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Starwood Capital has upped its offer for development firm Forestar Group, reports Housing Wire. Vornado Realty Trust is a finalist to build a new FBI campus in D.C. suburbs, according to NPR. These are among today’s must reads from around the commercial real estate industry.

1. Starwood Capital Ups its Offer for Forestar as Battle with D.R. Horton Intensifies “There’s a battle brewing between two real estate titans as Starwood Capital Group and D.R. Horton are both angling to acquire Forestar Group, a residential and mixed-use real estate developer. Last month, Forestar and Starwood announced that the companies reached a merger agreement, which would see Starwood acquire all of Forestar’s outstanding shares for $14.25 per share in cash. The total purchase price would be approximately $605 million. But, D.R. Horton attempted to swoop in with a superior offer.” (Housing Wire)
2. 10 Biggest Threats Facing Real Estate “Global uncertainty and political polarization are the top issues facing the housing industry in 2017 and 2018, according to The Counselors of Real Estate’s annual list of the Top 10 Issues Affecting Real Estate. The list was compiled using feedback from 1,100 real estate advisers from around the world who met at a recent CRE conference. Many of the issues are interconnected and reflect disruption in the economy and multiple real estate sectors, says 2017 CRE Chairman Scott Muldavin.” (Record-Courier)
3. Real Estate Firm with Ties to Trump May Build the New FBI Headquarters “A commercial real estate firm, Vornado is widely reported to be a finalist to build a new campus for the FBI somewhere in the suburbs of Washington, D.C. But its financial ties to President Trump are raising concerns about conflicts of interest. ‘It puts a cloud over Vornado’s otherwise perfectly sensible bid,’ says Rep. Gerald Connolly, D-Va. Vornado’s chairman, Steven Roth, is a Trump supporter, whom the president has called ‘one of the greatest builders in America.’ Trump appointed Roth to serve on his advisory council on infrastructure.” (NPR)
4. Forest City Laying Off 50 Workers as it Refocuses on Property Development Business“Forest City Realty Trust Inc., a major real-estate developer in New York, San Francisco, Denver and other cities, is laying off 50 employees as part of its effort to exit from most of its retail and entertainment business and refocus more on residential, office and mixed-use projects in urban markets. ‘We have to make extremely tough choices,’ Chief Executive David LaRue said Thursday in a message to employees informing them of the layoffs.” (Wall Street Journal, subscription required)
5. Foreign Investment Pours into Industrial Real Estate “Houston’s industrial real estate boom hasn’t been enough to woo big foreign investors away from the nation’s commerce hubs en masse. High demand nationwide for warehouse distribution space, driven largely by high hopes for an e-commerce future, has prompted a boom in direct investment from overseas, with the largest sums landing in traditional ports and rail yards like New Jersey, Southern California and Dallas, which topped the list of incoming investment in industrial real estate.” (Chron)
6. Bank Stress Tests Could Embolden Trump’s Deregulatory Agenda “The big banks’ high scores on the Federal Reserve’s stress tests could speed up deregulation out of Washington. For the third time in as many years, all 34 of the biggest banks in the United States met the minimum capital standards in the first half of the Fed stress tests designed to safeguard against another financial crisis on Thursday. The strong performance of firms such as Goldman Sachs (GS) , Morgan Stanley (MS) and Citigroup (C) could embolden D.C. lawmakers to loosen regulations on the financial sector.” (The Street)
7. Sears is Shuttering 20 More Stores “Sears Holdings is planning to shutter 20 more Sears stores in the U.S., in addition to the more than 200 closures that have already been announced, Business Insider reported Thursday. Sears reportedly announced the latest round of closures to its store employees on Thursday, several workers told the online publication. Some of the Sears locations on the updated list of stores being closed include those in Sarasota, Florida; Roseville, Michigan; Watchung, New Jersey and East Northport, New York, Business Insider said.” (CNBC)
8. Develop a Localized Investment Strategy When Considering Real Estate in the Northeast“In New York City-North New Jersey, Newark, Portland, Boston and Providence, the ratio of average home price to average rent is very high (above 20). With the exception of Portland, these markets also have high proportions of renters, 65 percent in Boston, 70 percent in New York. Here you will do best to buy a single-family property and divide it into several units, each with above-average rents. Find properties that are reasonably close to a college/university or to a hospital/medical center.” (Forbes)
9. Chicago’s New Apple Store Looks Like a Giant Laptop “The new Apple store under construction on the Chicago River is starting to look a little familiar. Construction crews on Thursday placed a big, white Apple logo on the roof of the new store on Pioneer Court, 401 N. Michigan Ave. Combine the new logo with the store’s curved, metallic roof, and the site starts to resemble a Macbook. Less than an hour later, however, crews rolled up the apple and took it away.” (DNA Info)
10. America is Over-Malled, with Not Enough Warehouses to Support Amazon “As sales by internet retailers grow, though, there could be one class of REITs poised to benefit, Jefferies analyst Jonathan Petersen wrote in a note to clients Friday. While there is a glut of malls, there aren’t nearly enough warehouses across the U.S. to support internet retailers like Amazon, Petersen said. ‘[R]etail sales are not in decline, but rather shifting toward e-commerce retailers who require large amounts of warehouse space.’” (CNBC)

