives a bigger increase, the homeowner’s tax bill would likely decline.
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Taxes also depend on the levy: how much local governments decide they need to collect in property taxes to fund their operations.
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Kaegi has irked landlords mainly with his use of a common real estate valuation metric called a capitalization, or cap, rate. He contends his predecessor, Joseph Berrios, used unreasonably high cap rates, resulting in especially low, and unfair, assessments of office and apartment buildings, shopping centers, hotels and warehouses.
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Kaegi says his office uses lower cap rates that more accurately reflect true—and in many cases, much higher—market values.
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“I’m not a sadist. It doesn’t give me pleasure to do that,” he said. But he’s “correcting for substandard procedures from previous administrations.”
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Nonetheless, the correction resulted in tax hikes for commercial landlords in the northern suburbs. Kaegi’s office boosted total commercial assessed values in the northern suburbs by 77 percent last year, versus a 14 percent increase for residential. After the Cook County Board of Review acted on property owners' appeals of their assessments, total commercial assessed values rose by a smaller amount, 25 percent, as did residential, increasing 11 percent.
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But many north suburban landlords suffered sticker shock when they received their tax bills earlier this year: The average commercial and industrial tax bill rose 15.8 percent, while the average residential bill rose 1.1 percent, according to the Cook County treasurer.
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Landlords in the south and west suburbs won’t receive tax bills based on their new assessments until next year, but some could be in for some hefty increases. In Orland Park, Kaegi’s office valued the Orland Square Mall at $227 million, more than double its previous value of $110 million. The assessor’s estimated value of Oak Park Place, a 204-unit apartment building in downtown Oak Park, rose 85 percent, to $36 million.
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Representatives of Indianapolis-based Simon Property Group, which owns Orland Square, and Oak Park Place owner John Hancock Real Estate, a unit of Toronto-based Manulife Financial, did not respond to requests for comment.
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Vacancy Climbs As Rents Fall Across Asset Classes
Most metros are seeing “bleak” fundamentals in apartments, office and retail, according to a new Moody’s Analytics.
By: Kelsi Maree Borland January 11, 2021 GlobeSt.com
Apartments, office and retail are all following a similar trend: rising vacancy rates with declining rents. A new report from Moody’s Analytics calls the dynamic “bleak, but not dire,” noting that while most metros are following a similar pattern, most of the declining fundamentals are more moderate than originally expected.
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The national apartment vacancy rate climbed to 5.2% in the fourth quarter, up nominally from 5.1% in the third quarter and 4.7% in the fourth quarter 2019. Apartment rents fell an additional 1.4% in the fourth quarter and are down 3.1% for the year. Major metros are bearing the brunt of the damage. Boston, Washington DC, San Jose, New York City and San Francisco had the most significant decline in apartment rents in the fourth quarter. New York and San Francisco are leading the pack with rents down 12.2% and 14.9%, respectively, for the year.
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The national office vacancy rate climbed to 17.7% in the fourth quarter, up from 17.4% in the third quarter and 16.8% a year ago. Office rents have been slower to decline, falling .6% in the fourth quarter and only .7% for the year. Like apartments, New York City and San Francisco led in declining fundamentals with rents falling 1.9% and 1.5%, respectively. However, Orange County, California had the steepest declines in office rents, down 2.3% for the quarter alone. The report found the vacancy rate increases more concerning, noting that 54 markets had an increasing vacancy rate and 26 metros have a vacancy rate higher than 20%.
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Of course, retail has been among the hardest hit commercial real estate sectors; however, fundamentals have not deteriorated more significantly than apartments of office. Retail vacancy increased to 10.5% at the end of the year, up from 10.4% in third quarter and 10.2% last year. Rents were down .4% for the quarter and 1.2% for the year. Of the 77 metros Moody’s reviews, 64 markets had a decline effective rent in the quarter.
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It isn’t all bad news. Select markets had improving fundamentals this year. In apartments, some secondary markets—Chattanooga, Las Vegas, Sacramento, Ventura County, Memphis and Fairfield County—had effective rent growth of 0.7% to 1.1%. In office, five markets had an increase in effective rents, including Lexington, Raleigh-Durham, Tulsa, Milwaukee and Buffalo. Retail is perhaps the most impressive with 13 metros seeing rising rents, although the growth was moderate.
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Unfortunately, Moody’s doesn’t have a better outlook for 2021. The report expects fundamentals to continue to decline this year, particularly in office and retail where tenants that have been locked into long-term leases have not yet had the opportunity to downsize or vacate the property.
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COVID Forces Texas Mall Closing
As a recent study shows the dangers of indoor gatherings, more shutdowns
could be on the horizon.
By Les Shaver November 12, 2020 Globest.com
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Spiking COVID-19 cases in Texas have forced Simon Property to close the Cielo Vista Mall in El Paso, Texas, according to CNBC.
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As Coronavirus cases rise around the country, many other mall operators could be following Simon’s lead, which could mean a second round of COVID shutdowns after the initial wave last Spring.
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Right now, Cielo Vista Mall is Simon’s only property that is closed. CEO David Simon told CNBC that he thought enclosed malls were being treated “unfairly and inconsistently,” and there wasn’t sufficient proof that the mall environment “spreads anything.”
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However, a recent study published in the journal Nature, found that restaurants, gyms and indoor venues accounted for 8 in 10 new infections from March to May in 10 cities, according to The New York Times. The study showed that less affluent areas were harder hit by COVID because the public venues in those areas were more crowded than in affluent areas. It also indicated that setting caps on the number of people in a facility could help slow the disease’s spread.
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Before shutting down Cielo Vista Mall in El Paso, all of Simon’s malls had been open since Oct. 7. During Q3, seven of its retail properties in California were temporarily closed on July 15 due to a governmental order. Six of the properties reopened on Aug. 31.
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As of Sept. 30, 2020, Simon’s occupancy was 91.4%, and its base minimum rent per square foot was $56.13, which was an increase of 2.9% year-over-year.
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While Simon and enclosed mall owners have struggled with shutdowns, open-air retail has generally remained open throughout the pandemic.
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“In open-air centers in many jurisdictions, retailers are currently generally permitted to operate with in-store shopping, although subject to some conditions aimed at limiting congestion and high customer traffic within the store,” Scott Grossfeld, a partner at Cox, Castle & Nicholson, told GlobeSt.com in an earlier interview.
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Landlords and retailers in enclosed retail spaces have tried to compensate by offering curbside and other pick-up services, according to Grossfeld. “Although such options provide retailers with some element of economic relief, they, unfortunately, are not the same [or as good] as providing in-store shopping,” he told GlobeSt.com
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COVID Forces Texas Mall Closing
As a recent study shows the dangers of indoor gatherings, more shutdowns
could be on the horizon.
By Les Shaver November 12, 2020 Globest.com
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Spiking COVID-19 cases in Texas have forced Simon Property to close the Cielo Vista Mall in El Paso, Texas, according to CNBC.
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As Coronavirus cases rise around the country, many other mall operators could be following Simon’s lead, which could mean a second round of COVID shutdowns after the initial wave last Spring.
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Right now, Cielo Vista Mall is Simon’s only property that is closed. CEO David Simon told CNBC that he thought enclosed malls were being treated “unfairly and inconsistently,” and there wasn’t sufficient proof that the mall environment “spreads anything.”
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However, a recent study published in the journal Nature, found that restaurants, gyms and indoor venues accounted for 8 in 10 new infections from March to May in 10 cities, according to The New York Times. The study showed that less affluent areas were harder hit by COVID because the public venues in those areas were more crowded than in affluent areas. It also indicated that setting caps on the number of people in a facility could help slow the disease’s spread.
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Before shutting down Cielo Vista Mall in El Paso, all of Simon’s malls had been open since Oct. 7. During Q3, seven of its retail properties in California were temporarily closed on July 15 due to a governmental order. Six of the properties reopened on Aug. 31.
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As of Sept. 30, 2020, Simon’s occupancy was 91.4%, and its base minimum rent per square foot was $56.13, which was an increase of 2.9% year-over-year.
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While Simon and enclosed mall owners have struggled with shutdowns, open-air retail has generally remained open throughout the pandemic.
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“In open-air centers in many jurisdictions, retailers are currently generally permitted to operate with in-store shopping, although subject to some conditions aimed at limiting congestion and high customer traffic within the store,” Scott Grossfeld, a partner at Cox, Castle & Nicholson, told GlobeSt.com in an earlier interview.
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Landlords and retailers in enclosed retail spaces have tried to compensate by offering curbside and other pick-up services, according to Grossfeld. “Although such options provide retailers with some element of economic relief, they, unfortunately, are not the same [or as good] as providing in-store shopping,” he told GlobeSt.com
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Some Apartment Markets Draw Eye-Popping Rent Growth in Pandemic
Multifamily Hubs Withstanding the Coronavirus Have Certain Things in Common
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By David Kahn and Sam Tenenbaum November 2, 2020 CoStar
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Demand for apartments in more affordable Sun Belt cities is rising while asking rents in pricey coastal cities are falling as the pandemic roils the country's apartment markets.
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To get a better sense of what's driving both the best and worst metropolitan areas for rent growth, CoStar Analytics analyzed the top 20 and bottom 20 multifamily areas nationwide.
For this analysis, only submarkets with more than 5,000 units were examined. This allows for a large enough sample of rent observations from Apartments.com and CoStar’s other listing websites, as well as CoStar’s multifamily research team.
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Many of the areas of the country with the highest rent growth are in fast-growing Sun Belt cities such as Atlanta, Phoenix and the Inland Empire in California. Those locales benefit from net migration from more expensive coastal markets, boosting demand for housing.
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Digging deeper, another common thread is a lack of supply. The top 20 rent growth submarkets collectively completed 1.2% of total inventory over the past 12 months and have 1.9% of inventory currently under construction. For comparison, the national average is roughly 2.5% for trailing 12-month deliveries and 3.4% for inventory under construction.
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And speaking of supply, the existing apartments in these areas is heavily tilted toward mid-quality, three-star housing stock, which is outperforming the national average. Of the top 20 rent growth nodes, 50% of inventory is three-star, or Class B, properties.
The booming industrial market has also benefited many of the submarkets on the list, as people employed in lower- to middle-wage industrial jobs often fall into the three-star rental demographic pool. Areas south of Atlanta, such as Henry County, South Fulton, Clayton County and Southeast DeKalb, all benefit from the region’s booming industrial sector, as do greater Ontario and Riverside County-Temecula in the Inland Empire.
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But not all of the top submarkets are squarely in the country’s southern high-growth region. South Lake County, a suburban submarket of Chicago located in Indiana, ranked second among all submarkets for rent growth over the past year. Northwest Indiana has seen strong population growth as Illinoisans flee the higher taxes while maintaining access to the commuter rail available into Chicago, said Brandon Svec, CoStar’s director of analytics for Chicago. The submarket’s low vacancies have given landlords confidence to push rents more than 12% over the past year.
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As for the bottom 20, the biggest standout here is the sheer number of submarkets in the Bay Area that fell into this category. Of the 20 worst submarket performers in terms of rent growth, 12 are located in the broader San Francisco, San Jose and East Bay markets. This shouldn’t come as too much of a surprise due to the region’s poor performance amid the pandemic. Expensive markets have seen consistent outflows of households over the past few months, as white-collar workers with the option to work from home seek larger, and cheaper, housing.
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Most of the other areas include downtown or core-urban nodes such as Downtown Chicago and Downtown Seattle, Midtown New York, and pricey Northern Virginia neighborhoods such as Rosslyn, Ballston and Crystal City.
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These areas have been developer favorites in recent years. The bottom 20 rent growth areas collectively delivered 3.4% of total inventory over the past 12 months and have 7.2% of inventory currently under construction. Both figures are above the national average.
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Unlike the top performers, the underperforming submarkets are all some of the most expensive regions in their respective markets. Each submarket’s average rents are more than $2,000 per month, or in the top 10% of rents across the country. Most of the residents that had been living in these pricey locales have had the ability to work from home.
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With no end of the pandemic in sight, renters have opted to avoid being locked into expensive leases, instead moving to places such as Dallas-Fort Worth, Phoenix and Boise, Idaho.
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Economist Report: Remote Workers
on the Move
Upwork Press, News & Media Coverage - No bye-line No date - Estimated to be November 2020
Introduction
More than half a year into the pandemic, remote work continues to be the reality for businesses across the country. Even as stay-at-home orders and lockdown measures have eased, many professionals are still working from their homes. This persistence, coupled with findings from early survey results, suggest that remote work is here to stay. While remote workers are already experiencing the direct impacts of this, with fewer commutes and less meetings, there are also early indicators of some larger, indirect effects of remote work. Perhaps the most significant of these effects is around the ability to access job opportunities far beyond one’s local labor market. In this analysis, we will explore how the ability to work remotely has impacted where people plan to live.
Key Findings
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Remote work will increase migration in the U.S.: Anywhere from 14 to 23 million Americans are planning to move as a result of remote work. Combined with those who are moving regardless of remote work, near-term migration rates may be three to four times what they normally are.
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Major cities will see the biggest out-migration: 20.6% of those planning to move are currently based in a major city.
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People are seeking less expensive housing: Altogether, more than half (52.5%) are planning to move to a house that is significantly more affordable than their current home.
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People are moving beyond regular commute distances: 54.7% of people are moving over two hours away or more from their current location, which is beyond daily or even weekly commuting distances for most.
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Housing market data confirms that the highest priced markets are taking the biggest hits: Rental data from Apartments.com reveals that the top 10 percent most expensive markets saw a 13% percentage point larger decrease in rent prices than rental markets in the bottom 10 percent.
Home Is Not Where the Company Is
Over the past few decades, work opportunities have become increasingly concentrated in a handful of superstar cities. At the same time, a lack of new housing supply and high building regulations in these cities have drastically risen the cost of living. In some of these expensive cities, such as San Francisco and San Jose, median house values are now well above $1 million, making it much more difficult for workers to find affordable housing in areas with these high concentrations of job opportunities. However, remote work has presented an alternative to this by allowing us to disconnect where we work from where we live.
Paying high housing costs is no longer a requirement for accessing high paying labor markets, and the geography of where people can live greatly expands. But will professionals seize this moment as an opportunity to relocate?
On the Move
To answer this question and to understand the impact of remote work on moving plans, we surveyed over 20,000 people to learn about their moving intentions. What we found is that the greater ability to work from home post-COVID-19 has increased the likelihood that a significant number of households will move out of the area where they currently live. In total, between 6.9% and 11.5% of households are planning a move due to the growing availability of remote work due to COVID-19.
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Of this group, 6.5% are planning on moving to a different area due to the greater ability to work from home. However, remote considerations also extended to those beyond the current, remote capable professionals. An additional 2.5% are moving because someone in the household can work from home, and another 2.5% are moving due to overall greater working from home job prospects.
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To further confirm these results, we ran two alternative surveys with varying ranges of possible responses. In a second survey, we found that a smaller, but substantial, 6.9% are planning on moving due to the ability to work from home. In a third version of the survey, we allowed them to indicate that they had already moved in 2020 as a result of greater ability to work from home. In this survey, a total of 7.9% said that would be moving or had already.
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Altogether, across the main survey and two alternatives, there is a consistently significant percentage moving due to a greater ability to work from home, ranging from 6.9% to 11.5%. These estimates imply that 14 to 23 million Americans are planning to move as a result of remote work. To contextualize this number, Census data from 2018 to 2019 suggests that 3.6% of people moved to a different county or state from 2018 to 2019. This means that between two to three times as many people are planning to move this year because of remote work than normally move in any given year for any reason. In other words, combined with people who are moving regardless of remote work, near-term migration rates may be three to four times what they normally are.
Where Is Everyone Moving?
With so many people on the move, it’s natural to wonder: where is everyone moving? Our survey data reveals that people in major cities are the ones most likely to see out-migration as a result of remote work. Among those currently living in a major city, 20.6% say they are planning to move. The next group that is most likely to relocate are those living in the suburbs surrounding cities (12.2%), followed by mid-sized cities or surrounding suburbs (8.6%). The least likely to see outmigration are small cities, towns (6.7%), or other suburbs and then rural areas (5.7%).
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To understand the motivations for moving, our survey also asked about the type of place that people are planning to move to. In further support of this big city exodus, we found that density and housing costs play a key role in moving plans. In fact, those moving are more than twice as likely to move somewhere less dense than more dense, and are also twice as likely to move somewhere with lower housing costs than higher housing costs.
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When asked specifically about housing costs, the importance of lower costs became even clearer. By broad majorities, people are planning on moving into less expensive homes. More than one in five are planning on moving into homes that are 50% less expensive or more. And altogether 52.5% are planning to move to a house that is 10% or more cheaper than their current home, compared to only 25% are planning on moving into a more expensive home.
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The plan to move to less expensive housing is also more common for those who are leaving major cities.
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To further understand moving intentions, we also asked about the distance of people’s moves. While it could be that some people are simply moving to cheaper buildings just down the block, we attempted to rule this out by asking about moving “out of the area.” We also asked how far people are considering moving. The results showed that 41.5% are moving more than 4 hours away and another 13.2% are within 2 to 4 hours. With 54.7% of people moving beyond daily or even weekly commuting distances, it suggests that most people are not simply moving out to the closest suburb near the office. Instead, it further supports the notion of a growing separation of where people work and where they live.
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Although the greater ability to work remotely is impacting people across the country, it appears that those living in major cities and those in major city suburbs are the ones most likely to relocate. There is a clear rationale as to why the ability to work remotely would lead people to seek out lower cost of living places and leave high cost of living places. Expensive places used to have a monopoly on the access to their valuable labor markets, and as work goes remote, they no longer do.
What Housing Markets Are Telling Us
Although the survey reflects only the intent to move, other data supports that many are putting intent into action. When looking at housing market data, we confirm that the highest price housing markets are taking the biggest hits.
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Rental data from Apartments.com illustrates a strong relationship between average apartment rents and the decline in rents over the past year. The most expensive places have seen the biggest decline in demand, while lower cost of living places have seen stronger demand.
While the data shows the relationship between high cost and falling demand, there are a variety of caveats and complexities to this. For example, places that are relatively expensive due to factors beyond labor market access, like location or public school systems, may see growing rather than falling demand. Additionally, suburbs that are expensive, but less expensive than nearby superstar cities may also be exceptions.
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Regression analysis shows that the statistically significant relationship holds across cities, counties, zip codes, and states. The models also show the story remains the same if you compare places within the same states. Overall it is clear: the most expensive housing markets are taking the biggest hits. A doubling of rents, which is a little less than going from the 10th percentile to 90th percentile of cities, is associated with 13 percentage points greater fall in rents.
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Additional models show that the relationship between higher costs and falling rents is really about the most expensive places. If the sample is divided into the 50% of lowest cost cities and 50% of highest cost cities, the relationship between price and change in demand only holds for the most expensive places. Being a fairly cheap place to live doesn’t matter more than being a very cheap place, but being a very expensive place is a lot worse than just being a little expensive.
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Both the survey data and housing market data suggest that major cities, especially the most expensive ones, will take the biggest demand hit from this. While this will have negative repercussions for those cities, it is important to step back and look at the wider economic meaning of this trend. A significant portion of the cost of housing in these places consists of economic rents created by regulatory constraints that limit the building of new housing. If remote work reduces those economic rents, as this analysis suggests it will, it has the potential to be a massive increase in economic efficiency. All else equal, it is better for people to live in places that actually build new housing when demand increases.
What This Means for Businesses
In addition to the impacts to cities, the results of the survey also present an important lesson for businesses on the future of remote work. In order to capture and provide professionals with the full benefits of remote work, businesses must allow full-time remote work. While a partial-remote model, a policy that requires a blend of both remote work and in office work, may have some appeal as a “best of both” choice, it also means forgoing many benefits. A professional cannot move hours and even states away if they still have to go into the office two days a week. Our survey shows that for 41% of people moving out of the area because of remote work, they are going 4 or hours farther away. This is not a weekly commute distance, and is not something workers can do easily with a partial-remote model.
Likewise, with a partial-remote model businesses forgo one of the biggest benefits of a remote workforce; the ability to hire from a larger talent pool. Businesses cannot hire workers wherever they are if weekly office visits are still required.
Conclusion
The pivot to remote work is the biggest, fastest transformation of the labor market since the World World II mobilization. The direct impacts on professionals and businesses are profound, but the indirect effects are arguably just as large, even though they are just beginning.
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Both survey data and housing market data provide early evidence that these indirect effects of remote work are real and likely to be economically important. This should make us optimistic that remote work work has the capacity to help lean against housing and affordability issues across the U.S. by enabling businesses and professionals to access talent and opportunities beyond their local markets.
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However, to unlock the full potential economic gains from remote work, businesses and professionals have to embrace policies that enable full-time remote work as an option offered to employees. This is an important consideration for businesses considering limiting remote work to a hybrid approach.
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A Closer Look at Multifamily’s
Widening Cracks
The multifamily asset class is still sound, but signs of softness are emerging that may give some investors pause.
By Natalie Dolce November 03, 2020 Globest.com
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Six months ago in the pre-pandemic world, concerns about matters such as rental growth stagnation for the multifamily asset class would have been laughable. Even as COVID-19 began to spread within the US, multifamily properties held their own, however more recently, a slightly different picture has emerged and cracks in the asset class have begun to widen. GlobeSt.com takes a closer look at what was once a seemingly unassailable asset class.
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Recent Signs of Improvement (Amongst Concession Challenges)
MRI Real Estate Software recently reported that move-in numbers for multifamily assets have improved; behind only 3% compared to last year as of September. While new applications have also increased, traffic on the other hand, has decreased since hitting a post-pandemic peak in June. However, traffic still remains above 2019 numbers.
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Throughout the pandemic, landlords have increasingly adopted new technologies to drive leasing activity, and as a result, new leasing and move-in activity within the sector has improved.
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Additionally, tenant move-outs peaked in June following the pandemic, and have been flat since July. Now move-out activity is below 2019 levels, however, renewals decreased in September and are down compared to 2019. According to the MRI report, the key take away is that tenants are staying in place during the pandemic.
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Moreover, a recent report from RealPage also showed an improvement in apartment leasing activity during the third quarter; up 8% year-over-year and more than four times the activity in the second quarter.
Contributing to the signs of progress within the market, and chief among the sector’s escalating challenges is the rising level of concessions. Landlords are offering incentives to prospective tenants, which has likely helped to drive strong leasing activity.
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MRI Real Estate Software reported that concession volume is up 21% compared to last year, while concession values are up 13% from last year and have increased 82% since April.
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In September, there was a significant jump in concessions from August—which was the first rental month after the CARES Act benefits expired. Concessions now total nearly $6 million.
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The concessions, however, have not assisted in stabilizing rental rates. Apartment rents were down 3% in September, despite the increase in concessions. In addition, pricing compared to renewal term is down the lowest since the start of the pandemic for longer lease terms and the highest it has been since the start of the pandemic for shorter lease terms. During the pandemic, many tenants have shifted to shorter lease terms, however, the industry standard of 12-month lease terms have started to normalize again. New lease term prices are trending 3% below 2019 numbers.
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Class A’s Rise in Concessions
The pandemic has placed added pressure on the multifamily sector, and as a result, apartment concessions have primarily increased within the nation’s most expensive markets. According to research from Fannie Mae, metros with higher rent levels and more construction activity are experiencing a substantially higher increase in concessions than lower priced metros.
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New York currently has the highest concessions in country, which have increased to 12.6% this year from 7.5% at the end of 2019. San Francisco concessions are trailing New York at 11.3%, while Boston follows at 9.6%. Modestly priced markets, like Orlando and Phoenix, have seen a lower increase in concessions compared to last year and relatively low concessions overall. Orlando concessions increased from 5.3% to 6.6%, and Phoenix concessions have increased from 4.9% to 6.4%.
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Fannie Mae notes that these markets have also seen the most new construction apartment deliveries this year. In 2020, 450,000 new apartment units have hit the market, but most of these units have been concentrated in 12 metros. New York, Washington D.C., Los Angeles, Houston and Dallas have seen the largest number of new apartment deliveries, while Austin, Seattle and Boston follow with slightly fewer units, and Orlando, Atlanta, Phoenix and Miami complete the list of the top 12.
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In terms of asset class, the highest-priced apartments in the most expensive markets are experiencing the highest concessions. Class A apartment concessions have increased from 7.2% at the end of 2019 to 9.2% in August 2020. In addition, this market segment has seen the most new construction activity. This year, 246,000 units have already been completed and another 204,000 units are scheduled for completion this year. As a result, class A concessions should continue to rise.
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Class B and class C asset classes have also seen an increase in concessions since April, but to a lesser extent than class A apartments, as these apartments are generally part of the older building stock and not new construction. Class B concessions increased from 5.5% in 2019 to 7.2% in August 2020, while class C apartments increased from 5.6% in 2019 to 6.8% in August 2020.
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The rising concessions in class A apartments could serve an indicator for the rest of the market. As class A concessions increase, pressure will be placed on class B and class C assets to do the same. As a result, Fannie Mae is anticipating rising concessions across asset classes in markets with high rates of new apartment deliveries. The agency additionally suggests that apartment demand will increase in step with job gains as the market unfolds over the next 12 months.
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Stalled Recovery in Gateway Product / Urban’s Drive
Overall, apartment demand rebounded in many metros in the third quarter, according to a report from Yardi Matrix, which suggests the resurgence helped stabilize the apartment market and kept asking rents from declining further. However, Yardi Matrix reported that while apartment demand has picked up in some areas of the country, recovery has stalled in high-priced gateway markets. As the pandemic sent workers home, these gateway markets experienced the largest exodus of people; possibly resulting in long and difficult recoveries. As a result, these expensive gateway markets and markets with new construction activity have generally seen the most significant decline in asking rents.
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According to Yardi Matrix, as rent growth is strongly correlated to the overall expense of apartments by market, higher-end units have experienced the largest decreases in rents and occupancy post-COVID-19. While class B and class C apartments were the first to struggle with rent and rent collections, urban core market apartment rents have begun to drop as the impacts from the pandemic set in.
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For example, landlords in San Francisco, Chicago, Los Angeles and San Jose experienced steep drops in rent growth and absorption year-to-date through August. In New York, rents declined sharply as absorption floundered.
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Data from RealPage shows that rents have declined 1.7% in the top 50 markets in the US; marking the first time since 2010 that rents in these markets have decreased. By comparison, national rents have only dropped .2% during the same time.
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As such, suburban rents are outperforming the urban core. During the pandemic, rents in the suburbs have actually increased by .4%. Though suburban rents have been surpassing urban rents for the last several years, urban markets are experiencing more dramatic impacts from the economic destabilization.
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During the first half of the year, occupancy rates within the urban core fell by more than 100 basis points. Upon a decrease in asking rents, the urban core remained stable at or above 95% for the last business cycle, and now nears 93%. While occupancy rates also fell in suburban markets, to a lesser degree, suburban markets have yet to see the same decrease in asking rents.
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Class B and C Apartments Will Be Next to Face Headwinds
Though future sector activity could be impacted by various factors, such as unemployment rates, government relief plans, economic recovery and the upcoming election, certain experts suggest that problems could be on the horizon for multifamily assets.
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Fitch Ratings’ recent report suggests that US apartment REITs with high exposure to class B and class C assets and properties in gateway cities are vulnerable to the economic fallout of the coronavirus pandemic, due to the risk of urban flight and high job losses among lower-income households.
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While federal stimulus payments and expanded unemployment benefits have assisted the apartment sector, Fitch Ratings cites Federal Reserve data displaying that job losses are highest among lower-income households, and others are seeing the same trend. “Low-income workers feel little financial stability,” CoStar Advisory Services consultant, Joseph Biasi told GlobeSt.com in an earlier interview. “You can see that with those making less than $75,000.”
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Unemployment among lower-income households increases the risk for apartment REITs with sizable exposure to B and C assets in low-income neighborhoods. Still, the pressure might be partially offset by renters trading down to B and C properties due to greater affordability, according to Fitch.
Other Risk Factors
As previously stated and as others additionally points out, apartment REITs’ exposure to gateway cities could serve as another risk factor. Many speculate that renters will relocate to more affordable suburban and Sunbelt markets as they seek more space in single-family rentals.
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“We’ll see some of those higher-income households pushing out into the suburbs and taking advantage of cheaper rents,” Biasi says. “On top of that, they’ll have a little more space because they’re not in a city anymore.”
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RCLCO forecasts that demand for build-to-rent homes is set to increase. “Given demographic trends RCLCO forecasts much greater demand than the current pace of production, which could result in a significant supply shortfall, suggesting the sector presents a strong market opportunity in the coming decade,” according to the RCLCO report, written by managing directors, Gregg Logan and Todd LaRue.
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If the urban flight continues, concessions are likely to continually rise in class A apartments in gateway cities. Enduring geographic and age-related demand shift preferences by renters could limit longer-term growth rates within these assets, according to Fitch.
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Though larger than expected same-store net operating income declines could pressure ratings, most Fitch-rated entities can withstand anticipated levels of delinquent rent payments that are consistent with recent trends. Still, Fitch says government-mandated moratoriums on evictions, high unemployment and lack of federal stimulus permanency are negatives for REITs’ top line.
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Late Loan Payments Spike / Recent Spike in Late Loan Payments
Though certain entities have been able to withstand recent delinquent rent payments, the sector is currently experiencing a spike in late payments for both agency and non-agency loans, according to Moody’s Analytics REIS.
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In September, late payments for agency loans rose to 1.4% from 0.46% in August. Non-agency late payments rose from 1.83% in August to 2.78% in September.
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“Now, thirty days of performance does not make a trend, but the magnitude of change is noteworthy,” according to REIS. “Nevertheless, the amount of the change is minuscule relative to changes we have witnessed in loans for retail and lodging properties. We will be watching this carefully as remits come in this month and thereafter.”
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According to Trepp, the special servicing rate hit its highest mark since May 2013, increasing 44 basis points to 10.48% in September. In August, the rate was 10.04%. While retail and lodging drove the increases, multifamily special servicing rates rose 10 basis points to 2.66%.
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Expecting further issues in the multifamily sector, principal, managing director and global head of Avison Young’s asset resolution team, Michael T. Fay states, “What is going to be interesting is what happens to multifamily with the expiration of the unemployment money that was coming out from the stimulus packages.”
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While landlords have been challenged to make rent payments throughout all sectors of commercial real estate, industry stakeholders will continue to watch closely as cracks continue to emerge within the market.
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RENT TRACKING
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According to the National Multifamily Housing Council’s Rent Payment Tracker, apartment rent collections declined by 2.4% in September, and fewer renters made a full payment in mid-September than in mid-August.
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Leading the urban core in rent decreases was Austin’s Downtown/University submarket, which declined by 8.4%. Downtown San Francisco and Downtown Los Angeles rounded out the top three on the list, with rents falling 7.8% and 6%, respectively. As a result, the list included four markets in California, which until the pandemic had seen strong rent growth, and in markets like Boston, which are both expensive and heavily supplied.
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Austin was really the only anomaly on the list; however, the Real Page report notes that it has been both a high-development market and a high-performing market at times during the last decade, and as a result has seen big increases and decreases in rental rates. In 2009, apartment rents fell 13%—the steepest decline on record, while rents climbed 14% in 2011. These swings have become typical for the market. Furthermore, the Downtown/University area is the most expensive neighborhood in Austin, which is on trend with the other markets.
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Affordable Housing Growth The migration to lower-cost housing could eventually give a boost to affordable housing, which is one demand driver for the asset class. Earlier this year, Novogradac, a national accounting and consulting firm, released a report saying that occupancy rates and rental income at low-income housing tax credit properties recover quickly after economic downturns. As the economic dislocation continues, market-rate apartment residents will start to seek more affordable housing options, increasing demand for affordable units. In a separate report, MRI Software’s Brian Zrimsek predicts that affordable housing demand will not decline.
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Other Demand Drivers John Burns Real Estate Consulting thinks short-term suburban rentals, which it defines as one-to-two-year lease terms—could also be demand drivers for residents looking for work-from-home space and outdoor access. John Burns believes these opportunities will be most available in suburban markets. Renters are seeking larger units in these areas, usually two-to-three bedroom apartments. These renters are less concerned about density, walkability and access to amenities, particularly as many restaurants, retailers and bars are shuttered.
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Affordable Housing Rent Collections Fell When CARES Act Relief Expired
Affordable housing provider Community HousingWorks saw an increase in rent delinquency in August and September, and more could be coming.
By Kelsi Maree Borland November 02, 2020 GlobeSt.com
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Affordable housing developer and operator Community HousingWorks has remained stable and above-market rent collections throughout the pandemic, but noticed a notable increase in rent delinquencies in August and September, when the additional unemployment benefits under the CARES Act expired.
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“Many affordable housing providers were seeing 11% of residents that either couldn’t pay rent or were behind on rent. At CHW, we have done a little better. As of September 5% of residents were not paying full rent. We expected a deterioration in rent collections, and that has occurred but not nearly as much as we collectively would have thought,” Sean Spear, the newly named CEO at Community HousingWorks in California.
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The pandemic has severely impacted service-driven industries, which employ many residents of affordable housing properties. As a result, the housing segment has been the hardest hit early in the recession, compared to market-rate product. “This is an evolving issue,” says Spear. “Everyone’s assumption was that our communities would be particularly affected by this situation. Residents have had a hard time meeting their rent or getting behind in rent at a dramatic scale and they are facing higher potential evictions. That being said, we have been surprised that many of our residents were staying up to date on rent.”
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However, Spear also believes that the strong rent collections indicate a bigger issue. “People are sacrificing other needs to pay the rent. The alternative of losing housing is a worse situation,” he says. “To me, this isn’t a good thing that we are seeing higher rent collections than expected. It is creating real stresses on families and individuals in supportive housing. That is an unfortunate consequence of the COVID crisis.”
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As residents begin to face more challenges, rent collections have been negatively impacted. After the additional unemployment benefit under the CARES Act expired in late July, Community HousingWorks saw an increase in rent delinquencies. “We definitely saw an increase,” says Spear. “We had been at a little less than 1% of non-payment before the COVID crisis, and in the first months, we increased to 2%. In August, it went up to 3% and in September it went up to 5%.”
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The expiration of unemployment benefits is just part of the issue. Unemployment benefits could expire altogether soon, and the market has yet to recover. This could increase rent delinquencies in the coming months. “I think we are particularly concerned because the additional $600 was helping to blunt the rent delinquency issue,” says Spear. “When that went away, we saw the impact. The other factor is that people were eligible for unemployment insurance, and that typically runs for six months. I think that we will start to see a dramatic increase as people’s unemployment benefits burn off and they aren’t able to find work again.”
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US Hotels Fall Below Half Full, Real Estate Rebound May Begin in 2021, Lower Parking Revenue Dings REIT
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By Richard Lawson October 28, 2020 CoStar News
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Hotels Fall Below Half Full
The two-week run of U.S. hotels hitting the half full mark ended last week with demand for rooms showing the biggest weekly drop since the early days of the pandemic.
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The average occupancy dropped to 48% for the week ended Oct. 24, according to the latest data from hotel industry research firm STR, which is owned by CoStar Group. Revenue per available room, another key metric for the lodging industry, remains more than 50% lower than last year.
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STR’s data showed demand for rooms dropped 4.1% last week from the previous week. Weekend occupancy, which had been going strong with leisure travelers, slipped below 60% to 57.2%.
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Jan Freitag, CoStar’s national director for hospitality analytics, said it could be a sign that leisure travel is starting to slow.
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Occupancy at midscale hotels dropped just below 50% for the first time in months while upper midscale and economy hotels stayed above half full, with 52.2% occupancy for each class. The figures are used by investors and lenders to value hotel property.
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Mountain areas, particularly the Great Smoky Mountains, performed well. Knoxville, Tennessee, topped the country for weekend occupancy at 90.7%, and weekday occupancy at 71%.
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The Tennessean, an 82-room boutique hotel in downtown Knoxville, for example, was fully occupied last weekend largely because of two weddings, according to staff. They said the hotel never closed during the pandemic.
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Meanwhile, the average hotel occupancy in China continues to climb, hitting 67.4%, moving toward seasonal norms, Freitag said.
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But the country also serves as an indicator of what to expect when U.S. travelers start feeling safe and travel more, particularly business travelers for corporate group meetings and conventions. A new outbreak of COVID-19 cases could delay the recovery, though.
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Europe hotel occupancy, for example, has been sliding since the end of August as countries grapple with a rise in new cases. Occupancy now is back down to 30.1% after having peaked near 45% in late August.
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Real Estate Rebound Could Begin Next Year
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Real estate economists and analysts forecast the industry will remain in a slump this year but begin recovering next year and accelerate that improvement in 2022, according to a survey from the Urban Land Institute.
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The September-October survey drew conclusions from 43 economists and analysts at 37 real estate firms around the country.
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They forecast that gross domestic product will fall 5% for 2020, then show 3.6% growth next year and 3.2% in 2022. Their 2021 and 2020 forecast reflects slower growth than they thought when they were surveyed in May.
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They forecast then that 2021 Gross Domestic Product growth would be 3.9% and 3.6% for 2022. Their 2020 forecast, though, is an improvement from the 6% GDP decline they forecast in May before early indicators showed a bigger initial bounce back than expected.
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The ULI survey revealed that the respondents said transaction volume will hit $300 billion this year, $25 billion higher than they projected in May. They maintained their earlier projections that 2021 transactions will hit $400 billion in 2021 and $500 billion in 2022.
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Industrial and single-family real estate will be the top performers, according to the survey. The economists forecast that national vacancy and availability rates for industrial and apartments will be below the 20-year average. But rates will be above average for office and retail.
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Lower Parking Revenue Dings Highwoods' Results
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Real estate investment trust Highwoods Properties Inc. reported parking revenue fell as fewer workers drive to work.
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Parking revenue dipped to help drag revenues down $6.4 million to $181 million for the quarter, the Raleigh, North Carolina-based REIT reported.
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Executives with Highwoods had warned during the second quarter that parking revenue would be lower because of the pandemic and persist through the rest of the year. Mike Mulhern, the REIT’s chief financial officer, said in a conference call to discuss its most recent earnings that it has offset much of the effect with lower operating expenses across properties.
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Ted Klinck, Highwoods' chief executive officer, said in the call that office capacity usage among tenants across its 27 million-square-foot portfolio rose to 25% in the third quarter. “We don’t expect a sizable increase in utilization until at least early 2021,” Klinck said.
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Another Hurricane Hits Louisiana
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Hurricane Zeta made landfall as a Category 2 hurricane Wednesday afternoon in southeastern Louisiana, about 65 miles southwest of New Orleans.
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Zeta is the fifth named storm to hit Louisiana this hurricane season, which doesn't end until Nov. 30.
Zeta was expected to bring life-threatening storm surge, damaging winds and heavy rain to Louisiana and surrounding states.
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Class B and C Apartments Will Be Next to
Face Headwinds
Fitch says that renters could relocate to more affordable suburban and Sunbelt markets as they seek more space.
By Les Shaver October 22, 2020 Globest.com
While the apartment sector has withstood the COVID-19 pandemic reasonably well due to federal stimulus payments and expanded unemployment benefits, problems could be on the horizon for multifamily assets, according to Fitch Ratings.
Fitch says that US apartment REITs with high exposure to class B and C assets and properties in gateway cities are vulnerable to the economic fallout of the coronavirus pandemic due to the risk of urban flight and high job losses among lower-income households.
Fitch cites Federal Reserve data showing that job losses are highest among lower-income households. Others are seeing that same trend. “Low-income workers feel little financial stability,” CoStar Advisory Services Consultant Joseph Biasi told GlobeSt in an earlier interview. “You can see that with those making less than $75,000.”
Unemployment among lower-income households increases the risk for apartment REITs with sizable exposure to B and C assets in low-income neighborhoods. Still, the pressure might be partially offset by renters trading down to B and C properties due to greater affordability, according to Fitch.
Another risk factor for apartment REITs is exposure to gateway cities, where the pandemic has an outsized effect due to density. Like others, Fitch speculates that renters will relocate to more affordable suburban and
Sunbelt markets as they seek more space.
Biasi told GlobeSt that he sees similar trends. “We’ll see some of those higher-income households pushing out into the suburbs and taking advantage of cheaper rents,” Biasi says. “On top of that, they’ll have a little more space because they’re not in a city anymore.”
Many of these renters could find themselves in single-family rentals. RCLCO, for instance, is forecasting that demand for build-to-rent homes is set to increase.
“Given demographic trends RCLCO forecasts much greater demand than the current pace of production, which could result in a significant supply shortfall, suggesting the sector presents a strong market opportunity in the coming decade,” according to the RCLCOreport, written by managing directors Gregg Logan and Todd LaRue.
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If this urban flight continues, concessions are likely to continue to rise in class A apartments in gateway cities. Enduring geographic and age-related demand shift preferences by renters could limit longer-term growth rates in these assets, according to Fitch.
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While larger than expected same-store net operating income declines could pressure ratings, most Fitch-rated entities can withstand anticipated levels of delinquent rent payments that are consistent with recent trends. Still, Fitch says government-mandated moratoriums on evictions, high unemployment and lack of federal stimulus permanency are negatives for REITs’ top line.
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Big warehouses are hardly feeling
the recession
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The industrial real estate market typically rises and falls with the economy, but the flourishing e-commerce and logistics industries have kept it from falling much during the current recession.
ALBY GALLUN October 13, 2020 Crain's Chicago Business
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Local industrial landlords are surviving the pandemic as owners of other commercial properties suffer. But they’re not immune.
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The vacancy rate for industrial property in the Chicago area rose to 6.73 percent in the third quarter, up from 6.42 percent in the second quarter and 6.15 percent a year earlier, according to brokerage Colliers International.
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Still, it hardly feels like a recession to investors that own big warehouses, which remain in high demand as e-commerce and logistics firms continue to expand. With more homebound consumers shopping online due to the COVID-19 pandemic, the companies that sell and distribute the products they buy need more warehouse space. Amazon has leased more industrial space in the Chicago area this year than any other company by far.
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After a frenzied second quarter, Amazon took a breather in the third, signing just one lease for two buildings in Cicero totaling 576,000 square feet, according to Colliers. But the Seattle-based e-commerce giant is on the hunt for more space, said Jeffrey Devine, principal in Colliers’ Chicago office.
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“They still have a huge appetite to grow here,” he said.
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Other companies picked up some of the slack in the third quarter but not enough to keep the local vacancy rate from rising. The primary measure of demand, net absorption—or the change in the amount of leased space vs. the prior period—totaled 1.1 million square feet in the third quarter here, an improvement from just 355,000 square feet in the second quarter but way down from 9.2 million square feet a year earlier, according to Colliers. Absorption in the Chicago area totaled 8.6 million square feet through the first nine months of the year, less than half the total for the same period in 2019.
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“Obviously, the pandemic pulls a lot of companies into hold mode,” unwilling to make big investments when the future is so uncertain, Devine said.
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Some didn’t hesitate in the third quarter. Detroit-based General Motors leased a 1 million-square-foot warehouse in Joliet, the biggest local lease of the quarter, according to Colliers.
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McKesson, an Irving, Texas-based pharmaceutical company, leased a 570,000-square-foot building in Manteno, the third-largest deal after Amazon’s Cicero lease. Drug companies are expanding their U.S. supply chains, which could boost demand for warehouse space, Devine said.
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The industrial sector, characterized by massive prefabricated buildings along the interstate, is hardly the sexiest part of the commercial real estate market. But it is the most stable these days. Owners of many hotels and shopping centers are struggling make loan payments, as the pandemic keeps travelers and shoppers at home. Office and apartment landlords are struggling, too.
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The industrial market typically rises and falls with the economy, but the flourishing e-commerce and logistics industries have kept it from falling much during the current recession. The local industrial vacancy rate soared as high as 12.2 percent after the last recession, in early 2010, and then dropped as low as 6.15 percent in third-quarter 2019, according to Colliers.
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Devine doesn’t expect the vacancy rate to rise much further, predicting it could fall again after the pandemic passes and economy recovers.
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McDonald’s, Chipotle and Domino’s Are Booming During Coronavirus While Your Neighborhood Restaurant Struggles
A health crisis is creating a divide in the restaurant world. Big, well-capitalized chains are thriving while small independents struggle to keep their kitchens open.
By: Heather Haddon October 12, 2020 Wall Street Journal
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The coronavirus pandemic is splitting the restaurant industry in two. Big, well capitalized chains like Chipotle Mexican Grill Inc. and Domino’s Pizza Inc. are gaining customers and adding stores while tens of thousands of local eateries go bust.
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Larger operators generally have the advantages of more capital, more leverage on lease terms, more physical space, more geographic flexibility and prior expertise with drive-throughs, carryout and delivery. A similarly uneven recovery is unfolding across the business world as big firms have tended to fare far better during the pandemic than small rivals, thinning the ranks of entrepreneurs who could eventually become major U.S. employers. In the retail world, bigger chains like Walmart Inc. and Target Corp. are posting strong sales while many small shops struggle to stay open.
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The divide between large and small restaurants surfaced in the summer. Chipotle more than tripled its online business sales in the second quarter while Domino’s, Papa John’s International Inc. and Wingstop Inc. all reported double-digit same-store sales increases in the third quarter compared with the year-earlier period. McDonald’s also said U.S. same-store sales rose 4.6% in the third quarter. That included a rise in the low double digits during September, its best monthly performance in nearly a decade. It credited faster drive-throughs and promotions.
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Off Menu
People are spending less than during the last recession at restaurants, particularly smaller independent ones, straining the finances of many businesses.
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Many other big restaurant companies took additional steps to take advantage of the shift to takeout. Brinker International Inc.’s Chili’s division pushed up the summer debut of a delivery-only brand, Just Wings, that it expects to generate more than $150 million in sales in its first year.
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“The silver lining in this pandemic is we are going to emerge stronger,” said Bernard Acoca , chief executive of El Pollo Loco Holdings Inc., a chain of 475 Tex-Mex restaurants across the Southwest. El Pollo Loco has opened three restaurants in 2020 and aims to add more in years ahead, he said.
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The prospects for many independent restaurants, meanwhile, are getting dimmer. Three-quarters of the nearly 22,000 restaurants that closed across the U.S. between March 1 and Sept. 10 were businesses with fewer than five locations, according to listing site Yelp.com.
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Frequent closings have always been a facet of the restaurant business. Restaurants typically run on slim margins. Some 60,000 restaurants open in an average year, according to the National Restaurant Association, and 50,000 close.
But this upheaval is the most profound in decades. The association predicts 100,000 restaurants will close this year. The sudden loss of many independent restaurants could permanently alter the landscape of American cities. Some chefs and restaurant operators fear the recent revival of downtowns across the country will slip into reverse.
Fewer Cooks in the Kitchen
Independent restaurants have shed more of their workers this year than chains as the industry takes a bigger hit than it did during the last recession. Many more restaurants are projected to close for good this time around.
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Employment at restaurants and bars has dropped by 2.3 million jobs from a total of more than 12 million before the pandemic, according to the Labor Department. In fact, the broader leisure and hospitality sector experienced the largest total drop in employment since February in a major industry.
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The pandemic will wipe out $240 billion in sales this year, according to a projection from the National Restaurant Association, a trade group. Last year, the industry brought in more than the agriculture, airline and rail-transportation industries combined, according to Bureau of Economic Analysis figures.
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Getting Bolder
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The pandemic hasn’t spared all big chains.
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Many casual-dining companies have posted double-digit sales declines. More than a dozen companies have filed for bankruptcy protection, including Ruby Tuesday Inc. and California Pizza Kitchen. Shake Shack Inc. and Ruth’s Hospitality Group Inc. returned millions of dollars of federal aid meant for smaller businesses hurt by the coronavirus pandemic. Starbucks Corp. , Dunkin Brands Inc. and Pizza Hut said they are planning to close 1,500 stores between them in the next 18 months.
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Yet many other chains say now is a time to get more aggressive. Olive Garden’s parent, Darden Restaurants Inc., is looking into expanding in urban areas including Manhattan where rents were previously too expensive to justify growth. Plenty of space is opening up: 87% of 450 restaurant bars, and clubs in New York said in a recent survey that they couldn’t pay their full rent for August, according to the NYC Hospitality Alliance.
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Starbucks, while closing some locations, plans to spend $1.5 billion during its current fiscal year partly to add 800 stores in its American and Chinese markets, speeding a shift to restaurants that emphasize drive-throughs and pick-up counters. Darden plans to spend $300 million by mid-next year, a chunk of it to add 40 new restaurants. Papa John’s franchisee HB Restaurant Group LLC plans to open dozens of shops and Wingstop said it added 43 restaurants in the quarter ended in September.
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“There is no better time than now to get bold,” Wyman Roberts , Brinker’s chief executive, said in an interview.
Some customers have already moved more spending to chain restaurants in ways they say they expect to last beyond the pandemic.
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Joyce Hill, a 52-year-old professor at the University of Akron in Ohio, said she has been ordering more from Cracker Barrel Old Country Store Inc. and Bloomin’ Brands Inc.’s Bonefish Grill and Carrabba’s Italian Grill divisions. She said she intends to stick with chains because it is easier and she doesn’t feel safe eating inside restaurants.
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“With a few clicks, I can order a whole meal, pay for it, and not have to leave my car to pick it up,” said Ms. Hill. She said she recently stopped by a local Mexican restaurant for shrimp tacos after not visiting for months. It was closed.
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One restaurateur benefiting from this shift is Tabbassum Mumtaz, the operator of 400 KFC, Long John Silver’s, Pizza Hut and Taco Bell restaurants in nine states. Things didn’t look good at first. He shut all of his dining rooms after the pandemic intensified in the spring, and his sales, typically about $500 million a year, fell by an average of 25%.
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But he said he shifted many of his 10,000 employees to cleaning and staffing drive-throughs—which he said became the core of his business.
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“Everyone was of one rhythm,” said Mr. Mumtaz, owner of Richardson, Texas-based restaurant operator Ampex Brands LLC.
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Mr. Mumtaz said his cash balance improved around April after parent company Yum Brands Inc. deferred the 5% royalty payments he owed for several months. Yum introduced promotions for bigger family deals, such as $30 buckets of KFC chicken, to help boost sales as customer counts remained low.
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Some landlords provided rent breaks and his three banks agreed to let him pay only interest on loans, suspending principal payments. Mr. Mumtaz also received a Paycheck Protection Program loan valued at more than $5 million in April to help retain 500 jobs, according to federal figures. He said he used the money to avoid layoffs.
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At the same time, Mr. Mumtaz said, he started drawing new customers, including those who used to frequent nearby independent restaurants and bars that still remained closed. Mr. Mumtaz said that his Pizza Hut same-store sales were up 18% over last year by the summer, and that business at KFC, Taco Bell and Long John Silver’s also rebounded. He has since paid back some of his deferred royalties.
Mr. Mumtaz said he is feeling optimistic: “I’m taking every step carefully.”
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No Levers to Pull
Turmoil among independent restaurants is cascading down to a swath of suppliers, including many seafood companies and small farmers that mainly serve diners rather than supermarket customers. Every 100 restaurant jobs support 50 more at suppliers such as wholesalers and farmers, according to the left-leaning Economic Policy Institute.
Kate McClendon, co-owner of McClendon’s Select organic farms in Arizona, said 95% of her restaurant orders vanished when the state shut down dine-in restaurant service in March. The family-run farm threw together a boxed-produce program to stay afloat, but a lot of the specialty greens they grow for chefs didn’t translate into demand from home cooks. She said the farm has recouped fewer than 60 of its 90 regular restaurant customers, and that orders are being placed roughly half as often.
“Independent farms rely on independent restaurants. Big chains don’t buy from local farms,” Ms. McClendon said.
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Many independent restaurants are suffering partly because they tend to have smaller physical footprints, especially in higher-cost big cities. Camilla Marcus closed West-bourne cafe in Manhattan’s SoHo neighborhood in September after her landlord declined to offer a break on her rent. West-bourne had no patio, and Ms. Marcus said the return of indoor dining at 25% capacity wouldn’t work at the communal tables in her 1,000-square-foot dining room.
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“With just one location, there are just no levers to pull,” said Ms. Marcus, a co-founder of the Independent Restaurant Coalition, which is lobbying Congress to pass a stimulus package backed by House Democrats that would allot $120 billion for the sector.
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Nick Kokonas, co-owner of the Chicago-based Alinea Group of four high-end restaurants, has relied on a rotating to-go menu to keep his operations afloat. Two of his restaurants made money last month, one broke even and one lost $100,000, he said. He is considering closing some of them for the winter to preserve cash.
“We’ll be open through December. Then we don’t know,” Mr. Kokonas said.
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Robert St. John, an owner of restaurants and bars in Hattiesburg, Miss., closed his restaurants in March when the state ended dine-in service, and filed a mass unemployment claim for his 300 employees.
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Banks restructured some of his loans, Mr. St. John said, and he received a PPP loan of roughly $600,000. But with sales down about 70% across the six restaurants, he said, he couldn’t justify bringing back many employees. An attempt at socially distanced dining at his Italian restaurant ended due to insufficient demand.
“There was no real excitement or fever about us reopening,” Mr. St. John said.
By the summer, Mr. St. John decided to close his flagship Purple Parrot Café, a destination eatery for the area that boasted 4,000 bottles of wine, after 32 years. He said he knows couples that celebrated prom together at Purple Parrot and now have been together for decades.
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He has also since closed a cocktail bar and a high-end doughnut shop, as business from Hattiesburg’s University of Southern Mississippi dried up with the school’s shift to virtual learning. Mr. St. John, who described himself as an optimist to a fault, is applying for a $500,000 small-business loan to build a new restaurant with a big patio where he can serve people outdoors.
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“It’s scary, I’ll tell you,” he said. “I would refuse to think that I would have to shut down more.”
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Manhattan Apartment Rents Dropped 11%
Last Month
Miriam Hall, Bisnow New York City October 8, 2020 Bisnow New York City
Apartment rents in New York City are still falling as the market digests the tectonic shifts brought on by the coronavirus pandemic.
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In Manhattan, the median rental price with concessions taken into account was $3,036 in September, an 11% drop from a year earlier, according to figures released by appraisal firm Miller Samuel and brokerage Douglas Elliman.
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Over 55% of the new leases signed had some form of concession included, up from 34% last year. The vacancy rate in the borough hit 5.75%, yet another record. Meanwhile, listing inventory tripled from last September.
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In Manhattan, the median price of a studio was $2,350 a 13% drop year-over-year. The decrease at the upper end of the market, the top 10%, was less severe, dipping 3% to hit a price of $8,216.
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The outer boroughs also recorded declines. The median rental price in Brooklyn was $2,815, a 3% decline, with 48% of all leases featuring a concession of some sort. In Queens, the median rental went down a massive 12% to reach $2,442, and nearly 63% of leases had some form of concession.
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The data further illustrates the impact the pandemic is having on the city, and the adjustments many residential landlords are making to deal with the impact of job losses and people opting to leave — permanently or temporarily.
“It’s the way the pendulum swings,” Joy Construction principal Eli Weiss told Bisnow last week. His company owns multifamily properties in Manhattan, Brooklyn, Queens and the Bronx. “Right now, if you’re a tenant, you’re the one who has all the power.”
Robert Nelson, whose company Nelson Management owns rental properties across the five boroughs, put it more bluntly on a recent Bisnowi webinar: “In Manhattan, there is blood on the streets,” he said. “It’s really, really bad.”
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Delayed Stimulus Talks Could Hurt These American Renters
Aly J. Yale, Senior Contributor October 7, 2020 Forbes
President Trump’s recent waffling on potential stimulus efforts could have sweeping effects for American renters.
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According to a new report from public policy think tank the Urban Institute, about 5.3 million renter households are dealing with a job loss. Though state unemployment helps, a whopping 68% of those are still considered rent-burdened—paying more than 30% of their income in rent each month.
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Though the additional $600 unemployment stipend offered through the CARES Act put a dent in these burdens initially, that assistance expired in late July. President Trump’s executive order in August provided another $300 in weekly assistance, but because many states have exhausted those funds, his announcement to stop stimulus talks on Tuesday will halt many of those payments as well.
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This puts renters in a bind—especially those in struggling states like Louisiana. Of the state’s renter households with a recent job loss, 71% are rent-burdened without any additional federal assistance. With the $300 payment, about 54% are.
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“Despite the slight economic improvement, the need for rental assistance is more pressing than ever,” Urban Institute researchers wrote. “The $300 federal supplemental assistance authorized through the president’s executive order is ending in some states. Renters who have not regained employment are likely to need longer-term assistance to stay housed, as many jobs are unlikely to return as the economy recovers.”
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According to the Institute’s findings, returning to the additional $600 supplement would reduce rent-burdened households considerably. In Louisiana, only about 36% of renters would struggle given this additional payment. Nationally, it’d be just under 40%.
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Fortunately, non-paying renters can’t be evicted just yet. Thanks to an eviction moratorium issued by the Centers for Disease Control in September, renters can’t be evicted due to non-payment until after December 31.
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Once 2021 rolls around, though? There’s no telling.
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“The CDC’s eviction moratorium affords most renters a few extra months without the threat of losing their housing,” Urban reported, “but the inability to pay rent puts renters and landlords in precarious financial situations.”
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Unless the moratorium is extended, it’s likely many non-paying renters would face eviction in the New Year.
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Incremental Improvements in Hotel Profitability Slow
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But New Analysis Shows Some Positive Trends
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By Raquel Ortiz October 7, 2020 STR/CoStar
Balance sheet data for U.S. hotels for August showed no major improvements in profitability, compared to July, according to an analysis by CoStar's hotel research and analytics company STR.
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Although gross operating profit per available room (GOPPAR) did remain positive for the second month in a row and August had the lowest demand decline since the pandemic started, revenue improvements were stagnant. For top markets, average total revenue per available room (TRevPAR) declined this month, but average GOPPAR did improve.
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Here are five takeaways from STR’s Monthly P&L Report for August.
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1. Revenues have been gradually improving, but profits remain weak compared to last year.
TRevPAR for full-service hotels is only 25% of what it was last year in August, and GOPPAR is only 6% of August 2019 levels. Limited-service hotels have been faring somewhat better with TRevPAR at 38% and GOPPAR at 26%, but these are down from last month. Although the indexes are very low compared to last year, they have improved since April.
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2. Beverage continues to outperform food revenue, but lack of business from groups has hurt.
With an average revenue per operating room of $9.46 since April, revenues from alcoholic beverages were closer to the levels of 2019 and have outperformed both food and other related revenues for services that come from groups and banquet business, such as meeting space rental revenue, audiovisual equipment rental and special service charges.
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When indexed, beverage revenues per operating room were 69.5% of August 2019 levels, compared to food at 58.8%, and other related revenues at 22.3%. The lack of group business has really affected other food and beverage revenues as they continue to be negative. Additionally, all three departments —beverage, food and related services — realized less revenue per operating room than they did in July.
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3. Group- and banquet-related line items realize the lowest revenue levels compared to last year.
Indexing revenues from the food and beverage department for 2019 and 2020, all line items relating to groups and banquets realized the lowest levels compared to last year’s revenues.
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Room rentals are indexed at only 6% of last year’s levels, which is the highest of any group-related line item. All other group- and banquet-related line items, which includes food service charges, food and beverage catering and audiovisual equipment, are indexed between 2% to 4% of 2019 levels. Comparatively, food and beverage venues are indexed at 15% and room service is indexed at 23% of 2019 levels, which are the highest indexes for the entire food and beverage department.
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4. TRevPAR has slowed for top markets, but eight top markets reported positive GOPPAR.
The average TRevPAR for top markets declined from $49.27 in July to $47.80 in August, but average GOPPAR improved from an average of -$6.19 to -$2.92, which points to more markets managing expenses better.
Two additional top markets demonstrated positive GOPPAR this month—Los Angeles with a GOPPAR of $5.97 and San Diego with a GOPPAR of $4.65. While there have been some improvements month over month, the year-over-year changes remain staggering. Average TRevPAR percent change for these top markets is down 77.0%, and average GOPPAR percent change is minus 97.6%, with New York; Washington, D.C.; and Miami realizing the largest GOPPAR declines.
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5. Full-service hotels realize higher gross operating profit margin losses in August.
In August 2019, more than 83.4% of full-service hotels and more than 93% of limited-service hotels realized a gross operating profit margin of greater than 20%. Less than 4% of full-service hotels and less than 1% of limited-service hotels realized a gross operating profit margin below 0%.
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In August 2020, it’s a much different story as less than 25% of full-service and only 66% of limited-service hotels realized a gross operating profit margin over 20%. Moreover, 37% of full-service hotels and 11% of limited-service hotels have a gross operating profit margin below 0%. For full-service, the highest percent of hotels (20.6%) had an average gross operating profit margin of 4.5%, and 21.2% of limited-service hotels had an average gross operating profit margin of 44.8%.
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Raquel Ortiz is assistant director of financial performance at STR, a CoStar hotel research and analytics company.
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Student Housing Investment Sales Volume Remains Depressed
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Despite in-person class policies that vary across the country, on paper occupancies at many off campus student housing properties remains high. That's not helping deals go through, however.
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Bendix Anderson Oct 06, 2020 National Real Estate Investor
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The crisis caused by the coronavirus has wreaked havoc upon the plans of educators and students for the fall semester. That’s complicated the outlook for off-campus, privately-owned student housing properties.
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And on the investment side, things have not been much better. Despite lagging fundamentals at some properties, potential sellers are not willing to accept discounts, which has contributed to an overall slowdown in deal volume.
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Most owners will only consider selling at prices that recognize the operating income currently earned by the property—most are fully-leased, even if not all the students have moved in. The few properties being sold are top-tier assets receiving prices as high as they might have earned before the crisis, relative to income.
“Cap rates in general aren’t changing,” says Dorothy Jackman, executive managing director of the National Student Housing Group for Colliers International, working from the firm's Tampa, Fla., office. She estimates that deal volume is down 40 percent to 50 percent compared to a year ago.
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Analysts chart an even steeper decline in the volume of sales over the spring and summer. Investors bought 27 properties with more than 100 beds apiece in the second and third quarters of 2020, according to a count kept by CoStar. That’s a fraction of the 101 student housing properties that traded over the same period in 2019.
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“Investment sales activity has slowed to a practical standstill since the onset of the pandemic in March—like most commercial real estate sectors,” says Pierce. “The number of student housing listings has most certainly picked up since the start of the fall semester, however we anticipate that the volume of listings and related closings in the fourth quarter will be much smaller than in recent years.”
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At many properties, most beds are full and most students are paying their rent, despite the COVID-19 crisis. The average property is fully-leased—nearly 90 percent of student housing beds are occupied, according to RealPage, Inc., even if some of those students have not yet arrived.
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A number of schools changed their plans for the current academic year, sometimes at the last minute. Some universities are holding more—or all—of their classes online. Others moved the starting date for their classes forwards or backwards—changing the move-in dates for students at those schools
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“Kids that have signed leases have not moved in—in some cases. How do you count that?” says Jackman. “Because of the moving target that is the September start to the school year, sellers are not comfortable putting properties on the market.”
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Some deals have closed with income guarantees, in which sellers agree to modify the purchase price if a certain number of students who have signed leases cancel. So far, however, nearly all of the students who signed leases for fall 2020 have continued to pay rent. “Collections last spring and this fall are all in the 90 percent range,” says Jackman.
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The potential sellers of student housing properties this fall also include some who planned to sell before the pandemic, but put those plans on hold until this fall. “Many of those would-be sellers are testing the waters this fall, but I don’t expect most to sell at a discount,” says Frederick W. Pierce, IV, president and CEO of Pierce Education Properties. “Rather, they will hold those assets unless they receive fair value or there are other compelling factors.”
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A good loan is hard to find
Potential buyers also have problems because of the pandemic. “Getting debt financing at attractive leverage levels and rates is challenging right now,” says James Jago, principal at Pebb Capital.
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Currently, a typical student housing loan from a Freddie Mac or Fannie Mae lender might cover 65 percent of the value of the property, down from 75 percent last year. Borrowers may also have put into escrow enough funds to pay principal and interest on the loan for a year.
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“Many lenders require higher debt service and operating carry reserves from borrowers, which creates a drag on equity returns,” according to Jago.
These changes have a direct effect on the prices equity investors are willing to pay for student housing properties.
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“It makes transactions a bit more difficult to get to the finish line,” says Jackman. “Debt markets need to thaw for us to get back to our normal velocity of deals.”
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Skeptical buyers worry about the future
Investors are especially skeptical about student housing properties the serve smaller colleges or universities that might potentially suffer from declining enrollments or cuts in the funding they receive from state governments.
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“Investors are shying away from smaller, tertiary, budget-constrained institutions, and public schools dependent on state funding in cash-strapped states,” says Jago. The budgets of these public universities may be vulnerable to cuts if their states are already struggling with expensive problems like opioid addiction and liabilities like unfunded obligations to pension plans in addition to the crisis caused by the coronavirus.
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However, neither buyers or sellers are discounting the operating income that properties are likely to be able to earn a year from now, in fall 2021. “No one is ready to accept this situation is going to linger that long,” says Jago. “They can’t because it would imply university failures and budget issues that create existential threat to many schools and assets.”
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U.S. Home Sales Extended Powerful Rebound Into August
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Sales rose 10.5% on annual basis, putting the summer’s housing market well ahead of last year’s sales levels
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By:Will Parker Sept. 22, 2020 Wall Street Journal
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Home sales rose in August for the third consecutive month, fueled by robust demand for luxury homes and a pickup in Northeast sales that kept the housing market hot.
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Sales of previously owned homes rose 2.4% from a month earlier to a seasonally adjusted annual rate of six million, the National Association of Realtors said Tuesday. That built on a 24.7% surge in July home sales, which was the strongest monthly gain ever recorded, going back to 1968.
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Home buyers have returned in force since late spring, when lockdowns related to the coronavirus pandemic eased, open houses resumed and ultralow mortgage rates helped spur sales. With many Americans working from home, buyers are seeking more space and accelerating plans to leave crowded cities for the suburbs or for more-rural areas, real estate agents say. Other home buyers have moved to live closer to family members.
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Economists and housing experts expect sales to stay strong through the end of the year. The Federal Reserve has signaled it expects to hold rates near zero for at least three more years, and mortgage rates are also expected to stay low. Many companies have indicated that large numbers of Americans will continue working from home even after a coronavirus vaccine is developed, which could continue to boost home purchases.
“Sales volume could begin to taper in late 2020, but given current conditions, it’s unlikely to diminish too much,” said Matthew Speakman, economist at Zillow.
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That is good news for the U.S. economy, which has struggled during the pandemic. The housing market has been one of the few signs of strength, and home sales can also help if consumers spend more on home goods and renovations.
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On an annual basis, sales rose 10.5% in August, putting this summer’s housing market well ahead of last year’s sales levels. The boom in sales was most pronounced at the upper end of the market. Sales of homes priced at more than $1 million rose 44% nationally and were up 63.1% in the South.
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“The luxury housing sector is just simply taking off,” said Lawrence Yun, chief economist of NAR.
Larger and more expensive homes are in demand as wealthier buyers seek as much room as possible to work from home and in case their children have remote learning this school year. Because home prices have continued to rise during the pandemic, some existing homeowners are taking advantage by selling at a profit and putting the equity directly into bigger and more expensive houses, said Odeta Kushi, deputy chief economist at First American Financial Corporation.
Sales were strongest in the Northeast region during August, increasing 13.8%. That was followed by the Midwest, where total sales rose just 1.4%. The pickup in parts of the Northeast reflected pent-up buyer demand after pandemic-related restrictions began easing in some markets.
Mortgage rates are also near historic lows. As of Sept. 17, the average interest rate on a 30-year fixed rate mortgage was 2.87%, according to Freddie Mac.
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The dearth of lower-cost homes available for sale continues to push up prices, making it difficult for first-time home buyers with more modest incomes to enter the market. The median sales price of an existing home in August was $310,600, 11.4% higher than in the same month last year.
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The lower-priced part of the housing market didn’t enjoy the same price gains. Sales of homes priced at less than $100,000 fell more than 20% compared with a year earlier, according to NAR. And sales of homes priced $100,000 to $250,000 fell 8.9%. Inventory is shrinking for most price points, but this was especially a problem for lower-price homes. “The lower the price point the greater decline in inventory,” Mr. Yun said.
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As in July, homes sold at an unusually fast pace in August. The average number of days a home sat on the market before selling was 22, down from 31 a year earlier.
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News Corp. , owner of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.
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Home sales rise most in 7 years
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Chicago-area buyers took advantage of super-low interest rates to trade up to the extra space they want in the COVID era.
Dennis Rodkin September 22, 2020 Crain's Chicago Business
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Home sales soared last month in the Chicago area, as did home prices, according to data released this morning by trade group Illinois Realtors.
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The increases in both prices and sales volume result from two things: low interest rates and households looking for homes that meet the space needs of their COVID era lifestyle that includes working and schooling at home.
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“The Chicago market was hot in August as homebuyers took advantage of record-low mortgage rates,” Maurice Hampton, president of the Chicago Association of Realtors and owner of Centered International Realty in Beverly, said in prepared comments that accompanied the data. “The spike in sales reflects increasing desires for greater space as a result of the ongoing pandemic.”
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In the nine-county metropolitan area, 13,360 homes sold in August, an increase of 19.6 percent from August 2019.
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It’s the second month of double-digit increases over last year and the biggest spike in home sales since September 2013, when Chicago-area home sales were up almost 28 percent. September 2013 was the last in a run of 20 months of home sale increases of 20 percent or more, as the Chicago-area home market accelerated out of the recession that followed the mid-2000s economic meltdown.
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In August, 2,813 homes sold in Chicago, up 8.2 percent from the same time last year. It was not a record increase—home sales rose by more in December and January. Chicago figures are included in the data for the nine-county metro area.
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“The housing market continued its summer surge in August,” Sue Miller, president of Illinois Realtors and designated managing broker of Coldwell Banker Real Estate Group in McHenry, said in prepared comments with the data. Some of the increase in sales are purchases that were delayed by the shutdowns of the first few months of the crisis.
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Nationwide, home sales were up 2.4 percent from a year ago, the National Association of Realtors reportedly separately this morning.
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Local home prices also rose sharply.
The median price of a home sold in Chicago in August was $335,000, up 15.6 percent from the same time a year ago, according to the Illinois Realtors report. That’s the biggest year-over-year-increase since March 2014, when prices were up almost 26 percent in the 12th of what would be a 14-month stretch of double-digit price increases.
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In the nine-county metro area, the median sale price last month was $280,000, up 11.6 percent from August 2019. It’s the biggest year-over-year increase since February 2017, when prices were up 11.7 percent.
The price increase here was in lines with the nationwide increase. The median price of homes sold across the country in August was up 11.4 percent from a year ago.
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US housing supply reaches nearly 40-year low
Increased demand is driving home prices up
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September 21, 2020 The Real Deal Staff Contrubition/No Byline
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The coronavirus pandemic has exacerbated the severe housing supply shortage in the U.S., with the number of homes on the market reaching historic lows.
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At the end of July, the National Association of Realtors found that there were 1.3 million single-family homes on the market, the lowest figure for any July since 1982, the Wall Street Journal reported. And in the week ending Sept. 12, the number of available homes was down 29.4 percent from the same time last year, according to Zillow Group.
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​“Every year we think, ‘We’re hitting new record lows, it can’t get worse,’ but then it does,” said Danielle Hale, chief economist for Realtor.com.
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The shortage has led housing prices to spike: In July, the median price for existing homes jumped past $300,000, an 8.5 percent increase from a year ago, according to NAR. That’s a hindrance for buyers who were lured to the market by lower interest rates, but may be put off by higher prices.
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The post-pandemic shortage is a case of supply and demand: There are more buyers looking for homes, and fewer sellers listing them. The high demand for contractors, painters and other home-improvement workers has led to delays in getting homes ready to sell, said Beth Traverso, managing broker at Re/Max Northwest Realtors. Once homes list in her Seattle suburbs market, they find buyers quickly, she told the Journal.
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But the lack of homes for resale has led to increased demand for new-build homes. Single-family housing starts were up 4.1 percent in August, according to the Commerce Department. [WSJ] — Akiko Matsuda
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The case for single-story office properties
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The Daily Herald 9/18/2020 (no byline)​
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Commentary by JSO
There is no doubt this this is your typical nightmare article, its advertising, complete with inaccuracies and taken by the newspaper most likely as a filler. There was no independent background checking done. There is also no byline, and frankly that is the very first giveaway.
There is a reason that these smaller one story building are not cataloged, the vast majority are low cost Class C buildings, lease to under capitalized tenants, short leases, very little tenant improvement offered, and minimal concessions.
It’s true a Class A building in Chicago or in Indianapolis maybe a look at differently. But what exactly is a Class A office structure. Parameters typically used are age, technological capabilities (such as touch-less elevators, state of the art internet access, personalized HVAC control), state of the art HVAC and power supply, elevators, interior infrastructure. These buildings possess state-of-the-art everything. Many are built to the US Green Building Council environmental standards. While they may not be LEED rated, they have been constructed with a low carbon footprint that is advantageous to all into the future. As the buildings age, they may drop-down class as technology over takes them. Class A buildings tend to attract the most significant tenants within the city. They tend to offer large open space 30,000- to 50,000-square feet and more per floor. There is a certain “wow” factor, and this is accompanied by well-capitalized tenants, strong tenant finishes (TIs), etc. This particular property in the article is very far from a wow factor.
One story office buildings have a at least one thing in common and that is their construction technology. As a general rule they are “stick and brick” buildings. A few have some steel, but there are typically I-beams tied into the roof but supported by the brick and concrete block walls. Each unit has a separate entrance and within the unit are bathrooms, at lease one. Two is not guaranteed. Sometimes there is a kitchen, mainly there are none. There walks scores as a general rule are low and these buildings are almost 100% car dependent.
There is simply no way to look at this article other then owners and brokers (NAI Hiffman) acting more like roosters trying to fool general public that they have a one-story Class A building. This is not uncommon.
There are very few Class A office buildings in the suburbs. There is an inherent risk in their construction as they reduce the geographic area in which to attract employees. Rosemont is a good example of where several good Class B buildings are located. Schaumburg as another office center. But Schaumburg has struggled really since the last recession and has been suffering from chronic vacancy issues.
Finally, this is a complex that has done an excellent self-promotion, case in point this article. There is so much smoke and mirrors but their job is to lease space. The truth is not really that important, paying tenants is what maters.
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The hierarchal class system that exists in the office markets across Chicago and the suburbs needs to change.
For decades, commercial real estate brokers, developers, investors and, to a lesser extent, tenants have designated office buildings according to a Class system. Depending on variables, buildings are considered class A, B or C. The newer the building, the better its location and the greater the mix of amenities, the higher the building class.
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According to CoStar, the inventory of 3,128 office buildings in the Chicago area totals 284.7 million square feet, including downtown and suburban properties. Of that total, 470 buildings totaling 157 million square feet are considered to be class A properties.
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Not one is a single-story building.
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Some would argue there is a bias against single-story office properties. By definition they aren't considered class A. They don't typically have amenities like a fitness center, shared conference rooms and/or coworking spaces. The perception is that these buildings are for back offices and local businesses, not satellite offices of Fortune 500 firms.
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The hierarchal building class system has served the market well, until today. Tenants increasingly are looking for an experience that is both first class and safe. In today's changing work environment there is increased life safety and security that comes with the lack of a common lobby, shared elevators and public restrooms.
As owner of Concourse Chicago, a 165,000-square-foot office complex in the O'Hare office market, I understand it may be a losing battle to classify a single-story building/complex class A. The more compelling argument is that a single-story office building can more easily achieve the status of first class by the overall experience and value it provides to those who matter most, its tenants.
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Concourse Chicago along with our other single-story properties seek to provide a first-class experience and compete directly with the neighboring class A multistory buildings. At Concourse Chicago there are 12 buildings spread across seven acres, with plenty of green spaces that have been populated with picnic tables, fire pits, public art and even an outdoor conference room.
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Concourse also offers tenants free use of multiple conference rooms and coworking spaces, a fitness center with private showers, a shared bicycle program and a complimentary coffee bar.
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Another element that generally works against single-story office buildings is a perception of being old and outdated. Yet it is clearly possible, with planning and an appropriate investment, to replicate some of the experiential offerings found in class A multistory buildings.
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And what is commonly overlooked is that single-story buildings are in the same markets -- even the same block -- as class A buildings. Single-story buildings share the same area amenities such as access to shopping centers and restaurants, expressways and public transportation ... but at a price 20-40% lower than class A competitors.
In addition to emulating those amenities, single-story office buildings, like Concourse, offer a number of other unique features that tenants find beneficial and class A multistory buildings can't provide. We call these features the SAFE experience:
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Safety: As we navigate through COVID-19 and beyond, there is an increased awareness of the significant risk and inconvenience that comes with navigating through a common lobby, shared elevators and shared public restrooms. It is a distinct health-safety advantage to have private and exclusive 24/7 control over HVAC systems. Finally, the private entry to each suite provides quick access from the well-lit open-air parking lots. Simply put, single-story properties offer tenants of multistory buildings a safer and easier way to social distance and go back to the office.
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Affordability: Single-story properties such as Concourse Chicago (at a rental rate of $27-$30 PSF gross) are more affordable than neighboring class A buildings (such as Presidents Plaza at a rental rate of $45-$50 PSF gross).
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Features: Single-story buildings offer tenants several unique features such as operating windows, internal skylights, private bathrooms and solar panels. Often they also offer walkability and access to green space right out the front door -- something even more important today.
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Efficiency: In a typical class A or Class B office building there is a common area loss factor that averages 10-20 percent. The common areas include lobby and amenity space, common corridors, public restrooms, elevators and stairways. In contrast, in a complex such as Concourse Chicago the loss factor at 3% is only a fraction of class A buildings.
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These characteristics often don't even make the list of class A amenities.
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As companies look to offer a safer experience for their employees while wanting to have more control and flexible options within their office space, a single-story office environment is getting a new look from companies.
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COVID-19, like 9/11, will significantly change the office market landscape along with the perception and value of the single-story experience. As it does, it may help to change the hierarchal class system that exists.
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The first-class experience provided at upgraded single-story properties like Concourse Chicago is every bit, if not more, the experience tenants now desire. That first-class experience is available more economically, and more safely, than ever before in a first-class single-story property and not a Class A building.
Jonathan Berger is the founder of Berger Asset Management, the owner of Concourse Chicago, a series of 12 single-story office buildings in the suburban O'Hare marketplace.
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A $700 Million CMBS Portfolio Is On the Brink as Malls Collapse
The bond’s performance shows how rapidly the pandemic is deepening losses in a sector.
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By Adam Tempkin September 18, 2020 Bloomberg
Bond investors who wagered on a group of malls owned by Barry Sternlicht’s Starwood Capital Group are starting to take losses after the Covid-19 pandemic shuttered stores and wiped out emergency cash reserves that had been keeping interest payments flowing.
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The commercial-property bond, known as Starwood Retail Property Trust 2014-STAR, is backed by an almost $700 million defaulted loan. It’s cutting interest payouts to investors for a second time, after a reserve account dried up in June and a sharply lower property valuation led to the servicer holding back some funds.
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The bond’s performance shows how rapidly the pandemic is deepening losses in a sector that was already getting crushed by online shopping. Even the part of the bond deal that was once rated AAA -- meaning bond raters saw virtually no risk of taking losses just two months ago -- have now been cut deep into junk territory.
“The experience of the mall CMBS from Starwood is certainly symptomatic of the larger narrative,” said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union. Weakening mall asset fundamentals and fewer willing investors “will present ongoing financing problems.”
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S&P Global Ratings in July downgraded the entire Starwood commercial mortgage-backed security to speculative grade after a reappraisal of the four regional malls backing the debt valued them 66% lower than when the bond was issued.
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And while the servicer on the loan, Wells Fargo & Co., and borrower hope to restructure or modify the loan, the pandemic has put those plans on ice for now, according to a commentary by Wells.
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Cutting Back
The servicer began slashing interest payments since June because the sharply lower appraisal triggered a CMBS protection mechanism known as an appraisal reduction amount. With the valuation so much lower, the ARA limits the amount of interest servicers have to advance on loans where the underlying collateral has declined in value.
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The idea is that the servicer will hold onto funds longer to safeguard senior bondholders.
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“Because of the appraisal reduction amount in place, the servicer is only advancing on a portion of the mortgage loan,” said Dennis Sim, a CMBS analyst at S&P.
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The Starwood loan defaulted at maturity last November when the borrower was unable to refinance, but the servicer paid investors out of a dwindling reserve account until June. Wells Fargo is now advancing smaller stopgap payments out of its own pocket.
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Total debt on the properties is $682 million. It’s tied to shopping malls anchored by struggling or bankrupt department chains including Nordstrom Inc. and J.C. Penney Co.
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The bond included debt linked to regional malls including The Mall at Wellington Green in Wellington, Florida, The Mall at Partridge Creek in Clinton Township, Michigan, and MacArthur Center in Norfolk, Virginia. Struggling collateral anchor Nordstrom shuttered stores at all three locations, according to Trepp.
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The slice of the CMBS originally rated AAA was last quoted at 69 cents on the dollar, according to Bloomberg data.
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The percentage of overall CMBS loans assumed by special workout servicers is increasing, going from 9.49% in July to 10.04% in August, according to Trepp. About 17.3% of retail loans were in special servicing in August, up from 16% in July, Trepp data show.
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Banks see CRE loans delinquencies
hit 5-year high
Rate of 0.59% still well below post-2008 levels
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By Kevin Sun September 17, 2020 The Real Deal, National
The delinquency rate on bank’s commercial real estate loans is at its highest point since 2015.
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The overall delinquency rate on bank CRE loans rose to 0.59 percent at the end of the second quarter, up 65 percent from the prior quarter, according to a report from Trepp. While the figure is far below the peak of 9 percent at the height of the financial crisis, the uptick could indicate an impending “wave of foreclosures” over the next year or so.
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Trepp used its Anonymized Loan Level Repository data feed, which covers $146 billion in outstanding loans on participating banks’ balance sheets, to shed light on this more opaque sector of CRE finance.
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The delinquency rate for bank loans is well below that of commercial-mortgage backed securities, which peaked at 10.32 percent at the end of June before easing to just over 9 percent in August. (Many CMBS lenders have offered forbearance to struggling borrowers during the downturn. When loans enter forbearance, their status is changed to “current” from “delinquent,” even if the borrower cannot pay on time. Given the surge in such arrangements, the delinquency rate does not reflect commercial real estate distress as well as it once did.) As more relationship-driven lenders, banks have proved much more willing to provide relief to borrowers in these uncertain times, compared to the special servicers responsible for CMBS trusts.
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At the same time, the sectoral distribution of distress in bank loans parallels the situation in CMBS, with retail the hardest hit, followed by hotels. Office and industrial assets have held firm.
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The delinquency rate on smaller bank CRE loans is also noticeably higher than that of large loans, the report finds, which “supports the narrative that smaller businesses are being more directly impacted by the pandemic related economic shutdown.” But there’s one interesting wrinkle in that data.
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Among bank CRE loans maturing within the next five quarters, loans of $25 million and above account for a disproportionate amount of the delinquent loan balance. Meanwhile, for loans maturing in the more distant future, these large loans make up 0 percent of the delinquent balance.
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“While the data is not able to determine borrower intent or motives, it does make a strong case that a significant number of borrowers with large balance loans have made the decision to stop making payments in advance of an expected default at maturity when they are unable to refinance or extend their current loan,” Trepp analysts write.
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Larger, more sophisticated borrowers are less likely to be restricted by recourse or guarantees on their loans, making “strategic default” a more rational move — and one that “will likely result in large number of foreclosures and new REOs on bank balance sheets” as these loans come due, the report concludes.
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Mall of America Is Facing a Complicated Debt Situation. But It Might Be Too Big to Fail.
The mall’s owners entered into an agreement with lenders to avoid foreclosure. Now what?
Liz Wolf Sep 16, 2020 National Real Estate Investor
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Like many U.S. malls, the massive, 5.6-million-sq.-ft. Mall of America in Bloomington, Minn.—the nation’s largest mall—was forced to temporarily shut down in March to help slow the spread of the coronavirus.
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While the mega-mall has gradually been reopening since June, foot traffic is down and the owners are grappling to collect rent from retailers, restaurants and entertainment venues at the property.
Entertainment concepts at the Mall of America include the indoor Nickelodeon Universe theme park, which reopened in August and is operating at a reduced capacity due to COVID-19 restrictions.
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The mammoth complex boasts more than 500 stores, roughly 60 restaurants and other attractions, including the Sea Life Aquarium, the LEGO Store, FlyOver America and CMX movie theaters.
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According to an August report by data firm Trepp, payments on the mall’s $1.4-billion mortgage were made through April, but were delinquent for the next three months. (Trepp’s September data rolls out on Sept. 17).
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The mall’s landlord is Canadian-based Triple Five Group, which is owned by the Ghermezian family. Triple Five entered into a forbearance agreement with the special servicer on its loan that would provide it with enough cash to avoid foreclosure. A Mall of America representative declined to comment on the missed mortgage payments or the servicing process.
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Trepp also reported that the mall’s collateral value has taken a hit, falling from $2.3 billion in 2014 to $1.9 billion in 2020.
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Tenant rent collections increased from 33 percent in April to 50 percent in July, Trepp reported, as more retailers and restaurants reopened. The Star Tribune reported that in August roughly 85 percent of the mall’s retailers had reopened. The property is under pressure with the reduced number of shoppers during the health crisis. On a normal day, the mall says it averages 100,000 to 150,000 visitors.
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Far from alone
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Malls across the country are dealing are with reduced rent collections and significantly less foot traffic. They’re also struggling with bankruptcies of department stores and apparel retailers as more consumers are shopping online. E-commerce activity picked up steam when the pandemic began and stores temporarily closed. As stores have reopened, many shoppers are still avoiding crowds.
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“Of all the retail types that have been whacked, malls are right on the top of the list for the biggest impact just because it’s a bunch of people,” says Deb Carlson, a director in the Twin Cities office of real estate services firm Cushman & Wakefield. “A mall is an event. And we’re not going to events anymore—whether it’s concerts or malls. Traffic at all of the malls is quieter, and certainly, you’re going to see that even more so at Mall of America.”
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One big ball
The Ghermezians own three of the four largest malls in North America. In addition to Mall of America, the other two are West Edmonton Mall in Alberta, Canada, and the struggling American Dream mega-mall in the New Jersey Meadowlands outside of New York City.
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The Ghermezians offer experiential retail and entertainment destinations, which many believed were internet-proof. Then the pandemic hit, consumers became anxious over the spread of COVID-19, and even “internet-proof” malls began losing out to online competition.
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This dynamic is taking its toll. Mall of America said it plans to lay off 211 people as of Sept. 30 and might have to extend the furloughs of up to 178 others.
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“When the year began, no one could have predicted the enormous challenges we would face as a business, a community and as a nation,” the Mall of America spokesman said in an emailed statement. “While we continue to make progress at Mall of America, the road to recovery is going to be slow.”
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The mall’s finances are complex
To make matters more complicated, Triple Five pledged a 49 percent stake in the Mall of America and a similar stake in the West Edmonton Mall as collateral when it secured financing for American Dream, linking the properties.
American Dream finally got built after nearly two decades of delays, bankruptcies and lawsuits. The mega-mall was less than a week away from opening its retail wing when the state closed down due to the health crisis.
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On Sept. 1, Triple Five partially reopened the 3.2-million-sq.-ft. mega-entertainment complex, which features an indoor ski slope.
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“American Dream adds a whole other wrinkle,” says Manus Clancy, senior managing director and the leader of applied data, research, and pricing departments at Trepp.
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“It never really opened in full in earnest. Just when it was set to open 12 years ago, we got hit with a great financial crisis when borrowers defaulted. Twelve years later, they’re ready to open, and we got hit with a pandemic and the pandemic closes them. And not only does it close them, but it takes some of their would-be tenants.”
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Bankrupt Lord & Taylor and Barney’s, for example, were both slated to fill the American Dream’s retail section.
“And of all things, one of their big attractions was a water slide park. (It’s DreamWorks Water Park, which mall owners say is the nation’s largest indoor water park). Nobody wants to be near that. Terrible timing. Terrible luck,” Clancy adds.
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Mall of America works with lenders
Despite challenges, retail experts anticipate that lenders will continue working with Triple Five on a solution for the Mall of America. They say the forbearance agreement gives the mall owners some breathing room to build back up the property’s finances as rent payments begin to return. It effectively places the mortgage in a stand-still arrangement, according to Nick Egelanian, retail consultant and founder/president of SiteWorks Retail Real Estate Services.
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“Given the complexities of the three malls’ ownership and financing, along with the cross collateralization of the Mall of America with American Dream, I suspect that the Ghermezians are in negotiations with multiple lenders, bondholders and equity holders regarding the various properties and loans in question,” Egelanian says.
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“It’s anyone’s guess how this will end up, but I am willing to bet that Triple Five will end up in control of all three malls when the dust settles, perhaps, with some change of terms and even some transfer of ownership interests.”
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“As I have said before, the only thing worse for the lenders than having the loans in default would be not having the Ghermezians to operate the properties,” Egelanian adds.
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‘Too big to fail’
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The Mall of America generates nearly $2 billion in economic activity annually, according to Triple Five.
“I think it’s one of those assets that for the state of Minnesota, it’s too big to fail,” Carlson says. “When it gets to it, probably a combination of the state and the county and the city will have to help. [The mall] asked for assistance and didn’t get it, but it’s not the last ask.”
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The mall’s owners requested tax relief due to the pandemic, but state legislators were divided on the issue and it wasn’t granted.
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Much of the responsibility, however, falls on the mall, Carlson points out.
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“They’re going to have to make some accommodations,” she notes. “They can’t continue on the way they are and expect assistance to come in. They’re going to have to do what they need to do to make that mall full and successful to whatever extent they can and hold up their end.”
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For example, Carlson says the mall has a very high rent structure, and she believes it’s going to have to be creative with its economic structure and offer tenants rent deals to attract and retain them. That’s because the “bar has been lowered” for a while on what kinds of sales retailers can achieve.
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“They’re going to have to pull down some of their rents,” Carlson notes. “They’re going to have to cut deals with retailers to get them in. Deals as in free rent. Creative tenant improvement packages.”
Carlson adds that that the mega-mall had some vacancies pre-COVID-19 and the pandemic “simply exasperated it.”
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‘Doing everything in their power’
“Mall of America is doing everything in their power to stay open and would be a great loss to the Twin Cities if they don’t,” says Kim Sovell, a professor of marketing at the University of St. Thomas in the Twin Cities.
Other malls and retailers are doing the same while consumer behavior is rapidly changing, she notes. “Pivoting to meet consumers’ needs takes time and retailers and malls do not have the luxury of time right now.”
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Malls were in flux prior to the pandemic and temporary closures. Ones that had taken strides to offer more than shopping were better prepared for changes in consumer demand, but not for closures, she notes.
“Being an entertainment destination when entertainment has dropped in value for consumers has made the situation more tenuous,” Sovell points out. “When we finally get ahead of this virus, it will be interesting to see who’s still standing and what they did to remain vital.”
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Announced Store Closures on Pace
to Set Record
Fallout Not Felt Equally Across the Retail Sector
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By: Kevin Cody September 11, 2020 CoStar Advisory Services
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Retailers have now endured an arduous six-month stretch during which a global pandemic led to widespread lockdowns and an ensuing recession. For most, it has been a very bumpy ride. With more than three months remaining in the year, announced store closures for 2020 have already surpassed last year’s level and are now on pace to reach an all-time high.
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While the pandemic will continue to have a significant impact on the retail market, digging deeper into this year’s announcements shows that the impact will not be felt equally across retail tenant sizes or center types.
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Year to date, retailers have announced plans to close nearly 130 million square feet of store space. In addition, more than half of this space can be chalked up to five traditional retailers: J.C. Penney, Macy’s, Stein Mart, Bed Bath & Beyond and Pier 1 Imports.
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Traditional retail, which is largely composed of apparel and department stores, has been struggling for years as e-commerce growth has siphoned sales from the sector’s brick-and-mortar locations. The coronavirus pandemic has only accelerated this trend.
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Conversely, over the past several years, experiential retail, such as restaurants, gyms and movie theaters, had proven to be a key source of growth because of its relatively low exposure to e-commerce competition.
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However, experiential retail has also been severely disrupted by the pandemic, and some major tenants in this sector have recently announced closures as well, including 24 Hour Fitness, Gold’s Gym, Chuck E. Cheese and many restaurants.
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As these announced closures go into effect, investors may want to begin thinking about what type of retail space is most at-risk. Additionally, as an opposing measure, announced store openings can shed light on the potential ability to backfill vacated space.
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Following 2018, a year in which large anchor tenants drove announced store closures, and 2019, a year in which smaller inline tenants were the key culprits, 2020 has fallen somewhere in between. However, one characteristic shared between all three years is that mid-size tenants have been the least impacted. This is especially apparent after layering in announced store openings.
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Since the start of 2018, mid-size tenants, those with store sizes of 10,000 to 25,000 square feet, have announced plans to open about 60 million square feet and close less than 30 million square feet, accounting for a 32 million-square-foot surplus.
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Over the same period, small tenants, those leasing under 10,000 square feet, were at a 12 million-square-foot deficit and large tenants that leased more than 25,000 square feet were at a 256 million-square-foot deficit.
Mid-size space may be better positioned to withstand the current disruption in the retail market and, if a closure does occur, there should be relatively more demand from other mid-size retailers to backfill it.
One caveat with announced store openings to be aware of is that discount stores have been a key driver in recent years. In 2020 alone, Dollar General, Dollar Tree, Family Dollar and Five Below have announced opening plans for more than 1,600 stores combined, and discount grocers Food Lion, Lidl and Aldi will be opening more than 180 stores combined.
Why is this is an important consideration for retail property investors? Because discount stores tend to target lower buying power trade areas and are less likely to lease space in large shopping centers such as malls.
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Further analysis of store closure data suggests that malls will experience an outsized share of move-outs in the near term, while neighborhood centers should hold up relatively well. The mall sector has been hit particularly hard largely because, on average, they have a high share of space leased to traditional tenants, specifically big-box anchor tenants such as JCPenney, Macy’s and Lord & Taylor. Roughly half of brick-and-mortar space operated by retailers that made closing announcements in 2020 is located within malls.
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Power centers and community centers are also expected to receive more than their fair share of closures, though to a much lower degree. Meanwhile, neighborhood centers, which are typically grocery-anchored, are positioned to be relatively less impacted.
Over the next 12 months, an increase in retail vacancy will ultimately be driven by pandemic-related closures, which is why mall vacancies are expected to expand by more than double that of the next highest center type. Mall vacancies are forecast to rise from the middle of the pack, at about 5.6% in the second quarter of 2020, to the highest level for all center types, at 9.3% just 12 months later.
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Seeing how announced store closures are disproportionately located in malls and not neighborhood centers, one might expect them to fare better. In our forecast, neighborhood centers are expected to experience relatively limited vacancy expansion of less than 1 percent over the same period. The forecast for power and community centers falls between the two, with average vacancy expected to increase by about 1 to 2 percent.
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Retail vacancies across all center types had been trending up heading into 2020, and the pandemic will certainly accelerate that expansion over the near-term. The fact that little new retail space was being added over the past several years will help limit the impact on retail vacancy and rents overall, but investors should navigate the market with care, as store closures continue to pile up and rent collection levels remain suppressed.
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As always, future retail resiliency and productivity of any given retail asset will also depend on its specific location. Research suggests that suburban retail will hold up better in the short term, but centers located in high-quality trade areas will outperform over the long term.
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As a forward-looking measure, announced store closures can help put the coronavirus impact into perspective. Although 2020 is already one of the worst years on record for closure announcements, some segments of the market are positioned to better withstand this period of disruption.
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Demand appears to be weak for small and large vacated spaces, which may make them especially challenging to backfill, while demand for midsize space appears to be strong enough to offset a substantial portion of its move-outs. And even as malls may face an outsize share of tenant move-outs, neighborhood centers should be relatively less impacted by store closures, which is reflected in CoStar’s forecast vacancy expansion.
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After Missing Payments, Starwood Forced To Relinquish $1.6B Mall Portfolio
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Dees Stribling, September 10, 2020 Bisnow National - National Retail
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Commentary by JSO
This really short article is loaded. The bolding below is mine and it is referring to what I would call something sinister and potentially downright dishonest. Bloomberg on August 24 referred to this and it really didn’t register with me immediately. The coronavirus has devalued some real estate, and definitely some more others. But it does appear that many of the REITs are skipping payments yet amassing billions of dollars to purchase properties resulting in significant and actual losses. Many of the players could without doubt still cover the note, but it does appear there is a significant “wink and a nod” taking place. Brookfield Properties are basically repurchasing their own properties at significant discounts. Their Chief Executive Officer Brian Kingston believes this is a perfectly okay. So for all those single-family properties got have fallen into foreclosure, why can’t these owners re-buy properties at significant discounts. If Mr. Kingston believes this is good, it should be good for everybody. Frankly, to me it looks like fraud.
Starwood Capital Group has surrendered control of seven U.S. shopping centers to a partnership between Pacific Retail Capital Partners and Golden East Investors after it defaulted on debt associated with the properties.
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Starwood, which acquired the malls in 2013 for $1.6B, issued CMBS bonds in Israel related to the properties, and began defaulting on the bonds earlier this year. A ratings firm downgraded the debt, thus enabling bondholders to seize the assets under the terms of an accelerated payment clause, The Wall Street Journal reports.
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A bidding contest followed, with Pacific Retail and Golden East winning for an unspecified price. The malls are in California, Indiana, Ohio and Washington state, with JCPenney and Sears as anchors of many of them.
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The new owners say they will reposition the properties into mixed use. "There is great familiarity with these assets and we see value,” Pacific Retail Managing Principal Steve Plenge told the WSJ.
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The pattern of delinquency on real estate debt among investors who presumably have the wherewithal to stay current is increasingly common in the retail sector, as well as in the hospitality sector. It appears to be a tactical retreat from those sectors, which have been the hardest hit by the coronavirus pandemic, to focus resources on more lucrative properties.