One very common mistake many property managers make is to create budgets without taking into proper consideration the strategic goals of ownership.

The obvious answer to the question “Are you budgeting strategically?” might be “Of course I am.” But there are some common misconceptions that pervade the budgeting process that can be avoided by a little reflection about how you’ve historically attacked the process.

One very common mistake many property managers make is to create budgets in a vacuum, inclusive of the typical operational concerns of course, but without taking into proper consideration the strategic goals of ownership. In doing so, the budget becomes a mere snapshot, rather than the forward-looking plan to maximize value that it should be. That snapshot might not reflect such important goals as the owner’s plan for a short-term hold with a sale in three to five years, or the preference to utilize the asset for ongoing cash flow with the intent of a sale 10 years out.

So it is important that the property manager understands what the owner wants to do with that property before he or she enters into the budgeting process.

That vacuum, the snapshot I mentioned, can also exclude benchmarking. It is vitally important that budgets be created within the context of the larger market. This is a truth that hits home for us at IREM as we prepare our annual income/expense analysis reports (the I/E), due out later this year. The I/E report is one vital tool for comparisons of critical performance data.

As the name implies, the I/E provides analysis of revenues and expenses for all major property types, and in so doing gives management a picture of asset performance set against the larger context of like properties, locally and nationally. A sampling of insights gleaned from last year’s reports include:

• Median income for opening shopping centers across the country. (Last year’s report stated that, while it fell to $16.58 per sq. ft., expenses had dropped by 0.59 percent over the past three years.)
• The performance of homeownership. (Last year’s report saw that homeownership continued its decline, pushing the rental market upward.)
• Conventional apartment industry performance. (Last year, we reported that the market grew steadily over the past few years, with substantial growth in rents, increasing 15.6 percent since 2011.)

This sort of benchmarking is key, particularly regarding the largest component of operating expenses:  utilities and real estate taxes. If your real estate taxes total $4 dollars per sq. ft., while the market rate is $3 per sq. ft., that is a serious red flag that demands addressing and can be called out only through benchmarking.

The budgeting process is also a critical time to consider capital improvements that might not be on ownership’s radar, issues such as energy performance upgrades. Part of a manager’s budgeting responsibility is not only to keep a keen eye on operating expenses, but also to factor in the capital expenditure potential of the property and the resultant ROI. These can include such upgrades as HVAC replacements, roof improvements and lighting replacements. (For more on sustainabillity as a value enhancer, please see my previousNREI column.)

While we have been talking about annual budgets, keep in mind that best practices also calls for the creation of a five-year capital plan and notification to owners of potential areas of improvement and the related returns, such as we just mentioned. Budgeting is a proactive process.

Part of that proactivity is to ensure your budget is zero-based. In other words, don’t take past data on specific properties (as opposed to benchmarking trends) into consideration when you’re completing an annual budget. Take it fresh, so you are always competitively bidding services and giving accurate numbers. It is not enough to take expenses from a year ago—or two years ago—and simply tack on 3 percent. Remember, past performance of specific properties is just that: past.

A properly crafted, strategic budget is the result of careful analysis and proper input. It is a forward-thinking plan that has as its goal maximum asset performance in a very competitive market. That is a capital plan that aids your vendors, your owner and your occupants and in so doing, it aids you.

So to paraphrase a popular commercial: what’s in your budget?

Michael T. Lanning is 2017 president of IREM. In addition, he serves as  senior vice president and city leader for the Cushman & Wakefield, AMO, office in Kansas City, Mo.

Taking the changing environment into account, we took a look at the multifamily markets that offer some of the best opportunities for institutional investors.

Qatar may overtake China as the world’s real estate investment powerhouse, according to Voice of America. Sears Canada has filed for bankruptcy protection, reports The Globe and Mail. These are among today’s must reads from around the commercial real estate industry.