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"I think you'll see us stick to our knitting with some fairly conservative product types and probably not doing much, if anything, in retail, which we haven't done in the last few years, or other sectors that could be considered a little bit more volatile," Starwood Property Trust President Jeff DiModica said during the company's most recent earnings call in August.
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As of late August, Starwood Group, which has about $60B in assets under management, including other malls, was behind on payments for more than half of the 30 malls it owned at the time, representing about $2B in CMBS debt, even as the company amassed an $11B war chest for other investments.
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Likewise, Blackstone Group had put together $46B for real estate as of the end of June, while behind on payments on a $274M mortgage associated with four Club Quarters hotels, and Colony Capital has quit paying on many of its hotel bonds while amassing $6B to buy data centers and cellphone towers.
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What Concessions Are Office Landlords Offering to Hold Onto Tenants as Demand Falters?
Recent reports have shown office landlords have been more willing to offer tenants additional perks to get them to commit.
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Sebastian Obando Sep 03, 2020 National Real Estate Investor
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Leasing concessions are increasing in the office sector, but how far landlords are willing to go to secure tenants amid a pandemic depends on the office product.
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Office lease concessions in the form of free rent and tenant improvement (TI) allowances rose sharply in the second quarter of 2020 as U.S. office demand fell the most since 2009, according to a report from real estate services firm CBRE. Net effective rents for office space dropped by 6.6 percent from the second quarter of last year.
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During the second quarter alone, the period of free rent on office leases averaged 10 months, up by 13.7 percent from the first quarter of the year, prior to the pandemic’s peak and widespread stay-at-home orders, according to the CBRE report. Long-term leases on class-A space in New York have seen average free rent increase to 15 months in the second quarter, with TI allowances averaging $115.00 per sq. ft., says Sarah Dreyer, head of Americas research at real estate services firm Savills. For comparison, in the second quarter of 2019 those figured totaled 11.5 months of free rent and $103.00 per sq. ft. in TI.
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“I really think traditionally you have two main types [of concessions]. First is rent relief in the form of ‘free rent,’ then the second is…TI, which is, I’d say, changes made to the office space,” says Omar Eltorai, market analyst at real estate data firm Reonomy. “Those are the classic two and those are very much still on the table. I would think that rent relief is the one that’s requested most because that’s the most immediate. However, TIs could also be in play for any sort of health concerns where the landlord or the property owner might need to reconfigure the office so that the tenant feels safer in that space.”
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Tenants are also likely to see increased flexibility regarding term length and options, says Dreyer. In addition, opt-out clauses are becoming more of a trend now, says Jonathan Stravitz, principal at SVN | BIOC commercial real estate.
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Declines in net effective rents were more severe in the 15 largest office markets than the national average, according to CBRE, due to the COVID-19 crisis affecting big cities more acutely in the initial stages of the pandemic. But not all office markets are seeing a vast increase in concessions for tenants, says Arnold Siegmund, principal at real estate services firm Avison Young who represens landlords in the Raleigh-Durham, N.C. area.
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“In our market, which is the triangle Raleigh-Durham Chapel Hill market, we honestly have not had a significant amount of requests for concessions on existing leases since the pandemic,” says Siegmund. “Most of the activity or lack thereof is with delays in decisions from new deals. If those companies had near-term expiration dates, they’ve been getting short-term renewals, one to two years, and those typically include concessions on short-term transactions.”
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Leasing activity fell in the Raleigh-Durham area by 56 percent year-over-year in the second quarter of 2020 to reach the lowest level registered since early 2007, according to an Avison Young report. Total U.S. office leasing volume declined by 42 percent from the first quarter to the second quarter of 2020, with at least 10 markets seeing a decline of 45 percent or more, says Dreyer. Markets that saw the most significant declines include Chicago, San Francisco and New York City.
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“Though we expect to see some uptick in activity in the third quarter and the fourth quarter, markets will continue to soften in the face of the pandemic downturn,” says Dreyer. “Rising availability presents tenants with more options in the market and a flux of sublease spaces competing with direct [space] will eventually put downward pressure on base rents.”
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Jobless Claims Ease, Showing Slowly Improving Labor Market
Payments from state programs down, but more people are tapping pandemic benefits
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By: Eric Morath Sept. 3, 2020 Wall Street Journal
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The number of people seeking and receiving state unemployment benefits fell at the end of August, signs of a slow improvement in a U.S. labor market still deeply damaged by the coronavirus pandemic.
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Weekly initial claims for jobless benefits fell by 130,000 to a seasonally adjusted 881,000 in the week ended Aug. 29, the Labor Department said Thursday. The number of people collecting unemployment benefits through regular state programs, which cover most workers, decreased by 1.24 million to about 13.3 million for the week ended Aug. 22.
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The latest figures on jobless benefits are part of a mixed picture about the labor market, which remains in a deep hole because of economic disruptions from the pandemic. About 29 million people were receiving assistance from state and federal programs as of mid-August, Labor Department data showed. The number of people seeking assistance through some pandemic-related programs also has increased in recent weeks.
Moreover, the Labor Department changed how it calculates seasonal adjustments for regular state claims starting with Thursday’s release, a move meant to better align the adjusted figures with raw numbers because of coronavirus-related distortions.
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The bulk of last week’s decline in new applications for state benefits reflects the methodology change, said Aneta Markowska, chief economist at Jefferies LLC.
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“Last week’s decrease is a catch up to the improvement that has been happening,” she said. “The labor market is healing, but the rate improvement is slowing and will continue to slow.”
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Thursday’s report showed applications to a separate unemployment program created in March, pandemic unemployment assistance, rose solidly for a second straight week, and nearly matched applications to regular state programs, which cover about 90% of workers. Figures on pandemic programs can be volatile because they rely on reporting from states about new programs put in place since the pandemic started.
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The pandemic assistance covers gig workers, the self employed and those with special circumstances, such as being unable to report to work due to lack of child care. That program, which is less generous than regular state programs, paid benefits to 13.6 million recipients during the week of Aug. 15, the latest available data. The figure also nearly matched those paid by state programs.
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“This is seriously worrying evidence that contractors,
entrepreneurs and self-employed workers are losing
their income, and in some cases closing up shop for
good,” said Patrick Anderson, chief executive of the
Anderson Economic Group consulting firm.
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Weekly applications to state programs, data with a
half-century record, are down from a peak of more
than six million in late March, but the recent level
remains well above the roughly 200,000 claims filed
weekly in February. Before this year, the most claims
filed in a single week was 695,000 in 1982.
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Seasonal adjustments are meant to account for
regular swings in layoffs that occur during certain
times of the year, such as around holidays. The
coronavirus, however, didn’t align with historical
patterns and likely led seasonal adjustments to overstate the actual number of weekly unemployment claims, economists say.
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The Labor Department didn’t revise previously published data Thursday. Forecasting firm IHS Markit estimates that if the Labor Department had changed its data methodology at the beginning of the pandemic, the cumulative number of seasonally adjusted jobless claims could be about four million lower since mid-March.
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While that would be a significant revision, it doesn’t change the overall narrative: The pandemic and related shutdowns caused layoffs to soar to levels not previously recorded in data back to the 1960s, and the amount is still likely to remain near levels associated with recessions in the near term.
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Ms. Markowska expects job growth to ease this fall as
most workers who were temporarily laid off are
recalled and business closures and downsizing result
in about seven million permanent job losses.
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U.S. employers shed 22 million jobs in March and April
and replaced 9 million of those the following three
months. Economists surveyed by The Wall Street
Journal forecast the August jobs report, to be released
Friday, will show employers added 1.3 million jobs,
reflecting still strong but easing job growth.
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Construction and manufacturing, buoyed by a hot
housing market, should add jobs at a strong rate,
Ms. Markowska said, while service-sector gains should
come at a slower pace, and government jobs, including
at public schools, could decline in August.
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Private-sector measures show the number of open
jobs has plateaued and the growth in worker shifts
has slowed from the spring. And several large
employers have warned of job cuts. United Airlines Holdings Inc. said Wednesday it planned to cut 16,370 staff amid a pandemic-driven slump in passenger demand, Ford Motor Co. is offering buyouts to salaried employees with the aim of cutting 1,400 workers, and cities have said they are contemplating staff cuts.
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Kimberly Blevins, 37 years old, of Wilmington, Del., said she was laid off from her housekeeping job at a Holiday Inn in March, and hasn’t been able to find a job to support herself and her 3-year-old son.
“It’s flipped our world upside down,” she said. “I’ve put in applications left and right, but most companies haven’t even hired back all their old people yet.”
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Ms. Blevins is receiving unemployment benefits, but after the $600 federal enhancement to benefits expired at the end of July, her weekly payment fell to $69, she said. She broke her apartment lease and moved in with her mother.
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“I’m hurting my mom financially,” Ms. Blevins said. “She can’t afford to take care of us on her Social Security.”
President Trump signed an executive action last month allowing states to tap disaster-relief funds to pay for a $300 a week in enhanced aid on top of state benefits. More than 40 states have received federal approval to distribute the extra payments, according to the Federal Emergency Management Agency. Some states, including Arizona and Louisiana, have already started delivering the money to individuals.
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The Labor Department estimates it could take an average of three weeks for states to disburse the supplemental assistance. The money to fund the extra payments is limited, and could be exhausted in five or six weeks, depending on the number who qualify for such funds.
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There are jobs available for unemployed workers in fields such as manufacturing, warehousing and logistics, said Deb Thorpe, president of Troy, Mich., staffing firm Kelly Professional & Industrial.
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But it is hard for firms to fill such jobs, which range in pay from $13 to $17 an hour, despite a historically high unemployment rate, she said. Workers remain concerned about safety and school closures mean many don’t have child care. Until recently, enhanced benefits meant many workers received more from benefits than they would receive in work pay. Ms. Thorpe said the no-show rate for new hires fell to about 20% after the enhanced benefits expired, from 40%, but the rate remains more than double a year ago.
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“We are seeing moderate demand for workers,” she said. “And more people are coming back to work because they want financial stability—they have bills to pay.”
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US Hotel Occupancy Falls Two Straight Weeks Heading Into Labor Day Weekend
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Demand May Remain Weak Because Business Travel Tends to Be Low in Week After Holiday
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JSO Comment
As a general rule CoStar produce well balanced articles but there are times when there are items in the articles that are simply missed or overlooked or slightly confusing as to their inclusion or exclusion. I would propose that just briefly touching what is the occupancy need today for simple breakeven for these hotels is fairly important. Let’s say moment 60%. If hotels are running between 40% to 50% occupancy, this is potentially significant. Clearly there is continued stress in the hospitality industry. The author touched on both the business traveler and TSA daily numbers. They however were never actually connected together. The primary source of revenue/occupancy for most hotels (not all) is the business traveler. Consultants where on the grueling Monday night arriving back at their home town on Thursday evening. They were the backbone of many occupancy rates. Finally, toward the end of the article got very confusing… are the conversion some hotels to COVID words included in the occupancy numbers or excluded…
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By Richard Lawson September 3, 2020 CoStar News
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Hotel occupancy rose in certain areas of the United States as thousands fled Hurricane Laura, but it wasn't enough to prevent the national average from dropping for a second straight week heading into the Labor Day holiday weekend.
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Hotel occupancy slipped to 48.2% last week from 48.8% the previous week, according to the latest report from industry research firm STR, which is owned by CoStar Group, the publisher of CoStar News.
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When occupancy drops, the average daily rate and revenue per available room, two other key metrics for the hotel industry, follow. The average daily rate dipped to $98.39 for the week ended Aug. 29 from $100.08 the prior week, while revenue per available room declined to $47.38 from $48.81. The data is used by investors, lenders and owners to value hotel properties.
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This slide could extend through the week after Labor Day. Jan Freitag, STR’s senior vice president of lodging insights, said there's typically little corporate demand. “I wouldn’t be surprised to see something similar” next week, Freitag said.
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But the trend of lower occupancy numbers could persist in the fall without the corporate group meetings and conventions that typically drive a lot of business for hotels.
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Freitag said, “We’re not sure that those business travel numbers will actually materialize.”
Travelers passing through airports is an indicator. Last week, the Transportation Security Administration showed that the total number of air travelers passing through security dropped by 5.4% from the previous week, STR noted.
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Big gains in air travel ended by mid-July. The hotel industry’s performance followed a similar path.
Weekend occupancy would be the bright spot. Occupancy last weekend averaged 54.7%, which has been roughly typical lately. Freitag said travelers may take longer weekends because many children are engaged in online learning.
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Beaches and mountain areas, such as the New Jersey shore and mountainous parts of California, remain at the top in popularity for occupancy. But other areas are getting strong occupancy because of government and emergency workers needing a place to stay.
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McAllen, Texas, which is at the border with Mexico, topped the list of markets with the highest occupancy, registering 78% for the week. The city became a hot spot for coronavirus cases as Texas numbers began hitting record levels in July. Leigh Wooldridge, director of sales for Visit McAllen, said the state sent nurses into the area to help with the treatment, with the convention center getting converted into an acute care facility.
“At a certain point our hospitals were full,” which meant that the influx of nurses to treat patients needed hotel rooms, Wooldridge said.
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Wooldridge said hotels have been filled by National Guard members who are in the area for various reasons.
Meanwhile, North Louisiana hotels hit 70% occupancy for the week, 77.6% for the weekend, with Hurricane Laura hitting the state and people evacuating to areas in south Louisiana such as Lake Charles. Shreveport is the largest Louisiana city in the northern part of the state.
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Evacuees and displaced residents traveled west as they did after Hurricane Katrina hit Louisiana in 2005. Houston’s average hotel occupancy rose to 51% for the week that ended Aug. 29 from 38.9% the previous week, according to STR. That surpassed the national 42% average occupancy for the top 25 largest hotel markets tracked by STR, Freitag said.
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How’s the Coronavirus Economy? Great or Awful, Depending on Whom You Ask
Some people are paying off credit cards and padding savings. Others are going hungry or worried about eviction. Here’s how that divergence happened.
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JSO Comment
In reading this article one is hard-pressed to figure out how this relates to real estate. There are so many articles like this, but there is an important theme, which is these are the people who are the users of real estate in one way or another. Housing is on top of the list, but there other forms of real estate mentioned. There was a funeral home, restaurants and coffee houses, day-care… Underlying theme is the underutilization of these properties and the stories behind them. It’s like putting a real face on a long told story.
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By: Ben Eisen Sept. 2, 2020 Wall Street Journal
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The coronavirus recession has been financially devastating for many Americans. It has been a boon for others.
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Many are going hungry or worried about eviction. Others are paying down debt or even buying second homes. What’s left is a confounding picture of U.S. household finances.
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The current recession, like any other, has deepened the division between those who can navigate it and those who can’t. But the unusual nature of this downturn has made those differences starker.
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The economy collapsed this year at record speed, but the federal government rushed in with additional unemployment benefits, stimulus checks and a moratorium on evictions and foreclosures. Banks allowed customers to pause mortgage and car payments without penalty. As a result, many people who lost their jobs have stayed afloat.
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And those with secure jobs, stuck at home with fewer places to spend money, came out ahead. Cutting back on commuting costs and eating out gave them more flexibility to spend on luxuries such as home improvement. Home sales had their biggest monthly gain ever in July, boosted by people looking to escape cities. There has been record demand in second-home destinations, and many are buying with cash, according to John Burns Real Estate Consulting LLC.
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The stock market, predominantly owned by the wealthiest Americans, has returned to record levels. Lists of the fastest-selling cars include luxury brands such as Lexus, BMW and Tesla, according to car search engine iSeeCars.com. Sellers of boats, pools and other high-end goods are reporting blockbuster demand.
At the same time, many laid-off workers have encountered outdated state unemployment systems that were slow to adapt to rapidly changing benefits. Some were told they were ineligible for benefits, such as some new college grads who had yet to start jobs.
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Kathi Edwards of Rockford, Ill., worked two part-time jobs until she was furloughed from one in July. With her job at a nonprofit gone, she filed for state unemployment benefits but received a letter saying that the $348 a week she still made from her funeral-home job was above the $325 maximum to obtain benefits.
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Whenever she calls the state unemployment office, she encounters an automated system and hasn’t heard back. The Illinois Department of Employment Security didn’t answer messages requesting comment.
In the meantime, Ms. Edwards has gotten by with some money she inherited from her mother, who died in June. She picked up groceries from a local church, something she never expected to do.
“I’m just kind of in limbo right now,” she said, “hoping the money holds out.”
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The ranks of the struggling are growing. The federal government’s $600 in additional weekly unemployment benefits expired in July. People have largely spent the stimulus checks they received in the spring. Lenders are bracing for more people to fall behind on debt payments. Grocery shoppers are cutting back on spending.
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Almost 11% of U.S. households didn’t have enough to eat in the previous seven days, as of July. That number was about 4% in 2018, according to an analysis of federal data by Diane Whitmore Schanzenbach, an economist at Northwestern University.
About a third of renters reported little or no confidence they could make next month’s payment, Census Bureau data from July show, also an elevated level.
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President Trump signed an executive order in August that would provide an extra $300 a week in federal unemployment, but the program has run into delays. Another round of stimulus checks has been discussed in Congress, but no agreement has been reached.
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Jeffrey Liebman and his students at Harvard University, where he is a professor of public policy, have been interviewing 60 households in the Boston area who recently visited food pantries. A single mother who just finished community college was told she couldn’t get unemployment benefits because she wasn’t working when the pandemic hit. A grandmother received free meals at a child-care center where she volunteered—until the center shut down.
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“For the folks who are economically vulnerable, things are still getting worse,” Mr. Liebman said.
Workers without permanent legal status, for example, are ineligible for unemployment. So are many waiters, baristas and other workers who have been called back to work but declined because they were afraid of getting sick.
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Elizabeth Ananat, an economics professor at Barnard College, has been surveying about 1,000 Philadelphia-area service workers throughout the pandemic. Just 44% of those laid off got expanded unemployment benefits.
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Malaysia Jemison, a single mother in Albany, N.Y., said she had to quit her job at a home-care agency in July because she had no one to take care of her daughter. She applied for unemployment benefits soon after but got radio silence, she said. The online portal she checked each day said, “We are continuing to work on your application.”
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Since then, she and her daughter had to move because their home flooded. She paid for medicine and internet service with help from family members, though they are hurting, too. She relied on food stamps even when she was working, but now they are her main lifeline.
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“We are waiting and hoping and praying a miracle happens,” she said last week.
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After The Wall Street Journal contacted New York state’s labor department, a representative called Ms. Jemison and said her benefits would be released. A spokeswoman said some claims can take longer “where further documentation or adjudication is needed.”
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Many of those who got expanded unemployment have been able to stave off the effects of the recession—at least for now.
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A majority of workers who lost their jobs but got the extra $600 a week earned more in unemployment for several months than they did at their jobs. They used the cash to pay down debt, add to savings accounts and spend.
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Larry McKenzie, a musician who plays under the stage name Wyatt Hurts, struggled when bars and restaurants closed early in the pandemic.
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Mr. McKenzie said he filed for unemployment with the state of Florida and heard nothing for weeks. But when it did kick in around the beginning of summer, he was brought current with a lump sum of more than $5,000. He also got a forgivable loan through the Paycheck Protection Program and a $1,200 stimulus check. All of a sudden, he was netting more income than usual, considering expenses he no longer had to pay.
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“I have paid off credit cards; my credit score has gone up. I’m actually paying my bills a month ahead now,” he said. He has since gone on and off unemployment as performance gigs have come up. He hasn’t been working since he got sick with Covid-19 recently, he said.
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Downtown has huge oversupply
of homes for sale
In a year that has seen life disrupted due to COVID and rioting and looting, there are enough homes on the market to fuel a year of sales.
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Dennis Rodkin August 31, 2020 Crain's Chicago Business
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COVID-19 and episodes of looting and rioting are casting a shadow over the downtown neighborhoods’ housing markets in the form of a huge over-supply of homes for sale.
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In the 60601 ZIP code, covering Lakeshore East and the northern part of the Loop, there are enough homes on the market to fuel 15 months of sales, according to Crain’s research using Midwest Real Estate Data’s listings. Immediately across the Chicago River in 60611, Streeterville up to Oak Street Beach, there’s 11.5 months worth of inventory on the market.
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That’s compared to 3.1 months of inventory on the market now citywide, and to less than three months in, among others, ZIP codes in Logan Square, Bucktown, Andersonville, Rogers Park and Albany Park. In Lincoln Park and Lakeview ZIP codes, inventory is around three and a half months.
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Four to six months of inventory is generally considered a balanced, healthy market.
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Matt Laricy, managing partner with Americorp Real Estate, said that in recent weeks, he’s been meeting with five new sellers a day, while he’d usually be seeing one a day in late summer.
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“Since the second round of looting, it’s been like the Hoover Dam broke and the water is gushing through,” Laricy said. “My phone does not stop ringing with people who say they love Chicago but they’ve had enough.”
There’s a little more than eight months’ inventory on the market in 60610 (Near North, Gold Coast) and 60654 (River North).
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In the neighborhoods immediately west and south of the Loop, the excess of inventory is less pronounced: roughly five months in ZIPs in the West and South Loop.
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The data shows that the market has fallen off in the neighborhoods surrounding downtown, where there have been nights of looting and more nights of bridges over the river kept raised to block the flow of traffic, and where the longtime bonus of having a short commute to Loop offices has lost its value as people work from home.
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“We don’t know when we’re going to be able to walk to work again, so that convenience is gone,” said Quinn Marcom, who with his wife, Tana Marcom, have their two-bedroom condo on Franklin Street on the market at $589,000. He’s in tech and she works at the Federal Reserve; both have been working at home for months, which means one of them has to use the kitchen counter as an office.
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“We need more space and we want more outdoor space than a balcony,” Tana Marcom said. They’re looking to move farther north within the city limits. Both said the looting episodes have had no direct impact on them or their feelings about living downtown.
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Amir Fouad, an @properties agent who focuses on Streeterville, said that in his experience, much of the inventory is being put on the market by investors, not live-in homeowners. They may be people with a property portfolio or people who used to live in the unit and have been keeping it as a rental.
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Investor-owners, he suggested, are the people who’ve “really lost interest in the city. It’s property taxes first, and everything else that has happened. They’ll put their investment somewhere else.”
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Debra Dobbs, an @properties agent who specializes in downtown luxury properties, said, “I happen to think the (safety) issue is 70 percent optics and 30 percent reality. There have been problems, but they’re going to be under control.”
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“The problems won’t last,” Dobbs said, “and these neighborhoods will still be beautiful places to live.”
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Even so, at the moment, these neighborhoods “are slow because of both the supply side and the demand side,” Laricy said. Some of the inventory is new construction, not being offered by homeowners but by developers. In the most log-jammed ZIP code, 60601, the inventory includes 21 units at Cirrus, a 47-story tower that’s under construction. That’s a little more than one month’s inventory for the ZIP code, competing with the homeowners who are selling in the same neighborhood.
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The current year’s crises are not the only factors in the slowdown, said Paul Barker, a Baird & Warner agent. Construction of high-priced condo buildings, including One Bennett Park, Vista Tower and No. 9 Walton, has driven people who might like to buy downtown into farther-out neighborhoods, he said.
This year’s crises “have exacerbated the slowdown,” Barker said.
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Industrial Market Headed For A Downturn
New Report Finds
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By: Dees Stribling August 27, 2020 Bisnow National
For now, industrial real estate is the commercial property asset class most in demand, but its time as a commercial real estate darling will be limited, a new report by NAIOP (Commercial Real Estate Development Association) predicts.
Though industrial has done well in the short run because of a spike in e-commerce, broader economic indicators point to a drop in demand for industrial space during the third quarter of 2020, with a recovery not until mid-2021 or later, the report says.
In fact, NAIOP predicts that net U.S. industrial absorption will be negative in a big way when the Q3 2020 numbers are ultimately crunched: 141M SF. In Q4 2020, the report forecasts net negative industrial absorption of 72M SF, followed by negative absorption of 27M SF in Q1 2021.
Only in the second quarter of next year will demand for industrial space make some kind of recovery, albeit a weak one. Pre-pandemic absorption levels will not return until at least the beginning of 2022, NAIOP predicts.
In the context of the pandemic-inspired recession, which saw an annualized contraction of the U.S. economy of about 33% during Q2 2020, the e-commerce boost for industrial absorption is thus something like a sugar high. Pronounced but ultimately short-lived.
"Real-time indicators of economic activity, as well as academic forecasts of growth, highlight the headwinds currently facing the U.S. economy,” wrote the authors of the report, Hany Guirguis of Manhattan College and Timothy Savage of New York University.
Besides waning demand for consumer goods, there will be disruptions to global supply chains and trade, the report points out, resulting in less manufacturing and construction, as well as fewer open retail stores needing goods.
For now, however, online retailers have been leasing industrial space with great gusto, especially in their long-standing quest to find last-mile facilities. In suburban Chicago this month, for example, retail giant Amazon inked a deal for two buildings totaling about 600K SF.
"Amazon.com was the difference maker during the second quarter of 2020,” Colliers International reported in its Q2 2020 industrial report for Chicago. “The e-commerce giant committed to an astounding 11M SF in 10 buildings."
The West Coast is seeing large transactions as well, Cushman & Wakefield Executive Director Robin Dodson said. “
Lease renewals were trending towards shorter term at the start of the pandemic, though we are now seeing many companies staying in place with long-term renewals of five to 10 years,” she told Bisnow.
Investors also are still keen on industrial properties. In Dallas this month, a partnership between VEREIT Inc. and Korea Investment & Securities Co. acquired a 2.3M SF distribution and warehouse facility.
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Unemployment Claims Remain Historically High
New applications for jobless benefits fell slightly to one million last week
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By Sarah Chaney and Paul Kiernan Aug. 27, 2020 Wall Street Journal
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Unemployment claims fell slightly last week but remained historically high, signaling layoffs continue as the coronavirus continues to hamper the economic recovery.
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New applications for unemployment benefits ticked down to one million in the week ended Aug. 22, the Labor Department said Thursday. Initial unemployment claims remain well below the recent peak of about seven million in March but are far higher than pre-pandemic levels of about 200,000 claims a week.
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The number of people collecting unemployment benefits through regular state programs, which cover most workers, edged down to about 14.5 million for the week ended Aug. 15. So-called continuing claims, which are released with a one-week lag, hit a high of nearly 25 million this spring but have declined in recent weeks, a sign companies are bringing back workers.
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“We’re seeing gradual improvement, but we really need to underscore the word ‘gradual’ here. We’re only inching along in terms of the labor market’s recovery,” said Sarah House, senior economist at Wells Fargo Securities.
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In a separate report released Thursday, the Commerce Department revised its estimate of second-quarter economic growth, saying gross domestic product fell at a 31.7% annual rate, slightly less than its earlier estimate of 32.9%, due to the effects of the coronavirus pandemic.
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The second-quarter contraction was the sharpest in more than 70 years of record-keeping. But the annualized figure assumes the economy shrinks at the same pace for a year, which analysts don’t expect. Other recent data indicate output is growing in the third quarter.
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Spending by American consumers drives about two- thirds of U.S. economic output, and the updated reading for consumer spending indicated it plummeted at a 34.1% annual rate in the second quarter, slightly less than the 34.6% drop previously estimated.
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A key measure of corporate profits—after taxes, without inventory valuation and capital consumption adjustments—fell at an 11.7% annual pace in the second quarter, the report showed. That was after dropping 13.1% in the first quarter as businesses began shutting down across the country to contain the novel coronavirus.
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Companies cut back on spending as profits plunged. Nonresidential fixed investment—which reflects business spending on software, research and development, equipment and structures—fell at a 26% annual rate in the second quarter from the first.
Among the firms cutting investment plans was Target Corp., which slashed its outlook for capital expenditures this year to between $2.5 billion and $3 billion, from an original plan for $3.5 billion.
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“There are many potential challenges on the horizon, including uncertainties surrounding Covid-19, economic headwinds from historically high unemployment, uncertainty surrounding government stimulus and a contentious November election,” Chief Financial Officer Michael Fiddelke said in a conference call last week.
More recent figures suggest employers have continued to add workers despite a hazy economic outlook. Nonfarm payrolls grew by 1.8 million in July, marking the third consecutive month of hiring. The jobless rate fell last month to 10.2% after peaking near 15% in April.
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The housing market has been a bright spot in the economy recently. The National Association of Realtors’ pending home sales index, which tracks signings for purchases of previously owned homes, rose for the third straight month in July, according to data released Thursday.
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Economists expect the road to a full recovery to be long and uneven. Weekly applications for jobless benefits are much higher than the pre-pandemic record of 695,000.
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“It’s massively concerning that five months into this crisis we are still seeing those levels,” said AnnElizabeth Konkel, an economist at the job site Indeed. “It’s just really pointing to how much economic pain there is right now, and I don’t really expect that to change anytime soon.”
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Job postings on Indeed declined for two consecutive weeks in August, which Ms. Konkel said could point to an economic backslide. Indeed job listings for higher-wage occupations have declined more than for lower- and middle-wage positions. Such a trend could point to long-term uncertainty among employers, as those in higher-wage sectors might plan their head counts based on projections for business demand several quarters into the future, according to Indeed.
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Job losses during the economic crisis have been widespread across industries and particularly steep in some services sectors, such as hospitality and tourism, which have been badly hurt by the coronavirus pandemic and lockdowns imposed to curb it.
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American Airlines Group Inc. said this week that it would shed 19,000 workers by Oct. 1, a sign of the devastation coming for the airline industry as the summer travel season winds down and government funds run out. Delta Air Lines Inc. said it would furlough 1,941 pilots unless it reaches a deal with their union on other cost reductions.
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The July 31 expiration of the separate, federally funded $600-a-week enhanced unemployment aid meant payments to those receiving support through regular state programs fell to levels approved by their states, which average a little more than $300 a week, according to the Labor Department.
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President Trump signed an executive order Aug. 8 allowing states to tap disaster-relief funds to pay for a reduced $300 a week in enhanced aid on top of state benefits. More than half of states have now received federal approval to distribute the extra $300 payments. Delivery of the additional money will vary by state, and the Labor Department estimates it could take an average of three weeks before people start receiving the supplemental assistance.
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An index of consumer confidence dropped in August to its lowest level since 2014, the Conference Board said Tuesday, which some analysts said could reflect growing consumer concerns about the diminished federal aid.
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Weaker consumer sentiment also underscored Americans’ souring views about their labor-market prospects. The percentage of consumers in the Conference Board’s survey saying jobs are plentiful dropped to 21.5% in August from 22.3% in July. Meanwhile, those claiming jobs are hard to get rose to 25.2% this month from 20.1%.
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Robin Emura, 64 years old, said she had to start economizing when the pandemic hit her freelance graphic-design business earlier this year.
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“We used to put a nice dinner on the table every night. Suddenly we were forced to really budget,” she said. “We had to really watch our pennies and still are.”
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Business has picked up slightly since the beginning of the pandemic, but the Flowery Branch, Ga., resident said she is bringing in about one-third as much money from her design gigs as she was before the coronavirus struck in March.
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“It’s a hard climb getting back to where I was, and I don’t see it happening for probably at least another six months,” Ms. Emura said.
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Since the extra $600 in unemployment aid expired at the end of July, Ms. Emura has collected $125 a week in jobless benefits. She expects that an additional federally funded payment of $300, which she sees as a reasonable amount, to provide “a little extra breathing room.”
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Houston Leads Nation for Distressed Property Loans as Oil Prices Fall
Pandemic Spurs Spike in CMBS Loan Troubles, With More Expected
By Marissa Luck August 25, 2020 CoStar News
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Think owning retail real estate can be risky during the pandemic? Try owning a hotel.
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Hotels emptied by the coronavirus are pushing commercial mortgage-backed securities loan defaults in Houston, which had the highest percentage of loans transferred to special servicing across the nation’s biggest cities in the second quarter, according to research from the credit rating agency DBRS Morningstar.
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About 8.8% of buildings tied to CMBS loans in Houston were transferred during the quarter to a special servicer, a sign that the building is in distress and in danger of foreclosure or the owner has defaulted on the loan. That was the highest percentage across the six biggest CMBS loan markets in the United States tracked by DBRS Morningstar, which is owned by the financial services firm Morningstar Inc.
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Lower oil and gas prices and lack of demand from efforts to curb the spread of the coronavirus has wreaked havoc on Houston, known as the world's energy capital. Houston's hotels have been hammered by canceled global energy conferences including the Offshore Technology Conference and IHS Markit’s CERAWeek, and travel restrictions and fraying U.S.-China relations have slowed an otherwise steady stream of international visitors.
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"Houstonians have a love-hate relationship with oil and gas," said a monthly report from the Greater Houston Partnership. When Houston led the nation in job growth, population growth and housing starts between 2010-2014, "no one seemed to mind that the good times were driven by a drilling boom in the Eagle Ford shale," the report said. "Now that energy is shedding jobs, the industry is seen as a liability, especially in light of growing concerns over climate change."
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Houston is the base of U.S. operations for most international oil and gas companies such as Saudi Aramco, TechnipFMC, Gazprom and PetroChina, and is a key center for international finance and leads the southwest United States with 16 foreign banks from nine nations, according to the Greater Houston Partnership.
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Without these key visitors the hotel industry in Houston relies on, properties could go out of business, according to DBRS Morningstar, and some real estate might be available for a major discount.
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Across the country, the CMBS market is seeing soaring rates of loans being transferred to special servicing and the number of CMBS loan delinquencies is expected to climb as the pandemic wears on, said William McClanahan, an analyst at DBRS Morningstar.
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Special Servicers
About 9.49% of U.S. CMBS loans were transferred to special servicers in July, up from 8.28% the month before and 3.25% a year earlier, according to the data firm Trepp. Loans tied to lodging and retail properties logged some of the highest rates among the special servicing transfers, Trepp found. Overall, about 24% of CMBS loans for hospitality and lodging properties and 16% of loans tied to retail properties were transferred to special servicers in July.
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Special servicing is one avenue a borrower can take to seek relief on a loan bundled into a CMBS portfolio, a type of bond deal. Loans are typically transferred to special servicing if an owner is behind on payments, taxes, insurance or loses a big tenant. Special servicers are third-party companies that work with borrowers on negotiating foreclosure alternative applications, such as a loan modification, forbearance plan or deed in lieu of foreclosure.
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During the second quarter, Atlanta had a slightly lower percentage of buildings tied to CMBS loans transferred to special servicers than Houston, followed in descending order by Chicago, Dallas, Los Angeles and New York City/Northern New Jersey.
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However, Houston trailed just behind Chicago in seeing the highest percentage of delinquencies and the highest percentage of loans watch-listed, a sign that more loans in Chicago may be in danger of defaulting. Overall, DBRS Morningstar found that a range of 4.3% to 5.5% of CMBS loans are delinquent across the top six markets.
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Across Houston’s hotel CMBS loan market, 14 borrowers requested forbearance, 16 loans were transferred to a special servicer and 28 loans totaling $548 million were delinquent in the second quarter, according to DBRS Morningstar.
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The biggest hotels to default on CMBS loans in Houston in the quarter were the Hilton Houston Post Oak, the DoubleTree Houston Intercontinental Airport and the Sheraton Suites Houston,according to DBRS Morningstar.
The Hilton Houston Post Oak, valued at $126 million, was delinquent on loans for three months before being transferred to special servicing in June, according to DBRS Morningstar. The owners of the Hilton Houston Post Oak and DoubleTree did not immediately respond to emails for comment. The owner of the Sheraton Suites could not be reached to comment.
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Houston had a total of 55 loans totaling $3.2 billion go delinquent during the second quarter, according to DBRS Morningstar. Another 38 loans totaling $5.5 billion were transferred to special servicing. Full service hotels and limited service hotels accounted for 58% of total CMBS loan delinquencies in Houston during the second quarter.
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Despite the oil downturn and mass lay offs in Houston's energy sector, the type of tenant that dominates multitenant office buildings in Houston, only two office properties tracked by DBRS Morningstar tied to CMBS loans were transferred to special servicing in the second quarter: Cypress Medical Plaza and One Westchase Center, according to DBRS Morningstar.
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Cypress Medical Plaza was transferred to special servicing in April after the building's biggest tenant, 1960 Family Practice, vacated the space before its lease expired in September, according to a note from the special servicer. That pulled the occupancy down to 46% at the 46,380-square-foot property, according to the note that is available in public filings. The owner of Cypress Medical Plaza did not immediately respond for comment.
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Meanwhile, One Westchase Center was bought by Houston-based Nitya Capital in August for an undisclosed price, according to a statement. The building's previous owners, affiliated with Investcorp, had been preparing to hand over the building’s keys to lenders in late June, according to a special servicer note filed with the Securities and Exchange Commission. Investcorp declined to comment about the building.
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More office buildings in Houston could default as the pandemic goes on. One office building tied to a CMBS portfolio, Two Westlake Park, was sold in a foreclosure auction in June. Major energy tenants BP and ConocoPhillips moved out of the building in Houston's Energy Corridor in recent years. Rialto Capital, which did not immediately respond to an email for comment, bought the building for $35 million and JLL is marketing the complex for sale as an investment opportunity, according to CoStar research.
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Meanwhile, Houston's retail sector has seen eight properties with CMBS loans transferred to a special servicer, totaling about $119.1 million in debt. The biggest retail properties transferred to special servicers were Vintage Park outdoor plaza in northwest Houston, the North Oaksshopping center in north Houston and Green Crossroads in the Greenspoint area, according to DBRS Morningstar.
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So far the biggest retail property to be foreclosed on during the pandemic was the Almeda Mall in southeast Houston off Interstate 45, which sold at a foreclosure auction in June for $16 million to an entity tied to the New York law firm Reznick Law, according to Harris County Appraisal District records.
Despite Houston's seeming reliance on the energy sector, the city is better insulated from the oil downturn than it may appear on the surface, said McClanahan with DBRS Morningstar.
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Houston is home to the world’s largest medical complex, the Texas Medical Center, which is continuing to expand and attract new investments in the biotech and life sciences sector. And as the nation’s fourth most populous city, new residents continue to flock to Houston for its low cost of living, culture and warm climate, McClanahan noted.
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"The good news is Houston" has been diversifying from the energy industry, said McClanahan, which could help to soften the economic blow from the pandemic for real estate investors.
Houston hotels transferred to a special servicer in the second quarter, according to DBRS Morningstar:
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Hilton Houston Post Oak, a 448-room hotel that had two CMBS loans transferred to a special servicer with a total trust balance of $76.4 million.
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DoubleTree Houston Intercontinental Airport, a 313-room hotel with a trust balance of $41.9 million.
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Sheraton Suites Houston, a 282-room hotel with a trust balance of $36.6 million.
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Crowne Plaza Houston Katy Freeway, a 207-room hotel with a trust balance of $29.9 million.
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Aloft Houston by the Galleria, a 152-room hotel with a trust balance of $30.856 million.
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Residence Inn – Katy Mills, a 126-room hotel with a trust balance of $14.19 million.
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Hilton Garden Inn- Houston Bush Airport, a 182-room hotel with a trust balance of $13.7 million.
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Hilton Garden Inn Houston – a 126-room hotel with a trust balance of $10.3 million.
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Remaining hotels with a trust balance of under $10 million included: Hilton Garden Inn – Katy, Texas; Holiday Inn Express Baytown; Holiday Inn Houston SW Sugar Land Area; Staybridge Suites Stafford; Homewood Suites Houston Intercontinental; Best Western Fountainview; Hampton Inn- Katy, Texas.
Houston retail properties transferred to special servicing during the quarter, according to DBRS Morningstar:
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The upscale outdoor plaza Vintage Park off Highway 249 in northwest; a 341,107 square-foot shopping center with $44 million in trust balance.
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The North Oak shopping center, a 448,740 square-foot center with $31.4 million in unpaid trust balance.
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Greens Crossroads, a 148,740 square foot center with $11 million in trust balance.
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Houston-area retail properties transferred to special servicing with under $10 million in trust balance included Long Meadow Farms; 8350 & 8366 Westheimer; two L.A. Fitness properties, one in Pearland and one in Spring; and the West Crossing Shopping Center.
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Seven Takeaways from UBS's Real Estate Outlook Report
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Uncertainty looms over the U.S. economy and no property type is immune from the potential financial impact.
Sebastian Obando Aug 24, 2020 National Real Estate Investor
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UBS's Asset Management arm has published its latest Real Estate Outlook edition, outlining the impacts of the pandemic on global and U.S.-based real estate investment. As can be expected, the continued prevalence of COVID-19 infections in the U.S. and the uncertainty surrounding the upcoming November elections are given real estate investors pause in striking new deals right now. However, some clear trends have emerged in the commercial real estate market and UBS researchers advise investors to take a long-term view on how the various property sectors are likely to perform. Here are seven takeaways from the report.
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The impact of the COVID-19 crisis on private real estate has been most immediately felt in three investment sectors: hotel, retail and new development, where properties and sites have been closed or limited in operations and projects might have been put on hold. Conditions in the office, apartment and industrial sectors have deteriorated in the short term, as expected due to widespread shutdowns, but generally these properties remain open, with some flexibility in being able to adapt to current market conditions.
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Apartment supply pipelines are facing delays. But as a sector that remains essential even in the midst of a pandemic, apartment buildings have posted the highest average rent collections of any major property type.
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The industrial sector has benefited greatly from fulfilling e-commerce orders as consumers have shifted a lot of their buying, including grocery purchases, from bricks-and-mortar stores to online. Year-over-year rent growth in the sector reached 4.8 percent in the second quarter, slower than during recent quarters, but still showing strength in a downturn. Helping keep industrial fundamental in check going forward could be the fact that new space supply deliveries are expected to slow for the rest of 2020.
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Occupancy rates in the office sector have benefited from the prevalence of long, multi-year leases, even while many offices have remain closed and office users considering long-term work from home options.
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Office rent collections, however, declined compared to the first quarter figures. Investors will likely adjust expectations on office projects going forward.
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The retail sector has both winners and losers at the moment. Some non-essential shops have shuttered, while others are attempting to remain viable by tapping into resources like the Paycheck Protection Act. On the other hand, grocers, pharmacies and other essential services retailers could see record first and second quarter sales.
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Overall investment sales volume is stalling out in real time, making it more difficult for investors and appraisers to find comparable sales data and come to an agreement on price discovery. Investment sales volumes dropped off when the pandemic hit the U.S. in March 2020 and have not recovered momentum.
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An Estimated 237,000 US Apartment Tenants Fall Behind on Rent for Two Straight Months
Scope of Struggle Prompts Industry Executive Concern About Next Month's NMHC's Data
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By: John Doherty August 24, 2020 CoStar News
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About a quarter-million apartment renters have fallen behind on their rent for the second straight month, a development that has prompted industry concern about the fallout that could come if there's a repeat next month.
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The National Multifamily Housing Council industry association reported on Monday that about 2.1% fewer tenants had made some sort of monthly payment by Aug. 20 than at the same time last year. That translates into about 237,000 fewer apartments in the black.
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The decline of about 2% is in line with what happened in July, when 2.1% fewer renters paid than the year before. And those renters most in trouble appear to be in New York City, Los Angeles and San Francisco.
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Caitlin Walter, vice president of research for NMHC, (See following article) said those economies, with a preponderance of out-of-work service, retail and hospitality workers, have produced big unemployment numbers that raise concerns about next month.
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“You can’t deny the fact that California and New York City in particular have been harder hit than other markets, and their economies have been hit harder,” she said. “I wasn’t shocked by where the numbers came in, at this point. I’m more concerned about what happens in September.”
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NMHC has been tracking rent collection rates at more than 11.4 million apartments around the country since the COVID-19 pandemic shut down much of the economy in March. The rate of rent collection has been falling, ever so slowly, in the past few weeks.
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And the $600-a-week enhanced unemployment benefits from the federal government that bridged the gap for millions of unemployed apartment renters expired at the end of July, worrying many multifamily owners that mass rent delinquencies were imminent.
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But so far, renters have come through. Through Aug. 20, a full 90% of the apartment renters tracked by NMHC have made full or partial payments. That’s down from 91.3% that paid through July 20.
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But still, as apartment experts have pointed out, it’s 90%, the vast majority of renters.
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“The industry remains encouraged by the degree residents have prioritized their housing obligations so far,” Doug Bibby, NMHC’s president, said in a statement Monday. “But each passing day means more distress for individuals and families, and greater risk for the nation’s housing sector. If policymakers want to prevent a health and economic crisis from quickly evolving into a housing crisis, [Congress] should act quickly to extend financial assistance to renters.”
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Even so, the relatively high payment figures from the NMHC have their limits on reflecting the scale of financial struggle among renters, one reason for concern among industry executives when the 90% figure looks on the surface to be positive. The data tends to reflect the biggest apartment owners in the country, which can give a distorted picture, because it captures properties that often can have high numbers of white-collar workers who are able to keep their jobs by working at home in the pandemic.
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And the high percentage of payments may not reflect those tenants who are doubling up with roommates or the units where tenants have moved out of expensive U.S. cities. And it also doesn't reflect an increased household savings rate in the pandemic.
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NMHC Rent Payment Tracker Finds 90 Percent of Apartment Households Paid Rent as of August 20
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The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found 90 percent of apartment households made a full or partial rent payment by August 20 in its survey of 11.4 million units of professionally managed apartment units across the country.
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This is a 2.1-percentage point, or 237,056 -household decrease from the share who paid rent through August 20, 2019 and compares to 91.3 percent that had paid by July 20, 2020. These data encompass a wide variety of market-rate rental properties across the United States, which can vary by size, type and average rental price.
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“Lawmakers in Congress and the Administration need to come back to the table and work together on comprehensive legislation that protects and supports tens of millions of American renters by extending unemployment benefits and providing desperately needed rental assistance,” said Doug Bibby, NMHC President. “The industry remains encouraged by the degree residents have prioritized their housing obligations so far, but each passing day means more distress for individuals and families, and greater risk for the nation’s housing sector. If policymakers want to prevent a health and economic crisis from quickly evolving into a housing crisis, they should act quickly to extend financial assistance to renters.”
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Lord & Taylor closing Woodfield, Northbrook Court stores
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Eric Peterson 8/21/2020 Daily Herald
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Woodfield Mall in Schaumburg will face the first vacancy among
its anchoring department stores in its 49-year history when the
Lord & Taylor there becomes one of the chain's last two Illinois
locations to shut down.
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As Lord & Taylor continues to reorganize under bankruptcy court
protection, it announced both its Woodfield Mall and Northbrook
Court locations have begun store-closing sales.
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Information on when both stores will close for good wasn't immediately available Friday.
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Schaumburg Economic Development Director Matt Frank said village officials have so far heard very little apart from the fact that Simon Property Group, which owns Woodfield Mall, had been working on a deal to try to get Lord & Taylor to remain.
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The anchor stores at Woodfield Mall, which also include Macy's, Sears, JCPenney and Nordstrom, own their properties rather than leasing from Simon.
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While the decision about the Woodfield location was made this week, Lord & Taylor had earlier announced plans to shutter its location at Northbrook Court in Northbrook.
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Northbrook Court has a bit more history of rebuilding and replacement among its anchor stores, but Tom Poupard, the village of Northbrook's development and planning services director, said the retail industry is in a far different place now than on any previous occasions.
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Though the village has been in regular contact with Brookfield Properties, which manages Northbrook Court, there's been no word about an immediate replacement for Lord & Taylor, Poupard said.
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"The retail world is evolving so quickly, I think it's a good idea they haven't locked into anything," he said. "I think it's an opportunity in a way. We've all been following the Lord & Taylor saga for the last year. It's no surprise that the other shoe dropped. It's an opportunity, but it's a loss."
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Poupard added that the whole philosophy about what draws people to a shopping center is changing.
"There's all these new retail models," he said. "Who would ever think that an Apple store, which is a store inside the mall, would be an anchor there?"
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The suburbs lost Lord & Taylor stores at Oakbrook Center in Oak Brook in January 2019 and at Westfield Old Orchard Mall in Skokie in April 2018. Lord & Taylor's corporate office did not respond to a request for comment Friday.
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The Woodfield and Northbrook Court locations jointly stated online that they are no longer able to accept returns from in-store purchases and can no longer honor coupons, mall certificates, Lord & Taylor Reward/Award cards or prices offered at any other Lord & Taylor in the country remaining open.
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The Northbrook Court store stopped accepting online returns Aug. 14 while the Woodfield store has set that deadline for Aug. 31, according to the website.
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JSO Comment
While Woodfield Mall maybe somewhat insulated not so for Northbrook Court. The mall which has always regarded itself as a high-end retail center has lost Macy's, Neiman Marcus and now Lord and Taylor (retail) and the AMC theaters are also closed. In a recent walk through the mall, approximately 50% of the stores were vacant or simply closed on that day. Starbucks for example was closed. That was a first for me. As much bravado as the owners and brokers like to portray, this is a very bad situation for this shopping center.
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Frankly, it's extremely hard to see a path forward. While Macy's has been demolished and is been redeveloped with townhomes and apartments, what about the other two retail anchors and there draw to the mall.
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Do many of the in-line tenants have exit clauses tied to the anchors being present? What is the Cook County Assessor going to do? This has turned out to be a clueless office, and I am quite sure they are at a loss to develop a value from a real estate taxation point of view. Another worry for the property managers Brookfield Properties.
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Will this have an effect on other retailing anchors throughout the Chicago metropolitan area?
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Only time will tell.
JOD
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London office rents predicted to plummet 40%
By Mitchell Labiak 17 August 2020 Property Week
Office rents in London are predicted to plummet by as much as 40% over the next year and a half, according to new data from Society of Industrial & Office Realtors (SIOR) and McCalmont-Woods Real Estate.
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The research suggested that overall West End office rents are could nosedive from £94.88 sq/ft at the end of 2019 to £56.22 sq/ft by the end of 2021 – a 40.7% drop.
The prime West End office market is expected to fare slightly better, though rents are still expected to crash 38.9% from £115 sq/ft at the end of 2019 to £70.3 sq/ft by the end of 2021.
Overall City office rents over the same period are predicted to slump 34.35% from £58.81 sq/ft to £39.26 sq/ft while overall Midtown office rents are predicted to fall by 24% from £68.06 sq/ft to £51.62 sq/ft.
Overall office rent and prime office rent in the Docklands and South Bank market are also forecast to decline.
Nick McCalmont-Woods, chief executive of McCalmont-Woods Real Estate, said: “As occupiers adjust to the impact of Covid-19 on their businesses and scale back, delay or even shelve some office requirements altogether, we expect the pattern of rental decline from the 2008/2009 great financial crash to repeat itself and, if anything, it may be exacerbated further in the event that significantly more tenant/occupier controlled space is released back on to the market as businesses adopt new working practices in the long-term.”
Paul Danks, director at DeVono Cresa and president-elect of SIOR Europe, said: “As a result of the ongoing pandemic, we expect the lettings market to remain subdued compared with historical levels mixed with increased appreciation for flexible office space. This sudden increase in availability is already prompting a swing in the balance of power back towards the tenant.”
JSO Comment:
Clearly this is across the Pond, and there are other issues such as the pending Brexit, but this is a cautionary tail of a possible rental collapses in some of the major US cities. As we saw in the prior article from CBRE, there has been a seismic shift in leasing.
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U.S. MarketFlash:
Office Lease Concessions Rising
In Tenant-Favorable Market
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August 13, 2020 CBRE​
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Office lease concessions in the form of free rent and tenant improvement allowances rose sharply in Q2 2020 as U.S. office demand fell by its biggest amount since 2009. Amid reduced leasing activity, base rents for office space in the 15 largest U.S. markets generally remained stable. Instead, property owners provided more favorable concessions to tenants, causing net effective rents to fall.
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Figure 1 shows this divergence, with base rents declining by only 1.1% in Q2 from one year ago, while net effective rents fell by 6.6% over the same period. Rent changes in the 15 largest markets were more severe than the national average due to the COVID-19 crisis affecting big cities more acutely.
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Longer periods of free rent primarily drove net effective rents lower in Q2. Figure 2 shows the spike in free rent offered in Q2 as a four-quarter average. For Q2 alone, free rent averaged 10 months, up by 13.7% from Q1.
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Tenant improvement allowances rose by 5.1% quarter-over-quarter in Q2 to $75.57 per sq. ft. The increase in these allowances may have been limited by declines in construction pricing, as evidenced by the Q2 drop in the Turner Building Cost Index for the first since 2010.
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Office market fundamentals will remain challenged in the near term and likely will fuel further concessions. Even though a low level of transactions may hinder efficient price discovery for a while, occupiers are potentially positioned to secure very advantageous terms right now. However, the U.S. economic recovery is ongoing and if a vaccine for COVID-19 is found by the end of the year, these tenant-favorable conditions may not last long.
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NCREIF PROPERTY INDEX RELEASED
National Council of Real Estate Investment Fiduciaries
Commercial Real Estate Returns Turn Negative with Historical Drop in Rent
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CHICAGO, IL, July 24, 2020 – The National Council of Real Estate Investment Fiduciaries (NCREIF) has released second quarter 2020 results for the NCREIF Property Index (NPI). The NPI reflects investment performance for 8,652 commercial properties, totaling $696 billion of market value. The returns are detailed in the attached Snapshot Report.
The total return was -0.99% in the second quarter which was a decrease from the 0.71% return for the prior quarter. This is the lowest return since the fourth quarter of 2009 which was the midst of the financial crisis that lead to the Great Recession. This is an unleveraged return for what is primarily “core” real estate held by institutional investors throughout the US. The leveraged returns for those properties in the index that have leverage was -2.76% for the quarter because the properties were earning less than the cost of debt.
NPI Unleveraged Total Quarterly Returns Since Great Recession
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The total return turned negative for the quarter because the capital return (change in value net of any capital expenditures) of -2.00% offset the net operating income (NOI) return of 1.01%.
Rent and NOI at Historic Lows
Both rent and NOI growth rates were the largest decline since NCREIF started collecting data which goes back to 1978 for NOI and 2001 for Rents. Not surprising, hotels had the greatest rent decline of 48.73% due to the impact of COVID-19 followed by retail with a 12.68% decline.
2nd Quarter 2020 Change in Rents by Property Sector
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Returns Drop for all Sectors
Total returns were lower for all property sectors this quarter and they were negative for all property types except industrial which had a negative capital return but the income return offset that to deliver a positive 1.02% return.
NPI Total Quarterly Unleveraged Returns by Property Sector
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Transactions Plummet
While NCREIF members are long-term investors for most of the funds, there are typically between 100 and 200 sales of properties each quarter. This quarter the number of sales dropped to 30 properties. The lack of transactions in the overall commercial real estate market has made price discovery challenging for appraisers and resulted in less liquidity for investors.
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About the NCREIF Property Index The NPI consists of 8,652 investment-grade, income-producing properties with a market value of $696 billion. The market value breakdown by property type is about 35.6% office, 25.4% apartment, 20% retail, 18.7% industrial and .3% hotel properties.
The NPI includes property data covering over 100 CBSAs. In addition, within each property type, data are further stratified by sub-type. These data enhance the ability of institutional investors to evaluate the risk and return of commercial real estate across the United States.
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Also read....
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NFI-ODCE records a negative total return for 2020q2, a first since 2009 4th quarter.
CHICAGO, IL, July 30, 2020
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U.S. Economy Contracted at Record Rate Last Quarter; Jobless Claims Rise to 1.43 Million
The Commerce Department’s initial estimate of U.S. gross domestic product in the second quarter is the steepest drop in records dating to 1947
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By: Harriet Torry July 30, 2020 The Wall Street Journal
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The U.S. economy contracted at a record rate last quarter and weekly jobless claims rose for the second straight week, amid signs of a slowing recovery as the country continues to struggle with the coronavirus pandemic.
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The Commerce Department said U.S. gross domestic product—the value of all goods and services produced across the economy—fell at a 32.9% annual rate in the second quarter, or a 9.5% drop compared with the same quarter a year ago. Both figures were the steepest in records dating to 1947.
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The contraction came as states imposed lockdowns across the country to contain the coronavirus pandemic and then lifted restrictions. Many economists think the economy resumed growth in the third quarter, which began on July 1.
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“The key caveat is that it will be a lot less better than we were expecting a few months ago,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said about the third quarter, citing the pickup in coronavirus cases.
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Separately, the Labor Department said applications for weekly unemployment benefits rose by 12,000 to 1.43 million in the week ended July 25, and the number of people receiving unemployment benefits increased by 867,000 to 17 million in the week ended July 18, signs the jobs recovery is losing momentum.
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The increased number of people receiving benefits, known as continuing claims, had been declining in recent weeks. Jim O’Sullivan, a strategist at TD Securities, said the reversal “could feed into fears that the economy” is weakening again.
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A surge in virus infections since mid-June appears to be slowing the recovery in some states, according to some private-sector real-time data.
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JPMorgan Chase & Co.’s tracker of credit and debit-card transactions, for instance, showed that spending rose in May and early June before stalling and remaining broadly flat through last week. Data by Facteus, which tracks transactions by 15 million debit and credit card holders, also suggest restaurant spending was increasing in June and has largely flattened since.
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The U.S. Census Bureau said in its latest weekly Household Pulse Survey that 51.1% of households experienced a loss of employment income in the week ended July 21, up from 48.3% four weeks ago.
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The decline in GDP in the second quarter reflected the deep hit to consumer and business spending from lockdowns, social distancing and other initiatives aimed at containing the virus. Consumer spending fell at a 34.6% annual rate, amid sharp decreases in services spending like health care and lower spending on goods. Business spending on software, research and development, equipment and structures fell at a 27% annual rate. Both exports and imports plummeted.
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States in May started reopening their economies—leading to partial rebounds in jobs and spending—though a number of them have put fresh restrictions in place because of the infection increase.
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U.S. Is About to Unveil the Ugliest GDP Report Ever Recorded
By: Reade Pickert July 29, 2020 Bloomberg News
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The U.S. economy ground to a halt for almost the entirety of April. Now the world is about to find out the depth of that contraction.
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Data due Thursday are forecast to show U.S. gross domestic product plummeted an annualized 34.8% in the second quarter, the most in records dating back to the 1940s, after the spread of Covid-19 prompted Americans to stay home and states to order widespread lockdowns.
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Even though economic activity picked up in May and June as stay-at-home orders lifted, the scale of the decline in April likely far outweighed any gains later in the quarter.
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Here are some questions and answers about the report:
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Did the U.S. economy actually shrink by one-third?
No. The Bureau of Economic Analysis, the government agency that compiles the GDP figures, has historically reported the headline numbers as an annualized rate. That shows what the quarterly change would be if it lasted a full year.
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Before the crisis, the economy was usually growing by a few tenths of a percentage point each quarter, resulting in an annualized pace typically ranging from 2% to 3%.
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This means the main number Thursday will look much worse than reality. A 35% contraction on an annual basis actually means the economy was about 10% smaller in the second quarter than it was in the first quarter.
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Even so, that would still be far beyond the record quarterly decline on an annual basis -- 10% in the first quarter of 1958, which coincided with a global flu pandemic.
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The latest figure, which is the first of three estimates, may be revised in the next two months and also in coming years like all GDP reports, and revisions could be bigger than usual.
What drove the second-quarter contraction?
Mostly a collapse in consumer spending, which typically accounts for about two-thirds of GDP, as Americans stayed home -- erasing spending on dining out, physical retail and travel. Personal consumption is projected to have plummeted an annualized 34.5% in the quarter, which would also be a record.
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Michael Gapen, chief U.S. economist at Barclays Plc, projects a 36% drop in second-quarter consumer spending. That translates to about 25 percentage points of the projected 35-point annualized decline in GDP.
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What Our Economists Say
“Lockdowns enforced in March through April led to a plunge in consumer spending. As restrictions lifted, the initial recovery was rapid, but will remain partial amid a resurgence of virus cases and orders to pause or reverse reopening plans.”
-- Andrew Husby, Eliza Winger and Yelena Shulyatyeva
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It’s not just personal consumption, though. A 40% decline in residential investment and a 50% drop in equipment spending, as well as drags from net exports and inventories, all likely contributed. The only major category Gapen expects will be positive is government consumption and investment, though it will add less than a percentage point to growth.
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Wells Fargo & Co., though, expects government outlays to be negative despite enormous federal stimulus. Why? Lower spending by state and local governments that have seen plunging tax revenues.
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Won’t the economy come back strongly in the second half?
Yes, but activity may remain below pre-pandemic levels for several years, and the recovery is already showing signs of stalling.
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The economy is expected to grow an annualized 18% in the third quarter, according to a Bloomberg survey of economists in early July. That would be just ahead of the record 16.7% pace in the first quarter of 1950.
“The question is, how sustainable is that bounce?” said Michelle Meyer, head of U.S. economics at Bank of America Corp.
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Amid a surge in new virus cases in the South and West, many states have paused or even reversed reopening plans, and measures of mobility and restaurant bookings have plateaued. Lawmakers are in the midst of debating another round of fiscal stimulus, with the supplemental $600 in weekly unemployment benefits about to expire.
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If the economy starts to deteriorate, the fourth quarter could show a contraction, said Gapen.
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What does it all mean for the election?
American voters will decide in three months whether to re-elect President Donald Trump to a second term against a backdrop of a virus-induced recession and his response to the health crisis.
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Before the pandemic, Trump’s goal was for a sustained pace of 3% economic growth. Now, the coronavirus has left its own mark on Trump’s economic legacy -- with the declaration of a recession and likely the worst quarterly GDP decline on record.
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The GDP figures for the third quarter -- the anticipated rebound -- are due Oct. 29, just five days before Election Day. Trump is well aware of the timing.
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“We’re going to have a great third quarter,” he said in an interview with Fox News’s Sean Hannity last week. “And the nice thing about the third quarter is the results are going to come out before the election.”
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While the results may in theory sway some last-minute deciders, many of those who mail in ballots will have already made their choice -- - especially if mail-in ballots happen in greater numbers this year as a result of Covid-19 concerns.
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Fed Sticks to Whatever It Takes With No Sign of Virus Easing
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By: Matthew Boesler and Catarina Saraiva July 29, 2020, Bloomberg News
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The Federal Reserve left interest rates near zero and vowed to use all its tools to support the recovery from an economic downturn that Chair Jerome Powell called the most severe “in our lifetime.”
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“The path forward for the economy is extraordinarily uncertain, and will depend in large part on our success in keeping the virus in check,” he told reporters in a virtual press conference Wednesday after the Fed left interest rates near zero. He sounded a dour tone about how long a road is ahead to get back to where the country was only months ago and notedthat more fallout from the virus still lies ahead.
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“Even if the reopening goes well -- and many, many people go back to work -- it is still going to take a fairly long time for parts of the economy that involve lots of people getting together in close proximity” to recover, he said. “Those people are going to need support.”
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Powell said that not all sectors of the economy were weakening, citing the housing sector as one bright spot. But on balance it looks like the data “are pointing to a slowing in the pace of the recovery,” he said, though it was too soon to say how large -- or sustained -- this pause would last.
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Summer Spike
“I think many FOMC [Federal Open Market Committee] members were discouraged by the resurgence in Covid-19 across much of the Sun Belt this summer and the subsequent pullback in economic activity,” said Mark Vitner, senior economist at Wells Fargo & Co. “This summer’s resurgence in Covid-19 showed how vulnerable the economy is and how difficult it is to make economic policy when we do not know what the virus will do next.”
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High-frequency economic indicators are pointing to a stall in the rebound as consumers hold back from activities like dining out and air travel, which had started to bounce back when the earlier wave of outbreaks dissipated.
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In its statement announcing the policy decision, the Federal Open Market Committee repeated that the coronavirus pandemic “poses considerable risks to the economic outlook over the medium term” and that the federal funds rate would remain near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
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Market Reaction
That indication that the Fed could be a near zero rates for a long time to come buoyed markets Wednesday.
The dollar extended its decline Wednesday, while U.S. stocks maintained their gains and gold remained buoyant. The 10-year Treasury yield was steady on the day around 0.57% as the U.S. bond curve steepened.
Five-year yields chalked up a series of record lows in the space of just four hours during the session, a further sign that investors fully expect the Fed to hold rates neat zero for an extended period.
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Fiscal Aid
The chair told reporters that supporting the recovery would need help from both monetary and fiscal policy, in a nod to ongoing negotiations among lawmakers and the Trump administration in Washington to refresh taxpayer support before current assistance runs out.
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“I see Congress negotiating now over a new package and I think that’s a good thing,” he said.
“Powell’s press conference was very much a moment of truth,” said Gregory Daco, chief U.S. economist at Oxford Economics. “I struggle to recall a time at which Powell, or any recent Fed chair, was as direct and candid about the urgency of fiscal stimulus to support the recovery and prevent a double-dip recession.”
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FOMC United
The vote, to leave the federal funds target rate in a range of 0% to 0.25%, was unanimous. The FOMC also reiterated its pledge to increase its holdings of Treasuries and mortgage-backed securities “at least at the current pace” over coming months.
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In a separate statement Wednesday, the Fed said it extended its dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through March 31, 2021.
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Powell and his FOMC colleagues have kept their benchmark rate pinned near zero since the pandemic’s onset in March and rolled out several emergency lending programs geared toward fostering liquid trading conditions in financial markets.
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That aggressive action has helped to calm investors. But progress toward recovery has been complicated in recent weeks by a new wave of coronavirus outbreaks across major states in the South and West including Texas, Florida, California and Arizona​
Investors have remained relatively optimistic despite renewed signs of weakness in the economy, thanks in large part to rising hopes that researchers will soon succeed in developing a vaccine.
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Before Wednesday’s decision, the S&P 500 index of U.S. stocks was within about 4% of the record high set in mid-February after losing more than a third of its value in the early days of the pandemic.
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Still, Powell made clear that the Fed was not pinning its hopes on a medical breakthrough.
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“Our job is not to plan for the upside case. The upside case -- we’ve got that covered,” he said. Rather, the Fed will “hope for the best and plan for the worst.”
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Incremental Improvements in Hotel Profitability Slow
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But New Analysis Shows Some Positive Trends
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By Raquel Ortiz October 7, 2020 STR/CoStar
Balance sheet data for U.S. hotels for August showed no major improvements in profitability, compared to July, according to an analysis by CoStar's hotel research and analytics company STR.
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Although gross operating profit per available room (GOPPAR) did remain positive for the second month in a row and August had the lowest demand decline since the pandemic started, revenue improvements were stagnant. For top markets, average total revenue per available room (TRevPAR) declined this month, but average GOPPAR did improve.
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Here are five takeaways from STR’s Monthly P&L Report for August.
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1. Revenues have been gradually improving, but profits remain weak compared to last year.
TRevPAR for full-service hotels is only 25% of what it was last year in August, and GOPPAR is only 6% of August 2019 levels. Limited-service hotels have been faring somewhat better with TRevPAR at 38% and GOPPAR at 26%, but these are down from last month. Although the indexes are very low compared to last year, they have improved since April.
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2. Beverage continues to outperform food revenue, but lack of business from groups has hurt.
With an average revenue per operating room of $9.46 since April, revenues from alcoholic beverages were closer to the levels of 2019 and have outperformed both food and other related revenues for services that come from groups and banquet business, such as meeting space rental revenue, audiovisual equipment rental and special service charges.
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When indexed, beverage revenues per operating room were 69.5% of August 2019 levels, compared to food at 58.8%, and other related revenues at 22.3%. The lack of group business has really affected other food and beverage revenues as they continue to be negative. Additionally, all three departments —beverage, food and related services — realized less revenue per operating room than they did in July.
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3. Group- and banquet-related line items realize the lowest revenue levels compared to last year.
Indexing revenues from the food and beverage department for 2019 and 2020, all line items relating to groups and banquets realized the lowest levels compared to last year’s revenues.
Room rentals are indexed at only 6% of last year’s levels, which is the highest of any group-related line item. All other group- and banquet-related line items, which includes food service charges, food and beverage catering and audiovisual equipment, are indexed between 2% to 4% of 2019 levels. Comparatively, food and beverage venues are indexed at 15% and room service is indexed at 23% of 2019 levels, which are the highest indexes for the entire food and beverage department.
4. TRevPAR has slowed for top markets, but eight top markets reported positive GOPPAR.
The average TRevPAR for top markets declined from $49.27 in July to $47.80 in August, but average GOPPAR improved from an average of -$6.19 to -$2.92, which points to more markets managing expenses better.
Two additional top markets demonstrated positive GOPPAR this month—Los Angeles with a GOPPAR of $5.97 and San Diego with a GOPPAR of $4.65. While there have been some improvements month over month, the year-over-year changes remain staggering. Average TRevPAR percent change for these top markets is down 77.0%, and average GOPPAR percent change is minus 97.6%, with New York; Washington, D.C.; and Miami realizing the largest GOPPAR declines.
5. Full-service hotels realize higher gross operating profit margin losses in August.
In August 2019, more than 83.4% of full-service hotels and more than 93% of limited-service hotels realized a gross operating profit margin of greater than 20%. Less than 4% of full-service hotels and less than 1% of limited-service hotels realized a gross operating profit margin below 0%.
In August 2020, it’s a much different story as less than 25% of full-service and only 66% of limited-service hotels realized a gross operating profit margin over 20%. Moreover, 37% of full-service hotels and 11% of limited-service hotels have a gross operating profit margin below 0%. For full-service, the highest percent of hotels (20.6%) had an average gross operating profit margin of 4.5%, and 21.2% of limited-service hotels had an average gross operating profit margin of 44.8%.
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COVID-19 Battered the Investment Sales Market During the Second Quarter
Uncertainty is contributing to considerable challenges in underwriting future income streams and accurately assessing property values and pricing.
Beth Mattson-Teig Jul 28, 2020 National Real Estate Investor
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Investment sales volumes in the commercial real estate sector fell nearly 70 percent as the massive economic disruption from the COVID-19 pandemic ground deal making activity nearly to a halt. Data from CoStar and Real Capital Analytics showed a similar drop in magnitude although the latest price indices show only a slight decline in values, evidence that a mass repricing of assets has yet to take place.
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Preliminary data from CoStar shows $35.5 billion in closed transactions during second quarter, which is down 69 percent compared to the $113.7 billion in sales during the same period in 2019. Meanwhile, Real Capital Analytics reported a similar 68 percent drop although at a slightly higher volume of $44.7 billion in total sales. The biggest impediment to investment sales is general uncertainty due to COVID-19, including the course it’s taking and impact on the economy, consumer behavior and demand for space. That uncertainty is contributing to considerable challenges in underwriting future income streams and accurately assessing property values and pricing.
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“Deal flow continues to fall, and I don’t think it’s going to turn around anytime soon, in part because pricing has only just started to adjust,” says Jim Costello, a senior vice president at Real Capital Analytics. Buyers and sellers have different expectations of where the market is at, and until owners are willing to accept bids that are severely lower than they were pre-COVID-19, there is not going to be many properties trading, he says. Capital also is sitting on the sidelines waiting for discounted distressed assets to emerge.
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“We do think there is a bid-ask gap for buyers and sellers, and that feeds into the challenges on pinpointing values,” agrees Andrew Rybczynski, a managing consultant at the CoStar Group. Industry forecasts generally agree on the significant weakness ahead in rental growth across property sectors. However, the dearth of transactions is making it difficult to gauge how property values have shifted.
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Another factor contributing to the decline in transaction volume is that owners are simply reluctant to bring properties to market in the current climate. Some properties will be forced to the market by distress. However, any seller in a strong enough position will likely choose to ride out the current downturn rather than attempting a sale, which is contributing to a decline in the amount of for-sale properties on the market, says Rybczynski. Overall, the number of listings added to the market in the first half of the year dipped about 15 percent with retail and office listings diminishing more than industrial or multifamily, according to CoStar.
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Some property sectors and geographic markets are proving to be more resilient than others. “Although there is a bid-ask gap on certain assets and in certain markets depending on how properties performed through second quarter, there also are many assets that have done very well and proven their investment thesis on design, location and execution,” notes Matthew Lawton, an executive managing director at JLL Capital Markets in Atlanta. Proven performance, along with new record-low borrowing rates, has resulted in very little price erosion, he says. “You have to be careful when painting certain markets with a broad brush as supply remains an issue near term but is very submarket driven,” he adds.
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According to CoStar, hotels saw the biggest drop in transactions, falling by 94 percent to $274.6 million, while industrial fared the best with a 42 percent decline to $8.9 billion. Most industry participants tend to agree that industrial has seen the least disruption from COVID-19. Self-storage is another property type that is holding up better amid COVID-19 pressures as transition, such as job losses that result in moves or college students moving in with parents, tends to drive demand for storage.
Prices for yield-producing self-storage properties have not changed significantly post-COVID-19, notes Ryan Clark, director of investment sales at Skyview Advisors. “We have experienced some bid-ask gaps on deals, but it is not an overwhelming trend in the deals we are marketing,” he says. However, COVID-19 has helped to create a more bifurcated market. Stabilized deals with management value add opportunities continue to receive intense interest as buyers hunt for predictable and stable yield. In contrast, newly developed properties with lease-up risk are seeing a shrinking bidder pool, he says.
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Investment sales volumes in the commercial real estate sector fell nearly 70 percent as the massive economic disruption from the COVID-19 pandemic ground deal making activity nearly to a halt. Data from CoStar and Real Capital Analytics showed a similar drop in magnitude although the latest price indices show only a slight decline in values, evidence that a mass repricing of assets has yet to take place.
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Preliminary data from CoStar shows $35.5 billion in closed transactions during second quarter, which is down 69 percent compared to the $113.7 billion in sales during the same period in 2019. Meanwhile, Real Capital Analytics reported a similar 68 percent drop although at a slightly higher volume of $44.7 billion in total sales. The biggest impediment to investment sales is general uncertainty due to COVID-19, including the course it’s taking and impact on the economy, consumer behavior and demand for space. That uncertainty is contributing to considerable challenges in underwriting future income streams and accurately assessing property values and pricing.
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“Deal flow continues to fall, and I don’t think it’s going to turn around anytime soon, in part because pricing has only just started to adjust,” says Jim Costello, a senior vice president at Real Capital Analytics. Buyers and sellers have different expectations of where the market is at, and until owners are willing to accept bids that are severely lower than they were pre-COVID-19, there is not going to be many properties trading, he says. Capital also is sitting on the sidelines waiting for discounted distressed assets to emerge.
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“We do think there is a bid-ask gap for buyers and sellers, and that feeds into the challenges on pinpointing values,” agrees Andrew Rybczynski, a managing consultant at the CoStar Group. Industry forecasts generally agree on the significant weakness ahead in rental growth across property sectors. However, the dearth of transactions is making it difficult to gauge how property values have shifted.
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Another factor contributing to the decline in transaction volume is that owners are simply reluctant to bring properties to market in the current climate. Some properties will be forced to the market by distress. However, any seller in a strong enough position will likely choose to ride out the current downturn rather than attempting a sale, which is contributing to a decline in the amount of for-sale properties on the market, says Rybczynski. Overall, the number of listings added to the market in the first half of the year dipped about 15 percent with retail and office listings diminishing more than industrial or multifamily, according to CoStar.
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Searching for bright spots
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Some property sectors and geographic markets are proving to be more resilient than others. “Although there is a bid-ask gap on certain assets and in certain markets depending on how properties performed through second quarter, there also are many assets that have done very well and proven their investment thesis on design, location and execution,” notes Matthew Lawton, an executive managing director at JLL Capital Markets in Atlanta. Proven performance, along with new record-low borrowing rates, has resulted in very little price erosion, he says. “You have to be careful when painting certain markets with a broad brush as supply remains an issue near term but is very submarket driven,” he adds.
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According to CoStar, hotels saw the biggest drop in transactions, falling by 94 percent to $274.6 million, while industrial fared the best with a 42 percent decline to $8.9 billion. Most industry participants tend to agree that industrial has seen the least disruption from COVID-19. Self-storage is another property type that is holding up better amid COVID-19 pressures as transition, such as job losses that result in moves or college students moving in with parents, tends to drive demand for storage.
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Prices for yield-producing self-storage properties have not changed significantly post-COVID-19, notes Ryan Clark, director of investment sales at Skyview Advisors. “We have experienced some bid-ask gaps on deals, but it is not an overwhelming trend in the deals we are marketing,” he says. However, COVID-19 has helped to create a more bifurcated market. Stabilized deals with management value add opportunities continue to receive intense interest as buyers hunt for predictable and stable yield. In contrast, newly developed properties with lease-up risk are seeing a shrinking bidder pool, he says.
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And while storage deals are still getting done, in many cases, it is more difficult to get them across the finish line. “Every deal closed post-COVID-19 has required an increased level of advocacy and problem solving on behalf of our clients in order to get from marketing through closing,” says Clark. In addition, difficulty obtaining financing and travel restrictions during second quarter created added challenges and lengthened the overall process to get deals done, he adds.
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Notably, multifamily, which has been a hotly pursued sector in recent years, saw a sharp drop in investment sales volume in second quarter—76 percent for CoStar and 70 percent per RCA data. Although unemployment insurance, government stimulus checks and moratoriums on renter evictions have helped to provide a buffer for occupancies and rent collections, there is some concern regarding the negative impact looming once that support disappears. Investors also may be nervous about the active development pipeline that is set to deliver even more supply to the market and the emerge of flat or negative rent growth.
Waiting for pricing discovery
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Aside from a proven coronavirus vaccine, one of the keys to kickstarting investment sales will be pricing discovery that helps to bridge the bid-ask gap. Sales that were in the pipeline pre-COVID-19 that proceeded to close in second quarter have helped prop up pricing averages. However, CoStar’s second quarter data is indicating some early pricing weakness, and the firm is forecasting a further erosion in values with the nadir or low point of the cycle likely to hit sometime in mid-2021, says Rybczynski
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RCA also is reporting some slight downward movement in prices. The decline is more noticeable in hotels, with pricing that had started to adjust pre-COVID-19 due to oversupply in some markets. Hotels saw the biggest decline of -1.0 percent compared to first quarter and a year-over-year pricing drop of -5.4 percent, whereas industrial continued to post gains of 1.7 percent over the previous quarter and 7.6 percent year-over-year.
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For all property types, the RCA CPPI was relatively flat in second quarter, up a slight 10 basis points compared to first quarter and rising 3.6 percent compared to the same period in 2019. “The pricing shift is not huge given the nature of the economic dislocation, but it is sort of a death by a thousand cuts that we’re going to go through as it could be up to a year of this steady decline in prices,” says Costello.
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Unable to Make Loan Payments, Texas Hotelier Loses Stake in Nine US Hotels
Ashford Discloses Details on Loss of W Hotel Minneapolis and Other Hotels
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By Candace Carlisle July 24, 2020 CoStar News
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The 148-room Homewood Suites Pittsburgh Southpointe hotel is one of the limited service hotels in a portfolio in default. (CoStar)
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Ashford Hospitality Trust, a real estate investment trust hit hard financially by the pandemic, told investors it is losing its ownership stake in nine hotels, including a W hotel in a high-profile Art Deco skyscraper in Minneapolis and eight U.S. limited service hotels.
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The Dallas-based REIT, seeking to deleverage itself as U.S. travel industry demand has declined dramatically with no end in sight as the pandemic wears on this summer in spots throughout the country, has been working with its lenders after defaulting on nearly all its loan agreements beginning April 1.
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Ashford did not immediately return an emailed interview request Friday from CoStar News regarding the nine hotels, which was reported in a Securities and Exchange Commission filing. The publicly traded REIT could give investors further information at its second-quarter earnings call July 30.
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The SEC filing shows lenders are taking action to protect their interests in the borrowing entity behind the hotel properties, said Stacy Stack, a founding partner of the recently launched Goodwin Advisors, a real estate advisory firm based in Dallas.
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"They seem to be looking for investors who want to strategically step into the borrower's role," Stack said in an interview. "It will be interesting to see what the entities sell for at auction, but it hasn't changed the value of the senior debt on the deal. This could be an unofficial call for strategy by the lenders to see who wants to play in the market."
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It's too early for investors to yet know how the pandemic will impact the hospitality industry, but Stack said she's seeing a wide delta between what sellers want to price hotel properties at and what investors are willing to pay. While not yet seeing hotel auctions as a result of defaults or unraveling commercial mortgage-backed securities loans, Stack said the public auction could give lenders an additional data point on how to proceed in uncertain times.
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Prior to the pandemic, Ashford Hospitality owned 116 hotels and nearly 25,000 rooms throughout the United States. By losing its stake in the W hotel in Minneapolis, a 229-room hotel in a historic Minneapolis skyscraper, reported by CoStar News earlier this week, and the eight U.S. limited service hotels in one of its portfolios, the REIT will be down nine hotels and 1,283 rooms.
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Loans tied to the W hotel are scheduled to be sold at a public sale on Aug. 6, according to the SEC filing. Loans tied to the eight-hotel limited service portfolio with a principal amount of nearly $144.2 million matured on July 9. The senior mezzanine lender on the portfolio, called the Rockbridge Portfolio, previously sent the company a notice of Uniform Commercial Code sale, giving the lender the ability to sell the Ashford subsidiaries that own the hotels at a public auction.
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On the senior mezzanine loan tied to the limited service hotel portfolio, there's an outstanding balance of $16.5 million, according to the filing. The portfolio, with hotels in Arizona, Kansas, Massachusetts, Ohio, Oklahoma, and Pennsylvania, include:
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Courtyard Billerica, a 210-room hotel at 270 Concord Road in Billerica, Massachusetts
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Hampton Inn Columbus Easton, a 145-room hotel at 4150 Stelzer Road in Columbus, Ohio
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Hampton Inn Phoenix Airport, a 106-room hotel at 601 N. 44th St. in Phoenix, Arizona
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Homewood Suites Pittsburgh Southpointe, a 148-room hotel at 3000 Horizon Vue Drive in Canonsburg, Pennsylvania
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Hampton Inn Pittsburgh Waterfront, a 113-room hotel at 301 W. Waterfront Drive in Homestead, Pennsylvania
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Hampton Inn Pittsburgh Washington, a 103-room hotel at 475 Johnson Road in Washington, Pennsylvania
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Residence Inn Stillwater, a 101-room hotel at 800 S. Murphy St. in Stillwater, Oklahoma
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Courtyard Wichita, a 128-room hotel at 820 E. 2nd St. in Wichita, Kansas
Ashford purchased the hotel portfolio, which originally included another full-service hotel in Michigan, more than five years ago, in a deal totaling $224 million, or about $179,000 per room. At the time of the deal, Ashford Chairman and CEO Monty Bennett said the portfolio gave the REIT the opportunity to expand its geographic footprint.
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In a separate deal, Ashford reworked agreements with lenders recently to keep a portfolio of 19 hotels spanning 13 states. The reworked deal represents one of Ashford's largest loan pools, which positions the REIT to "survive the pandemic crisis and thrive after it has passed," according to a spokeswoman. Of Ashford's $4.1 billion in property level debt outstanding as of March 31, the REIT has reworked loans for about $1 billion of that debt.
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Forenote: It is not just in this country that there is stress in commercial real estate. Department stores in particular have been hit hard, with the demise of Sears a few years ago, to Neiman Marcus, JC Penny and of course the trouble that Macy's has found itself for several years. The level of debt already outstanding plus the additional debt being taken to try to secure a survivability for the next few years which is now unsecured by real estate continues to grow. Below is more not so great news from London.
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Debenhams up for sale in last-ditch bid to avoid liquidation
Julia Kollewe July 27, 2020 The Guardian
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Debenhams has put itself up for sale in a last-ditch attempt to prevent a fall into liquidation.
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The 242-year-old department store chain this weekend appointed investment bank Lazard to oversee the sale process and hopes to secure a buyer before the end of September.
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The struggling retail group called in administrators in April, for the second time in a year. The restructuring firm FRP Advisory is working alongside its management under a “light touch” administration.
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This means directors are running the business rather than handing it over to the administrators. The chain has already shut 18 stores, with the loss of more than 1,000 jobs in shops and at the headquarters in London.
After lease negotiations with landlords, 124 stores are still trading. They reopened on 15 June after the government allowed non-essential retailers to open again following the Covid-19 lockdown.
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“Now that Debenhams has 124 stores in the UK open and is trading ahead of expectations, the administrators of Debenhams Retail Ltd have initiated a process to assess ways for the business to exit its protective administration,” the company said on Sunday.
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“There are a range of possible outcomes which could include the current owners retaining the business, potential new joint venture arrangements (with existing and potential new investors) or a sale to a third party, and the administrators will be guided by what delivers the best outcome for creditors.”
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Like other retailers, Debenhams has been badly hit by the coronavirus lockdown, but was already struggling with a £600m debt pile. It previously went into administration in April 2019, which wiped out its shareholders and transferred ownership to a group of financial investors including US hedge funds managed by Silver Point Capital and GoldenTree Asset Management. Debenhams then underwent a company voluntary arrangement, an insolvency procedure that allowed it to close stores and renegotiate rents.
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Debenhams’ Irish chain has been placed into liquidation, but a liquidation of the main group is unlikely and would only happen once all other options have been exhausted. Debenhams also owns the Magasin du Nord chain in Denmark.
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Rival John Lewis plans to close eight of its 50 stores putting 1,300 jobs at risk, while Marks & Spencer is cutting 950 jobs as part of a £500m cost-saving drive.
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Office Space Demand Expected to Drop 10-15% as More People Work From Home
The expected reduction in office demand may be offset by de-densification, another new trend.
By Angela Morris July 27, 2020 GlobeSt.com
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A new report suggests the office real estate sector, especially in gateway cities like New York, San Francisco and Washington, DC, will feel the pain for years from the pandemic-led work from home trend.
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“The notion that a well-located office building full of highly paid workers in or near a dense, expensive city is the best way to operate a successful firm has been challenged by the acceptance of remote work,” said the report by Green Street Advisors, a real estate research company. ”Coupled with an increase in individuals who no longer regularly go into the office, many more may consider moving further away from coastal city centers.”
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Overall, the need for office space will decline by 10-15% because so many people are working from home, and the trend could become a permanent employment benefit after the pandemic has passed, wrote Danny Ismail, lead office analyst of Green Street.
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The reason that working from home may become permanent is because it’s been widely successful. Remote employees or just as productive—sometimes more so—and they like not commuting and having scheduling flexibility, the report said. In the future, some employees will still go to the office every day, but others may not go daily.
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Ismail wrote that he did not expect a fully work-from-home world. Companies’ success depends too much on factors like organizational culture, corporate communication and employee retention, he explained.
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The expected 10-15% reduction in office demand may be offset by another trend, however. In the past decade, companies squeezed more employees into the same office space. The need for social distancing could undo this densification trend, the report said.
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“A shift toward de-densification could prove a boon to office demand and potentially offset the impact” of working from home, wrote Ismail. “Investors should remain open-minded about a de-densification trend as this reversal could have material positives for the office sector.”
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The report also noted that Green Street expects for the need for office space to shift geographically away from gateway markets, which are large international cities that serve as entry points into the country. Smaller cities are not so economically sensitive and offer a lower cost of living and better fiscal health, said the report.
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For example, the top five cities that will be “winners” as the work from home rate accelerates are: Raleigh, North Carolina; Denver, Colorado; Charlotte, North Carolina; Austin, Texas; and Phoenix, Arizona.
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In contrast, the five cities that may benefit the least from the trend are: San Jose, California; New York City; Washington, D.C.; Boston, Massachusetts; and Houston, Texas.
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“Employers and employees see more of their income lost due to taxes in gateway markets compared to Sun Belt markets, which has partially driven the recent large net migration towards the Southeastern United States,” wrote Ismail. “Less expensive locales with nice weather will attract talent from high cost and high tax markets.”
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Rise in Weekly Unemployment Claims Points to Faltering Jobs Recovery
Initial claims climb for first time in nearly four months to 1.4 million amid uptick in coronavirus cases
By: Eric Morath July 23, 2020 The Wall Street Journal
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Filings for weekly unemployment benefits rose for the first time in nearly four months as some states rolled back reopenings because of the coronavirus pandemic, a sign the jobs recovery could be faltering.
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Initial unemployment claims rose by a seasonally adjusted 109,000 to 1.4 million for the week ended July 18, the Labor Department said Thursday, halting what had been a steady descent from a peak of 6.9 million in late March, when the pandemic and business closures shut down parts of the U.S. economy.
The increase followed a period where claims had settled around 1.3 million a week, well above the pre-pandemic record of 695,000 in 1982.
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New applications for jobless benefitsSource: U.S. Employment and TrainingAdministration via St. Louis FedNote: Seasonally adjusted.
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The data also show that unemployment rolls have shrunk in recent weeks. Taken together, claims and benefits totals suggest new layoffs are being offset by hiring and employers recalling workers, though at a slower pace than a few weeks ago.
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“The reopening across the country has been very bumpy,” said Michelle Holder, an economist at John Jay College in New York, before Thursday’s data. “I think unemployment applications are going to be sticky at this level because many states are seeing a reassertion of the virus.”
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Last week’s increase in applications came after several states imposed new restrictions on businesses such as bars and restaurants when coronavirus cases rose.
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The number of people receiving benefits through regular state programs, which cover the majority of workers, decreased by 1.1 million to 16.2 million for the week ended July 11. The decline extends the recent trend, with the number receiving benefits the lowest reading since the week ended April 11. Those so-called continuing claims are reported with a week lag
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Employers added a combined 7.5 million jobs in May and June after shedding 21 million jobs in March and April, separate Labor Department data showed.
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On an unadjusted basis, the level of claims was mixed across states last week, falling in some states where virus cases have risen, including in Florida and Texas, and rising in others, including California and Louisiana.
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The elevated level of claims indicate many workers are being laid off, perhaps for a second time, and that parents who want to work are unable to access child care, Ms. Holder said.
California is among the states that imposed new restrictions to deal with a surge in cases of the new coronavirus. The latest restrictions caused Jessica Jenkins, a 30-year-old stylist, to lose her job last week for the second time this year.
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Ms. Jenkins, an independent contractor who rents a booth at Bloom Salon in downtown Napa, had been back at work for five weeks, following a monthslong shutdown that began in mid-March. Being out of work again “is definitely uncomfortable,” Ms. Jenkins said. “I don’t know how long [this shutdown] is going to be or how much it’s going to affect my business.”
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Ms. Jenkins said coronavirus precautions, which required that stylists space out customers and disinfect chairs and other equipment after every use, meant before the second shutdown she was working longer hours and making about half the money she was before the pandemic.
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The self-employed, gig workers, parents who can’t find child care and others who qualify under special pandemic programs are able to tap unemployment benefits under a law passed in March, even if they don’t qualify under regular state programs.
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Last week, 975,000 workers applied for benefits through the new Pandemic Unemployment Assistance program, a modest increase from the prior week. But the number receiving payments through the program fell by nearly 800,000 in the July 4 week to 13.2 million, according to the latest available data, which isn’t adjusted for seasonality. Economists caution that accounting for the new program is inconsistent across states.
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A decreasing number of Americans receiving benefits indicates that recalls and new hiring are outpacing fresh layoffs—suggesting U.S. employers are likely to add jobs to total payrolls for the third straight month in July.
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Greystone Lodge on the River in Gatlinburg, Tenn., temporarily shut its doors on April 1, but didn’t lay off employees. General Manager Jackie Leatherwood said the 241-room hotel wanted to be loyal to longtime employees and avoid a scramble for staff before its busy summer season.
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Greystone reopened on May 1, and since hired four additional employees, including a front-desk clerk and a laundry attendant, and has several openings, Ms. Leatherwood said. Business picked up in June as visitors returned to the nearby Great Smoky Mountains National Park. She said July so far “looks really good.”
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Other businesses are facing renewed challenges with a rising number of virus cases.
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The Midnight Cowboy cocktail bar in Austin, Texas, had to close its doors and put five employees back on furlough when the state ordered bars to shut down for a second time in late June. Another four employees have been on furlough since mid-March. Bill Norris, co-owner at the bar, said that during the weeks it was open, revenue was about half of what it was during a comparable period last year.
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“We were scraping by,” Mr. Norris said. He said he expects the bar will eventually reopen, when state rules allow it to and when customers are ready to come back. But he said he worries about furloughed employees.
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“To know that you can’t support people who’ve been the heartbeat of your business is crushing,” Mr. Norris said.
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The tens of millions of workers covered by a range of unemployment insurance programs face the prospect of a significant reduction in benefits at the end of this month, when a $600 weekly benefits enhancement is set to expire. Lawmakers are negotiating over whether and how to extend those benefits, with the possibility of passing a temporary extension while talks continue over a longer term solution. State programs alone pay about $350 a week, on average.
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The federal government paid $18.3 billion in enhanced compensation for the week ended July 18, the Labor Department said. That is the equivalent of 30.5 million $600 payments, though some of the total amount could reflect back payments.
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University of Michigan labor economist Don Grimes said if the amount offered under unemployment insurance is reduced, the number of Americans receiving benefits is likely to decline, but not necessarily the number of new applications.
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“The $600 additional weekly payment may have encouraged people to stay on unemployment,” he said. “But if someone loses their job they will file for unemployment benefits whether the value of those benefits is $300 a week or $900 a week.”
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The coronavirus exposes the perils of profit in seniors’ housing
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Martine August The Conversation
Assistant Professor,
School of Planning
University of Waterloo
In May 2020, Orchard Villa, a long-term care home in Pickering, Ont., made headlines for a bad COVID-19 outbreak. Just two months into Ontario’s lockdown, 77 patients in the 233-bed home had died.
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A report by Canada’s military revealed horrifying conditions, short staffing and neglect. Some family members blamed for-profit ownership, arguing that COVID-19 had simply exposed, in tragic fashion, the impact of prioritizing profits in the operation of seniors housing.
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Notably, Orchard Villa had been purchased in 2015 by private equity firm Southbridge Capital, adding it to Canada’s growing stock of “financialized” seniors’ housing — bought by financial firms as an investment product.
This has followed the trend of what’s known as financialization in the global economy, in which finance has come to dominate in the operations of capitalism, prioritizing investor profits over social, environmental and other goals. In seniors’ housing, financialization has arguably intensified the profit-seeking approach of private owners, with harmful outcomes for residents and workers alike.
Grey wave
Seniors’ housing includes both government-subsidized long-term care (LTC) homes (nursing homes), and “private-pay” retirement living. Canada’s population is aging, with a so-called grey wave predicted to require 240,000 new spaces by 2046.
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Industry experts call this “a rising tide that can’t be denied.” Investors are rushing to get on board, both with LTCs, where long waiting lists and government funding ensure steady income, and with retirement living — where hospitality services (housekeeping, laundry, meals) and private-pay health-care services can drive rents as high as $7,000 a month.
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Financial operators have spent two decades consolidating ownership of Canadian seniors housing. These operators include Real Estate Investment Trusts (REITs), institutional investors and private equity firms.
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In 1997, the first seniors housing REIT launched with 12 homes. What followed was a consolidation frenzy and the rise of financial firms like Chartwell, Sienna, Revera, Extendicare, Amica, Verve and others. By 2020, financial firms controlled about 28 per cent of seniors housing in Canada, including 17 per cent of LTCs and 38 per cent of retirement homes.
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American owners
Ownership has also become international. Today, Canada’s biggest owners are the largest health-care REITS in the United States.
Ventas REIT and Welltower REIT entered Canada in 2007 and 2012, and have amassed major interests in 36,792 suites (225 homes). Canada has also seen a surge in U.S.-based private equity ownership by firms that recognize similarities between our private-pay retirement sector and privatized health care south of the border.
They are eager to capitalize on the growing number of seniors on LTC waiting lists who require care and are forced into private-pay retirement living.
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Why should it matter if financial firms own seniors housing?
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Researchers have found that for-profit facilities have lower staffing levels, lower quality of care and poorer resident outcomes, in both the U.S. and Canada.
Among for-profits, corporate chains are worse than independent operators.
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Financialization, meanwhile, is like private ownership on steroids. In other sectors, financial firms view homes as assets for generating profit, and their large scale, sophistication and access to capital enable them to pursue it more aggressively.
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In seniors housing, REITs are clear about prioritizing share value, growth and monthly investor distributions. But there are no objectives to deliver better care, dignified environments or good workplaces, which should be paramount in the operation of seniors housing.
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Fatalities higher in ‘financialized’ homes
Pandemic mortality rates are highlighting the serious problems with financialization in the sector. Using data compiled by writer Nora Loreto on COVID-19 deaths in Ontario long-term care facilities as of June 23 and my own original database on seniors housing ownership, I found worse fatalities in for-profit homes.
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In Ontario, for-profits own 54 per cent of beds, but had 73 per cent of deaths. Public homes, by contrast, include 20 per cent of beds, but had only had 6 per cent of deaths. Financial operators (REITs, private equity and institutions) had higher death rates than other for-profits, with 30 per cent of beds and 48 per cent of Ontario LTC deaths.
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There were 875 deaths in Ontario’s nearly 24,000 financialized long-term care beds, or a 3.7 per cent rate of deaths per total beds. This is 1.5 times higher than other for-profits (at 2.5 per cent), and five times higher than the rate in public homes (at 0.7 per cent).
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While more detailed studies are needed to compare features of the homes and their residents, this trend appears to support what researchers suggest — that financial operators may pursue profits at the expense of nursing home quality.
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Orchard Villa was not the only private equity-owned property to experience crisis. Southbridge Capital had outbreaks in nine of its 26 Ontario homes, and a 7.4 per cent death rate — more than 10 times that seen in public facilities.
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Investors in Southbridge Care Homes are promised a yield-based investment with “upside market gain.” While those profits roll in, 176 people have lost their lives to COVID-19 in the firm’s investment properties.
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These numbers underscore the need for transformative changein the seniors housing sector. All seniors deserve the right to affordable and safe housing, high-quality health care and a dignified environment. Staff deserve safe, well-paying and rewarding jobs. The pandemic has revealed the devastating mistake we’ve made in allowing homes to be treated as financial assets for investor gain.
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Banks Facing Potential Hefty Volume of Troubled CRE Loans
With forbearance periods still underway, visibility has not yet emerged on how much distress sits on bank balance sheets.
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By: Beth Mattson-Teig Jul 21, 2020 National Real Estate Investor
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Snowballing distress in commercial real estate loans are threatening to become an avalanche that could overwhelm banks.