1. Qatar Issue May Affect China’s Soft Power as Biggest Property Buyer “China’s soft power as the world’s biggest property buyer is under severe strain due to a government crackdown on capital flight and the Qatar controversy, which is expected to drive a lot of Arab money into the property market in western countries. Qatar citizens are desperately looking for alternative investment avenues as Saudi Arabia and the United Arab Emirates recently cut off relations with their country, and issued orders making it difficult for them to hold property in different Arab countries, property sellers said.” (Voice of America)
2. What You’ll Pay for Rent in America’s Fastest-Growing Cities “The U.S. Census’ list of fastest-growing cities by percentage released last month comprised primarily suburbs in high-growth metro areas. The mass of people flocking to these cities will be happy to know that in most cases, the average apartment rent falls in line with that of the market in which they are located.” (Forbes)
3. Sears Canada to Close 59 Stores, to Cut 2,900 Jobs “Ailing Sears Canada Inc. on Thursday got court protection from its creditors so it can close 59 stores – including 20 large department stores – and let go about 2,900 of its 17,000 employees to continue operating and possibly sell the business. Toronto-based Sears said it is closing 20 of its 94 department stores, plus 15 of its home stores, 10 outlet stores and 14 Hometown locations. Insolvent Sears Canada Group operates 225 stores in all under the Sears and Corbeil banners. It got protection from Ontario Superior Court under the Companies’ Creditors and Arrangement Act.” (The Globe and Mail)
4. President Trump Using Trump Hotel to Hold Trump Re-Election Fundraiser “President. Candidate. Businessman. Three of President Donald Trump’s roles converge next week as he holds his first re-election fundraiser at his hotel in Washington. Trump can see the Trump International Hotel from the White House lawn, making it a premier and convenient location for the June 28 major-donor event, his campaign director Michael Glassner said. But the choice also raises ethics questions, according to conflict of interest attorneys who have been critical of Trump’s decision not to cut financial ties with his global business empire.” (Fortune)
5. CT Realty to Develop $300M Industrial Park in Atlanta “CT Realty’s industrial growth spurt has hit metropolitan Atlanta. Acting through its affiliate, Port Logistics Realty, the real estate company paved the way for the development of the 3.5 million-square-foot Palmetto Logistics Park with the acquisition of 213 acres of land and an option on an adjacent 145 acres. Upon full completion, the three-building industrial project in Fulton County will be valued at $300 million. Joining CT Realty in the development of Palmetto are Prudential Global Investment Management and River Oaks Capital Partners. The joint venture partners believe location will be one of the keys to the project’s success.” (Commercial Property Executive)
6. Sycamore Partners Reportedly Near Deal to Acquire Staples, Report Says “Private equity firm Sycamore Partners is in advanced talks to acquire Staples following an auction for the U.S. office supplies retailer, people familiar with the matter said on Wednesday, in a deal that could top $6 billion. The acquisition would come a year after a U.S. federal judge thwarted a merger between Staples and peer Office Depot on antitrust grounds. It would represent a bet by Sycamore that Staples could more quickly shift its business model from serving consumers to catering to companies if it were to go private.” (Fortune)
7. Amazon Wardrobe Is Another Blow to Department Stores “Amazon.com Inc. isn’t letting a $14 billion deal to buy Whole Foods Inc. distract from its efforts in fashion. With the introduction of Amazon Wardrobe, experts say the e-commerce giant is delivering yet another blow to the already-ailing department store sector. Department stores are already suffering from a number of headwinds, including declines in mall traffic and the need for massive store closures.” (MarketWatch)
8. Why Public Markets Aren’t the Best Way to Invest in Real Estate “What if I told you the value of your investment portfolio had dropped by 50% overnight? How would you react? Probably with a mix of confusion, anger and even a total loss of confidence in the stock market. While most investors might assume this scenario is highly unlikely, the truth is that the average investor is subjected to this sort of value slashing every day without even realizing it. To understand how such a dramatic occurrence could go largely unnoticed, look no further than the seemingly familiar event of a company “IPOing” on the public market.” (Forbes)
9. Skittish Israeli Investors Respond to Drop in Extell Bond Price “Gary Barnett is back to calming nervous Israeli investors over his company’s bonds trading on the Tel Aviv Stock Exchange. Since May, when his firm Extell Development released its first-quarter financial reports, the price on the two rounds of Extell bonds have decreased between 5 and 7 percent, and are now trading at 13 percent yields. That’s an improvement over last year’s high of 16 percent, but too high for comfort for some investors.” (The Real Deal)
10. HTI to Buy Sibling’s Portfolio for $120M “In an all-cash transaction valued at about $120 million, Healthcare Trust Inc. (HTI) will be acquiring substantially all of the assets of American Realty Capital Healthcare Trust III Inc. (HT III), the two New York–based companies announced Monday. Both companies are sponsored by AR Global, also of New York, and both are externally managed by the same management team. The ARC HT III portfolio comprises 19 properties totaling 467,932 square feet, of which 17 are medical office buildings with an average occupancy of 97.1 percent.” (Commercial Property Executive)