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Getting a glimpse behind the curtain on how bank loans are performing isn’t easy. “It’s amazing that we have gone from the great financial crisis to now and still have no better transparency into the banks at a granular level as we do with CMBS,” says K.C. Conway, director of research and corporate engagement at the University of Alabama’s Alabama Center for Real Estate (ACRE) and chief economist for the CCIM Institute. Some banks are more transparent than others and there is definitely a lag in the data, he says.
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In addition, the FDIC is allowing banks to forbear on loans and not have to report them as troubled loans for up to 180 days. “We’re not going to see anything big show up in the numbers until this deferral period expires,” says Johannes Moller, director in North American banks, at Fitch Ratings. The next big question is how the Federal Reserve is going to act and whether there will be further forbearance, which will help to determine when clarity on defaults on loans held by banks will be revealed, he says. (According to the Mortgage Bankers Association, commercial banks currently holding 39 percent of the $3.7 trillion in commercial/multifamily outstanding mortgage debt outstanding in the U.S.)
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The COVID-19 related economic downturn is widely expected to cause a surge in loan defaults and delinquencies in some property sectors, and there is some data emerging that is providing insight into the potential stress ahead. For example, Trepp has analyzed a diverse portfolio of 13,000 commercial real estate balance sheet loans held by commercial banks. Trepp is forecasting that the cumulative default rate for that dataset will rise from its current 0.5 percent default rate to 6.5 percent. Notably, the hardest hit sectors are expected to be lodging, with a cumulative default rate of 21 percent and retail at 9 percent. Other major real estate sectors analyzed will experience more moderate increases in distress with multifamily at 4.7 percent, office at 4.5 percent and industrial at 2.4 percent, according to Trepp.
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Although Fitch Ratings anticipates asset quality deterioration and rising defaults, the rating agency’s view is that banks started the current crisis with relatively good financial strength, liquidity, earnings and credit quality, says Moller. Fitch has put a number of banks on “negative outlook,” but the agency has not yet made any downgrades. “We do think underwriting standards are quite robust for the banks, especially for the large ones,” he says.
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Some banks likely face more exposure than others. Some of the key points that Fitch highlighted in a recent report on commercial real estate loan risk among banks include:
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Construction lending is the category with the highest inherent risk as evidenced by the loss history relative to other commercial real estate loan types.
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Exposure risk is greater among smaller banks and those that have higher concentrations of commercial real estate loans. Small banks with between $10 million and $100 million in assets have gained market share in commercial real estate lending since the Great Recession. Smaller banks also tend to have less diversification than larger banks.
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There are long-term implications of the pandemic on commercial real estate that bear watching in terms of how demand will be affected across property sectors.
Fed stress tests highlight liquidity concerns
The Fed released the results of its 2020 stress tests in late June with the addition of special sensitivity analyses that were conducted in light of the coronavirus pandemic. Analysis was performed on 34 banks, each with more than $100 billion in assets. The stress test included three downside scenarios for a V-shaped recession and recovery; a slower, U-shaped recession and recovery; or a W-shaped, double-dip recession.
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In aggregate, loan losses for the 34 banks ranged between $560 billion and $700 billion in the sensitivity analysis. Under the more dire U-shaped and W-shaped scenarios, most of the banks remained well capitalized but several would approach minimum capital levels. In light of the results, the Fed took several steps to help banks preserve capital and remain resilient. Notably, the Fed suspended bank stock buyback programs and put temporary limits on the dividends banks could distribute to shareholders.
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The stress tests are drawing mixed reviews. A recent opinion article in Bloomberg described them as “confusing and vague.” Others view the results as worrisome if the COVID-19 crisis worsens. A public health crisis of this magnitude wasn’t appropriately modeled in the bank stress tests, notes Conway. Even under the Fed’s worst case scenario, things could get worse, which is why the Fed put a temporary cap on dividends and a moratorium on buyback programs, he adds. The problem is that those limits also make it harder for publicly-traded banks to raise additional capital. “Who is going to invest or buy a new offering if you don’t know when or how much dividend they can pay?” he asks.
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This year’s stress tests were unique with a lot of different moving parts coming together, including the implementation of the stress capital buffer, adoption of new Current Expected Credit Loss (CECL) accounting rules and a new dividend cap for the banks, notes Christopher Wolfe, managing director and head of North American Banks at Fitch Ratings. “But there was nothing that came out of it that changed our views on how we are looking at anything,” he says.
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Gauging risk exposure
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There are some notable differences that exist in the current market versus prior to the financial crisis a decade ago that may help banks weather the current storm. Banks have less exposure to loans outside of their geographic footprints, which got some banks into trouble in the last recession, notes Wolfe. In addition, concentration risks are different today. Banks have put limits on development and construction risk, for example, he says. Banks as a group also appear to have good diversification across property type. Based on data from fiscal year 2019, the biggest concentration for national banks is in the office sector, at 32 percent, whereas regional/local banks have the biggest exposure to apartments, at 27 percent, according to Real Capital Analytics.
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Yet the concentration of commercial real estate debt held by banks is concerning, and what is more worrisome is added exposure risk to commercial and industrial (C&I) loans, says Conway. One way that banks were able to lower commercial real estate loan concentration numbers is to structure real estate loans to operating businesses, such as seniors housing, hotels, restaurants and auto dealership as C&I loans with a lien on the real estate. “I think we are going to find as we peel back the C&I onion that there is a lot of real estate classified as C&I loans in the banks,” he says.
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According to the FDIC, nearly 500 banks failed during and immediately following the Great Financial Crisis. “I think we could easily end up over the next 18 to 24 months breaking bank closure records. It’s going to be pretty severe, particularly when you look downstream at community banks,” says Conway.
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The level of stress is going to depend heavily on what property types and regions that banks are invested in. Those that got more aggressive in lodging, retail and C&I lending to seniors housing and restaurants could get hurt very badly, says Conway. Another question that remains is whether the Fed will allow banks to operate at lower capital ratios and give them time to work through problem loans, or if they are going to do another Troubled Asset Relief Program (TARP) bailout to pump money directly into the banks as they did in the financial crisis with an injection of about $700 billion, he adds.
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Summer Rise in Covid-19 Hot Spots Derailing Hotel Recovery
Swelling coronavirus cases in some popular states for tourism are spoiling near-term hopes for hoteliers
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By: Peter Grant July 21, 2020 The Wall Street Journal
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Just when many owners of hotels in Florida, Texas, Arizona and California thought the worst of the pandemic was behind them, a surge of Covid-19 cases in those states is spoiling any near-term recovery hopes.
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Demand in 12 of 13 Florida markets, gauged by the number of room nights purchased, weakened for the week that ended July 11 compared with the week that ended June 27, according to data firm STR. Overall demand was down 7.4% in Florida for the period.
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“We saw a nosedive in our reservation trend,” said Heiko Dobrikow, general manager of the 231-room Riverside Hotel in downtown Fort Lauderdale. “The customers are saying: ‘Why should I leave where I am to go somewhere there is an influx of Covid?’”
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In Arizona, demand fell 9.9% and it was down in Texas, too, said the data firm, which compared the last week in June with the second week in July to exclude the effect of the July 4 weekend.
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Total U.S. hotel rooms purchased, change from previous week Source: STR
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Until the recent rise in Covid-19 cases, markets in Phoenix and some parts of Florida and Texas were strong compared with other U.S. markets, according to Richard Hightower, an analyst with Evercore ISI. “There was pent-up demand on the leisure side. People just wanted to get out of the house,” he said.
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People still feel that way but they also want to avoid areas that are recording spikes in Covid-19. Given that most leisure travel is being done by car these days, many families keep an eye on the news and simply head in a different direction than the outbreaks, analysts say.
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Travellers can show up at the last minute and get a room because hotels are operating at such high vacancy rates compared with normal times.
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“There’s plenty of availability,” said Andreas Ioannou, chief executive of hotel owner Orchestra Hotels + Resorts, whose properties include the Hilton Fort Lauderdale Beach Resort. “People know they can walk in and get a room, whereas in normal circumstances they would not be able to do that.”
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The poor performances of the hotel markets in the states that suffered new outbreaks helped drag down the U.S. lodging industry, which has been one of the hardest-hit commercial-property types. National demand was rising at an average clip of 8.3% a week between the week that ended April 18 and the one that ended June 13, STR said.
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Between the weeks that ended June 20 and July 11, demand rose only an average of 2.9% a week. “Where the media reported on an uptick in cases, consumers voted with their wallets,” said Jan Freitag, senior vice president of STR.
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California also has been hard hit according to a report last week by Baird Equity Research. Of the 21 top metropolitan areas Baird tracks, 10 logged weaker growth in revenue per available room, a common industry metric. Seven of the 10 were in hot-spot states such as Arizona, California, Florida and Texas, Baird said.
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California Gov. Gavin Newsom last week rolled back that state’s reopening because of its surge in Covid-19 cases, putting new restrictions on a range of public places and activities. Hotels weren’t on the long list of closures, which included malls and indoor activities at wineries, bars and entertainment centers. Still “we believe the appeal of leisure travel to California has certainly taken a hit,” the Baird report said.
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Some small markets reachable by car and not recording a rise in Covid-19 cases are benefiting from the outbreaks in other parts of their state, said Michael Bellisario, a Baird senior research analyst. He included markets such as Panama City, Fla., Sedona, Ariz., and Corpus Christi, Texas.
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“You’re going to make a decision Wednesday or Thursday on where you’re going Friday,” he said. He added that hotel guests are driving up to eight hours depending on “how many kids you have and how long you want to tolerate them in the car.”
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The Hilton Fort Lauderdale has 374 rooms and suites. Mr. Ioannou said occupancy rose steadily in June from about 5% in the first week after the property reopened. “Within two weeks the momentum went to occupancy in the 30s on weekdays and over 50% on weekends. We were building up to 80% on July 4 and we were saying, ‘Oh my God, this is great,’” he said.
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But then there was a jump in infections. “That caused hundreds of cancellations and occupancies dipped down again,” he said.
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A note of caution regarding the following article from the JSO web manager
This is an article from the CoStar Group that completely omits the fact that there is a bifurcation of the industrial market not just in the Chicago metropolitan area but throughout most major metropolitan areas in the country. The sale at just short of $150 per square foot, is for a Class A industrial property that is in high demand at the current time, and while vacant we believe will be populated quickly. But at what rent is still an unanswered question. What the article omits to mention, are the many industrial buildings that are struggling through out Cook and the Collar Counties for various reasons. One of course is the high level of taxation within the Chicago area, especially Cook County where there is a new Assessor with no real estate back-ground what so ever. Most people would might concur that the industrial sector in Chicago has weathered the Coronavirus better that other sectors of real estate, but that would be in inverted comas! Retail has been gutted, the office sector is very mixed but showing rents trending alarmingly south, and the residential market is in flux with a significant bifurcation between Classes A and B and Class C. Did someone mention Senior Housing? There is simply no need to mention the hospitality sector. More importantly, there is serious talk about pending bank failures where the numbers may well edge out the nearly 500 banks that failed immediately following the Great Financial Crisis - yes that one in 2008-09! The article is included as it is news worthy, but it also skews the overall direction of the market in general. It’s nice but right now its only trivia.
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Denver Firm Pays $24 Million for Warehouse Near O’Hare Airport
Sale of Project in Final Construction Stages Underscores Chicago Area's Industrial Market Strength
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By Jennifer Waters July 21, 2020 CoStar News
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In the latest testament to the strength of the industrial sector in the greater Chicago area, a Denver-based real estate investment management firm paid top dollar for a vacant warehouse near O’Hare International Airport.
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Black Creek Group forked over $23.6 million for a 159,100-square-foot building in suburban Wood Dale, Illinois, that is in the final stages of construction. Developed by Crow Holdings Capital, the property at 640 N. Central Ave. sits on nearly 10 acres only 18 minutes away from O’Hare and 36 minutes from Midway International Airport on Chicago’s South Side.
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The sale is among a handful of industrial deals completed during the pandemic that has put much of the commercial real estate industry on hold. It also comes at a time when there is about 18 million square feet of space under construction in greater Chicago with several large speculative projects racing toward completion, according to CoStar research. The market is set to see another supply-heavy year in 2020.
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“This is just another example of how the industrial sector has weathered the coronavirus storm better than other property types,” said Denes Juhasz, senior market analyst in CoStar’s Chicago office. “It’s a fully vacant building that sold for one of the highest prices we’ve witnessed on a price-per-square-foot basis, at nearly $148 per square foot. And during the pandemic, too.”
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The property has easy access to Interstate 290 that wraps north and south around the suburbs on the east side of the city. It’s also near quick routes to air cargo facilities that have been improved in recent years as demand for moving products through Chicago has swelled.
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“Central Avenue represents the well-located Class A distribution warehouses that Black Creek Group prefers for our holdings,” Marty Edmondson, senior vice president of the company’s North Central region, said in an email.
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“We saw this acquisition as a unique opportunity for the firm to grow our presence in the Chicago area, particularly in Wood Dale the O’Hare submarket, which is a land-constrained location with low vacancy rates,” he added. CBRE’s Zachary Graham is handling the leasing on the property that Edmondson said already has “seen strong leasing interest.”
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Edmondson said the property is a good fit for warehousing and distribution tenants or manufacturing tenants. “We have seen a lot of interest in the property but do not have any deals we can discuss at this time,” he said.
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Aldi's Launch of 70-Store Expansion Pushes an Atypical Real Estate Strategy
German Grocery Brand Aims to Become Nation's Third Largest Chain
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By: Cara Smith-Tenta July 21, 2020 CoStar News
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Discount grocer Aldi's launch of a significant nationwide expansion, including plans for a Gulf Coast regional office and distribution center, marks its latest push to position itself among the few biggest U.S. grocery store chains partly by using a different real estate strategy.
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The German company said it plans to open 70 more U.S. stores by the end of the year, after recently hitting its 2,000 U.S store milestone. The company expects to become the nation's third-largest grocery chain by store count by 2022. The company did not disclose how many stores it expects to open by then but in 2017, it projected that it could have at least 2,500 stores in 2022.
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Among the planned locations this year, the company expects to make its first entry into Arizona, its 37th state, with four Phoenix stores, and to continue its expansion into the Gulf Coast including Louisiana, Alabama and the Florida Panhandle next year. Plans include building a 564,000 square-foot distribution center and office in Loxley, Alabama.
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The expansion is part of Aldi’s more than $5 billion initiative, launched about five years ago, to massively grow its physical footprint in the United States, revamp its existing U.S. stores and beef up its fresh food selection by 40% with an emphasis on fresh produce, meat and organic foods.
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That the company is still moving forward on those plans now stand in contrast to the state of the national retail industry where closings and reductions in property footprints have been increasing amid challenges presented by the coronavirus pandemic. But it comes as other companies, including e-commerce giant Amazon, launch their own brick-and-mortar grocery store expansion plans to capitalize on the demand for food, which consumers still largely prefer to buy in-person instead of online.
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Aldi is an unusual grocer in the industry in terms of real estate, and that could allow it move into less conventional commercial property than a typical grocer. Aldi's stores average about 16,000 square feet, smaller than the average supermarket, which come in at around 40,000 square feet.
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Its interiors appear low-cost and simple with an industrial-chic feeling and not draped in the warm lighting or higher-end finishes popular with chains such as Whole Foods or Kroger. Rather, Aldi says its focused on staying well-stocked with affordable basics and fresh produce.
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Aldi’s emphasis on affordability may be part of its appeal. As the U.S. unemployment rate continues to sit at some of its highest historical levels in the pandemic, consumers are drawn more than ever to saving money.
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“In fact, as food costs are rising across the country, we're lowering prices on hundreds of items to meet our customers' increased need for savings,” Jason Hart, CEO of Aldi U.S., said in a statement.
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The company said it has been one of the fastest growing grocery chains in the nation. It's unclear whether its 2017 projection to hit 2,500 stores by 2022 still holds. However, the chain maintains it could be the third larger grocer by store count in the nation in two years.
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Excluding big-box retailers such as Walmart, Kroger is America's largest grocery chain by store count with 2,796 stores, according to a disclosure to investors on its website. It is followed by Albertsons with 2,252 stores and Publix with 1,252 locations, according to those companies' respective financial filings.
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Aldi has been buying up locations of some competitors that have closed or gone out of business as some of its organic-focused and pricier peers, such as Lucky’s Market, have not fared as well. In January, Boulder, Colorado-based Lucky’s Market filed for bankruptcy protection. Aldi wound up buying five Lucky’s Market stores and one of the company’s corporate-owned properties. In April, the Asheville, North Carolina-based natural foods grocer Earth Fare sold off several of its stores as part of its Chapter 11 bankruptcy case. Aldi bought one of those stores.
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Other peers in that category struggle to compete with deep-pocketed chains such as Whole Foods and Kroger, which can afford to strike up lucrative partnerships with curbside pickup services and adapt their strategies to best compete amid the pandemic. But Aldi said it has expanded its own online services.
In May, it announced that it would accelerate the rolling out of its curbside pickup service to almost 600 stores by the end of this month.
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Aldi said it is also plans on breaking ground in 2021 on a 564,000-square-foot regional headquarters and adjacent distribution center in Loxley, Alabama, which will serve Aldi’s new stores in the Gulf Coast region.
Those developments in Loxley are poised to infuse $100 million in capital investments in the community and create 200 jobs throughout the region, according to a separate statement from the company. Loxley sits in the southern tip of Alabama, around 21 miles east of Mobile and just a short drive to the state’s southernmost coast line.
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Aldi bought 160 acres in Loxley in the city’s industrial and warehousing district, just north of Interstate 10 at exit 44.
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Men's Wearhouse and Jos. A. Bank are closing hundreds of stores
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By Jordan Valinsky July 21, 2020 CNN Business
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New York (CNN Business)
Tailored Brands, which owns suit sellers Men's Wearhouse and Jos. A. Bank, is shuttering hundreds of stores and drastically reducing its corporate workforce as the coronavirus pandemic continues to decimate the retail industry.
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The company has identified 500 stores for closures and said it's cutting 20% of its corporate positions in hopes of strengthening its "financial position and enable it to compete more effectively in the challenging retail environment," according to a release. The company has around 1,500 stores in the United States, with about half operating under the Men's Wearhouse name.
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"Unfortunately, due to the Covid-19 pandemic and its significant impact on our business, further actions are needed to help us strengthen our financial position so we can navigate our current realities," said Tailored Brands CEO Dinesh Lathi.
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The store closures and resulting layoffs will cost the company $6 million in severance payments and other termination costs, Tailored Brands said. The stores will close "over time" and it has not "yet quantified the expense savings and costs related to potential store closures."
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Other companies facing the risk of bankruptcy include Ascena Retail Group (ASNA), owner of clothing chains Lane Bryant, Justice, Ann Taylor and Dress Barn, which recently warned there is "substantial doubt" about its ability to remain in business.
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Tailored Brands disclosed it is at risk of bankruptcy or even shutting down operations because of the Covid-19 crisis in a filing Wednesday evening.
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"If the effects of the Covid-19 pandemic are protracted and we are unable to increase liquidity and/or effectively address our debt position, we may be forced to scale back or terminate operations and/or seek protection under applicable bankruptcy laws," the filing said. The company said it had no comment beyond the filing.
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The company suspended rent payments for April and May when most of its locations were shut. It said it has been able to negotiate rent deferrals for a significant number of its stores, with repayment at later dates, beginning at the end of 2020 into 2021. It also furloughed or laid off 95% of its 19,000 employees.
But things have not gone well at the 44% of Tailored Brands stores that reopened in early May. For the week ended June 5, sales at locations open for at least one week fell 65% at its Men's Wearhouse and were down 78% at Jos. A. Bank and 40% at K&G.
Sales declined 60% in its fiscal first quarter, which ended May 2. All of its stores were closed for about half the quarter, and its online operations halted for two weeks in March. But Tailored Brands has delayed reporting its complete results -- the Securities and Exchange Commission allows companies to postpone reporting during the pandemic.
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One reason for the delay is that it is weighing how large a charge it must take to write down the value of various assets, including the goodwill it carries on its books -- a measure of the value of a company's brands and reputation. The charge will be purely an accounting move that involves no cash, but it could raise the cost of borrowing money the company needs to get through the crisis.
Tailored Brands had $201 million in unrestricted cash on hand as of June 5, but that was primarily because it drew down $310 million on existing credit lines during the first quarter. That left it with only $89 million of borrowing available under those lines.
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The company has about 1,400 stores in the United States and Canada, with about half under the Men's Wearhouse name. It will probably have to close a significant percentage of them whatever happens with its reorganization efforts, said Basu.
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"This is the company that has the legs it needs to possibly turn things around," she said. "But consumers' tastes and demand are going to change. They're going to emerge from bankruptcy with a much smaller footprint."
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Early-Stage Mortgage Delinquencies Exceed Great Recession Levels in U.S.
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By Michael Gerrity | Residential News » Irvine Edition | July 14, 2020 World Property Journal
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According to CoreLogic's latest Loan Performance Insights Report for April 2020, 6.1 percent of U.S. mortgages were in some stage of delinquency (30 days or more past due, including those in foreclosure). This represents a 2.5-percentage point increase in the overall delinquency rate compared to March 2020, when it was 3.6 percent.
To gain an accurate view of the mortgage market and loan performance health, CoreLogic examines all stages of delinquency, including the share that transition from current to 30 days past due. In April 2020, the U.S. delinquency and transition rates, and their year-over-year changes, were as follows:
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Early-Stage Delinquencies (30 to 59 days past due): 4.2 percent, up from 1.7 percent in April 2019.
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Adverse Delinquency (60 to 89 days past due): 0.7 percent, up from 0.6 percent in April 2019.
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Serious Delinquency (90 days or more past due, including loans in foreclosure): 1.2 percent, down from 1.3 percent in April 2019. For the fifth consecutive month, the serious delinquency rate remained at its lowest level since June 2000.
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Foreclosure Inventory Rate (the share of mortgages in some stage of the foreclosure process): 0.3 percent, down from 0.4 percent in April 2019. This is the lowest foreclosure rate for any month since at least January 1999.
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Transition Rate (the share of mortgages that transitioned from current to 30 days past due): 3.4 percent, up from 0.7percent in April 2019. This marks the highest transition rate since at least January 1999. In January 2007, just before the start of the financial crisis, the current- to 30-day transition rate was 1.2 percent, while it peaked in November 2008 at 2 percent.
In the months leading up to the coronavirus (COVID-19) pandemic, U.S. mortgage performance was showing sustained improvement. As of March, the nation's overall delinquency rate had declined for 27 consecutive months, and serious delinquency and foreclosure rates stood at record lows. However, unemployment reached its highest level in more than 80 years in April, reducing affected homeowners' ability to make monthly mortgage payments.
The CARES Act provided forbearance for borrowers with federally backed mortgage loans who were economically impacted by the pandemic. Borrowers in a forbearance program who have missed a mortgage payment are included in the CoreLogic delinquency statistics, even if the loan servicer has not reported the loan as delinquent to credit repositories. Early-stage delinquencies (30-59 days past due) reached its highest level in at least 21 years in April. With home prices expected to drop 6.6percent by May 2021, thus depleting home equity buffers for borrowers, we can expect to see an increase in later-stage delinquency and foreclosure rates in the coming months.
"The resurgence of COVID-19 infections across the country has created economic uncertainty and leaves those who are unemployed concerned with their ability to make monthly mortgage payments," said Dr. Frank Nothaft, chief economist at CoreLogic. "The latest forecast from the CoreLogic Home Price Index predicts prices declining in all states through May 2021, erasing some home equity and increasing foreclosure risk."
All states logged increases in overall delinquency rates in April. New York and New Jersey were both hot spots for the virus and experienced the largest overall delinquency gains of 4.7 and 4.6 percentage points respectively in April, compared to one year earlier. Nevada, Florida and Hawaii were hit hard by the collapse in business travel and tourism, posting spikes of 4.5, 4.0 and 3.7 percentage points, respectively.
On the metro level, tourism destinations such as Miami, Florida (up 6.7 percentage points); Kahului, Hawaii (up 6.2 percentage points); New York, New York (up 5.5 percentage points); Atlantic City, New Jersey (up 5.4 percentage points) and Las Vegas, Nevada (up 5.3 percentage points), led the nation in overall delinquency gains.
"Despite the scale and suddenness of the pandemic, mortgage delinquency has yet to emerge as a major issue, thanks to government COVID-19 relief programs and other housing finance industry efforts," said Frank Martell, president and CEO of CoreLogic. "As the true impact of the economic shutdown during the second quarter of 2020 becomes clearer, we can expect to see a rise delinquencies in the next 12-18 months -- especially as forbearance periods under the CARES Act come to a close."
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An indicator that presaged the housing crisis is flashing red again
By: Andrew Van Dam July 14, 2020 Washington Post
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New mortgage delinquencies hit a record in April, well above anything seen during the Great Recession.
Some 3.4 percent of Americans became at least 30 days delinquent on their mortgage in April, according to an analysis from CoreLogic. The real estate data firm’s figures include about three of four U.S. mortgages, going back to 1999.
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Mortgage delinquencies were among the first signs of the housing crisis and can signal underlying weakness in the housing market. But does the surge in delinquency mean a second housing crisis looms with a wave of foreclosures?
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Probably not. As with most data released during this coronavirus period, these figures come wrapped in caveats and uncertainty.
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For starters, the new delinquency figure includes an unknown number of households that are late on their payments because their loans are in forbearance, said Frank Nothaft, CoreLogic’s chief economist. On March 27, President Trump signed the Cares Act, which made it easy for qualified homeowners to request a total of 12 months of mortgage forbearance. That leaves a small window in which the first homeowners who applied for forbearance could show up in the April data.
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The forbearance program has been wildly popular. The Mortgage Bankers Association reports 4.1 million households were in forbearance as of July 5. To be sure, many applied after the April period measured here, and not all who apply for loan deferrals will actually fall behind on their payments. The program was broad, and many homeowners took advantage of the loan reprieve as a precautionary measure.
Millions of Americans who didn’t have a loan backed by the federal government weren’t eligible for the program. “There are some loans that are not in forbearance that are going right into delinquency,” Nothaft said.
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There are endless reasons to fall behind on your payments right now. About 33 million people have lost their jobs and are receiving jobless benefits, Labor Department data show. The unemployment rate in April was at its highest since the Great Depression, plunging millions into dire financial situations, and the Federal Reserve projects unemployment will remain near double digits through the end of the year.
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Even excluding mortgage loan deferrals, a Census Bureau survey shows that as of June 30, about 8.4 million households missed a mortgage payment in the past month. That’s up from the end of April, when it stood at about 5 percent.
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“I do think we’re going to see further increases in delinquency rates,” Nothaft said. And a year from now, if the economy hasn’t improved substantially by the time forbearance runs out, “you could be looking at a prospect where the lender begins foreclosure proceedings.”
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Delinquencies are concentrated in the Northeast and South, often in states harder hit in the earlier stages of the pandemic.
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If delinquencies continue to follow the virus, they could become a national phenomenon in the months to come. CoreLogic’s models forecast serious delinquency rates will quadruple during the next 18 to 24 months, meaning about 3 million borrowers could be at risk of losing their homes.
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That’s not to say the coronavirus crisis will be a repeat of the Great Recession. Almost 4 million homes were lost to foreclosure between 2007 and 2010, according to an analysis from the Federal Reserve Bank of Chicago, but the housing market is much healthier now. Subprime mortgages are rare, and homeowners have far more equity in homes. That leaves them in a much better position to weather a downturn and less likely to walk away from their homes when things go south.
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“Right now, there isn’t any risky behavior that’s resulting in a big rise in delinquencies,” said Redfin lead economist Taylor Marr.
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The housing market looks strong for now. There were 22 percent fewer homes for sale during the week ending July 4 than there were at the same time last year, according to Zillow, and ultralow interest rates have ensured steady demand from buyers. Low supply and high demand have had a predictable effect: Home prices are still climbing.
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That may change next year. If delinquencies lead to foreclosures, as the forbearance time period expires, we could see an increase in the number of properties on the market. It may be compounded by other stressed buyers, who need to cash out of their home to pay bills as the recession continues. The supply glut could increase further if shutdowns are lifted and homeowners who held off on selling during a pandemic suddenly flood the market. On the demand side, there are fears buyers could pull back as stimulus fades and unemployment remains high.
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Nothaft estimates home prices will fall about 6.6 percent from this May to the next. Mortgage giant Freddie Mac forecasts flat home prices next June. Redfin’s Marr, while optimistic, also says falling home prices are possible. However, he said, the supply glut could be alleviated by the long-awaited influx of first-time millennial home buyers, as well as the myriad forces that have prevented home builders from fully meeting demand.
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Like so many things right now, the future of the housing market ultimately depends on how quickly the novel coronavirus can be contained and whether the government’s stimulus programs will be extended as the pandemic drags on.
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“I would say the risk of a massive wave of foreclosures is pretty low,” Marr said. “I have high hopes that the government and other agencies will do what they can to keep people in their homes.”
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https://www.washingtonpost.com/business/2020/07/14/new-mortgage-delinquencies-hit-record-high/
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Borrowers Begin to Walk Away From Troubled Loans
Growing Number of Hotel, Retail Properties Are Likely to End up in Lenders’ Hands
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By Mark Heschmeyer July 9, 2020 CoStar News
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A growing number of borrowers large and small are willingly opting to give their properties over to lenders. They can potentially write off the loss and reduce their outstanding debt.
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The trend, as evidenced in the latest special servicer commentary on loans packaged in commercial mortgage backed-securities, suggests any economic recovery from the coronavirus pandemic could be drawn out, particularly in the hospitality and retail sectors.
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More than $1.3 billion in loans is currently in some stage of a mutually agreed-upon transition from borrowers to lenders, according to a CoStar analysis of servicer and bond rating agency reports. Under an action known as deed in lieu of foreclosure, a borrower agrees to sign over the deed to a property to the lender in place of continuing to make loan payments.
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“We’re in very unchartered territory here,” Ann Hambly, a 35-year veteran of the CMBS industry and CEO of 1st Service Solutions, which works with borrowers on strategies to pay back loans, told CoStar in an interview. “I’ve had about five deeds-in-lieu over the past 30 days. That’s a big number. I don't think I ever saw that in the 2008, 2009, 2010 downturn because people then would prefer to work it out.”
Instead, borrowers are now saying they have sunk all the money they want to spend on a loan and are ready to walk away, she said.
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The prospect of a quick rebound is typically the deciding factor when it comes to holding properties or folding on them, according to Hambly, who gave an example using retail.
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Borrowers on properties anchored by necessity retailers such as grocery stores could be OK in the long run and just need some temporary debt relief, she said. But borrowers on properties reliant on department stores and movie theaters — sectors going through potentially permanent changes — may decide now is as good a time as any to walk away.
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Most of the deeds in lieu that Hambly is seeing now are in the sector. And CoStar research shows two of the largest loans currently considering a transition over to lenders are for hotels.
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Last month, Colony Capital confirmed it was willing to give up control of a portfolio of 48 hotels to a receiver after missing April and May payments on a $780 million loan securing the properties. Colony is 90% owner of the portfolio, which includes the Residence Inn near New Jersey's Newark Liberty International Airport, in a joint venture with Chatham Lodging Trust. Traditionally, receivers are appointed to manage properties and turn over cash flow to the lender pending either a sale or foreclosure.
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Also last month, Blackstone Group skipped a payment on a $274 million hotel loan secured by four Club Quarters hotels in Chicago, Philadelphia, Boston and San Francisco that it acquired in 2016.
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The New York City private equity firm said it’s considering all options regarding the loan.
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“This is a very small investment that had been written down prior to COVID-19 as a result of unique operational challenges,” a Blackstone spokesperson said in an email. “We will continue to work with our lenders and the hotel management company to create the best possible outcome under the circumstances for all parties, including the employees.”
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Hotels make up a small portion of Blackstone’s global real estate holdings valued at $324 billion. In the company’s first-quarter earnings call, it noted about 80% of its portfolio comprises logistics, residential assets and high-quality office properties, with logistics being the most dominant theme.
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It’s not just hotels showing up as potential deed-in-lieu transfers. Bahrain-based Investcorp International owns a shopping mall and office property that servicers noted could end up with lenders.
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A $65 million loan on the Southland Mall in Miami transferred to special servicing in April. According to the servicer’s note, the borrower initially asked for debt relief but has since made the decision that the property would be unsustainable at its current debt level. The servicer is said to be determining the optimal workout strategy that achieves the highest recovery.
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Investcorp officials didn’t return requests for comment on the Southland Mall nor on a $47 million loan on One Westchase Center, a 466,159-square-foot office building in Houston.
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The servicer note on that loan said the borrower would like to transition the property to the lender due to pending loan maturity in October and because of COVID-19’s impact on the Houston economy.
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Other loans currently identified in servicer notes and bond rating agency reports as potentially going back to lenders were for smaller loan amounts and various property types.
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It’s likely, though, that the total amount of such loans could be much larger than indicated as not all servicers provide specific commentary on loan workouts. In addition, the amount could go higher as borrowers face continued disruption from the pandemic.
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U.S. Mortgage Rates Fall to Record Low 3.03% for 30-Year Loans
By Craig Giammona July 9, 2020 Bloomberg News
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Mortgage rates in the U.S. hit a record low for the sixth time since the coronavirus outbreak began roiling financial markets.
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The average for a 30-year fixed loan was 3.03%, the lowest in almost 50 years of data-keeping by Freddie Mac. The previous record was 3.07%, which held for a week. Rates have plunged as the Federal Reserve holds its benchmark rate near zero and buys mortgage bonds as part of its plan to stimulate the economy.
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Analysts have argued that rates could dip below 3% this year.
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Low borrowing costs have fueled demand for homes, even with the pandemic battering the economy. Americans stuck at home have been looking to trade up for more space, while a shortage of available inventory has helped prop up prices.
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Social-distancing measures kept some buyers and sellers on the sidelines in recent months, but the market is bouncing back, according to Lawrence Yun, chief economist at the National Association of Realtors.
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“The residential market has seen a swift rebound of activity as numerous states have begun to ease mandatory stay-at-home orders,” Yun said in a statement.
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See Interest Rates section of this Web Page
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Brooks Brothers, Hurt by Casual Fridays and Coronavirus, Files for Bankruptcy
The 202-year-old maker of business suits, and one of the last with U.S. factories, joins other apparel brands in bankruptcy court
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By: Suzanne Kapner and Soma Biswas July 8, 2020 The Wall Street Journal
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Brooks Brothers dressed the American business class in pinstripes for more than 200 years and survived two world wars and the shift to casual dressing. But it was no match for the coronavirus pandemic.
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The closely held company, which is owned by Italian businessman Claudio Del Vecchio, filed for bankruptcy protection in Wilmington, Del., on Wednesday. One of the few brands to make clothes domestically, it plans to halt manufacturing at its three U.S. factories on Aug. 15 and will use the bankruptcy process to search for a new owner.
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Brooks Brothers joins a parade of U.S. retailers seeking relief in bankruptcy court since March, including Neiman Marcus Group Inc., J.Crew Group Inc. and J.C. Penney Co.JCPNQ -5.73%. Economic fallout from Covid-19 has also pushed high-profile companies in other industries into bankruptcy, including Hertz Global Holdings Inc. HTZ -1.35% andChesapeake Energy Corp. CHKAQ
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Mr. Del Vecchio blamed the pandemic for the company’s current troubles, saying in an interview on Wednesday that temporarily closing stores during the lockdowns greatly reduced revenue, yet the company still met its contractual obligations to workers, suppliers and other vendors. He said he wished that the government had provided a lifeline to larger retailers the way it did to small businesses.
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“Through every era, we had challenges, but we were confident we would be able to manage through them,” he said. “Retailing has been changing a lot in the last four to five years, and we were in the process of adapting to that new environment. When coronavirus came, there was really no way to sustain things.”
While it seeks a buyer and restructures its debts, Brooks Brothers said it has secured a $75 million debtor-in-possession loan from WHP Global. WHP, backed by Oaktree Capital and BlackRock, is a brand-management firm that owns the Anne Klein and Joseph Abboud apparel brands.
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Brooks Brothers was facing challenges before the health crisis forced nonessential retailers to temporarily close their stores. The company had about $1 billion in revenue in 2019, and about a quarter of its sales came from ecommerce. It has 500 stores around the world and roughly 200 in North America, after deciding to close about 50 locations because of the pandemic.
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Corporate America had turned increasingly casual, and fewer men were buying suits. Once people started sheltering at home, they turned to even more casual attire, such as sweatpants.
As people begin to head back to the office, it isn’t known whether they will return to a more formal way of dressing.
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“I’ve seen a growing trend toward more casual dress partly because that’s how our clients are dressing,” said Quyen Ta, a partner in law firm King & Spalding LLP’s San Francisco office. “I’ve met with general counsels of public companies who are in hoodies.”
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Brooks Brothers hired the investment bank PJ Solomon last year to explore strategic options, including a possible sale, according to people familiar with the situation. It also received a $20 million loan from liquidation firm Gordon Brothers, these people said. The loan was from the firm’s financing arm, which is separate from the division that handles liquidations, one of the people said.
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Brooks Brothers is expected to attract buyers, other people familiar with the situation said. Authentic Brands Group LLC, a licensing company that owns the Barneys New York and Sports Illustrated names, is a potential suitor, they said.
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Other sellers of men’s work attire have also struggled since the pandemic. Tailored BrandsInc., TLRD -1.55% parent of Men’s Wearhouse and Jos. A. Bank, said in June that it has taken several steps to conserve cash, such as taking longer to pay landlords and suppliers. The company reported a 60% decline in sales in the quarter ended May 2. Last week, Tailored Brands skipped a bond interest payment.
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Founded in 1818, Brooks Brothers, which pioneered ready-made suits, came of age along with the nation. It started selling its clothes before the Erie Canal opened and the California Gold Rush began. Its clothes have been worn by dozens of U.S. presidents, including Abraham Lincoln and Theodore Roosevelt, as well as tycoons ranging from the Astors to the Vanderbilts.
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It introduced the first button-down-collar shirt in 1896, an idea a grandson of the founder got from watching a polo match in England. He noticed that the players’ collars didn’t flap in the wind, because they were buttoned down. It popularized other looks such as the reverse-stripe “repp” tie, a take on Britain’s regimental neckwear, as well as Harris Tweed and the Shetland sweater.
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Robert Herbst, a 62-year-old lawyer, remembers his father taking him to buy a Brooks Brothers shirt, tie and blue blazer when he was about 7 years old. Later, when he joined the law firm White & Case LLP, he bought his first Brooks Brothers suit.
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“It was the uniform,” said Mr. Herbst, who lives in Larchmont, N.Y., and is now the general counsel of several small companies. “Brooks Brothers was a way of life,” he said. “It represented a traditional, old-line way of dressing.”
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Mr. Herbst said that although he has a closet full of Brooks Brothers suits he has been dressing more casually in recent years. “I used to wear suits five days a week, and that’s very rare now,” he said.
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Even as other retailers moved production overseas, Brooks Brothers continued to manufacture a small portion of its suits, ties and shirts in three U.S. factories—in Haverhill, Mass., Garland, N.C., and Long Island City, N.Y. The factories produce roughly 7% of its finished goods, mainly suits, ties and some shirts.
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As the move to dress more informally gained steam through the 1990s and 2000s, Brooks Brothers tried to adapt. In 2016, it introduced Golden Fleece, a line of casual clothes that included sweaters, jackets, sport shirts and slacks. But it faced competition from many upstarts. Today, tailored clothes account for about a fifth of its sales, with casual sportswear making up the rest, according to a spokeswoman.
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Brian Ouellette of Clyde Hill, Wash., bought his first Brooks Brothers suit when he entered the PaineWebber & Co. training program in 1995. “My attire today is much more casual,” said the 48-year-old, who started his own company in 2010 that coaches financial advisers. “I’ll wear French cuff shirts with shorts and loafers in the summer.”
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Brooks Brothers was acquired by the British retail chain Marks and Spencer GroupMAKSY 1.51% PLC in 1988. It was sold in 2001 to Retail Brand Alliance Inc., which was controlled by Mr. Del Vecchio, whose father founded Luxottica Group SpA, the Italian eyeglass maker. It changed its name to Brooks Brothers Group Inc. in 2011.
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Restoring Brooks Brothers has been a passion of Mr. Del Vecchio, who became enamored of the brand while growing up in Italy, according to a 2015 interview on the company’s website. Brooks Brothers was the first store he visited when he came to the U.S. at the age of 25. “As a frequent customer, I thought there were ways I could improve on quality,” Mr. Del Vecchio said in the interview.
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He upgraded the fabrics, overhauled the supply chain and introduced new lines, including Black Fleece, a collection created by avant-garde designer Thom Browne that was discontinued in 2015. He also pushed the company to expand internationally. In 2001, Brooks Brothers’ only international market was Japan. Today, it has a presence in more than 70 countries.
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Mr. Del Vecchio said he was unsure what he would do after Brooks Brothers is sold. “For now, I want to ensure a long life for this company.” he said.
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Ann Taylor Owner Ascena Prepares Bankruptcy to Cut Debt, Stores
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By: Eliza Ronalds-Hannon and Katherine Doherty July 7, 2020 Bloomberg News
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Ascena Retail Group Inc., the owner of mall brands that occupy almost 3,000 stores in the U.S., is preparing to file for bankruptcy and shutter at least 1,200 of those locations, according to people with knowledge of the plan.
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The company, which owns brands such as Ann Taylor and Lane Bryant, could enter Chapter 11 as soon as this week with a creditor agreement in place that eliminates around $700 million of its $1.1 billion debt load. Lenders including Eaton Vance Corp. would assume control of the company, said the people, who asked not to be identified discussing a private matter.
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Ascena has experienced years of financial losses amid a boom in online shopping and slowdown in foot traffic at malls. The bankruptcy filing would allow the company to keep some of its brands operating while it shutters or sells others, the people said. Catherines and Justice are among the chains it’s considering to close or sell, they said. The plan is not final and certain details could change.
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Mahwah, New Jersey-based Ascena didn’t provide a comment. The company is getting advice from restructuring lawyers at Kirkland & Ellis and investment bank Guggenheim Securities. A representative for Guggenheim declined to comment, while spokespeople for Kirkland and Eaton Vance didn’t immediately return messages seeking comment.
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Ascena shut its shops in mid-March as the coronavirus outbreak spread, and began to re-open locations in early May as state authorities lifted restrictions. Customer traffic is much lower than normal at the revived stores, the company said in an update on the impact from Covid-19 on its business.
Like other retailers, the company cited a slump in sales tied to the closures. The company’s earnings and cash flow have been “significantly reduced” despite efforts to preserve liquidity, Carrie Teffner, Ascena’s interim executive chair, said in the update.
Ascena previously failed to sell two of its chains amid the losses and signs that creditors were losing confidence in its prospects. In September management discussed divesting Catherines and Lane Bryant, which specialize in plus-size women’s apparel, Bloomberg reported.
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— With assistance by Lauren Coleman-Lochner
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WeWork Scrapping Baltimore Lease, Days After Ditching New York Deal, Shows Market Pressure
Co-working Firm Enters Agreement With Armada Hoffler to Terminate 69,000-Square-Foot Accord
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By Michael Cobb and Bryce Meyers July 7, 2020 CoStar Analytics
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The June completion of Wills Wharf brought yet another high-quality office building to Baltimore’s waterfront. However, the 12-story property in the growing Harbor Point development is now without its anchor tenant: WeWork.
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Armada Hoffler Properties, the owner of the Harbor Point development, said Tuesday it came to a mutual agreement with WeWork to terminate its 69,000-square-foot lease at 1201 Wills St. WeWork had been committed to Wills Wharf for upward of two years. In fact, its deal represented the largest new office lease signed in southeastern Baltimore in the past five years and would have marked WeWork’s first location in the market.
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But the coworking giant has been scaling back its expansion plans as the coronavirus pandemic has largely kept office workers home and in turn pummeled an industry with a communal workspace model that is at odds with the new era of social distancing. That has led WeWork to get out of several lease agreements of late.
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Just days ago, WeWork said it reached a deal to terminate its full-building lease with Columbia Property Trust at 149 Madison Ave. in New York. And in early June, the company canceled a lease in Germany that represented one of its largest lease agreements in Europe.
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The terminated leases are part of a larger strategy by WeWork to reassess its global real estate footprint after years of relentless expansion. The company grew rapidly using venture capital funding from groups including main investor SoftBank Group Corp., the Tokyo-based firm that spearheaded the round of funding that pushed WeWork's valuation to $47 billion — a record high for a real estate-focused startup.
The New York company quickly saw its valuation fall, however, after an ill-fated initial public offering last year revealed questionable business practices and a lack of a clear path forward to profitability. The company’s review of its global operations has only accelerated in recent months as efforts to contain the pandemic forced offices to close and raised new questions about the viability of coworking in general.
WeWork's new CEO, Sandeep Mathrani, said in May the company may exit or restructure about 20% of its global leases as it looks to rightsize its business and optimize its portfolio. WeWork declined to comment beyond a statement it issued.
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For Baltimore, the canceled WeWork deal means that the emergence of net-new office demand has once again evaded Charm City. This is a trend that has been well documented in recent years, particularly within city limits.
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Despite those woes, the Baltimore market’s office vacancy rate is still in good standing, at least when compared with its own historical norms. Yet, asking rents declined last year and have continued to do so year-to-date. Those declines are likely to be further exacerbated in the coming months and quarters as the pandemic affects businesses and corresponding office footprints.
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Prior to the termination announcement, the new Wills Wharf building had been about 55% leased to a tenant roster that also included Ernst & Young, Bright Horizons and digital marketing company Jellyfish Group. With the top two floors now back on the market, the 236,000-square-foot building is just over 25% leased.
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“With its prime waterfront location in Harbor Point, we are in active negotiations to lease the balance of the building, inclusive of the 69,000 square feet that WeWork was to occupy,” Louis Haddad, president and CEO of Virginia Beach, Virginia-based Armada Hoffler, said in a statement.
Armada Hoffler developed Wills Wharf as part of Harbor Point, a larger project in the Inner Harbor that includes more than 325,000 square feet of office, retail and a boutique-style Canopy by Hilton hotel. JLL’s team in downtown Baltimore handles leasing at Wills Wharf.
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Lender halts funding for Helmut Jahn-designed skyscraper on Michigan Avenue, putting project in doubt
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By Ryan Ari July 7, 2020 The Chicago Tribune
A Helmut Jahn-designed skyscraper along South Michigan Avenue is on hold at least until September and buyers of the luxury units are being offered some of their deposits back, after the project’s lender stopped funding its construction.
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The latest delay, resulting from economic concerns tied to the coronavirus pandemic, raises questions about the viability of the biggest condo project to break ground in Chicago in more than a decade.
At 74 stories and an expected cost of $470 million, the 1000M tower would be difficult to pull off even in the best of times.
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It would not be the first audacious project in Chicago to succumb to a case of bad economic timing. The most memorable is the 2,000-foot-tall, Santiago Calatrava-designed Chicago Spire, a project that fell apart after breaking ground and became a global cautionary tale about the fickleness of construction cycles.
Construction lender Goldman Sachs has put the 1000M project on hold until it can be reviewed after a 90-day period ending in September, providing more time to assess the impacts of COVID-19 on real estate demand, according to developers Time Equities, JK Equities and Oak Capitals.
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Goldman Sachs is “concerned about economic stability of the market at this particular time due to recent events,” Time Equities chairman and CEO Francis Greenburger said in an email Tuesday.
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In recent weeks the virus has rapidly spread in several states, causing concerns about long-term damage to the economy.
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The lender could agree to continue funding the project after the three-month wait, and the developer is exploring other ways to finance the project in the meantime, Greenburger said. He declined to say how much construction financing Goldman Sachs had agreed to provide.
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“We are hopeful that a solution will be found in the months ahead,” he said.
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The project, across from Grant Park, was the first prominent high-rise construction project in Chicago to shut down during the pandemic. The 1000M developers in June said foundation work stopped during the spring to prevent the spread of COVID-19.
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The lender covered the cost of the initial phase of the foundation but has not released additional funds, Greenburger said. “We remain hopeful that this graceful iconic structure will one day help define the skyline of Chicago,” he said.
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The 832-foot-tall tower designed by Jahn is the largest condo project in Chicago, by unit count, to begin construction since the last recession. There are contracts to buy 101 of 421 units, and buyers have made 10% down payments, Greenburger said.
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The developers recently informed buyers who had signed contracts that construction was being idled, giving them the option to take back half of their earnest money, Greenburger said.
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Many buyers declined to take back the 5%, and those who did would need to repay the 5% when construction resumes, he said
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During stay-at-home orders issued in March, construction was deemed an essential industry by Gov. J.B. Pritzker.
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The devastating impact on the economy and the need to take health precautions such as distancing, staggering work shifts and taking workers’ temperatures has made construction projects challenging. Still, many big projects have continued uninterrupted in recent months.
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One of the 1000M developers, New York-based JK Equities, took the rare step of starting work last month on a 42-unit luxury condo project on Chicago’s Near West Side.
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Large projects delayed by the pandemic include construction of the massive office space Uber leased in The Old Post Office redevelopment and the planned observatory at the Aon Center, which would include adding an exterior elevator tower and creating a thrill ride atop the city’s third-tallest skyscraper.
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Developers and construction contractors are closely watching to see how the pandemic will affect a more than decade-long construction boom, at a time when several megadevelopments are in advanced planning stages.
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If completed, 1000M would stand tallest in the iconic row of skyscrapers on South Michigan Avenue.
It also would be the tallest building designed by German architect Jahn in his adopted hometown. Jahn’s prominent Chicago designs include the James R. Thompson Center and the United Airlines terminal at O’Hare International Airport.
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1000M is already years in the making. The developers bought the site in the 1000 block of South Michigan Avenue for $17.2 million in 2016. That’s the year the city approved the project after Jahn altered the design, including chopping 200 feet from its height.
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It took years before enough units were pre-sold to begin construction.
The Tribune reported in October that 1000M was moving close to the starting line, and later that month the developers held a groundbreaking ceremony.
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At the time, Greenburger said the developers were close to finalizing an unspecific amount of financing from Goldman Sachs, with construction expected to take about three years.
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Twitter @Ryan_Ori
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Fannie, Freddie See Jump in Halted Payments on Senior Housing Loans
Government-Run Mortgage Companies Report Another $3 Billion in Multifamily Forbearances
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By: Mark Heschmeyer July 7, 2020 CoStar News
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Fannie Mae and Freddie Mac have reported reduced or suspended payments on another $3 billion in loans, a sign of intensifying distress in the U.S. multifamily industry related to the coronavirus pandemic.
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The two government-sponsored enterprises have now offered this forbearance on about $12.2 billion in loans. Fannie Mae added more than 40 loans to its total in June, while Freddie Mac added more than 175.
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Senior housing loans led the increase. The largest single loan in forbearance now is tied to a $1 billion portfolio of senior facilities owned by an affiliate of Blackstone Group, the New York-based private equity giant. Blackstone did not provide comment in response to a query from CoStar.
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Senior housing has been related to almost 40% of U.S. coronavirus deaths through the end of May, according to the Kaiser Family Foundation, a national nonprofit group focused on healthcare. Efforts by landlords and operators to minimize the introduction and spread of the coronavirus, including stopping in-person tours and limiting move-ins in an elderly population in which the coronavirus symptoms tend to be more severe, caused occupancies to decline, credit agency Fitch Ratings said last month.
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Fannie Mae has about $2 billion in loans tied to senior housing properties, representing 44% of the unpaid principal balance of its loans in forbearance. Of Freddie Mac’s $7.9 billion of forborne loans, 10.4% are backed by senior housing.
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“The COVID-19 pandemic continues to have a profound economic impact across the country,” Steve Guggenmos, vice president of research and modeling at Freddie Mac, said in a statement. “At present, all states are in some stage of reopening. Nevertheless, unemployment claims remain high and there is much uncertainty about an economic recovery and — for many tenants and borrowers — concerns around how to make their next rent or loan payment.”
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Freddie Mac reported 1,189 forborne loans, roughly 5% of all its mortgages that have been securitized for investors. This equates to about $7.9 billion of its unpaid balance. The average loan balance was about $6.6 million.
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A high percentage of Freddie Mac’s forborne loans have small balances, at 75% by loan count, but 30% by unpaid loan balance.
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Freddie Mac has a program that offers multifamily loans from $1 million to $7.5 million for properties with as few as five units. At smaller apartment complexes, a single tenant experiencing financial stress can have a significant impact on landlords, which explains why so many have requested forbearances, according to Guggenmos.
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Fannie Mae reported 273 loans in forbearance totaling about $4.3 billion, or roughly 1.2% of its securitized loan balance. The average loan in forbearance equaled about $15.6 million.
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The Blackstone loan was the largest added to the forbearance list by either mortgage company last month. Fannie Mae granted forbearance on a $536 million loan backed by 60 Brookdale Senior Living facilities totaling about 5,540 units. Blackstone and Brookdale acquired the facilities in a joint venture in March 2017. The loan is in forbearance until the end of August.
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Blackstone fully intends to meet its interest obligations on the loan, a person familiar with the forebearance told CoStar. Senior housing makes up less than 1% of Blackstone's global real estate holdings.
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Beginning in April, Fannie Mae and Freddie Mac started granting forbearance relief to qualifying multifamily borrowers to defer up to three months of mortgage payments. Those agreements are now coming to an end, even though the national number of coronavirus cases continues to increase. Last week, the federal government agreed to give borrowers the option to extend forbearances another three months.
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Apartment Industry Advocates Lobby for New Stimulus Legislation as Senate Goes on Recess
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“We are tremendously concerned what happens if those systems are not renewed,” says one insider about expanded unemployment benefits.
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Bendix Anderson Jul 06, 2020 National Real Estate Investor
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The clock is ticking in Washington D.C. In a few weeks, a federal emergency program will stop distributing extra funds to people who lost jobs in the crisis caused by the novel coronavirus. That could cause a huge number of renters to fall behind on their rents and eventually lose their homes.
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“There is a threat of a massive wave of evictions,” says David Dworkin, president and CEO of the National Housing Conference, a Washington, D.C.-based non-profit focused on ensuring safe and affordable housing for all Americans. “I am hoping that the impetus for Congress to take action is not when sheriff’s deputies on a large scale start dumping people’s personal effect and children’s toys onto the sidewalk. I don't think it takes a lot of social media to provoke a reaction to that.”
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Millions of renters lost jobs in the economic crisis caused by the global pandemic. So far, they have largely been able to pay their rent on time, thanks to a web of government stimulus programs. The largest is now timed to expire at the end of July. Yet while the U.S. House of Representatives has passed the Health and Economic Recovery Omnibus Solutions (HEROES) Act some time ago to offer Americans a new round of stimulus money, the Senate has just gone on a two-week July 4th recess without passing a bill of its own.
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For the time being, many property managers have been forbidden from evicting tenants from rental housing in many parts of the U.S. by a patchwork of local laws and federal regulations that are also expiring and, in some municipalities, face lawsuits.
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Housing advocates get through to lawmakers
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It’s not the first time Congress has waited to act on an important program. “No one is surprised that we are not going to have this done [by the beginning of July],” says Paula Cino, vice president of construction, development and land use policy for the National Multifamily Housing Council (NMHC), a non-profit advocacy group for the apartment industry. However, the delay is still nerve-wracking. “We don’t see any certain timelines.”
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Advocates like Dworkin and Cino have been in close contact with legislators and their staffs, despite the crisis caused by the spread of the coronavirus. “Nobody is on the Hill having in-person meetings anymore,” says Cino. “It’s all conference calls and Zoom calls.”
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Because of the crisis, advocates can no longer catch the attention of Washington players in the halls of Congress and the offices nearby. However, they can often schedule more substantive conversations.
“Everyone is working from home and they are dying for human contact,” says Dworkin. “If you have something worth talking about, it is easier to get a meeting with a member of Congress.”
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The expiration of programs like enhanced unemployment benefits for out-of-work Americans at the end of July has also added urgency to these discussions. “We are already seeing an increased interest in discussion of this issue among Republican staff in some member’s offices,” Dworkin notes.
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The U.S. House of Representatives also recently passed a proposal focused just on housing issues, which would postpone evictions and foreclosures for struggling renters and homeowners for a year. The new bill repeats parts of the much larger, $3 trillion HEROES Act that has largely been ignored by the Republican-led Senate since the House passed it in May.
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The smaller, new Emergency Housing Protections and Relief Act of 2020 includes many provisions supported by advocates for both renters and property managers—such as $100 billion in emergency rental assistance. “That’s critical—it gets dollars into renters’ hands to keep them from ever missing a rental payment,” says NMHC’s Cino.
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The House bill also includes a national, uniform moratorium on evictions for all renters, which is more controversial.
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“Rental housing providers cannot alone bear the burden,” says Greg Brown, senior vice president of government affairs for the National Apartment Association, a non-profit trade group for apartment building owners and suppliers. "These policies will inhibit the ability of property owners to manage their communities by interrupting the cash flow necessary to maintain effective operations."
Most renters are still paying
The vast majority of apartment tenants are still writing rent checks for now. By June 20, more than nine out of 10 apartment renter households (92.2 percent) had made a full or partial payment for the month, according to a survey by NMHC, which gathered data on 11.4 million professionally-managed apartments from five leading property management software systems.
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That’s more than a quarter of the 43 million rental apartments in the United States.
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Millions of Americans have filed new claims for unemployment benefits every week since the COVID-19 crisis began in March. Many have been able to keep paying rent because of trillions of dollars of benefit programs created by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) in the first weeks of the crisis. That includes direct payments of $1,200 per taxpayer and expanded unemployment benefits that provide recipients an extra $600 per week.
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“We are tremendously concerned what happens if those systems are not renewed,” says Cino.
Of these existing programs, expanded unemployment benefits may have helped renters the most. But they have also created the most controversy with legislators. “There are those that believe that it leads to unintended consequences,” says Cino. “It is absolutely one of the top issues and concerns for Senate Republicans.”
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Advocates hope that deadlines coming up will motivate Congress to act. “I am very concerned that things are not moving,” says Dworkin. “However, last minute solutions are what Congress does best.”
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The Economics (and Nostalgia) of Dead Malls - By Nelson D. Schwartz New York Times (2015)
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https://www.nytimes.com/2015/01/04/business/the-economics-and-nostalgia-of-dead-malls.html

With Department Stores Disappearing, Malls Could Be Next
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Brick-and-mortar retail was in the midst of seismic changes even before the pandemic. Analysts say as much as a quarter of America’s malls may close in the next five years.
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By: Sapna Maheshwari July 5, 2020 New York Times
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The directory map for the Northfield Square Mall in Bourbonnais, Ill., has three glaring spaces where large department stores once stood. Soon there will be a fourth vacancy, now that J.C. Penney is liquidating stores after filing for bankruptcy.
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With so much empty space and brick-and-mortar retail in the midst of seismic changes even before the pandemic hit, the mall’s owners have been talking with local officials about identifying a “higher and better use for the site,” though they have declined to elaborate on what that could be.
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“Filling in one anchor space, generally, is doable,” said Elliot Nassim, president of Mason Asset Management, which co-owns the Northfield Square Mall and dozens of other enclosed shopping centers. “But once you get hit by two others and you’re dealing with three anchor closures, that’s usually where we become a little more likely to put it into the bucket of a redevelopment.”
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The standard American mall — with its vast parking lots, escalators and air conditioning, and an atmosphere heavy on perfume samples and the scent of Mrs. Fields cookies — was built around department stores. But the pandemic has been devastating for the retail industry and many of those stores are disappearing at a rapid clip. Some chains are unable to pay rent and prominent department store chains including Neiman Marcus, as well as J.C. Penney, have filed for bankruptcy protection. As they close stores, it could cause other tenants to abandon malls at the same time as large specialty chains like Victoria’s Secret are shrinking.
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Malls were already facing pressure from online shopping, but analysts now say that hundreds are at risk of closing in the next five years. That has the potential to reshape the suburbs, with many communities already debating whether abandoned malls can be turned into local markets or office space, even affordable housing.
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“More companies have gone bankrupt than any of us have ever expected, and I do believe that will accelerate as we move through 2020, unfortunately,” said Deborah Weinswig, founder of Coresight Research, an advisory and research firm that specializes in retail and technology. “And then those who haven’t gone bankrupt are using this as an opportunity to clean up their real estate.”
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Ms. Weinswig said the malls that are able to withstand the current turmoil will be healthier — better tenants, more inviting and occupied — but she anticipated that about 25 percent of the country’s nearly 1,200 malls were in danger.
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Most retailers that have filed for bankruptcy are closing stores but plan to continue operating.
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Department stores account for about 30 percent of the mall square footage in the United States, with 10 percent of that coming from Sears (which filed for bankruptcy in 2018) and J.C. Penney, according to Green Street Advisors, a real estate research firm. J.C. Penney, which declined to comment, has said store closings will start this summer and could eventually number as many as 250. Green Street forecast in April that more than half of all mall-based department stores would close by the end of 2021.
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That will have significant effects beyond reduced customer foot traffic. Many small mall retailers have clauses in their leases — so-called co-tenancy clauses — that allow them to pay reduced rent or even break the lease if two or more anchor stores leave a location.
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“At a lot of lower-quality malls, where maybe there already is a vacant anchor, where you’ve got the Sears box that closed two years ago and not yet filled it, and now your J.C. Penney box is closed — that is going to cause that mall to likely lose a lot of tenants and possibly even lose its competitive positioning very quickly,” said Vince Tibone, a retail analyst at Green Street.
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Mr. Tibone said he was pessimistic about the ability of most malls to fill vacant spaces, especially during the pandemic. Entertainment options like Dave & Buster’s are off the table, for instance.
“The reality is there are going to be dark boxes for some time,” he said.
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And then there are customers, who already shop online in huge numbers and may not be all that eager to return to enclosed emporiums where they will be surrounded by other people.
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“If there’s a perception out there that people are safer outside and less safe inside, that’s not great,” said Matthew W. Lazenby, chief executive of Whitman Family Development, which manages the luxury open-air Bal Harbour Shops outside Miami.
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Even before the pandemic, American shopping malls were seeing their fortunes diverge. While malls in affluent areas with high-end stores and restaurants generally thrived, lower-tier malls, particularly those with competitors nearby, suffered over the years as retailers winnowed their physical stores and filed for bankruptcy. Macy’s, which also owns Bloomingdale’s, said in February that it would close 125 stores in “lower-tier malls” during the next three years, and Nordstrom just recently said it would close 16 of its 116 full-line department stores. While Neiman Marcus, which filed for bankruptcy in May, said it plans to reopen all its stores, landlords are watching warily.
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Mr. Lazenby said that his mall was in a good position, but it, too, has been dealing with the decline of department stores. Barneys New York, which finished liquidating this year, was meant to anchor an expansion, and the mall also has a Neiman Marcus.
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Brad Schlossman, chief executive of West Acres Development, where he oversees the popular West Acres mall in Fargo, N.D., which was founded by his father, said Sears was the mall’s first tenant and it had a lease that, including renewal options, had a 45-year-term that ran out in 2017.
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Since Sears exited, the mall has been trying to redevelop the space, installing a Best Buy and trying to attract restaurants, though those plans may be put on hold depending on which tenants are able to pay rent in the near future.
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Mr. Schlossman is optimistic about West Acres, partly because it is the only major mall in an area where the weather favors enclosed spaces. But he anticipates greater struggles in places where there are clusters of malls. “We are it in our community, so we don’t have that same either cannibalization or struggle to attract tenants because we’re competing against another mall,” he said.
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As of June, 84 percent of the country’s 1,174 malls were considered healthy, reporting vacancy rates of 10 percent or less, according to the CoStar Group, a data provider for the real estate industry.
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But that compares with 94 percent in 2006. And the percentage of healthy malls is expected to drop further as retailers carry out store closings announced this year, accounting for more than 83 million square feet of retail space. A significant percentage of that comes from apparel stores, which represent about 60 percent of occupied mall space.
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Major mall operators have started to signal concern. The Simon Property Group, the biggest mall operator in the United States, is trying to terminate its $3.6 billion deal to acquire Taubman Centers, which owns and operates about two dozen high-end shopping centers.
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In court filings last month, Simon Property said that Taubman’s malls were mostly enclosed, and that indoor malls “are the last types of retail real estate properties that most consumers will want to visit on a long-term basis after Covid-19.” (Simon Property also owns many enclosed malls.) While Taubman has promoted its wealthy, educated shoppers as an asset, Simon Property said that those consumers, in particular, are now “far more able and likely to use online shopping.” The sides have been ordered to enter mediation but if an agreement isn’t reached by the end of the month, they will go to trial.
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CBL & Associates Properties, which owns and operates roughly 60 malls, outlet stores and open-air shopping centers in the United States, said in filings last month that it was skipping about $30 million in interest payments due in June “to advance discussions with its lenders and explore alternative strategies,” and that there was “substantial doubt” it would continue to operate as a going concern.
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Jim Hull, the owner and managing principal of the Hull Property Group in Augusta, Ga., which oversees 30 enclosed malls, expressed frustration about the exit of big national chains from “smaller or tertiary markets.” The result, he said, is that “the majority of people living in the smaller markets will either have to buy from the internet or have to drive 45 miles,” he said.
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Already this year, Victoria’s Secret said it would close 250 stores in North America, while the Gap brand is closing at least 170 stores globally. Financial troubles are plaguing mall chain companies like Ascena Retail, which owns Ann Taylor and Loft, and the owner of New York & Company. And bankruptcies since early 2019 have included mall staples like Forever 21, Things Remembered, Payless ShoeSource and GNC. Lucky Brand Dungarees filed for bankruptcy on Friday.
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Mr. Hull said that he anticipated making malls more “community-based” in smaller markets, with local and regional businesses. “It’s going to be cooking classes, boutiques, internet businesses that want a physical presence, health care, food choices,” he said.
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In Cupertino, Calif., where Apple has its headquarters, the fate of the shuttered Vallco Shopping Mall has become a contentious issue, with impassioned public debates around replacing it with affordable housing, new entertainment and retail options or office space.
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In the meantime, it is a partially demolished eyesore, according to Rod Sinks, a member of the Cupertino City Council. “We have a chain-link fence around the whole thing,” he said.
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In Los Angeles, the former Westside Pavilion mall, once featured in the movie “Clueless” and Tom Petty’s “Free Fallin’” music video, is turning into office space for Google. Terri Tippit, the 74-year-old chairwoman of the local Westside neighborhood council, lamented the loss of the space and said it “reflected the way our society is changing and going.”
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Still, some investors have bought midtier malls in recent years and have already been working on how to repurpose and change spaces — even “de-malling” malls, by flipping store entrances so that they face the street.
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“We didn’t buy malls since 2014 thinking that J.C. Penney or Sears or Bon-Ton were going to be in business forever and operate department stores, and if you were, then shame on you,” said Ami Ziff, director of national retail at Time Equities, a real estate firm whose investments include eight enclosed malls. “Is there going to be more distress, vacancy and bankruptcy? Yes. Hopefully, you know what you’re doing so you can pick up the pieces to refill that space.”
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https://www.nytimes.com/2020/07/05/business/coronavirus-malls-department-stores-bankruptcy.html
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By the Numbers...
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U.S. Job-Growth Optimism Tempered by Stall in States’ Reopenings
By: Reade Pickert July 2, 2020 Bloomberg News
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The U.S. labor market made greater progress than expected last month digging out of a deep hole, yet optimism over the rebound was tempered by stubbornly high layoffs and a resurgent coronavirus outbreak across the country.
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Thursday’s simultaneous release of the monthly employment report and the weekly jobless claims data offered diverging snapshots of the economy: One reflecting a flurry of rehiring -- particularly at restaurants and retailers -- as state economies reopened. The other reflecting a jump in new virus cases, which has led many of those same states to halt or even walk back reopening plans.
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While President Donald Trump said the jobs figures proved the economy is “roaring back,” the pace of recovery may slow or even stall if employers grow cautious and delay rehiring workers -- in fact, some have already been laid off a second time.
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Paired with the coming expiration of the federal government’s extra $600 in weekly unemployment benefits, the economy could take another hit in the months ahead. Even a decade from now, the jobless rate will still be above pre-pandemic levels, according to Congressional Budget Office projections released Thursday.
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“No one should be expecting we’re on a straight trajectory higher,” said Jennifer Lee, senior economist at BMO Capital Markets. Initial jobless claims are the “worrying part” of Thursday’s figures, and “it’s going to be a few steps forward and a couple steps back,” she said.
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Payrolls rose by a more-than-expected 4.8 million in June after an upwardly revised 2.7 million gain in the prior month, according to Labor Department figures. The data, which offer a snapshot of mid-month conditions, also showed the unemployment rate fell for a second month to 11.1%. That was a bigger decline than anticipated, but the rate still remains far above the pre-pandemic half-century low of 3.5%.
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Meanwhile, a separate weekly report showed initial applications for unemployment benefits in state programs remained extremely elevated last week, falling by less than expected to 1.43 million new applications. Continuing claims -- or claims for ongoing unemployment benefits in state programs -- rose slightly to 19.3 million in the week ended June 20.
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U.S. stocks rose following the data, though they pared gains on speculation that a second wave of coronavirus cases could jeopardize an economic rebound.
What Bloomberg’s Economists Say
“The upward surprise in the June jobs report demonstrates that economic fundamentals remain strong enough to facilitate a relatively robust recovery once Covid-19 is under control. However, in the near term, the positive signal somewhat fades given the recent sharp acceleration in new virus cases and the looming income cliff stemming from the expiration of augmented unemployment benefits this month.”
-- Yelena Shulyatyeva, Andrew Husby and Eliza Winger --
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The Labor Department’s Bureau of Labor Statistics has largely fixed a problem that resulted in respondents being misclassified as employed when they should have been labeled as unemployed. Adjusted for the errors, the June unemployment rate would have been about 1 percentage point higher than reported -- or 12.3%, compared with an adjusted 16.4% in May. “The degree of misclassification declined considerably in June,” BLS said.
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The increase in payrolls was led by leisure and hospitality and retail, illustrating the effect of the easing of business restrictions. Health care also saw increases as doctors’ and dentists’ offices reopened.
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It’s a “little more disconcerting that we’re not seeing broad-based gains across industries,” BMO’s Lee said.
Also, state government payrolls fell by another 25,000 -- the fourth straight decline -- as budget situations grew more dire amid falling tax revenues.
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Beneath the headline numbers are even bigger underlying trends. About 17.8 million Americans remain unemployed, down from 23.1 million in April, indicating that only about a third of the jobs lost during the pandemic have been recovered.
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Another is massive churn: About 12.4 million people were newly employed in June -- about double the pre-pandemic pace -- according to BLS figures compiled by Bloomberg, while the rate of people moving from employed to unemployed was also double last year’s average rate.
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White House economic adviser Larry Kudlow, speaking on Bloomberg Television, said the report was “spectacular” and many more people temporarily laid off will return to work.
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Trump’s Democratic opponent, Joe Biden, said on a livestream Thursday that the positive jobs report doesn’t compensate for the scale of the health crisis. “There is no victory to be celebrated,” he said. “We’re still down nearly 15 million jobs, and the pandemic is getting worse, not better.”
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Key Numbers
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Unemployment among minorities and women remained worse than among White Americans and men. The Black unemployment rate fell to 15.4% from 16.8%, while it declined to 10.1% from 12.4% among White Americans. Hispanic unemployment dropped to 14.5% from 17.6%.
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Meanwhile, the household survey showed more than 2.8 million Americans permanently lost their job in June, a 588,000 increase from a month earlier that was the biggest since the start of 2009. While the total number is the highest in six years, the figure bears watching for more systemic damage to the labor market caused by the pandemic.
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“The first thing I looked at was number of people permanently laid offand that continues to climb, and I think that’s some cause of concern,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics. “Even when this pandemic’s over those people are going to need to find work.”
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I really comment on the articles in the feed. I believe that they should stand on their own merit. But the information over the last several days has been less than inspiring. When the Federal Reserve pointedly is telling the government what it needs to do, it is a case of the tail wagging the dog - but not in a good way. The Europeans have abandoned us, we are lumped in the same category as Brazil and Russia and the pandemic appears have no end in sight. There is no doubt from a real estate point of view, these are troubling omens.
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Fed officials raised concerns in June that U.S. could enter a much worse recession later this year if coronavirus cases continued to surge
The scenario, which officials described as plausible, was revealed in minutes of their June meeting before the surge in cases escalated
By: Rachel Siegel July 1, 2020 The Washington Post
Federal Reserve officials raised concerns about additional waves of coronavirus infections disrupting an economic recovery and triggering a new spike in unemployment and a worse economic downturn, according to minutes released Wednesday by the central bank about its June 9-10 meeting.
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Fed Chair Jerome H. Powell has repeatedly said that the path out of this recession, which began in February, will depend on containing the virus and giving Americans the confidence to resume normal working and spending habits. But the notes from the two-day meeting reveal how interconnected Fed officials view a prolonged economic recession and the pandemic’s continued spread — and why Powell often asserts that lawmakers will need to do more to carry millions of Americans out of this crisis.
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“In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast,” the minutes read. “In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.”
On June 10, when this Fed meeting concluded, there were 20,456 new coronavirus cases in the United States that day, according to a Washington Post analysis. The situation has deteriorated markedly since then, and 44,474 new cases were reported Tuesday. Anthony S. Fauci, the government’s top infectious-disease specialist, warned this week that the country could soon face 100,000 new coronavirus cases a day “if this does not turn around.”
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Notably, the Fed’s discussion about these concerns came before the big surge in coronavirus cases in the past two weeks. The latest surge has forced California, Florida and Texas to reimpose restrictions on restaurants and bars, and nine other states have postponed or scaled back reopening plans. The reversal means that many Americans — including hourly and low-wage service employees — have been kicked out of the workplace for a second time.
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That grim reality is colliding with what experts have dubbed a “fiscal cliff,” when the $600-per-week increase in unemployment benefits expires at the end of this month. Congress is facing multiple decisions about how or whether to extend government aid this summer. Powell has often said that more congressional action is likely to be needed to provide direct relief to struggling households and businesses.
Powell and other Fed officials stop short of outlining exactly what they think lawmakers should do in a new stimulus package or other legislation. But the meeting minutes underscore what the central bank’s leaders have said in public, which is that the Fed’s tools can do only so much.
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The Fed has propped up many emergency programs to support the markets and extend loans to municipalities and small and midsize businesses. But the central bank only has authority to lend — not spend. Testifying before the House Financial Services Committee on Tuesday, Powell said that for many companies and industries desperate for help, “more debt may not be the answer here."
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Among the risks noted by Fed officials at the June meeting: “Fiscal support for households, businesses, and state and local governments might prove to be insufficient.”
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Still, those concerns are much different from the forecast the White House has offered, as President Trump has predicted a sharp increase in economic growth. This week, senior White House economist Larry Kudlow said that the “overwhelming” evidence pointed to a V-shaped recovery.
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Powell has hesitated to say precisely what type of bounce back — including a V, U or W-shaped recovery — the country could face, and he emphasizes that the situation remains extraordinarily uncertain.
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But the Fed has taken steps to incorporate a range of possibilities, including more dire ones, into its emergency response. Last week, the Fed released new data on how the country’s largest banks would fare under those three scenarios and concluded that if there is a slower, U-shaped recovery or a W-shaped scenario, several financial firms “would approach minimum capital levels.”
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Others within the central bank have been more direct. In an interview with The Post on Wednesday, Mary C. Daly, president of the San Francisco Federal Reserve Bank, said she “would hesitate to call this a recovery” and specifically said the country was not in a V-shaped rebound.
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The Fed’s June meeting took place just weeks after George Floyd, a black man in Minneapolis, died in police custody, spurring nationwide protests against racism and American policing. With the protests came a broader reckoning over racial inequalities that permeate the American economy, especially for communities of color, which are most vulnerable to the current recession.
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Powell has frequently been asked whether the Fed should specifically consider the black unemployment rate, or whether the central bank’s programs widen economic disparities rather than repair them. His frequent response is that the Fed’s emergency programs are meant to protect American jobs and that if unemployment can return to its historically low, pre-pandemic levels, minority workers will especially benefit.
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“Injustice, prejudice, and the callous disregard for life had led to social unrest and a sense of despair,” the Fed minutes said.
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Source: National Association of Convenience Stores
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Weak Demand for Ventas, Healthpeak Senior Housing Bodes Poorly for the Industry
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Hundreds of communities halted admissions during the pandemic, leading to lost revenue as pandemic-related costs have soared
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By: Peter Grant June 30, 2020 The Wall Street Journal
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The reopening of admissions at senior housing communities owned by companies like Ventas Inc. and Healthpeak Properties Inc. is slowing but failing to end the downward slide in occupancy rates, the latest sign that the hard-hit industry faces a long slog to recovery.
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Hundreds of senior housing communities halted admissions during the pandemic to protect residents against a virus that is particularly deadly to the elderly and those with health problems. That has meant lost revenue at a time when pandemic-related costs have soared.
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Now, as a shaky reopening proceeds in parts of the U.S., many of these communities have started admitting new seniors. But the reopening of admissions hasn’t led to a surge in move-ins and rising occupancy resulting from pent-up demand that some companies have expected.
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About 53% of operators with assisted living units reported that occupancy was continuing to decline in the week that ended June 8 from the same period in the prior month, according to a closely watched Covid-19-related weekly survey of 150 operators conducted by the National Investment Center for Seniors Housing & Care. That is an improvement from the week that ended May 10, when 70% of the operators reported occupancy declines.
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Tepid Demand
More operators of assisted-living units reported move-ins declined from a month earlier than reported increases.
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Many of the operators also continue to report that move-ins are down from one month ago, although this statistic also is starting to improve, according to the survey.
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Many seniors and their families are still concerned that they may face a higher chance of catching Covid-19 at a senior community than living by themselves or with family members. Some also are reluctant to move to senior housing because many communities are still restricting visitor access even if they are allowing new admissions.
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Ventas, one of the country’s largest senior housing owners, said in mid-May that about 30% of its communities were still closed to new admissions. Earlier this month the company said that move-ins were improving and that many of its communities were planning to open “to a more robust resident experience” in early July.
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The communities that are in advanced stages of reopening have “a lifestyle that looks and feels much more like it did before the Covid crisis,” said J. Justin Hutchens, Ventas executive vice president, at an investor presentation earlier this month.
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Like other senior housing companies, Ventas-owned properties have adopted strict protocols for new admissions. New residents must have two negative Covid-19 tests before being admitted and many have to stay in quarantine for two weeks before mixing with other residents.
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With admissions restarting, move-ins have risen at Ventas communities. But occupancy at a 395-community portfolio of Ventas properties fell 0.70 percentage points in the first two weeks of June.
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That is an improvement from the 1.5 percentage points it fell in the last two weeks in April. But occupancy now stands at 80.7%, compared with 85.5% in the first week of April.
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Ventas in June cut its quarterly dividend to 45 cents a share, a decrease of 43% from the first quarter.
Meanwhile, Healthpeak Properties, another large senior housing owner, said in an investor presentation that, as of the end of May, 78% of its communities were accepting move-ins, versus 45% as of late April.
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The occupancy of Healthpeak’s senior housing operating portfolio fell 1.9 percentage points between April 30 and May 31, to 79.5%, the company said. It was an average of 85.7% for the first quarter of 2020.
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The higher expenses and reduced revenues hitting operators are compounding financial headaches that many were facing before the pandemic due to oversupply and a growing aging-in-place trend.
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Michael Carroll, an analyst at RBC Capital Markets, said that conditions facing the industry were improving but he predicted that occupancy declines would likely continue at a “modest” level in the near term. “The virus is so unpredictable, there’s not a lot of ability to have confidence on what will happen in the next several months,” he said.
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Shopping Center Rents Could Tumble as Retailers Exit
Key Occupancy Data Hits 11-Year Low, Indicating More Retail Vacancies May Be Ahead
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By Jennifer Waters June 30, 2020 CoStar News
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There's been a lot of talk in the retail industry in the past decade about the balance between store occupancy and vacancy rates weighing favorably for property owners, boosting rents and profitability.
But that’s changing.
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The initial three months of 2020 marked the first time in 11 years that retail property has had negative net absorption, or more tenant space going empty than filling up. The change in the total amount of square feet occupied from one quarter to the next dipped into negative territory.
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As the second quarter closes out, that downward angle is steepening, according to CoStar Market Analytics, which is projecting net absorption could be on a slippery slope through the start of the third quarter in 2021, plunging to its deepest level at the end of this year before starting to ease up.
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While the coronavirus pandemic required all but the most essential retailers to turn the lights off for nearly three months, a seismic transformation that already was underway in the industry fast-forwarded from roughly a 10-year span to five years or even less time.
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Retailers are immediately whittling down their footprints. Bankruptcies are soaring. Others are just giving up completely.
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Cumulatively, that’s a harbinger of what could be steeply rising vacancies, falling lease rates and property values. None of that has happened. Yet.
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“It’s likely to,” said Brandon Svec, director and market economist in CoStar's Chicago office. “This is a forced rightsizing of the industry.”
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For landlords, it represents a big red flag as they brace for dark storefronts of every size and shape while even the healthiest of tenants see their revenues ravaged. Those retailers waning ahead of the pandemic have already either disappeared, such as Pier 1 Imports, or are thinning their store ranks, such as J.C. Penney and Macy’s.
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More tenants moving out than in is expected to put even more pressure on owners who were looking to fill big holes before COVID-19. On top of that, there’s uncertainty about whether experiential features such as fitness centers and food halls will still be people magnets a year from now.
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“This is a little ripple before the tidal wave of what we’re actually going to see,” Svec said.
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CoStar is forecasting about 100 million square feet of negative net absorption between all of 2020 and the first half of 2021. The fourth quarter alone is projected to total slightly more than the three previous quarters combined as the physical process of closing stores accelerates. New retail space is expected to spike by 24 million square feet in the third quarter right before a 40 million-square-foot plunge in absorption in the fourth quarter, according to CoStar data.
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Key Industry Indicator
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Net absorption reflects supply and demand and is a good measure of the muscle of any sector of the commercial real estate industry. When it’s positive, it means demand for space is elevated, occupancy rates are healthy and rents are competitive. When it reverses course, vacancy rates creep ahead and effective rental rates tend to sink.
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Data tends to lag because net absorption is gauged by the physical occupancy at properties. If a retailer says it’s going to close 100 stores by 2021, the net absorption rate doesn’t actually change until each store is vacated and then left empty.
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At the same time, if that retailer were to clean a store out on a Friday and a new big-box tenant were to set up shop Monday — something akin to a logistical magic trick in this environment — the net absorption rate would stay static.
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It falls into the minus column when there’s no one to take that vacant space, something expected to be commonplace as the pandemic wears on and leasing activity slows. Landlords are finding out weekly which stores are likely to close, but it may not actually impact absorption levels until liquidation sales are completed and the keys are handed back.
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When all is said and done, the retail landscape will look dramatically different, and the cost of leasing space could drop considerably.
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In a worst-case scenario, real estate firm JLL is projecting retail rents will slump some 7.1% on an overall basis. That’s in the event of an ongoing pandemic with a more severe impact and store closings ahead. In a more moderate setting, rents are expected to fall 5.5%. But if consumer confidence and retail sales rebound faster, that so-called V-shaped recovery, rents might drop back only 2.1%.
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That’s a bad-news scenario on any level, but it’s not an across-the-board issue because some segments and markets will be better at squaring net absorption than others, said James Cook, director of retail research for the Americas at JLL.
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“It’s going to depend on what market you’re in and depend on what retail property type we’re talking about,” Cook said.
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Transformation Speeds Up
Indeed, the acceleration of the retail transformation is fast at work: Some segments, such as indoor shopping centers and malls that are department- and chain-store heavy, are expected to get hit hardest, while open-air lifestyle settings with grocers as anchors and discount centers should be relatively spared.
“The markets where it will be especially tough in the near term are those that are tourism focused, that depend on travelers for revenue,” Cook said. It is expected that domestic travel will pick up more quickly than international travel, especially after the European Union’s ban on all travelers from the United States.
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“Markets like Las Vegas and Orlando, Florida, that rely on domestic and international travelers will be slow to return,” Cook said.
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Big urban markets could bounce back sooner, according to Anjee Solanki, national director of retail services at Colliers International.
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“The deal flow is very active in New York, for example,” she said. “I would have thought that it would be slow, considering how big it is and the COVID there, but there’s a lot of positive push from chains and national brands that have actually been performing quite well during the COVID outbreak.”
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By her reckoning, that’s the silver lining of more tenant space going vacant than filling up for those who were priced out of markets such as New York, Los Angeles and Chicago, for example. That's even the case in smaller emerging markets such as Austin, Texas, or Raleigh, North Carolina, before the pandemic.
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“They have the ability to get onto certain streets and certain locations that are now more open,” she said of tenants.
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For would-be leaseholders, it’s a blessing they’re looking to get. An East Coast health food restaurant entrepreneur, who didn’t want to be identified because he’s negotiating deals, started a small chain of quick-serve stores in 2015 and hopes to expand into at least two more this year.
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“Before the pandemic, you didn’t have to convince people to come to your restaurant and eat, you just had to be a good restaurant,” he said. As economies across the country are reviving, he’s reopening his sites and putting the legwork in again to find new locations.
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“Of the deals we’ve already looked at, we’re not being cut a deal on rent but getting cut a deal on tenant improvements,” he said. “At the end of the day, it’s just a math equation, and it’s working really well for us now.”
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That could change, according to JLL’s Cook, but it’s too early to see it. “All the asking rents are the same they were before COVID-19,” he said. “Sure, the effective rents are probably being negotiated lower, but we don’t have a ton of visibility on that yet.
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“One thing’s for sure, rents are certainly not going up,” he said.
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June commercial rent collections mirror previous quarter day at four-day mark
By Jessica Newman Tuesday 30 June 2020 Property Week - UK
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The commercial property management platform reported that the UK average of total rent collection had risen from 18.2% - the amount recorded on 24 June. The updated 38% average on 28 June is the same as that recorded at the four-day mark after the March quarter rent day.
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On the March quarter day, 25.3% of commercial rent was received in the first 24 hours, rising to 67% 60 days after the deadline.
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London has increased its collection the most out of the UK regions compared with the previous quarter day. Rent collected in the capital was up 3% on the amount collected four days after the March deadline, although the total collected in London remains below the overall UK average at 36%.
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Re-Leased’s analysis revealed that the West Midlands was the strongest performing region, receiving 41% of rents due by 28 June. This is up 1% on its March quarter day performance and 3% higher than the current UK average.
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Meanwhile, the North West is performing at 8% lower than the UK average with 30% collected, 1% lower than the amount collected four days after the March quarter day.
Re-Leased’s analysis is based on rent collection from 10,000 commercial properties and 35,000 leases on its UK platform.
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Re-Leased chief executive Tom Wallace said: “It’s promising to see that London’s rent collection curve is trending upwards compared to the same day in the March quarter. This is a sign of the capital’s resilience and our latest data should provide some reassurance to landlords with diverse portfolios that include assets in London.”
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“As the first week of the quarter has progressed, there are new positive signals for the UK-wide picture. By day 4, June is tracking like-for-like with March, with 38% of rent due paid. This demonstrates that since the due date on 24th June, the rate of collection has improved.”
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AMC Theaters Pushes Back
Re-openings to July 30
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Chains Revise Plans Based on Delays for Major Movie Studio Releases
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By Lou Hirsh June 29, 2020 CoStar News
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Struggling AMC Theatres, the nation's largest movie theater chain and a key traffic generator at retail centers, has pushed back the opening of its U.S. cinemas by two weeks to July 30 after studios, including Walt Disney Co. and Warner Bros., delayed openings of highly anticipated new releases that AMC is counting on to remain financially viable.
AMC Theatres, based in Leawood, Kansas, said it now plans to reopen about 450 U.S. locations on July 30 instead of the previously announced July 15. It expects to open an additional 150 cinemas the following month.
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"Barring further complications from the coronavirus outbreak, AMC expects to be open at essentially its full complement of approximately 1,000 theatres globally by early August," the company said in a statement Monday.
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The expected summer openings come as AMC Theatres, which operates 11,000 screens globally as part of China-based conglomerate Dalian Wanda Group, struggles with a difficult financial situation created by coronavirus-forced shutdowns in mid-March.
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AMC said the closings essentially shut off all revenue for the company, causing "substantial doubt" it can viably remain in business after losing as much as $2.4 billion in the first quarter, according to financial filings. The company said its future depends on factors including the pace of reopenings and the timing of movie releases as the film production industry remains in shutdown mode.
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As coronavirus cases climb in many regions, studios have delayed the release of major films in hopes of premiering them at a time when they can draw in the largest audiences possible. Among them, Warner Bros. announced delays several times this month for the release of its anticipated blockbusters "Tenant" and "Wonder Woman 1984."
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The effects are industrywide. Theater closings have spurred the layoff and furloughs of thousands of theater industry employees nationwide, with some now coming back to work at the major national and regional chains.
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Rival theater chain Regal Cinemas, part of Cineworld Group, plans to start reopening theaters July 10 at half-capacity with a mostly older lineup of movies, such as "Jurassic Park," "Star Wars: The Empire Strikes Back" and "Black Panther."
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Another big chain, Cinemark, began phased reopenings in several cities on June 19, with capacity restrictions and other measures based on local health regulations.
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AMC has said its U.S. theaters are expected to reopen at 30% capacity with enhanced hygiene and distancing protocols, and customers are expected to wear masks.
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"Our theatre general managers across the U.S. started working full time again today and are back in their theatres gearing up to get their buildings fully ready just a few weeks from now for moviegoers," said CEO Adam Aron in a statement, noting the company is devoting "extraordinary resources" into safety and sanitation efforts ahead of planned reopenings.
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U.S. Pending Home Sales Post Record Gain, Exceed All Forecasts
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By: Maeve Sheehey June 29, 2020 Bloomberg News
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Contract signings to purchase previously owned U.S. homes surged in May by the most on record as mortgage rates fell and some states began to reopen from coronavirus lockdowns.
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The National Association of Realtors’ index of pending home sales increased 44.3% to a three-month high of 99.6, after falling in April to the lowest level in records back to 2001. The median projection in a Bloomberg survey of economists called for a 19.3% gain in May. Even with the outsize advance, the index is below the pre-pandemic high of 111.4, reached in February.
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The advance adds to signs the residential real estate market is snapping back faster than most of the economy after the typically robust spring home-selling season was interrupted amid the shutdowns. Mortgage rates have dropped to the lowest on record, helping to stabilize demand though the industry may be challenged by high unemployment and lingering health concerns.
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“The outlook has significantly improved,” Lawrence Yun, NAR’s chief economist, said in a statement.
The Realtors project existing home sales to reach 4.93 million units this year, up from a previous forecast of 4.77 million. Last year, there were more than 5.3 million previously owned homes sold.
An S&P homebuilders index advanced 1% in early trading on Monday after the Realtors data.
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Some government officials began easing their restrictions on business in May. With coronavirus cases increasing in states including Texas, California and Florida, some locations are putting a pause on lockdowns. Still, home-purchase loan applications are close to an 11-year high.
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Pending home sales rebounded sharply in all U.S. regions, including a 56.2% monthly jump in the West and a 43.3% gain in the South.
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‘Flying Blind Into a Credit Storm’: Widespread Deferrals Mean Banks Can’t Tell Who’s Creditworthy
Bankers are tightening lending standards and looking for new data that can help them figure out who’s risky and who’s not
By: AnnaMaria Andriotis June 29, 2020 The Wall Street Journal
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Banks have pulled back sharply on lending to U.S. consumers during the coronavirus crisis. One reason: They can’t tell who is creditworthy anymore.
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Millions of Americans are out of work and behind on their debts. But, in many cases, the missed payments aren’t reflected in their credit scores, nor are they uniformly recorded on borrowers’ credit reports.
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The confusion stems from a provision in the government’s coronavirus stimulus package. The law says lenders that allow borrowers to defer their debt payments can’t report these payments as late to credit-reporting companies. From March 1 through the end of May, Americans deferred debt payments on more than 100 million accounts, according to credit-reporting firm TransUnion, a sign of widespread financial distress.
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The credit blind spot has further clouded the outlook for lenders. For years, strong consumer spending and borrowing helped propel them to record profits. Now the economy is in shambles, and they are trying to figure out what is going to happen to all of the debt Americans racked up in better times.
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Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards, auto loans and other consumer debt. They are also hunting for new data sets that could indicate who is in financial trouble and how much they need to set aside to cover soured loans. The Federal Reserve last week said the biggest U.S. banks could be saddled with as much as $700 billion in loan losses in a prolonged downturn.
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“Without accurate information, their only option is to pull back on credit,” said Michael Abbott, head of banking for North America at consulting firm Accenture PLC. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”
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Banks started tightening their underwriting standards in March, when the first wave of coronavirus layoffs began.
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By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.
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Loan originations have fallen, a result both of the tightening and a decline in consumer demand. An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, according to Equifax Inc. Auto loan and lease originations fell to 266,000 from 390,000 during the same period. General-purpose credit-card originations totaled 483,000, down from 856,000. In 2019, weekly card originations rarely fell below 1.2 million.
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Lenders have asked some credit-reporting companies to remove borrowers in deferment programs from solicitation lists for credit cards and other loans, according to people familiar with the matter. Some 74 million credit-card solicitations were mailed out in May, down from 316 million in February, according to Mintel Comperemedia. Mailed personal-loan solicitations fell by more than half to 84 million over the same period.
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“Banks are looking very carefully at their underwriting models to see if they need to be adjusted to factor in latent risk,” said Rob Strand, senior economist at the American Bankers Association.
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Prepandemic, deferrals weren’t much of a problem for banks. They were used rarely for most types of consumer debt and were usually confined to areas hit by natural disaster. Now, a staggering number of consumers around the U.S. are in deferral or other repayment programs, leading banks to question whether the credit scores and reports they have relied on for decades are reflecting applicants’ true level of risk.
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Lenders are recording that information on borrowers’ credit reports in different ways. Boxes that were either marked on time or late are being left blank by some lenders. Some are applying codes next to debt accounts that indicate the borrower is in deferment or forbearance. Others are using natural-disaster codes.
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What’s more, lenders can’t tell if a borrower in deferment has fallen on tough times or is simply taking advantage of lenders’ relief options.
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Forbearance and natural-disaster codes “were really designed for acute types of situations,” said Curt Miller, executive vice president of credit-risk solutions at TransUnion. “If you look at what’s happened, it’s so broad and widespread there’s nothing in the system designed to say 100 million accounts are in this status.”
Lenders are looking for data that will help them figure out which applicants are a safe bet and who’s likely to run into financial trouble.
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They are also considering using unemployment data—such as cellphone records that show unemployment office visits and benefit-deposit data—that could help them figure out how to account for future loan losses, according to people familiar with the lenders’ discussions. Some banks are reviewing cash flow in deposit accounts to get a better idea of the risk lurking in their loan books, the people said.
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The Long, Unhappy History of Working From Home
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As the coronavirus keeps spreading, employers are convinced remote work has a bright future. Decades of setbacks suggest otherwise.
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By David Streitfeld June 29, 2020​​ New York Times
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Three months after the coronavirus pandemic shut down offices, corporate America has concluded that working from home is working out. Many employees will be tethered to Zoom and Slack for the rest of their careers, their commute accomplished in seconds.
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Richard Laermer has some advice for all the companies rushing pell-mell into this remote future: Don’t be an idiot.
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A few years ago, Mr. Laermer let the employees of RLM Public Relations work from home on Fridays. This small step toward telecommuting proved a disaster, he said. He often couldn’t find people when he needed them. Projects languished.
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“Every weekend became a three-day holiday,” he said. “I found that people work so much better when they’re all in the same physical space.”
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IBM came to a similar decision. In 2009, 40 percent of its 386,000 employees in 173 countries worked remotely. But in 2017, with revenue slumping, management called thousands of them back to the office.
Even as Facebook, Shopify, Zillow, Twitter and many other companies are developing plans to let employees work remotely forever, the experiences of Mr. Laermer and IBM are a reminder that the history of telecommuting has been strewn with failure. The companies are barreling forward but run the risk of the same fate.
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“Working from home is a strategic move, not just a tactical one that saves money,” said Kate Lister, president of Global Workplace Analytics. “A lot of it comes down to trust. Do you trust your people?”
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Companies large and small have been trying for decades to make working from home work. As long ago as 1985, the mainstream media was using phrases like “the growing telecommuting movement.” Peter Drucker, the management guru, declared in 1989 that “commuting to office work is obsolete.”
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Telecommuting was a technology-driven innovation that seemed to offer benefits to both employees and executives. The former could eliminate ever-lengthening commutes and work the hours that suited them best. Management would save on high-priced real estate and could hire applicants who lived far from the office, deepening the talent pool.
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And yet many of the ventures were eventually downsized or abandoned. Apart from IBM, companies that publicly pulled back on telecommuting over the past decade include Aetna, Best Buy, Bank of America, Yahoo, AT&T and Reddit. Remote employees often felt marginalized, which made them less loyal. Creativity, innovation and serendipity seemed to suffer.
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Marissa Mayer, the chief executive of Yahoo, created a furor when she forced employees back into offices in 2013. “Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people and impromptu team meetings,” a company memo explained.
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Tech companies proceeded to spend billions on ever more lavish campuses that employees need never leave. Facebook announced plans in 2018 for what were essentially dormitories. Amazon redeveloped an entire Seattle neighborhood. When Patrick Pichette, the former chief financial officer at Google, was asked, “How many people telecommute at Google?” he said he liked to answer, “As few as possible.”
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That calculus has abruptly changed. Facebook expects up to half its workers to be remote as soon as 2025. The chief executive of Shopify, a Canadian e-commerce company that employs 5,000 people, tweeted in May that most of them “will permanently work remotely. Office centricity is over.” Walmart’s tech chief told his workers that “working virtually will be the new normal.”
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Quora, a question-and-answer site, said last week that “all existing employees can immediately relocate to anywhere we can legally employ them.” Those who do not want to go anywhere can still use the Silicon Valley headquarters, which would become a co-working space. Quora declined to say how many employees it has.
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Adam D’Angelo, Quora’s chief executive, said that he and the rest of the leadership team would push against the notion that remote workers were second class by working remotely themselves. All meetings would be virtual. The future of work, he wrote, would be a paradise for the rank and file.
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Quora said 60 percent of its workers expressed a preference for remote work, in line with national surveys. In a Morning Consult survey in late May on behalf of Prudential, 54 percent said they wanted to work remotely. In a warning sign for managers, the same percentage of remote workers said they felt less connected to their company.
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One very public setback for remote work was at Best Buy, the Minneapolis-based electronics retailer. The original program, which drew national attention, began in 2004. It aimed to judge employees by what they accomplished, not the hours a project took or the location where it was done.
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Best Buy killed the program in 2013, saying it gave the employees too much freedom. “Anyone who has led a team knows that delegation is not always the most effective leadership style,” the chief executive, Hubert Joly, said at the time.
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Jody Thompson, a co-founder of the program who left Best Buy in 2007 to become a consultant, said the company was doing poorly and panicked. “It went back to a philosophy of ‘If I can see people, that means they must be working,’” she said.
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The coronavirus shutdown, which means 95 percent of Best Buy’s corporate campus workers are currently remote, might now be prompting another shift in company philosophy. “We expect to continue on a permanent basis some form of flexible work options,” a spokeswoman said.
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Flexible work gives employees more freedom with their schedules but does not fundamentally change how they are managed, which was Ms. Thompson’s goal. “This is a moment when working can change for the better,” she said. “We need to create a different kind of work culture, where everyone is 100 percent accountable and 100 percent autonomous. Just manage the work, not the people.”
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But it is also a moment, she acknowledged, when working can change for the worse.
“It’s a crazy time,” Ms. Thompson said. “When you’re a manager, there is a temptation to manage someone harder if you can’t see them. There’s an increase in managers looking at spyware.”
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Remote workers might be free of commuting costs, but they are traditionally more vulnerable. Jeffrey Gundlach, who runs the Los Angeles investment firm DoubleLine Capital, said in his monthly webcast that he had started seeing his newly remote staff in a new light.
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“I kind of learned who was really doing the work and who was not really doing as much work as it looked like on paper that they might have been doing,” he said. With “some of the supervisory, middle-management people,” he added, “I’m starting to wonder if I really need them.”
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At the beginning of the year, the unemployment rate was low and workers had some leverage. All that has been lost, at least for the next year or two. Widespread remote work could consolidate that shift.
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“When people are in turmoil, you take advantage of them,” said John Sullivan, a professor of management at San Francisco State University.
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“The data over the last three months is so powerful,” he said. “People are shocked. No one found a drop in productivity. Most found an increase. People have been going to work for a thousand years, but it’s going to stop and it’s going to change everyone’s life.”
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Innovation, Dr. Sullivan added, might even catch up eventually.
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“When you hire remotely, you can get the best talent around and not just the best talent that wants to live in California or New York,” he said. “You get true diversity. And it turns out that affects innovation.”
Mr. Laermer, the public relations executive, is more cautious about the implications of the crisis. In March, when he shut down his office, he anticipated disaster — like what happened on Fridays in 2017, but five times worse.
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Instead, things have been pretty good. He even hired a few people he had never met, via Zoom, “and they’ve been phenomenal.”
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What changed? Well, the technology, including Zoom, is better. Moreover, “we have rules now,” he said. “You have to be available between 9 a.m. and 5:30 p.m. You can’t use this as child care.”
But he said he was not trying to get out of his office lease.
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“Companies are saying working from home is working so well we’re going to let people work from home forever,” he said. “It’s good P.R., and very romantic, and very unrealistic. We’ll be back in the office as soon as there’s a vaccine.”
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https://www.nytimes.com/2020/06/29/technology/working-from-home-failure.html
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U.S. Home-Mortgage Delinquencies Reach Highest Level Since 2011
By
John Gittelsohn Bloomberg News
June 21, 2020
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U.S. home-mortgage delinquencies climbed in May to the highest level since November 2011 as the pandemic’s toll on personal finances deepened.
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The number of borrowers more than 30 days late swelled to 4.3 million, up 723,000 from the previous month, according to property information service Black Knight Inc. More than 8% of all U.S. mortgages were past due or in foreclosure.
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The increase in delinquencies was smaller than the 1.6 million jump in April, when the economy ground to a halt nationwide. Still, the path ahead is clouded by the spread of new Covid-19 cases, uncertainty over business reopenings and the looming expiration of benefits that have helped jobless homeowners avert delinquency.
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About 20.5 million Americans filed continuing claims for unemployment benefits in the first week of June, Labor Department figures show.
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The delinquency count includes homeowners who missed payments as part of forbearance agreements, which allow an initial six-month reprieve without penalty. Many of those borrowers initially made payments despite qualifying for the relief plans, a share that has diminished as the crisis lingers.
Only 15% of homeowners in forbearance made payments as of June 15, down from 28% in May and 46% in April. Black Knight also reported:
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Mississippi had the highest delinquency rate in May, followed by Louisiana, New York, New Jersey and Florida.
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New York’s share rose to 11.3%. It peaked at 13.9% in December 2012.
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New Jersey’s rate was 11%, compared with the peak of 16.8% in December 2012.
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Florida’s share climbed to 10.5%. Its previous peak was 25.4% in January 2010
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Colony Capital Likely to Turn Over Control of 48 Hotels
Portfolio Spanning 21 States Faces Default After Loan Modification Talks Stall
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By Mark Heschmeyer
CoStar News
June 21, 2020
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Colony Capital appears willing to give up control of a portfolio of 48 hotels to a receiver after missing April and May payments on a $780 million loan securing the properties.
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If the portfolio spanning 21 states goes into receivership, it would be one of the first notable casualties of the coronavirus pandemic in the commercial mortgage-backed securities market. Hotels have been particularly hard hit by decreased travel and government stay-at-home orders issued to slow the spread of the coronavirus.
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The loan is collateral in a single-borrower CMBS deal. According to a filing with the Securities and Exchange Commission, it was transferred to special servicing in April due to imminent monetary default.
Colony, which declined to comment to CoStar, is 90% owner of the portfolio in a joint venture with Chatham Lodging Trust. A person familiar with the situation but not authorized to speak about it confirmed CMBS information regarding the loan's status.
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“The lender and borrower have attempted to negotiate a loan modification, although [they] have not been able to come to an agreement on terms,” according to CMBS notes from special servicer Midland Loan Services. “The lender is in the process of seeking the appointment of a receiver for all of the properties. The borrower has agreed to an orderly transition of the properties to a receiver since agreeable terms for a loan modification could not be reached.”
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Traditionally, receivers are appointed to manage properties and turn over cash flow to the lender pending either a sale or foreclosure.
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In its first-quarter earnings report, Chatham Lodging reported that the joint venture did not make debt service payments in April and May. Revenue per available room, a key hotel industry metric, was down about 18% for the portfolio.
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The joint venture was in active negotiations with Midland to seek various relief, including interest forbearance, temporary use of capital expenditure reserves to fund interest payments and hotel operations, Chatham reported.
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The portfolio consists of 48 select-service, limited-service and extended-stay hotels, totaling 6,401 rooms. The hotels operate under eight different flags across three hotel brands that include Marriott, Hilton and Hyatt.
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Colony has seven hotel portfolios that combined total 157 properties. The Los Angeles-based global investment firm run by real estate veteran and President Trump confidante Thomas Barrack disclosed last month that it does not anticipate putting any more capital into any of its hotel properties and was exploring options for those holdings. Colony has been working with its adviser, Moelis, and all its lenders to maximize shareholder value in the lodging segment.
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The debt on the properties within the portfolio are securitized entirely at the property level and not guaranteed by Colony. Nor is the loan cross-collateralized with other portfolios. Such a debt structure gives potential third parties flexibility of maintaining or capturing the value of a portfolio, according to a Colony SEC filing.
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Last winter, Colony announced plans to unload its oldest real estate properties and shift to become a global platform for investing in digital infrastructure and real estate.
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New Surveys Pour Cold Water on Notion That the Office Is Dead
Big Majorities Say They Don't Expect to Work From Home Forever
By Sharon Smyth
CoStar News
June 19, 2020
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Over the past three months, the COVID-19 pandemic has forcibly accelerated the growing trend of working from home, leaving workplaces around the globe empty and prompting many market commentators to hail the end of the office.
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Not so, according to Harry de Ferry Foster, co-head of U.K. operations at Savills Investment Management, which has 23.4 billion U.S. dollars of assets under management globally.
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"I think the death of the office has been overdone. Twenty years ago, it was thought that the rise in home working would mean no one would want offices anymore, but we’ve needed far more space than was predicted at the time. Technology has obviously improved and people do work from home more, but we have still needed more and more office space," de Ferry Foster said during a telephone interview. "There are many commentators who want to say something interesting and predict the end of the office, and when it doesn’t happen the hype is quickly forgotten.’’
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Research from Colliers International indicates he may well be right. The broker’s latest "Global Work From Home" survey, which polled more than 5,000 respondents from 18 different industries across the globe, found that, while there is employee support for the continuation of some form of remote work, the desire and need to return to the office is likely to be strong once the pandemic is over.
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Only 12% of respondents said they would like to work four days or more from home post-lockdown, with 49% saying they would like to limit WFH to a maximum of two days a week when the pandemic has subsided, the survey found.
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"The greatest surprise for many companies has been the realization that their organization can work remotely, be productive and stay connected,’’ said Jan Jaap Boogaard, head of Colliers' advisory practice for workplaces in Europe, the Middle East and Africa, which carried out the survey. “However, the office is very much alive and kicking because it is hard to create a compelling team culture when working remotely. We need face-to-face interaction in order to build true, meaningful connections.”
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The survey found that 23% of respondents reported that their productivity had declined as a result of working at home full time, 26% reported it had increased and 51% reported no change at all. Living arrangements had the greatest impact on productivity, with about 30% of respondents who had roommates, and around 27% of those who had children reporting a more pronounced decline or lower increase in their work performance, according to the survey.
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"People like to be around other people. It was fine on lockdown but as we are coming out there seem to be more neighbors working on their homes, more children running about and that level of disturbance will only increase the further we come out of lockdown,’’ de Ferry Foster said. "And what about graduates? Are children going to grow up learning from an iPad, go to virtual university and then as they progress to a job sit at home and never interact with anybody? I don’t see that happening; graduates need to be in offices around mentors, listen to people on the phone and pick up how are things are done.’’
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Of the employees polled in the Colliers survey, those aged between 21 and 30 expressed the greatest desire to work from the office compared with older generations. Thirty-eight percent of respondents said that remote working left them feeling isolated from their team, and 12% said their managers were unable to manage virtually.
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According to Sven Moller, associate director for EMEA Workplace Advisory at Colliers, companies will need to find a balance between creating enough space to allow people and teams to meet in the office when they need to, while managing their space efficiency and flattening workplace occupancy peaks. "Many successful innovations and collaborations arise unexpectedly, it’s serendipity, and this is hard to achieve over scheduled video calls,’’ Moller said.
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A separate survey by Savills sent to 65,000 clients during the lockdown period in late April found up to 89% of respondents said they believed that physical office space remains a necessity for companies to operate successfully, but the office is set to change.
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Over 70% of respondents believe there will be a long-term impact on the design and size of the workplace, including an increase in flexible and remote working, which is predicted not to affect significantly, if at all, the total demand for office space given the need to create more distance between workers. The survey found that 18-24-year-olds continue to display a clear preference for the office, with 25% still expecting to spend no time at home post-lockdown, the highest of any age category.
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In a column for CoStar, Hunter Booth, Savills director of office agency in London, wrote the pandemic has accelerated a "cultural shift in work style with a deeper trust of employees to manage their time and location appropriately," suggesting going forward that companies are likely to offer more flexibility in work relationships.
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"The office offers a valuable boundary between work and home, but the flexibility to work from home when required is here for good," he argued.
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"Overall, what has shifted for good, I believe, is a mindset of inclusiveness and the realization that, as long as we are all doing it, we can blur the lines of work, home and play to ultimately be more productive, happier and fulfilled," he concluded, before saying there are some new safety routines he is ready to bid goodbye to once the health crisis is over. "I’m not walking one way round the office forever though!"
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Mall of America Said to Miss Another Payment on Mortgage Debt
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By: John Gittelsohn - June 16, 2020, Bloomberg News
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Minnesota’s Mall of America missed another payment on a $1.4 billion mortgage, putting the borrower more than 60 days delinquent, according to people with knowledge of the financing.
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The mall, one of the largest shopping centers in the U.S., didn’t make its roughly $7 million debt payment for June, according to the people, who asked not to be named speaking about a private matter. It was the third straight month of missed payments for the property.
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Triple Five Group, the company that owns the mall, didn’t reply to requests for comment.
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The 5.6-million square-foot complex, which features 500 stores, partially reopened June 10 with reduced capacity at restaurants and movie theaters. An indoor theme park, Nickelodeon Universe, remained closed to comply with health directives, according to its website.
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Mall of America is one of North America’s three largest shopping centers, all owned by the Ghermezian family. The properties face financial challenges as coronavirus infection precautions depress the lure of experiential attractions, such as theme parks, and brick-and-mortar retailers lose market share to online competitors.
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Mall landlords have struggled to collect rent from shuttered retailers, adding to the financial pressure in the industry.
The West Edmonton Mall, the first mega shopping center developed by the Armenians in the 1980s, began gradually reopening in May.
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The Ghermezians’ American Dream, a megamall in the New Jersey Meadowlands with an indoor ski slope and water park, has not yet fully opened. The developer’s construction costs for the project surpassed $2 billion, up from an original 2015 estimate of $1.55 billion, according to a recent report by CBRE Group Inc.
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The Ghermezians pledged 49% of their equity interests in the West Edmonton Mall and Mall of America as collateral to finance the American Dream.
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The demise of America’s malls can deal a blow to the towns that depend on them
PUBLISHED SAT, JUN 20 2020 CNBC
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KEY POINTS
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Malls and shopping centers across the country provide $400 billion in local tax revenue annually, according to the International Council of Shopping Centers.
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“I worry a lot as this crisis plays out,” ICSC CEO Tom McGee said. “Our industry funds everything form the fire and police to [local] infrastructure.”
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The coronavirus pandemic is speeding up the demise of America’s struggling shopping malls, which could deal a devastating blow to some towns that depend on them.
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When a mall goes dark, a community loses more than just a place to shop and grab a slice of pizza at the food court’s Sbarro. In many neighborhoods, the mall is an economic engine, hiring hundreds, if not thousands, of workers and providing a significant amount of dollars to the local tax base.
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Malls and shopping centers across the country provide $400 billion in local tax revenue annually, according to the International Council of Shopping Centers, the retail real estate industry’s trade group. And there are about 1,000 malls — both privately and publicly held — still operating in the U.S. today, according to commercial real estate services firm Green Street Advisors.
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“I worry a lot as this crisis plays out,” ICSC CEO Tom McGee said. “Our industry funds everything form the fire and police to [local] infrastructure.”
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In a pre-Covid-19 universe, teenagers would often land their first jobs at the mall. Kids would hang there after school. So-called mall walkers would use the open space in the mall before stores opened to the public to break a sweat. Mom-and-pop shop owners would open their first businesses there. And department stores, a mall’s coveted anchors, once thrived during their prime.
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The acceleration of e-commerce, along with a shift toward more consumers wanting to live downtown instead of the suburbs, has led to fewer people frequenting malls over the years. And as the pandemic hit, malls were boarded up, along with the stores in them. Some, including the Northgate Mall managed by Northwood Retail in Durham, North Carolina, are now closing for good. Former department store executive Jan Kniffen has predicted a third of America’s malls will vanish by 2021.
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The Rent is Due
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As retailers aren’t able to pay rent on time, landlords of America’s malls are not able to pay their own bills, making matters worse during the pandemic and speeding up this domino effect. The Tennessee-based mall owner CBL & Associates warned earlier this month that its ability to continue as a going concern is in doubt after the retailers in its properties have skipped rent payments during the Covid-19 crisis, forcing CBL to miss two of its own interest payments.
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Should CBL be forced into bankruptcy, it would mark the first filing by a commercial real estate owner during the pandemic. They keys to CBL’s 108 malls could be handed back to lenders. Some of its properties could be shut down permanently, if no new owners emerge to take over and run these assets. A CBL spokesperson declined to comment about a potential bankruptcy.
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CoolSprings Galleria, a CBL mall in Franklin, Tennessee, offers up one such example of a property that is a huge aid to its local tax base. And as the mall has taken a hit during the pandemic, the town of Franklin is tapping into its budget reserves to make ends meet, according to one administrator.
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“Our mall is such an attraction, it drives our revenue significantly,” according to Franklin County City Administrator Eric Stuckey. “If you are so dependent on sales taxes [like us], it can take just a month or two and you’ll see the impact.”
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He compared the situation with 2008 and the Great Recession.
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“The recession had a real impact on disposable income,” Stuckey said. “What people weren’t able to spend at the mall ... translated into lost local revenue.”
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He explained that Franklin will need to use its fund reserves for the foreseeable future until CoolSprings Galleria bounces back, which he expects to happen over time since it is the only major retail draw in the area.
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Others will be less fortunate.
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“Malls die slowly, generally over a period of years,” said Lacy Beasley, president of the real estate advisory firm Retail Strategies. “At first one anchor closes and then another. For a mall to shut down completely, the mall has already been declared dead by the customer.”
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However, the rapid acceleration of store closures this year, due in large part to the Covid-19 crisis, is adding to mall owners’ challenges and could be speeding up that death. As many as 25,000 closures could be announced by retailers this year,according to a tracking by Coresight Research, with 55% to 60% of those in malls. That would set a new record, up from a previous record of more roughly 9,800 in 2019, the firm said.
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As anchor tenants such as bankrupted J.C. Penney go dark, non-anchor tenants such as American Eagle or Gap typically have what are known as co-tenancy clauses to be able to vacate the property sooner if they’d like. With enough vacancies and nothing to replace them, a mall could be pushed out of business this way. (Penney is already kicking off going-out-of-business sales at more than 150 locations this month, as it tries to restructure the company in bankruptcy proceedings.)
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To be sure, developers are trying to get creative. A former Sears store at the West Oaks Mall in Ocoee, Florida, was rebuilt into a Xerox call center. Ford Motor moved its offices into a former Lord & Taylor department store at the Fairlane Town Center in Dearborn, Michigan.
But it might not be enough.
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“Malls can be redeveloped and released, but it often will never replace the impact [to towns] the mall had in their heydays,” Retail Strategies’ Beasley said.
A blow to the budget
PREIT, a real estate investment trust that has a portfolio of 21 malls in the U.S. including Cherry Hill Mall in Cherry Hill, New Jersey, said it pays more than $65 million in real estate taxes every year. In Pennsylvania and New Jersey alone, the company estimates that its malls account for about 17,000 jobs.
“When you think about a mall from an economic perspective, it’s a real engine, there is no question about it,” PREIT CEO Joe Coradino said in an interview. “We are typically the largest tax payer in any given municipality.”
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An analysis by Retail Strategies outlines the substantial impact a mall closure would have on local municipal budgets.
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The average size of a regional mall in the U.S. is anywhere between 400,000 and 800,000 square feet, with three to five anchor tenants. So-called C- and D-rated malls, which bring in the least amount of sales per square feet, are those considered to be the most at risk to go under. These malls average sales of between $200 and $325 per square foot, Retail Strategies said.
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That said, the annual sales receipt of an average C- or D-rated mall would be roughly $90 million to $145 million, according to the analysis. And at a 2% local tax collection rate, the locality that it is situated in would collect anywhere between $1.8 million to $3 million annually on the mall for sales tax, it said.
There are roughly 730 B- C- and D-rated malls in the U.S., according to Green Street.
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As purchases made at certain malls have tumbled over the years, municipalities are left trying to reshape their budgets.
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“Cities are more incentivized to help retail now than they ever have been,” Beasley said.
Even the biggest mall owner in the U.S., Simon Property Group, has voiced concern over this issue.
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Simon’s portfolio of about 200 malls and outlet centers, including Roosevelt Field mall in East Garden City, New York, are by and large A-rated, making it one of the best operators in its space. Most, if not all, of Simon’s malls are expected to stay open longer-term.
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“We want to help these local communities because frankly they depend on our sales tax and our real estate tax,” Chief Executive David Simon said in May during an earnings conference call, as he discussed the mall owner’s plans to reopen during the coronavirus pandemic.
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“I hope the communities appreciate what we’re doing,” he added, mentioning the Long Island area in New York as one example, where Simon pays more than $60 million annually in property taxes for a handful of properties.
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https://www.cnbc.com/2020/06/20/how-mall-closings-in-america-hurt-the-towns-depending-on-them.html
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Boxpark founder warns of retail and hospitality sector ‘Armageddon’
The retail and hospitality sectors are “on a collision course” to Armageddon, Boxpark founder Roger Wade warned this week as shoppers returned to UK high streets after 12 weeks in lockdown.
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By Jessica Newman Wed 17 June 2020 Property Week
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Wade said that if landlords, tenants and government did not come together to address the rent crisis, up to 50% of retail and hospitality operators were in danger of going under. “We’re certainly on course for collision. At the end of June, there’s going to be up to six months outstanding rent and I think you could have up to 50% of retail and hospitality businesses that won’t survive lockdown.”
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He called on landlords and tenants to set aside their differences and work together. “We’ve got to realise we’re all in this boat together and unless we all swim together, we will all sink together,” said Wade. “Everyone has to compromise. If landlords reduced rent by a third, the government gave a third towards a grant and operators were responsible for a third, that might be acceptable. But we’ve got to get to a sensible solution, because if not it will come down like a house of cards.”
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Wade described the proposed code of practice to encourage “fair and transparent discussions over rental payment” as little more than “a token gesture” and called for a more robust framework that could be applied across the industry.
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Wade, who is both a landlord and tenant, added that for operators to survive, three things needed to happen: the social distancing rule needed to be slashed from 2m to 1m; pubs, restaurants, cafes and hotels needed to reopen on 4 July; and tenants needed to take a more holistic approach to solving their rent issues with landlords.
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He said he also wanted to see the three-month moratorium on commercial landlord sanctions against tenants for non-payment, which is currently due to expire at the end of the month, extended “until we find the framework to resolve the current rent crisis”.
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As The High Streets Task Force was formally launched this week with Ellandi co-founder and former Revo president Mark Robinson at the helm as chair, Wade also questioned the likely impact of the government’s new £50m Reopening High Streets Safely Fund, likening it to a band-aid.
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It was now a question of survival not growth for many businesses, he added. “Our shops, our hotels and our pubs are the heart and soul of our community,” he said.
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“If we want to create ghost towns up and down our country, then, you know what, do nothing. We need urgent measures, so initiatives like overhauling business rates and encouraging turnover rents.”
Calling for “decisive action to address the issue of rent”, he warned: “Government didn’t create this problem; landlords didn’t create this problem and operators didn’t create this problem, so we must adopt an attitude of shared pain.”
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Coronavirus Tips Ailing Gym Chain 24 Hour Fitness Into Bankruptcy
Gym chain to permanently close nearly a third of its 445 locations
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By: Alexander Gladstone - Updated June 15, 2020 The Wall Street Journal
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Gym chain 24 Hour Fitness Worldwide Inc. filed for bankruptcy protection Monday as it deals with the fallout from temporarily closing its locations due to the Covid-19 pandemic.
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The San Ramon, Calif., company, which is owned by private-equity firm AEA Investors LP and the Ontario Teachers’ Pension Plan, aims to permanently shut down 135 of its 445 gyms throughout the U.S. The gym chain, which has about 3.4 million members, plans to reopen most remaining locations by the end of June.
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The company sought protection under chapter 11 in the U.S. Bankruptcy Court in Wilmington, Del., seeking to restructure some $1.4 billion in debt, including $930 million of senior loans and a $500 million unsecured bond. The gym chain said that it has reached an agreement with a group of creditors to provide about $250 million of debtor-in-possession financing to fund its business during the bankruptcy case.
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The coronavirus outbreak has hurt a number of other fitness chains. Gold’s Gym International Inc. filed for bankruptcy in May. Town Sports International Holdings Inc., the parent company of New York Sports Clubs and Lucille Roberts gyms, has hired lawyers to explore a debt restructuring, which could include a bankruptcy filing.
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The Wall Street Journal reported in May that 24 Hour was shopping for a bankruptcy loan of as much as $200 million.
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“If it were not for Covid-19 and its devastating effects, we would not be filing for chapter 11,” Chief Executive Tony Ueber said. “We expect to have substantial financing with a path to restructuring our balance sheet and operations to ensure a resilient future.”
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Even before the pandemic, 24 Hour Fitness was struggling with declining membership and rising costs due to minimum-wage increases. The company had earlier tried to save costs by eliminating towel services at the majority of its clubs.
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The company’s restructuring chief, Daniel Hugo, said Monday that a number of operational missteps in previous years had hurt its financial performance.
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The company was beginning to see positive changes under a new management team installed in early 2019, but its turnaround efforts were materially disrupted by Covid-19, Mr. Hugo said in a declaration filed with the court.
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Last year, 24 Hour Fitness brought in $1.5 billion of revenue. Before furloughs and layoffs due to Covid-19, the company had approximately 19,200 employees. After temporarily closing its clubs in mid-March, 24 Hour furloughed 17,800 employees and terminated 700 others, the company said.
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The chain is now reopening gyms it plans to keep. It has reopened about 20 of its fitness centers in Texas. The company is using an app-based reservation system to enforce social-distancing requirements and a touchless check-in system to limit contact with surfaces, Mr. Hugo said.
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Businessman Mark Mastrov founded 24 Hour Fitness in 1983. AEA, Ontario Teachers’ Pension and other investors paid $1.85 billion for the chain when they bought it in 2014 from private-equity sponsor Forstmann Little & Co.
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Judge Karen B. Owens of the U.S. Bankruptcy Court in Wilmington has been assigned to oversee the 24 Hour bankruptcy case, number 20-11558.
—Dave Sebastian contributed to this article.
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https://www.wsj.com/articles/24-hour-fitness-files-for-bankruptcy-11592217700
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‘Running on Fumes’: Restaurants Trying to Reopen Face Cash Crunch
In addition to financing their reopenings, many restaurants need to pay overdue bills
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By: Justin Scheck and Heather Haddon - June 16, 2020 - The Wall Street Journal
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Denver chef Justin Brunson got caught in the middle of the financial squeeze facing restaurants as they try to reopen. He needed cash to start serving again at his four establishments, and he is owed money by some of the 150 restaurants that are customers of his high-end butcher business.
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At his flagship restaurant, meat-heavy Old Major, the cost of food, staff, cleaning and training for new sanitary protocols was already daunting. When Mr. Brunson sat down a few weeks ago to calculate the cost of reopening, he had a harsh realization: “There’s no money in the bank, and I probably need 80 grand to start up again,” Mr. Brunson said.
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Compounding the cash crunch, many of the customers of his butcher business, River Bear American Meats, still haven’t paid for things such as the capicola, kielbasa and short-rib bresaola they ordered just before the shutdown. “I’m just upset, worried and scared,” he said.
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Restaurants, with their high failure rate even in good times, have trouble getting financing from banks, and the situation is worse now. “You do have very limited options,” said Kathryn Petralia, president of Kabbage, a small-business lender. Kabbage lends to restaurants, and the average interest rate on its loans is greater than 25%. Since restaurants have had little revenue recently, Kabbage shut down all its credit lines for new and old customers, and instead helped them apply for federal loans.
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Restaurants are slowly resuming dine-in service after nearly every state required they suspend it in March because of the coronavirus. Limited dine-in service has resumed statewide in 38 states, according to investor research firm Gordon Haskett, though sales at sit-down restaurants remain down by double-digits from last year.
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In many ways, the reopening has turned out to be harder than the closing because it is nearly impossible to predict revenues amid social distancing, while fixed costs remain the same.
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The biggest problem is cash. Many restaurants get their food on credit and pay 30 days later with the revenue they have earned from selling it. Many never sold the food they bought before the shutdown and haven’t paid for it. Some suppliers won’t deliver new food on credit unless some of the old bills are paid.
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Restrictions on how federal assistance money can be spent have been eased, but the fixes may have come too late for struggling small businesses.
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Dwight Lawson and his wife, Susan Lawson, have owned Jabo’s Bar-Be-Q in Greenwood Village, a Denver suburb, for nearly 30 years but weren’t able to get federal assistance. They turned to takeout, and business fell by about 90%. “It’s been an absolute dogfight,” said Mr. Lawson, who is 75. “We’ve been running on fumes.”
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When local laws allowed them to reopen at 50% capacity in late May, the couple tallied the costs, including about $2,000 for 300 pounds of brisket, more than twice the old price. Fearing they wouldn’t be able to pay back a loan, they pulled almost $20,000 out of their retirement savings.
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In Colorado, restaurants were given less than a day’s notice before the shutdown. Many chefs gave away food, laid off staff and started trying to figure out ways to do takeout. There was a sense of communal struggle, said Denver-based chef Max Mackissock, who owns five restaurants including the bistro Morin.
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“Everybody was pitching in and helping out,” he said. His cheese supplier gave him some free cheese. But “after about three weeks, the tune changed and everybody was like, ‘I gotta cover my ass,’” Mr. Mackissock said. It will cost about $10,000 to reopen each of his four restaurants that have remained partially open doing takeout and $50,000 or so to reopen the one that closed completely, he said.
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As the shutdown set in, food suppliers became more worried about getting paid by restaurants that could be on the verge of closing down, said Mike DeNiro, vice president of LaSource Group in North East, Pa., which does debt collection for restaurant suppliers.
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In the first month or so of the shutdown, Mr. DeNiro said, business slowed down. Clients such as Supreme Lobster, a Chicago seafood wholesaler, were more focused on managing the crisis than on collecting old debts. Demand from restaurants was plummeting, but retailer demand was soaring.
“It became mayhem with our supermarkets,” said Jacqueline Sylenko, who handles accounts receivable for Supreme Lobster. “The meat ran out, and people wanted seafood,” she said. “People wanted catfish. People wanted tilapia.”
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Once the scramble to meet demand was over, she said, the company turned toward its restaurant clients. Many, she said, agreed to pay a few hundred dollars a month on their outstanding bills, but that still meant paying upfront for food delivered for the reopening.
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Some, Ms. Sylenko said, “want to create new debt without paying off the old debt” and refused to negotiate a payment plan. That won’t work, she said.
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That is when she calls in Mr. DeNiro. He approaches restaurants with a simple message: Figure out a way to pay your old bills, or you won’t get any more food when you reopen. “The last thing you want when you open are problems with your supply chain,” Mr. DeNiro said.
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Those that can’t make good seem likely to go under. He worries that could happen to a lot of restaurants: May was his busiest month ever, he said, which means lots of clients aren’t paying up.
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An estimated 3% of U.S. restaurants have closed for good since the start of the crisis, according to the National Restaurant Association. The trade group expects tens of thousands of restaurants will shut as a result of the pandemic.
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Restaurant chains typically have more access to cash than independent restaurants, but it can be costly. Anthony Pigliacampo started a small chain called Modern Market in Denver that took on private-equity funding and expanded to dozens of locations. He said founders of private-equity-backed chains might have to give up some of their equity if they need to tap their investors for more money ahead of reopening.
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There is still cash available, but it is a fraction of what it was before. ARF Financial LLC, a finance company that lends to restaurants, has cut back the size of its loans from an average of $100,000 to between $15,000 and $20,000, and borrowers will have to “show they’re making progress ramping up to average sales” to get further credit, said President Les Haskew.
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Mr. Brunson, who had been the owner of Old Major, said additional cash wouldn’t solve his bigger problem: Restrictions on the number of customers and a depressed economy mean he might end up operating at a loss. He could have switched to a cheaper menu or focused on takeout. Instead, this month he sold Old Major and will use the money to support his other ventures.
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Write to Justin Scheck at justin.scheck@wsj.com and Heather Haddon at heather.haddon@wsj.com
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This could be the next major retailer facing bankruptcy
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By Chris Isidore, CNN Business - Monday June 15, 2020
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New York (CNN Business) With more than 10 million men out of work and millions more working from home, perhaps indefinitely, this is not the best time to be selling men's dress clothes.
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That's why Tailored Brands (TLRD), which owns the Men's Wearhouse, Jos. A. Bank and K&G brands, could be the next major American retailer to file for bankruptcy.
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"The company has had bankruptcy advisers for a couple of months now. It's exploring all of its options and it's not a 100% that they're filing, but the odds are pretty high," said Reshmi Basu, an expert in retail bankruptcies and an analyst with Debtwire, which tracks distressed companies. "There is not going to be as much demand given the work from home environment."
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A number of national retailers already have filed for bankruptcy during the pandemic, including J.Crew, Neiman Marcus and JCPenney. The clothing sector of retail has been particularly hard hit by the crisis as consumer demand for new clothes has fallen sharply. Gap (GPS) reported a record $932 million loss for its first quarter.
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Other companies facing the risk of bankruptcy include Ascena Retail Group (ASNA), owner of clothing chains Lane Bryant, Justice, Ann Taylor and Dress Barn, which recently warned there is "substantial doubt" about its ability to remain in business.
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Tailored Brands disclosed it is at risk of bankruptcy or even shutting down operations because of the Covid-19 crisis in a filing Wednesday evening.
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"If the effects of the Covid-19 pandemic are protracted and we are unable to increase liquidity and/or effectively address our debt position, we may be forced to scale back or terminate operations and/or seek protection under applicable bankruptcy laws," the filing said. The company said it had no comment beyond the filing.
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The company suspended rent payments for April and May when most of its locations were shut. It said it has been able to negotiate rent deferrals for a significant number of its stores, with repayment at later dates, beginning at the end of 2020 into 2021. It also furloughed or laid off 95% of its 19,000 employees.
But things have not gone well at the 44% of Tailored Brands stores that reopened in early May. For the week ended June 5, sales at locations open for at least one week fell 65% at its Men's Wearhouse and were down 78% at Jos. A. Bank and 40% at K&G.
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Sales declined 60% in its fiscal first quarter, which ended May 2. All of its stores were closed for about half the quarter, and its online operations halted for two weeks in March. But Tailored Brands has delayed reporting its complete results -- the Securities and Exchange Commission allows companies to postpone reporting during the pandemic.
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One reason for the delay is that it is weighing how large a charge it must take to write down the value of various assets, including the goodwill it carries on its books -- a measure of the value of a company's brands and reputation. The charge will be purely an accounting move that involves no cash, but it could raise the cost of borrowing money the company needs to get through the crisis.
Tailored Brands had $201 million in unrestricted cash on hand as of June 5, but that was primarily because it drew down $310 million on existing credit lines during the first quarter. That left it with only $89 million of borrowing available under those lines.
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The company has about 1,400 stores in the United States and Canada, with about half under the Men's Wearhouse name. It will probably have to close a significant percentage of them whatever happens with its reorganization efforts, said Basu.
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"This is the company that has the legs it needs to possibly turn things around," she said. "But consumers' tastes and demand are going to change. They're going to emerge from bankruptcy with a much smaller footprint."
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https://www.cnn.com/2020/06/14/investing/mens-wearhouse-bankruptcy-threat/index.html
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Oregon pauses reopening for a week amid rising infections and hospitalizations
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June 12, 2020 - The Washington Post
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Oregon has put a one-week pause on counties’ reopening applications amid evidence that coronavirus infections are rising in both urban and rural parts of the state, Gov. Kate Brown (D) said Friday at a news conference.
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The move is intended to give public health experts time to determine why the virus is spreading and whether the state needs to modify its reopening plan. Brown said she planned to work with those experts to decide whether to extend the pause, lift it early or take other action to stem the spread.
“This is essentially a statewide yellow light,” she said.
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Of Oregon’s 36 counties, 29 are in Phase 2 of reopening, six are in Phase 1, and one has not begun to reopen. Brown’s order freezes in place each county’s status.
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Health officials analyzing the state’s coronavirus data have noted reasons for concern, said Pat Allen, director of the Oregon Health Authority. The state recorded 178 infections on Thursday, its highest number since the outbreak began. Although testing has increased, Allen said the percentage of positive results has risen from 1.9 percent to 3 percent.
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Emergency department visits have decreased, but overall hospitalizations have increased. Allen said the state is also facing large outbreaks in workplaces, including a seafood wholesaler in Lincoln County.
State Health Officer Dean Sidelinger told reporters that as of Friday morning, Oregon officials had not identified a positive case of the coronavirus in someone who recently attended a protest of police brutality.
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“This is a tsunami”: These big retailers stiffed their landlords in May
Bankruptcy looms over some retailers who paid zero percent in May
TRD NATIONAL / By Sasha Jones June 08, 2020
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About 40 percent of national retail chains once again skimped on their rent in May, according to the latest monthly report on collection rates.
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Among those are 24 Hour Fitness, AMC Theaters and Pier One, all of which have either announced potential bankruptcy or plans to liquidate assets.
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Overall, national retailers paid 60.1 percent of rent, a small increase from April’s 56.7 percent collection rent, according to a report from the data firm Datex Property Solutions. Total collections – from both national and local retailers – checked in at 58.56 percent in May, up from 54 percent in April, according to the data.
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However, an increase in collections may not be a silver lining. Many retailers have negotiated rent relief with their landlords, which could make the numbers seem higher than they actually are, according to Datex CEO Mark Sigal.
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At the end of May 2019, national retail chains were able to pay 96 percent of their rent. Even just two months ago, that figure was at 94 percent.
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The plummet in rent collections is largely a consequence of the coronavirus pandemic, which has shuttered stores, in some cases permanently.
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Fifteen companies, out of the 131 companies included, have not paid a dime of rent last month. Bed Bath & Beyond, H & M, Century City, AMC theaters, Regal Cinemas, The Gap and Party City are among those.
Seven others have paid very little, including Barnes & Noble and DSW Shoe Warehouse. On Wednesday, The Real Deal first reported that Simon Property Group sued The Gap for $66 million for withholding rent in April, May and June.
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“A lot of the growth has been around more lifestyle oriented retail, the kind of retail where there’s a goodness to being present,” Sigal said. “With social distancing, the retailers that most build around that, folks like gyms and yoga studios or movie theaters — the types of operators where people are in the same space and close quarters — are the ones that have been most existentially impacted.”
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The report counts major chains as those that have a minimum gross monthly rent of $250,000 or lease 10 or more locations. It is based on verified collections from Datex’s portfolio of clients that report payment information from thousands of U.S. properties.
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However, not all companies are on their landlord’s naughty list this month. Unsurprisingly grocery stores, like Giant and Aldi have paid almost all their rent.
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Between competitors, companies’ collections differed greatly. PetSmart, according to Datex, paid 89 percent of its collective bill, while Petco paid 42 percent. Hobby Lobby similarly paid 99 percent, while Michael’s trailed behind at 39 percent, per the data.
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In part, this may be due to different franchisees or unsuccessful expansions in different areas, according to Sigal.
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“This is a tsunami that is unanticipated,” Sigal said. “Within that, you may have heard of this quote, ‘bad companies are destroyed by crises; good companies survive them; great companies are improved by them.’ Retail is that story”
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The restaurant sector experienced similar contrasts. McDonalds and Taco Bell, for example, paid the majority of their bills, while Jamba Juice and Five Guys paid less than half of theirs.
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Stage Stores Bankruptcy Approval Could Put More Than 700 Stores Up for Sale or Lease
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Retailer Still in Talks With Potential Buyers Even As It Proceeds with Liquidation
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By Marissa Luck CoStar News - June 11, 2020
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A bankruptcy court judge approved Stage Stores Inc.'s plan to wind down operations at more than 700 stores nationally, meaning potentially millions of square feet of retail space could be put up for sale or lease across the country this year unless the department chain finds a buyer for its business.
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So far, no prospective buyers have submitted formal bids to buy Stage Stores, the Houston-based national department store chain owner that operates Stage, Peeble's, Gordman’s, Bealls and Palais Royal stores in 42 states.
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Stage Stores filed for Chapter 11 bankruptcy protection May 10, and said it would liquidate its assets unless someone came forward to buy the company by a June 1 deadline. That deadline has passed with no proposals, but the company is still talking with some interested parties, said Joshua Sussberg, attorney at the law firm Kirkland & Ellis, the legal counsel in bankruptcy proceedings for Stage Stores.
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“We expect there to be significant, continued dialogue and action in the coming days,” Sussberg said in a June 10 hearing in the U.S. Bankruptcy Court for the Southern District of Texas.
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Absent a buyer, Stage Stores sought and gained approval Wednesday from bankruptcy court Judge David Jones on how to wind down its operations at its nearly 730 stores. According to court filings, the stores will wind down and close within 16 weeks of reopening from coronavirus lockdowns, which in most cases is by the end of August.
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PJ Soloman Securities is continuing to work with interested parties on behalf of Stage Stores for a potential sale of the business. Stage Stores also is pursuing the sale of smaller real estate assets, distribution centers and intellectual property such as customer data, according to a presentation in court.
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Stages Stores owned about $540 million in land and $10.3 million of buildings as of Nov. 2, according to a filing with the U.S. Securities and Exchange Commission. Stage Stores owns two of its distribution centers in Jacksonville, Texas, including a 328,000-square-foot facility and a 171,000-square-foot property, according to its latest annual report filed in February 2019.
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Stage Stores has settled any lockout disagreements with landlords, its attorneys said in the June 10 hearing.
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Stage Stores had paid only part of its rent for May for its headquarters office at 2425 West Loop South in Houston's Uptown-Galleria area, Ivan Gold, an attorney with Allen Matkins Leck Gamble Mallory & Natsis LLP who represents the office landlord Galleria 2425 Owner Inc., said in a phone call.
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Jones' order Wednesday will require Stage Stores to pay the remainder of unpaid rent for its office and retail locations by Aug. 1, according to the order. That means Stage Stores will have to be caught up on rent and continue to pay rent during the liquidation. Gold said Stage Stores paid its June office rent in full. According to court filings, Stage Stores pays $477, 868 per month for the space. Stage Stores leases 189,000 square feet of space at the office tower, which is owned by an affiliate of Naissance Capital Real Estate and managed by Hines, according to CoStar records.
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Stage Stores also said it had not paid the majority of March, April and May rent across multiple locations, according to court filings.
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A settlement with lenders has not yet been approved and is not expected to be considered until the end of June.
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Now, Stage Stores has reopened about 721 stores since coronavirus lockdowns have ended in many states, and stores are selling significantly more than originally expected, Sussberg said. Since mid-May, sales have hit $89 million, about $30 million above expectations, according to a presentation in court. Off-price store Gordman’s is performing particularly well, with same-store sales up 69% over the same time last year, Sussberg added. The remaining 6 closed stores in Stage’s chain are expected to open by June 15.
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The Houston-based discount retailer, which was already struggling before the coronavirus, had $1.01 billion in debt and $1.71 billion in assets when it filed for bankruptcy, according to its court filings. The retailer said it generated $1.6 billion in revenue in 2019 and its biggest creditors include Nike, Adobe, Skechers, Ralph Lauren and Levi, among 50 other major product and service providers it owes money.
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Stage Stores joins Neiman Marcus, J.C. Penney, Tuesday Morning and other retailers that have filed for Chapter 11 bankruptcy protection because of the coronavirus lockdowns and the recession.
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For the Record
Stage Stores hired Kirkland & Ellis LLP law firm as general legal counsel, while the law firm Jackson Walker LLP is assisting as local legal counsel, according to court filings. A&G Realty is Stage Store's real estate consultant during the restructuring. PJ Solomon Securities is assisting Stage Stores with evaluating business prospects and the selling of assets. Berkeley Research Group and Kurtzman Carson Consultants are also acting as consultants for Stage Stores. Gordon Brothers Retail Partners LLC is managing clearance sales.
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JSO add-on
Stage had planned to convert more than 500 department stores across the country in 2020, including Bealls, Goody’s, Palais Royal, Peebles, and Stage, into Gordmans. Once the change-overs were completed, Gordmans would have had around 700 locations, making it one of the largest retail unified chains in the United States.
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Hidalgo unveils COVID-19 'threat level' system, says Harris County at second-highest risk
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Zach Despart June 11, 2020 Houston Chronical
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A large, ongoing outbreak of COVID-19 places the Houston area on the second-highest of four public threat levels unveiled by Harris County Judge Lina Hidalgo on Thursday.
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If troubling trends continue, including an increase in coronavirus cases and hospitalizations, the county health department again would recommend residents stay at home except for essential errands, such as buying groceries and medicine, she said.
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JSO Commentary:
This is a potential second wave and could be a major setback in the fledgling economic recovery currently taking place. There is no doubt this is a worrisome development.
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Federal Reserve predicts slow recovery with unemployment at 9.3 percent by end of 2020
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The central bank plans to keep the benchmark U.S. interest rate
near zero through at least 2022.
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By Heather Long - June 10, 2020 - Washington Post
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Federal Reserve leaders predict a slow recovery for the U.S. economy, with unemployment falling to 9.3 percent by the end of this year and to 6.5 percent by the end of 2021, after tens of millions of Americans lost their jobs in the stunning recession caused by the outbreak of the novel coronavirus.
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Fed Chair Jerome H. Powell stressed Wednesday that more aid from Congress and the central bank is likely to be needed, especially since a substantial number of Americans may never get their jobs back.
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“Unemployment remains historically high,” Powell said during a news conference Wednesday. “My assumption is there will be a significant chunk ... well into the millions of people, who don’t get to go back to their old job ... and there may not be a job in that industry for them for some time.”
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What the Labor Department is doing about the ‘error’ that led to a lower unemployment rate
To revive the economy from the deepest recession since the Great Depression, the Fed pledged to keep interest rates at zero, most likely through 2022, and to continue its extensive bond-buying programs at the current pace for the foreseeable future. The Fed’s historic efforts, which could swell its balance sheet to $10 trillion by year’s end, are also fueling deeper inequality in the United States, many economists say.
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Low interest rates have spurred enormous stock market gains and made it cheap to get a loan for a car, mortgage or business operation. But a prospective borrower generally needs to have savings and a stable job to get access to credit or invest in the market. The Fed has limited tools to use in emergency situations such as this, and they tend to buoy Wall Street far more than Main Street.
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Read more....
https://www.washingtonpost.com/business/2020/06/10/fed-forecasts-economy/
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Another 1.5 million workers filed for
unemployment insurance
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Unemployment insurance claims have been trending down but remain historically high.
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By
Eli Rosenberg - June 11, 2020 Washington Post
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Another 1.5 million people applied for unemployment insurance for the first time last week, adding to the tens of millions of people who have applied for the benefits since the pandemic began and continuing a months-long drop in the number of initial claims.
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The numbers seeking jobless benefits have remained at historically high levels for 12 weeks, since the coronavirus pandemic took hold in back in March, disrupting global supply chains and shuttering businesses for months.
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The number gig and formerly self-employed workers who also applied for jobless benefits newly available to them under the expanded federal program went up to 705,000, from 620,000 the week before.
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The total number of people currently receiving benefits edged down slightly to 20.9 million, from a revised 21.3 million the week previously, a staggering toll on the labor force. More than 44 million people have applied for unemployment benefits during the pandemic.
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“That means 29 percent of the workforce has filed for unemployment claims during that period,” said Joseph Brusuelas, the chief economist at RSM. “Some may have returned to work. But that’s a stunning number nonetheless.”
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The numbers add to the complicated economic outlook that U.S. policymakers face, as they push to reopen for business while containing further spread of the virus at the same time.
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President Trump has hailed the signs that the economy may have already hit bottom — the unemployment rate dropped in May, surprising many economists — as an indication of that the recovery is beginning to take shape. But the official unemployment rate remains higher than at any time since the Great Depression.
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Meanwhile, data collection errors disclosed by the Bureau of Labor Statistics have contributed to the official unemployment rate registering lower than what it should be, BLS has said.
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And while some jobs, especially in the restaurant, retail and service sectors, are bouncing back quickly as local economics reopen, there are concerns about a second wave of layoffs. On Wednesday, the Federal Reserve chief Jerome H. Powell warned that some of the jobs lost won’t come back easily or at all.
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“Hiring appears to be picking up, but is far below what the labor market needs for a robust recovery,” Nick Bunker, an economist at Indeed said in a statement.
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While 1.5 million claims is among the lowest number of those seeking jobless benefits since the pandemic first started affecting the U.S. economy in mid-March, it’s still more than double the pre-pandemic record of 695,000 from 1982.
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“We’re seeing devastating tolls in lives and lost economic output from the Covid pandemic,” said Mark Hamrick, an economist at Bankrate. “The elevated claims are a reminder that this two sided crisis is still very much with us.”
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Federal Reserve officials are forecasting a slow and uneven recovery, saying Wednesday that they expect unemployment to fall to 9.3 percent by the end of the year as the economy shrinks 6 percent.
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Fed Chair Jerome H. Powell said that more aid from Congress and the central bank will likely be needed.
Nicole Moore, a former part-time Lyft driver and organizer with Rideshare Drivers United, spoke about the challenges that drivers have faced as their work has been wiped out nearly overnight.
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“People are so stressed,” she said. “I had a note that just broke my heart from someone....'Dear sir, I can’t explain the situation I’m in but I don’t have enough food for myself and my kids. Can you help me get my unemployment?' Those are the types of things that we’re seeing. It scares me what we’re going through."
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U.S. economy officially went into a recession in February, ending record 128-month expansion
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By: Rachel Siegel June 8, 2020 The Washington Post
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The United States officially fell into a recession in February, ending a historic 128-month expansion as the coronavirus swept the country and put the economy into a tailspin.
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The Business Cycle Dating Committee, which tracks and dates business cycles for the National Bureau of Economic Research, said the economy peaked just before the pandemic forced business and social activity into a holding pattern. Recessions often refer to two consecutive quarters of contraction, but the NBER’s calculation includes other factors, such as domestic production and employment.
“The time that it takes for the economy to return to its previous peak level of activity or its previous trend path may be quite extended,” the committee’s report said.
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States and communities began issuing stay-at-home orders in mid-March to stem the spread of the highly contagious virus. The moves prevented an estimated 60 million coronavirus infections in the United States, according to a study published Monday, but came at a great cost to the economy. More than 40 million Americans lost their jobs as consumers stayed out of shopping malls, restaurants, theaters and other places where crowds gathers. Travel, tourism, retail and other industries were devastated, tipping such well-known brands as J. Crew, Neiman Marcus and Hertz into bankruptcy.
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Though the nation’s unemployment rate dropped to 13.3 percent in May, versus 14.7 percent in April, the reading comes with an asterisk. The Bureau of Labor Statistics said it had misclassified data in May, April and March. Without the error, the unemployment rate would have been 16.3 percent for May and 19.7 percent for April, the agency said.
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Now, as states gradually ease pandemic restrictions, the question will be whether “reopening” fuels an economic turnaround anytime soon, or whether the downturn will extend into next year as people struggle to go back to work and the nation contends with a possible second wave of infections.
That the economy had plunged into a recession was not a surprise. As economist Ernie Tedeschi put it: “It’s now official (and utterly unsurprising).”
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Still, NBER’s report highlighted just how sharply the pandemic upended vast swaths of the economy and closed the book on an expansion that started in June 2009.
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“In the case of the February 2020 peak in economic activity, the committee concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief,” the report noted.
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In tracking business cycles and their inflection points, the NBER committee also takes into account indicators such as initial unemployment insurance claims, wholesale retail sales and industrial production. The committee’s official reports come retrospectively — or once it becomes clear there won’t be a need for major revisions even when more data becomes available.
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Government officials and economists have offered different timelines for when the economy might rebound, offering up an alphabet soup of W-, V- and U-shaped recoveries that could unfold later in the year or into 2021.
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The nonpartisan Congressional Budget Office expects the economic consequences of the novel coronavirus to exceed $8 trillion and suggests the economy will not fully recover until 2030. It also expects unemployment to hover above 10 percent into 2021, meaning the nation could still have joblessness that is worse than the Great Recession for months.
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But experts say the turnaround will hinge on controlling the spread of the novel coronavirus, which has killed more than 109,000 people in the United States.
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The NBER report had no effect on Wall Street, which is in the midst of a stunning three-month rally. On Monday, the Standard & Poor’s 500 index moved into positive territory for the year, the tech-heavy Nasdaq Composite set a record high and the Dow Jones industrial average extended its winning streak to six days.
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Mall REITs Say Only 20% of Tenants Paid May
Rent in Pandemic
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Collection Rate Also Dips at Strip Centers, the Most Resilient of the Property Type
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By Mark Heschmeyer
CoStar News - June 8, 2020
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Rent collection rates among retail landlords have deteriorated further during the coronavirus pandemic.
Shopping mall owners posted the worst numbers by far among major publicly traded real estate investment trusts, which hosted virtual presentations at the National Association of Real Estate Investment Trusts’ annual symposium. The REITs said they had collected about 20% of rents on average, according to a tally compiled by Morgan Stanley Research. The May figure was down from an average of about 26% in April.
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Owners of strip shopping centers fared better, reporting an average of 57% of rents collected in May versus 65% in April. Strip centers generally are occupied by a higher percentage of retailers deemed essential, such as banks, grocery stores and pharmacies, medical offices and home improvement stores.
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Retail properties across the country are beginning to reopen, but tenant troubles could be an obstacle to seeing rent collection numbers rebound. Some of the largest high-risk retailers occupy a significant share of mall space. In fact, 14 of the 20 largest mall tenants are either apparel retailers or department stores, and these 14 tenants occupy nearly one-quarter of all U.S. regional and super regional mall space, according to CoStar data.
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Apparel retailers and department stores were among the tenants the REITs reported as having the lowest rent payment numbers.
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For example, Jacksonville, Florida-based Regency Centers reported collection rates of 83% higher in May than in April for essential retailers. However, collections for soft goods retailers such as department and apparel stores was at 20%.
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Oak Brook, Illinois-based Retail Properties of America reported an 88% collection rate for essential retailers. For nonessential retailers, the rate was 26%. The apparel retailer rate was just 12%.
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Apparel and department store retailers are also highly exposed to the threat of e-commerce. According to the U.S. Census Bureau, clothing and accessory store sales slid 78.8% from March to April and have now fallen by 89.3% since April 2019.
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However, nonstore retail sales, which are mostly e-commerce sales, grew about 8.4% month-over-month in April.
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Since the outbreak of the coronavirus, four large apparel retailers have filed for bankruptcy: J. Crew, Neiman Marcus, Stage Stores and J.C. Penney.
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Also last week, the tension between landlords and clothing retailers escalated as the nation's largest mall operator, Simon Property Group, sued clothing seller Gap to collect on $66 million in back rent.
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Tenant problems are also showing up in the entertainment sector. Last week, major anchor tenant AMC Entertainment Holdings disclosed “going concern” doubts as it was projecting a loss in the first quarter between $2.1 billion and $2.4 billion.
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Entertainment tenants are also among retailers that landlords report are having the most trouble making rent payments.
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Regency Centers reported collecting May rents from just 15% of its entertainment tenants. Overall, it collected 68% of April pro-rata base rent, and 58% in May.
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Retail Properties of America said it had not collected any rents from 2.1 million square feet of amusement/play center tenants. Overall, the REIT received 52.4% of May rent.
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May rent collections were more bullish for other property types, according to Morgan Stanley’s tally.
Apartment REITs reported the highest rent collection numbers on average at 96% of rents collected in May versus 97% in April. Industrial REITs s reported 95% collection rates in May, down from 98% in April. Office REITs reported rent collections in May were similar to April at about 90%.
WeWork Chief Culture Officer to Depart Company He Co-Founded
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Miguel McKelvey to Leave at End of June
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By Clare Kennedy
CoStar News
June 6, 2020 | 8:04 A.M.
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Coworking giant WeWork is preparing to soon say adieu to Miguel McKelvey, who co-founded the New York-based company in 2010 with former CEO Adam Neumann.
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McKelvey, whose official title at WeWork is chief culture officer, announced he was leaving the company in an email to WeWork's staff, according to WeWork. His departure is voluntary, said a company spokesman who declined to comment further on the matter. CNBC reported the news early Friday.
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"After 10 years, I’ve made one of the most difficult decisions of my life – one that I’m not even sure has sunk in just yet," McKelvey wrote in the statement to WeWork's staff, which was provided to CoStar by the company. "But at the end of this month, I’ll be leaving WeWork. While it’s hard to leave, and I know there is a lot more work to be done, I could only make this decision knowing this company and our people are in good hands.”
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McKelvey is taking his leave after a flurry of challenges to WeWork, which include a class action lawsuit brought by investors who allege WeWork misled them about its financial condition and operations, as well as a threat of legal action from WeWork tenants in three major U.S. cities who joined together last month to demand the firm stop charging them rent for office space they can't use because of government-ordered coronavirus shutdowns.
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He is one of the last remaining members of the original leadership team at WeWork, which has seen a number of shakeups in its top ranks since WeWork's once meteoric rise came to a grinding halt last fall, when Wall Street's scrutiny of its filings for its initial public offering cast doubt on the company's structure and viability.
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WeWork withdrew its IPO in September and Neumann was left the firm. In October, one of its largest investors, Japan's SoftBank, largely took control.
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In February, WeWork hired a seasoned real estate executive, Sandeep Mathrani, as its new CEO in the hopes of staging a turnaround. However, the company's attempts to regroup were set back by the coronavirus pandemic, which swept the United States in early 2020 and necessitated widespread stay-at-home orders in most of the nation's major cities. The pandemic continues to pose an existential threat to the coworking industry, which is premised on providing its tenants with a stimulating work environment that maximizes human connection.
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Executives at WeWork struck a warm, complimentary tone in their statements about McKelvey and his imminent departure.
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McKelvey's "dedication to establishing a community that fosters connection and compassion has helped build a business that recognizes and celebrates inclusivity, authenticity, learning, and growth. I am confident [he] will bring the same entrepreneurial spirit to his future endeavors and we wish him all the best in what lies ahead," Mathrani said through the spokesman. "He has left an indelible mark on this company and he will be missed.“
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Marcelo Claure, CEO of Softbank Group International, COO of Softbank Group and executive chairman of WeWork, recalled talking with McKelvey into the wee hours the night before he became executive chairman.
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"I know that whatever his next adventure holds, he will continue to have an impact on so many,” Claure said.
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States Hardest Hit by Closures Could See Property Valuations Fall by Low Double Digits
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A new report from Reonomy looks at where property valuations might dip the most
https://www.reonomy.com/research/reports/post/covid-19-hit-list-hardest-hit-markets
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Sebastian Obando | Jun 08, 2020
National Real Estate Investor
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It’s been made clear by now that the retail, restaurant, travel and energy sectors have been hit the hardest by the impact from the COVID-19 crisis. But a recent report from Reonomy, a data platform for the commercial real estate industry, also highlights that administrative work, arts, entertainment and recreation industries have seen outsized fallout. Across the U.S., all these industries account for approximately 14 percent of GDP, Reonomy researchers point out.
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In addition, many of these industries are concentrated in specific states, leading Reonomy to conclude that Alaska, Nevada, New Mexico, Oklahoma and Wyoming will be among those that will suffer more from the pandemic. Firm closures in the impacted sectors can lead to higher unemployment rates and longer-lasting periods of unemployment for workers, and to decreased tax revenues for the states. And decreased economic activity will also weaken property valuations.
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In addition to the above-mentioned states, states with high concentrations of at-risk jobs include those that rely heavily on tourism (Mississippi, Louisiana, South Carolina and Hawaii), states with high levels of energy production (Wyoming, North Dakota, South Dakota and Louisiana) and states with large manufacturing sectors (Indiana, South Carolina, Alabama and Kentucky).
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Complicating the matter are higher commercial rental rates in some of the most affected states. The higher the rents, the more difficult it will be for struggling tenants to pay them, even when the impact of the government’s PPP loans is factored in, Reonomy notes. The harder hit markets may ultimately experience valuation decreases somewhere in the low double digits, says a Reonomy analyst.
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To get further insight on what the report’s findings mean, NREI spoke with Omar Eltorai, market analyst at Reonomy.
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The following is a partial response... Read more at:
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NREI: The report mentions at-risk labor forces and at-risk industries. Expand on that, what are the main takeaways from these sections?
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Eltorai: The at-risk labor force is focusing on unemployment. The way I would break it down is labor force is focusing on the employee and the industry is focusing on the employer. That’s the difference between the two. They are certainly related. Think about it this way, there are types of jobs where the business might survive, but the employee is put in financial stress. Any sort of role where the job’s hours get cut back, or the job can’t be shifted remotely, and the employer has to cut hours instead of laying off. Even though that’s beneficial and helpful to provide some relief to the employer in terms of decreasing expenses, the employee is still put in a tricky spot where if they weren’t working for the last couple of months, that puts an added financial burden at the individual level. The industry piece is really focused on the employer level, where there are a number of businesses that can have inherent risk because of the way in which we’ve been trying to contain the pandemic.
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NREI: What are some important trends you see developing that are worth keeping tabs on?
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Eltorai: What’s unique about the pandemic and crisis that really make up this pandemic is how important geography is. It’s really a big factor, you can see that on a national level, when you’re looking across the states, but it also comes down to a much more local level where geographies have dramatically different experiences. There are many places that have higher density that are really feeling the effects of this pandemic and this crisis much more severely than other places. There are many other states that are reading about the pandemic, but they’re not quite experiencing it to the same degree. I think that’s really going to come through not only during the crisis and be a key differentiating factor there, but it will also be very key in the recovery as well. So, I think that it has been pretty amazing to see how powerful this pandemic has been. It has reshaped certain markets, but then it has left other markets, I don’t want to say untouched, but it’s far less noticeable in other markets.
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NREI: What are some important trends you see developing that are worth keeping tabs on?
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Eltorai: What’s unique about the pandemic and crisis that really make up this pandemic is how important geography is. It’s really a big factor, you can see that on a national level, when you’re looking across the states, but it also comes down to a much more local level where geographies have dramatically different experiences. There are many places that have higher density that are really feeling the effects of this pandemic and this crisis much more severely than other places. There are many other states that are reading about the pandemic, but they’re not quite experiencing it to the same degree. I think that’s really going to come through not only during the crisis and be a key differentiating factor there, but it will also be very key in the recovery as well. So, I think that it has been pretty amazing to see how powerful this pandemic has been. It has reshaped certain markets, but then it has left other markets, I don’t want to say untouched, but it’s far less noticeable in other markets.
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A Million-Mile Battery From China
Could Power Your Electric Car
In a market broadsided by the pandemic, global sales of gas-powered cars and trucks may have already peaked.
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The Chinese behemoth that makes electric-car batteries for Tesla Inc. and Volkswagen AG developed a power pack that lasts more than a million miles -- an industry landmark and a potential boon for automakers trying to sway drivers to their EV models.
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For the makers of gas powered cars this graphic below is sobering .
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Read more...
Bloomberg New...June 7, 2020,
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Office Towers Are Still Going Up, but Who Will Fill Them?
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By Kevin Williams, June 2, 2020, New York Times
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Developers around the country are grappling with the fallout from the coronavirus pandemic as tenants cancel plans and workers fear returning to the office.
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Before the pandemic shut down businesses, a robust economy had powered a building boom, sending office towers skyward in urban areas across the United States. The coronavirus outbreak, though, has scrambled plans and sent jitters through the real estate industry.
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Skyscrapers scheduled to open this year will remake skylines in cities like Milwaukee, Nashville and Salt Lake City. Office vacancy rates, following a decade-long trend, had shrunk to 9.7 percent at the end of the third quarter of 2019, compared with 13 percent in the third quarter of 2010, according to Deloitte.
Developers were confident that the demand would remain strong. But the pandemic darkened the picture.
“There is a pause occurring as companies more broadly consider their real estate needs,” said Jim Berry, Deloitte’s U.S. real estate sector leader.
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The timing is unfortunate for Mark F. Irgens, whose 25-story BMO Tower in Milwaukee opened in mid-April at the peak of the statewide lockdown in Wisconsin. A month later, a small fraction of typical daytime foot traffic was passing by as most businesses adhered to the governor’s stay-at-home directive, which expired last week. A restaurant that was slated for the ground level was canceled, and three potential tenants have delayed their plans.
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Instead of showing off the building’s sparkling Italian marble floors and panoramic vistas of Lake Michigan, Mr. Irgens is worrying about who is going to pull out next and what type of corporate landscape he might face when the pandemic finally ends.
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But he is not putting on the brakes. The BMO had been planned for five years, and he has leases to negotiate, investors to please, tenants to woo and loans to pay off.
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“Development projects are different than making widgets,” he said. “You can’t stop; you can’t turn it off. You have to continue.”
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Slowly, workers are filling their BMO offices. Managers, who were scheduled to report on Monday, constitute about 15 percent of the building’s occupancy. Mr. Irgens thinks it will be the end of the summer before it gets up to 50 percent. Without a coronavirus vaccine, it may be year’s end before the building approaches a “normal” occupancy, he said.
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Other developers around the country are also dealing with the fallout, especially for towers with Class A space, regarded as the highest-quality real estate on the market. In most cases, new buildings are not fully occupied, and developers were counting on a strong economy to do the work for them. For instance, the BMO Tower was 55 percent leased before the pandemic.
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The question facing the owners of office towers is: Will anyone still want the space when coronavirus crisis fades?
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If the economic pain drags on, there could be long-lasting changes to the way people work and how tenants want offices to be reimagined, said Joseph L. Pagliari Jr., clinical professor of real estate at the University of Chicago’s Booth School of Business. Some of the changes — like more spacious elevators — could be costly to put into place, he said.
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The pandemic could be a “pivot point,” Mr. Pagliari said, and that would be bad news for building owners. The office towers were designed to be “best in class,” he said, but the pandemic has suddenly made their most salable amenities — common areas, fitness centers and food courts — into potential liabilities.
The economic crisis could also spur high interest rates on debt, which would cause building values to fall, Mr. Pagliari said. That may happen even if the crisis diminishes in the weeks ahead.
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“The current pandemic has raised perceptions about the likelihood and consequences of future pandemics,” Mr. Pagliari said. Developers who can factor in such events will gain an advantage, but any skyscrapers that are built with pandemic fears in mind are years away.
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The prospect that workers may want to continue working from home does not worry John O’Donnell, the chief executive of Riverside Investment and Development, which is developing a 55-story tower at 110 North Wacker Drive in Chicago. The tallest building erected in the city since 1990, it is scheduled to open in August and will be anchored by Bank of America. Other tenants include law firms, many of which are doing business from home.
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“There is a need for collaboration, team building, common business cultures and a continuous desire to have social contact within a business,” Mr. O’Donnell said.
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The building is 80 percent leased ahead of its August opening. One tenant signed for 40,000 square feet of office space at the height of the lockdown, which Mr. O’Donnell took as an encouraging sign.
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The building is already being adjusted to meet post-pandemic needs, something Mr. O’Donnell said newer structures were better able to do. Amenities are being updated to be touch free. And owners are talking with tenants about walk-through thermal imaging to monitor workers and visitors for fevers.
The pandemic will result in a demand for more office space, not less, said Paul H. Layne, the chief executive of the Howard Hughes Corporation, a national commercial real estate developer based in Houston. Developers will move away from the industry-standard 125 square feet per person toward roomier workplaces.
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But others say it is too early to tell when demand for office space will return. Jamil Alam, managing principal of Endeavor Real Estate Group, said the situation would vary by city.
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“There will be winners and losers,” Mr. Alam said, explaining that he thinks denser metro areas like New York and Boston, which have been ravaged by the coronavirus, could find their luster lost in favor of smaller markets.
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Endeavor, which is based in Austin, Texas, has a portfolio that includes 15.6 million square feet of commercial real estate in cities like Dallas, Denver and Nashville. One of its projects, the 20-story Gulch Union, will be the largest office tower in Nashville when it opens in August with 324,254 square feet of office space.
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Smaller markets like Nashville are well positioned for companies wishing to pull up stakes from major metropolitan areas with higher density and costs, Mr. Alam said. Gulch Union has leased 27,000 square feet, and four more deals totaling 40,000 square feet are near completion.
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Endeavor, which is based in Austin, Texas, has a portfolio that includes 15.6 million square feet of commercial real estate in cities like Dallas, Denver and Nashville. One of its projects, the 20-story Gulch Union, will be the largest office tower in Nashville when it opens in August with 324,254 square feet of office space.
Smaller markets like Nashville are well positioned for companies wishing to pull up stakes from major metropolitan areas with higher density and costs, Mr. Alam said. Gulch Union has leased 27,000 square feet, and four more deals totaling 40,000 square feet are near completion.
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“Deals are still being done,” he said.
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There will be an appetite for urban, walkable, mixed-use office environments, Mr. Alam said, and changes will need to be made in buildings over time, like fewer touch points on handles and elevator buttons.
But projects that have not been started yet will be paused, said Chris Kirk, managing principal of the Salt Lake City office of Colliers, the commercial real estate brokerage firm.
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“If you are a developer or landlord or C.F.O., you are concerned,” he said. “Everyone is feeling the impact.”
Salt Lake City is in a better position to weather the crisis than other markets, he added, because Utah has had fewer coronavirus cases than most states and has not been under a statewide lockdown.
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And the city is experiencing a building spurt downtown. A 24-story Class A tower developed by City Creek Reserve, the development arm of the Church of Jesus Christ of Latter-day Saints, is scheduled for completion next year. The building, which will have 589,945 square feet of office space, is already 80 percent leased.
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Salt Lake City has been averaging a new Class A office high-rise every decade, and the pace is increasing. Still, the pandemic might put the brakes on that.
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“Anyone who would be coming out of ground speculatively now without the commitment has got to be thinking about their timing,” Mr. Kirk said.
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Mr. Irgens hopes to ride out the pandemic and continue with other projects. In February, his company broke ground on a six-story building in Tempe, Ariz., and it is moving forward with a 235,000-square-foot Milwaukee office project that is 42 percent leased.
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“My partners in my business are working really hard to figure out how to have business continuity, and it is really hard to do that,” he said. “Things are changing daily.”
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https://www.nytimes.com/2020/06/02/business/coronavirus-office-towers.html
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Landlords ‘baffled’ as Travelodge prepares to launch CVA
By Jessica NewmanWed 3 June 2020 Property Weekly
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Travelodge landlords have voiced their concerns as the operator prepares to to launch a CVA (Company Voluntary Arrangements) later today in a bid to end its bitter rent dispute.
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Claiming it had proved too complex to negotiate a deal with its more than 300 landlords, Travelodge is to put forward CVA proposals which would see it pay £230m in rent for the period until December 31 2021, after which rent would become fully payable.
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The business’s shareholders have agreed to inject £40m into the business, use more than £100m of reserves and take on an additional £100m of debt, including £60m from shareholders.
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The proposals include keeping all Travelodge hotels open during the CVA, and giving landlords the option to add an extra three to five years onto their lease terms to make up for foregone rent during the Covid-19 lockdown.
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The budget hotel operator, which is owned by Golden Tree Asset Management and Avenue Capital and the investment bank Goldman Sachs, has been locked into a bitter dispute with landlords since it refused to make its quarterly rent payment in March.
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The proposals are subject to approval from its creditors, the majority of which are its landlords.
The CVA will be put to a vote on 19 July.
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Viv Watts, managing director at Oasis Holdings and head of the Travelodge Owners Action Group, said landlords are “baffled” by the choice to CVA.
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Speaking on behalf of the landlords of 390 Travelodge Hotels, Watts said: “The Travelodge Owners Action Group has on three occasions shared a very generous proposal with Travelodge, offering some £70m in rent write-offs in 2020. Our proposal clearly demonstrates that any CVA, which would undermine the integrity of long term leases at great risk to UK pension and insurance industries, is not necessary,” he said.
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“The latest plan appears to be an attempt to force through Travelodge’s original unjust proposal under the guise of a ‘non-traditional’ CVA, designed to enrich its offshore shareholders at the expense of UK savers and investors.”
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Meanwhile, Nick Leslau’s Secure Income REIT, which owns 123 hotels, confirmed in a statement that it would be “scrutinising” any proposals made by Travelodge.
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The statement read: “Travelodge has yet to provide details of their proposal to the Company and we await sight of any CVA documentation.”
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“Once received, we will be scrutinising any proposals along with our team of expert advisors in order to best protect the Company’s position in determining whether or not to support any CVA proposals. Further information about the potential impact on the Company will be announced once we have been provided with the relevant information.”
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Savills is advising Travelodge.

Mall Operator on Brink of Default After Retail Rents Go Unpaid
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Lauren Coleman-Lochner and Steven Church Bloomberg News
June 2, 2020, 10:43 AM CDT Updated on June 2, 2020, 3:08 PM CDT
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Unpaid rent from retailers is upending turnaround efforts at CBL & Associates Properties Inc. and forcing the mall owner to skip an upcoming interest payment while it negotiates with creditors.
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CBL said in a filing it withheld the $11.8 million due June 1 on its 5.25% unsecured notes, which mature in 2023, and invoked a 30-day grace period. Last week, the company drew $280 million from its line of credit, furloughed employees and halted redevelopment investments designed to reverse the decline facing many American malls.
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The move could put the rest of CBL’s debt in jeopardy, too. If the company doesn’t make good on the missing bond payment, holders of CBL’s senior secured credit facility and other notes due in 2024 and 2026 could demand immediate repayment, according to the filing.
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“Our priority during this time of uncertainty has been to preserve cash,” Chief Executive Officer Stephen D. Lebovitz said in an statement to investors last week. Chief Investment Officer Katie Reinsmidt declined to comment.
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Trends haven’t been in CBL’s favor, and it’s not just because of the wave of bankruptcies and store closings that predates the virus crisis. Analysts have long predicted a major shakeout in retail properties serving less affluent areas, which dominate CBL’s roster of more than 100 properties in 26 states. Its malls have been hard hit by the departures of anchor stores such as Sears, J.C. Penney, Macy’s and Forever 21.
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“It’s definitely a lower, less-productive portfolio,” Bloomberg Intelligence analyst Lindsay Dutch said in an interview. Its same-store sales average less than $400, compared with more than $660 for Simon Property Group Inc., the largest U.S. operator.
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CBL lags in occupancy rates, a problem that could grow as retailers elect to keep more stores permanently shuttered. The Chattanooga, Tennessee-based company also lacks the cash to invest in attracting consumers and innovative tenants to its properties, Dutch said.
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CBL has reopened 66 of the 68 malls it owns or manages, Lebovitz said. However, it collected just 27% of billed cash rents in April and likely will get 25% to 30% of May rents, based on preliminary receipts and conversations with retailers, he said.
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“We have placed a number of tenants in default for non-payment of rent,” Lebovitz said in the May 26 statement. “We anticipate a significant portion of April and May rents will be collected later in 2020 and into 2021 under agreed upon deferral plans. However, negotiations are ongoing, and it is premature to estimate a recovery rate at this time.”
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In January, CBL said it was exploring ways to reduce leverage and interest expense andto extend the maturity of its debt. The company hired the law firm Weil, Gotshal & Manges LLP and financial advisory Moelis & Co. LLC, according to the filing.
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Even top-ranked centers are hurting now, with market rents at A-level malls expected to fall about 20% in the coming years, said Green Street Advisors, the real-estate research and consulting firm, in a May 27 note.
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Green Street has forecast that more than half of all mall-based anchors will close by the end of next year. “Many mall-based retailers are in a much worse financial position compared to last cycle,” Green Street analysts wrote in the note. “Bankruptcy activity could be widespread and the surviving brands will likely seek to reduce their store fleets.”
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till, the bankruptcy of General Growth Properties in late 2009 shows there can be a second act. The company reworked its $27 billion in debt, incurred during numerous aquisitions, and emerged the following year with Brookfield Asset Management holding a 26% stake. Brookfield took over the mall operator, then as now the second-largest in the U.S., in 2018.
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More recently, Brookfield announced the creation of a $5 billion fund to shore up troubled retailers, following moves with larger competitor Simon Property Group to take stakes in bankrupt retailers Aeropostale and Forever 21.
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But as shopping centers start to reopen, expect more retail distress, Dutch said.
“Some of those closings are going to be permanent,” she said, and when even healthier merchants decide to close locations, they’re going to choose less-productive malls first. “The demand for lower-quality locations isn’t there.”
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Nursing Homes Fought Federal Emergency Plan Requirements for Years. Now, They’re Coronavirus Hot Spots.
The long-term care industry resisted a federal mandate to plan for disasters including pandemics. About 43% of nursing homes have been caught violating the requirement, including facilities that have now had deadly COVID-19 outbreaks.
by Bryant Furlow, New Mexico In Depth, Carli Brosseau, The News & Observer and Isaac Arnsdorf, ProPublica
May 29, 5 a.m. EDT
On Dec. 15, 2016, the nation’s largest nursing home lobby wrote a letter to Donald Trump, congratulating the president-elect and urging him to roll back new regulations on the long-term care industry.
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One item on the wish list was a recently issued emergency preparedness rule. It required nursing homes to draw up plans for hazards such as an outbreak of a new infectious disease.
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Trump’s election, the American Health Care Association, or AHCA, wrote, had demonstrated that voters opposed “extremely burdensome” rules that endangered the industry’s thin profit margins.
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“Part of the public’s message was asking for less Washington influence, less regulation, and more empowerment to the free market that has made our country the greatest in the world,” AHCA wrote. “We embrace that message and look forward to working with you to improve the lives of the residents in our facilities.”
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The letter was another salvo in the industry’s fight against regulations designed to stop diseases like COVID-19 from devastating elderly residents of the nation’s nursing homes, according to a review of documents and data by New Mexico In Depth; The News & Observer of Raleigh, North Carolina; and ProPublica.
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The lack of pandemic plans helps explain why nursing homes have been caught unprepared for the new coronavirus, patient advocates and industry observers said. Across the country, more than one in four nursing homes have registered an outbreak, according to media reports. More than 16,000 nursing home residents and workers have died, accounting for 17% of COVID-19 deaths nationwide, according to an AARP tally on May 18. That figure is likely an understatement of the true scope of the harm.
Ongoing questions about the regulations may also have played a role. The 2016 rules mandated planning for all kinds of hazards, citing Ebola as an example. In 2019, the Trump administration clarified that nursing homes needed to include a specific plan for outbreaks of unfamiliar and contagious diseases — such as the coronavirus.
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The plans must address how facilities will respond in an emergency — specifying how nursing homes will decide to shelter in place or evacuate and how they will provide residents with food, water, medicine and power. Nursing homes have to train their staff on these plans and practice them at least twice a year, if possible by participating in a drill with local agencies.
Some nursing homes were slow to comply, according to an analysis of inspection data, watchdog reports and interviews with ombudsmen and advocates. Inspectors have found more than 24,000 deficiencies with nursing homes’ emergency plans between November 2017, when the so-called “all hazards rule” took effect, and March 2020, according to public data reviewed by the news organizations. The violations occurred in 6,599 facilities, equal to about 43% of the country’s nursing homes.
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Because of how the Centers for Medicare and Medicaid Services tracks the data, it’s not possible to say exactly how many of the emergency planning violations related specifically to a failure to plan for an infectious disease outbreak. Failures to meet routine infection control standards were excluded from the analysis.
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But nursing home advocates say that more detailed plans accounting for expected staff and equipment shortages would have likely resulted in fewer deaths and illnesses at nursing homes stricken by the coronavirus. The current rule requires nursing homes to make contingency staffing preparations, but it doesn’t require stockpiles of personal protective equipment, or PPE.
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“It’s just a river of grief, and it could have been prevented,” said Pat McGinnis, executive director of California Advocates for Nursing Home Reform.
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Emergency plans help facilities train their staff ahead of time and guide tough decisions during a crisis, said Ted Goins, the president and CEO of Lutheran Services Carolinas, a nonprofit based in Salisbury, North Carolina, that runs several highly rated elder-care facilities.
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“COVID-19 is a perfect example of why we have emergency plans in our facilities, and I’m sure that’s why it’s a requirement,” Goins said.
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AHCA declined to make any executives available for an interview. In a statement, the group said the pandemic shows that nursing homes should be a bigger priority for resources but not for regulation.
“As we assess the COVID-19 pandemic and how to prepare our healthcare system for future outbreaks, more regulation is not necessarily always the answer,” AHCA said in the statement. “There will be time to look back and determine what we can do better for future pandemics or crises.”
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One place to start: a nursing home and rehabilitation center in Albuquerque, New Mexico, with five deaths and 42 infections tied to a COVID-19 outbreak and no plan for dealing with a pandemic, according to its employees and New Mexico public records.
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“Pandemic response? I mean, I don’t think anybody was really prepared for a pandemic of this level or this quickly,” said Edwardo Rivera, the facility’s administrator. “We did have some things in place, but nothing could have prepared us for what COVID-19 was.”
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An Emergency Call
Robert Potts, 91, once flew America’s leaders around the globe.
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A retired Air Force colonel who flew combat missions in Korea and Vietnam, Potts returned to the United States to serve as pilot for Air Force One and Air Force Two in the 1960s, according to service records and a family member. He spoke of flying President John F. Kennedy and first lady Jacqueline Kennedy.
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After he fell at home and hit his head in March, Potts wound up at Advanced Health Care of Albuquerque, part of a nationwide network of 22 post-hospitalization rehabilitation and skilled nursing facilities.
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The Albuquerque facility is a top-rated rehabilitation center with personal bedrooms and wine glasses in the dining hall. It takes care of patients needing physical, occupational or speech therapy after hospitalization.
In early April, AHC of Albuquerque staff and residents began testing positive for the coronavirus. Concerned about her father’s health, Potts’ daughter Susan wanted to bring him home. Somebody from the facility — Susan could not remember exactly who — assured the family that Potts had tested negative for COVID-19.
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Read more...
U.S. Renewables Outstrip Coal for First Time Since 19th Century
By
May 28, 2020, 11:32 AM CDT
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The U.S. consumed more energy from renewable sources last year than from coal, the first time that’s happened since the late 1800s when wood stopped powering steamships and trains.
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Coal accounted for 11.3 quadrillion British thermal units of energy in 2019, a 15% decline from the prior year, a drop driven mainly by utilities turning away from the dirtiest fossil fuel. Renewables recorded 11.5 quadrillion Btu, up 1.4%, according to a statement Thursday from the the U.S. Energy Information Administration.
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While coal has been gradually replaced in transportation and heating, it remained the biggest source of U.S. electricity until it was surpassed by natural gas in 2016. In a significant milestone, power generated by burning coal was expected to be overtaken by renewable electricity this year, but the consumption figures show that the green transition is already happening.
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“This shows us the trend toward renewables is clearly well underway,” said Dennis Wamsted, an analyst for the Institute for Energy Economics and Financial Analysis. “We see it speeding up.”
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Crossover
The U.S. consumed more energy from renewables last year than from coal
Source: U.S. Energy Information Administration
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How COVID-19 Is Impacting Asset Values in Europe
May 28, 2020 - Source: SitusAMC https://www.situsamc.com/insights/how-covid-19-impacting-asset-values-europe​
In 2019, SitusAMC evaluated nearly $1.3 trillion of commercial real estate across the U.S. and Europe. Hugo Raworth, Managing Director of SitusAMC and leader of the firm’s real estate valuation services in Europe, discusses how COVID-19 is impacting cash flow and property values in the European Union (EU), and which asset classes are likely to bear the brunt of the crisis.
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How are valuers accounting for the impact of COVID-19 on commercial real estate assets?
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With limited transactions outside of super prime assets, valuers have been moving values out based on market sentiment and short-term rental voids. However, the true impact, be it benign or aggressive, will become even more clear over the coming months as the market solidifies around transactional data.
Unlike 2008, this is a health crisis that has led to an income-liquidity crisis, not a capital-liquidity crisis. Pressure on investors and lenders is being driven by tenants’ cash-flow issues, not because of reckless behavior by borrowers nor sponsor or bank capital illiquidity. However, COVID does bear a similarity to 2008 in that both crises have led to market paralysis outside of super prime. No one wants to sell into a market that may recover in a few months’ time and most buyers are taking a wait-and-see attitude. In addition, investment alternatives will also play a big part in the re-pricing effect on real estate, whereby the stock and bond markets aren’t necessarily reflecting good risk-adjusted yields relative to real estate.
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The good news is that with valuers now able to undertake inspections, the hope is that we may start to see some market activity, which will enable valuers to point to more market evidence in assessing and tracking values.
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What asset classes will be hardest hit by the pandemic?
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Before the pandemic, retail had already been experiencing value losses with significant headwinds. That has been exacerbated by COVID-19, as consumers curtail spending and shop online rather than in-store. Coronavirus has pressed the fast-forward button on those challenges, intensifying some of the balance-sheet issues faced by other struggling occupiers.
Other assets are exposed to corporate occupiers with limited maneuverability due to high corporate debt. High corporate debt is not sector-specific, but some areas of the market are more exposed; serviced offices and some hotels have been widely commented on in the press in recent months.
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Thirdly, any sector which relies on social interaction will have to adapt at least in the short term; leisure, retail, healthcare, hotels and again, flexible office space. How far and how deep these sectors are hit remains uncertain, but the road to recovery lies in occupiers in these sectors being able to adapt to the new world post-COVID and a swift return to full operational capacity.
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What do lower asset values mean for owners and investors in terms of potential mark-to-market losses in their portfolios for the rest of 2020?
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Investors and lenders will take write-downs on their assets, but this will be sector-specific and could be limited if some parts of the market recover swiftly. One thing is clear, there is significant weight of capital out there and banks are willing to lend. With real estate still priced attractively compared to other asset
classes, it is reasonable we could see this lessen the blow in some sectors, which will of course reduce mark-to-market losses.
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Given questions about the security of income, aren’t investors likely to expect a discount in price to reflect the cash-flow risk?
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So far, we are only seeing prime assets trade – grocery stores, prime central London offices and the like, or long-leased properties secured to strong tenants. In short, all super-secure, low-risk assets, and so far, no discount in this part of the market.
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We have seen some repricing on assets where deals were agreed upon pre-COVID and have transacted now, but these are still limited. It’s clear that the market is expecting some discount even on some of the better-performing sectors such as offices and logistics. However, with most investors anticipating some market improvement over the balance of the year, and with no pressure yet to sell, many fail to see the logic in transacting now at a discount.
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Increased national debt across most affected countries will be a significant economic burden for the foreseeable future. What impact will that have on property valuations, if any?
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The cost of intervention has been huge across Europe; in the United Kingdom the government is paying 80 percent of wages of all furloughed staff. Any direct impact of increased national debt on values in any country in Europe is and will continue to be difficult to corroborate. However, governments will have to walk a careful path between fiscal responsibility and paying down the debt, whilst not suffocating economic recovery under the burden of high taxation and limited spending.
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By the Numbers... Average National gas prices and more importantly the margin.
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Source: nacsdaily@convenience.org

Americans have filed more than 40 million jobless claims in past 10 weeks, as another 2.1 million filed for benefits last week
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The economic struggle continues as states seek to reopen, but many workers and businesses remain uneasy about the future
By Tony Romm - Washington Post
May 28, 2020 at 7:33 a.m. CDT
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Americans have filed more than 40 million claims for jobless benefits in the past 10 weeks, according to new Labor Department data, laying bare a tremendous and sudden disruption in the U.S. economy that is already changing the types of jobs desperate workers are looking to fill.
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More Americans are vying against each other to snag a shrinking pool of jobs assisting offices, entering data and handling other responsibilities that can be predominately executed from home, offering early clues about a labor market crunch that will intensify this summer.
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The competition for these postings has become even more intense. The new Labor Department data said 2.1 million Americans filed for jobless claims last week, adding to an already tremendous number of people who have recently been laid off.
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The scramble for remote, socially distant employment reflects lingering fears on the part of U.S. workers about their physical and financial security as the coronavirus pandemic stretches into its third month. There have been roughly 40 million applications for jobless benefits since March, and the Trump administration is expected to announce Thursday that even more have joined their ranks.
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Many states have begun to reopen their economies, but the process has been uneven and companies continue shedding workers as the economic outlook for the rest of the year remains quite dark.
For Americans seeking new gigs, or aspiring to return to the workplace, the market may prove daunting, according to a snapshot compiled by ZipRecruiter, a job-posting website. There is a growing number of openings in warehouses as major retailers such as Amazon expand their footprints. But some of the greatest demand is for harder-to-get, “safe” jobs requiring little to no face-to-face contact, including data entry, customer service and other human-resource tasks, said Julia Pollak, the company’s labor economist.
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Three months ago, for example, 19 people on average might have applied for an open customer-service representative position on the site, ZipRecruiter found. By May, that average had tripled, even though there was a 40 percent drop in the number of those jobs listed online in the first place.
“With six, seven, eight, maybe even 10 unemployed Americans per job opening,” Pollak said, “it’s a very competitive labor market.”
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The tension looms over Washington as congressional lawmakers and the White House feud over their next response to the economic crisis wrought by the coronavirus. The latest hit came Wednesday, as Boeing, one of the largest U.S. manufacturers, said it was taking steps to lay off thousands of workers.
Millennials are the unluckiest generation in U.S. history
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The pandemic has resulted in a national unemployment rate exceeding 14 percent, marking the highest rate since the Great Depression.
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The historic rate of joblessness threatens the United States with an uncertain path toward economic recovery, the Federal Reserve affirmed in a report Wednesday, which highlighted precipitous drops in consumer spending, domestic tourism, manufacturing activity and agricultural conditions over the life of the pandemic.
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More
https://www.washingtonpost.com/business/2020/05/28/unemployment-claims-coronavirus/
Tuesday Morning Files for Chapter 11 Bankruptcy Protection, Plans to Close 232 US Stores
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Discount Home Goods Retailer Lands $100 Million of Debtor-in-Possession Financing
By Candace Carlisle
CoStar News
May 27, 2020 | 2:34 P.M.
Discount home goods retailer Tuesday Morning Corp. filed for Chapter 11 bankruptcy protection as a result of the coronavirus-spurred lockdowns nationwide and plans to shed hundreds of its least profitable U.S. locations and a distribution center even as sales rise in the stores it has reopened.
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The Dallas-based operator of 687 stores in 39 states said in plans filed Wednesday in the U.S. Bankruptcy Court for the Northern District of Texas in Dallas it seeks to emerge as a stronger company by early fall. This is the latest brick-and-mortar retailer to file for bankruptcy protection, citing profitability issues tied to pandemic-related store closings, joining J.C. Penney, Neiman Marcus, Stage Stores and others.
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The move is significant because it shows that full-price retailers, which were already struggling, aren't the only chains hurt by stay-at-home orders implemented to slow the spread of the coronavirus, and that even a chain that was growing and healthy just three months ago is shedding commercial real estate space. Prior to the pandemic, Tuesday Morning said it had been growing its vendor base, improving brands and investing in technology, and the stores it has reopened have double-digit sales growth from the prior year, but it can't recover from months of lost business.
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Many brick-and-mortar retailers were struggling financially before the pandemic because of changing consumer habits. Pier 1, another home goods retailer based in the Dallas area, filed for Chapter 11 protection three months ago and is now liquidating its assets after failing to find a buyer. Total U.S. retail sales fell more than 16% to $403.9 billion in April from the previous month, according to the latest report from the Department of Commerce. Sales at home goods stores like Tuesday Morning and Pier 1 fell 58.7% in April from March, and 66.5% from April 2019.
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Tuesday Morning plans to close up to 230 stores in phases starting this summer. The initial phase includes 132 store closures as well as the closing of its Phoenix distribution center, which supported nearby underperforming stores. Tuesday Morning signed a 10-year lease at the Arizona hub in 2015 totaling nearly 594,000 square feet. At the time, the retailer expected to employ 300 workers at the site.
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The initial store closures and liquidation sales are expected to start June 1, and take 10 weeks to complete, according to court filings.
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Another 100 store closures are expected in additional phases, leaving Tuesday Morning with about about 450 stores. Officials said the move is expected to help the company redirect resources to its most profitable stores. A spokeswoman for Tuesday Morning said the company had no additional comments beyond the bankruptcy filing and statement.
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Tuesday Morning listed total assets of $92 million and total debts of $88.35 million as of April 30, according to court filings. Tuesday Morning's average monthly lease obligation is about $10 million, and the company owes more than $16 million to various landlords for rent in April and May, according to court filings. The company owns its Dallas headquarters building and a distribution center in Dallas, records show.
British Land’s portfolio value tumbles by £1.2bn
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By Sebastian McCarthy Wed 27 May 2020
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British Land has reported a £1.2bn slump in the value of its property empire as the Covid-19 pandemic takes its toll on the group’s embattled retail portfolio.
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For the year ending 31 March 2020, British Land’s portfolio valuation slid from £12.3bn to £11.1bn, marking a 10.1% drop.
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The FTSE 100 REIT said that the drop was driven by a 26.1% fall in values in the group’s retail property, which it blamed on the “ongoing structural challenges compounded by the impact of Covid-19”.
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Overall, the group collected 68% of the rent originally due for the March quarter (97% for offices and 43% for retail), which equates to 91% adjusting for rent deferred, forgiven or moved to monthly payments.
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British Land also said that is has restarted work on all of its major sites – including 100 Liverpool Street and 1 Triton Square – having suspended developments in March for health and safety reasons.
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Chief executive Chris Grigg said: “We expect the major trends that inform our strategy to accelerate. This includes the shift to online retail, reinforcing our focus on delivering a more focused Retail business and we made progress on this with £296m of retail sales. All of our offices are in London, and here we expect demand to further polarise towards safe, modern, sustainable and well located workspace.”
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He added: “Near term, we are expecting the offices market to be more cautious, but we continue to conduct virtual viewings and are encouraged by negotiations we are having. In Retail, given current valuations and the lack of liquidity in the investment market, our focus is on delivering value though asset management, working to keep our places full and exploiting demand for assets which support an online offer. Our financial position is robust with debt low, significant covenant headroom and access to £1.3bn of undrawn facilities and cash so we are well placed to weather today’s challenges and succeed in the long term.”
J.Crew Landlords Pursue Rent From
Reopened Stores
Bankrupt retail chain asks judge to let it pause paying rent for all stores until July 6
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By
Soma Biswas The Wall Street Journal
Updated May 21, 2020 5:18 pm ET
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Dozens of J.Crew Group Inc.’s landlords, including some of the biggest mall owners in the country, are seeking rent payments from the retailer’s stores as they reopen, according to court filings.
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The chain’s landlords - including Simon Property Group Inc., CBL & Associates Management Inc. and Brookfield Property REIT Inc. - say they deserve to be paid rent on stores as malls and shopping centers reopen. Many states are gradually easing restrictions on retailers that were forced to close stores to slow the spread of the new coronavirus, and have issued guidelines for restarting operations.
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J.Crew has asked the bankruptcy court to allow it to stop paying rent on all its stores for 60 days - until July 6 - saying it needs to preserve cash after closing about 500 locations in March.
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Simon, a landlord for 126 J. Crew stores, said that 30 of its shopping centers reopened in early May in Florida, Georgia and other states.
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J.Crew filed for chapter 11 protection in early May after struggling for years before the coronavirus pandemic prompted it to close stores and scrap plans to raise cash by spinning off its Madewell chain.
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A committee representing J.Crew’s unsecured creditors has also objected to the retailer’s request to defer rent payments, pointing out the company hasn’t promised to pay back the deferred rent.
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J.Crew and its real-estate adviser, Hilco Real Estate LLC, have been trying to negotiate rent concessions with landlords and assessing which stores will shut down for good.
A hearing is scheduled on the matter before Judge Keith Phillips of the U.S. Bankruptcy Court in Richmond, Va., on May 26.
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The tension between the company and its landlords echoes battles playing out in other retail bankruptcies. Modell’s Sporting Goods Inc., which filed for bankruptcy just before government mandates forced nonessential retailers to close their doors, won court approval to stop rent payments in March and April and got that extended until the end of May.
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New Your Post - May 19, 2020
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Pier 1 Imports to close all 540 stores after 58 years
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By: Lisa Fickenscher
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Pier 1 Imports is calling it quits.
The bankrupt home-goods retailer has asked a court for permission to liquidate its remaining 540 stores once they reopen after coronavirus-driven lockdowns, ending a 58-year legacy of selling glassware, wicker furniture and other home decor.
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Pier 1 said it is in talks with several prospective buyers to sell its remaining assets, including its intellectual property and e-commerce business, during a court-supervised auction on July 15. The company has tapped Gordon Brothers to begin liquidating its locations this weekend across the US, according to court documents.
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“It is now clear that Pier 1’s future does not involve any brick-and-mortar retail locations,” Pier 1 said in court filings.
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The Fort Worth, Texas-based chain — founded in 1962 in San Mateo, Calif., under the moniker Cost Plus Imports — filed for bankruptcy protection in February, pushed to the brink by increasing competition from online home furnishings giant Wayfair, Target and Walmart.
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In March, Pier 1 canceled a court-administered auction to sell the company, citing a lack of interest. Lenders explored buying the company but ultimately backed away, forcing Pier 1 to shut down for good, according to court papers.
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“This is not the outcome we expected or hoped to achieve,” Robert Riesbeck, Pier 1’s chief executive and chief financial officer, said in a statement.
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At the beginning of this year, Pier 1 had 936 stores and had hoped that closing half of them in bankruptcy would be a linchpin to its reorganization. But the coronavirus quashed the company’s ability to restructure, according to court documents.
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“This decision follows months of working to identify a buyer who would continue to operate our business going forward,” Riesbeck said. “Unfortunately, the challenging retail environment has been significantly compounded by the profound impact of COVID-19, hindering our ability to secure such a buyer and requiring us to wind down.”
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A handful of other big retailers have lately gone bankrupt amid the coronavirus crisis, including J. Crew, Neiman Marcus and JCPenney. Those retailers have all pledged to downsize their chains in a bid to keep them open.
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Pier 1 had $358 million in sales for the quarter ended Nov. 30, down 13.3 percent from the comparable period in 2018, while its net loss grew from the prior year to $59 million.
The retailer is already getting a jump on Memorial Day sales, posting a 40 percent off discount on all outdoor furniture and wall decor.