Lidl’s pared down approach with a pop of wine, bakery and specialty items is expected to draw shoppers, but not siphon off a great deal of business from more traditional grocers.

The looming battle between German supermarket operators Aldi and Lidl for a share of the U.S. market is getting into high gear.

In mid-June, the Neckarsulm, Germany-based grocery chain Lidl began opening the first 20 stores of its planned 150 locations in the U.S., an expansion that retail real estate professionals have anticipated with both curiosity and some wariness about how the brand will impact the U.S. grocery market. The company already has two distribution centers in the Southeast, to support stores in Rocky Mount, N.C.; Greenville and Spartanburg, both in S.C.; and Virginia Beach, Va.

The company hopes to appeal to a wide range of shoppers—from patrons of fresh artisanal breads to the nightly meat and potatoes crowd—with its simple store layouts and offerings pared down to just six aisles of carefully selected items.

It sounds familiar, much like Aldi stores.

Things in common

Based in Essen, Germany, Aldi also sells groceries in stores with a simple layout, with an occasional selection of specialty items at the center of the store, such as household or gardening items. The similarities set up a potential battle for the two companies in a market where supermarkets are already a highly sought-after anchor for grocery-anchored shopping centers.

Yet the two chains are different in notable ways. For Lidl, coming to the U.S. represents a major test for a company headed in a new direction. Lidl has a new CEO in Jesper Hojer, a 10-year veteran of the company. Hojer is expected to lead the U.S. expansion with a new store format too.

Aldi has a 41-year head start in the U.S., with an existing 1,600-store portfolio here. Recently, however, the company has been preparing to mount an aggressive strategy to spruce up its existing locations and open 900 new ones over a five-year period.

In February, the company announced plans to invest $1.6 billion in an extensive remodel and expansion program. Aldi claims that it serves more than 40 million customers each month, a 60 percent increase since 2013, when current CEO Marc Heubinger took the helm of the company.

No major damage

Landlords expect that Lidl will take a bite out of the U.S. grocery market, but they do not see a major disruptor in the brand.

“They obviously didn’t get the message that it is the end of retail,” said Andrew Alexander, CEO of Weingarten Realty during NAREIT’s 2017 REITWeek. “They are offering a very basic concept, and I think they’ll take a part [of the grocery market].”

The company will most likely own freestanding stores, according to John Feeney, vice president with The Boulder Group, a Northbrook, Ill.-based commercial real estate brokerage specializing in the net lease market.

At 20,000 to 30,000 sq. ft., Lidl stores are larger than Aldi locations, Feeney notes. They feature an on-site bakery and a carefully curated section for wines. Lidl also features a so-called surprise section, where the chain sells an ever-changing selection of non-grocery specialty items like shoes or kayaks. All told, Lidl’s pared down approach with a pop of wine, bakery and specialty items is expected to draw shoppers, but not siphon off a great deal of business from more traditional grocers.

“It is not going to take over the traditional grocery model,” Feeney said. “There is always going to be a need for that and for specialty items.”

Some investors argue that capping taxpayer rescue funds, while releasing Fannie and Freddie to private shareholders like Paulson could upend the $5 trillion market for the bonds they issue.

(Bloomberg)—A hedge fund proposal for freeing Fannie Mae and Freddie Mac from U.S. control is poised to face stiff opposition from investors who say it risks wrecking the mortgage-bond market.

The Moelis & Co. blueprint, which firms including Paulson & Co. and Blackstone Group LP sponsored, calls for raising tens of billions of dollars in capital for the mortgage-finance companies. The plan, released earlier this month, would also limit the amount of federal money available to offset any Fannie and Freddie losses to $150 billion.

Fannie and Freddie package mortgages into debt securities that most investors treat as being fully guaranteed by the U.S. government, in part because the companies are currently under federal control. Some investors argue that capping taxpayer rescue funds, while releasing Fannie and Freddie to private shareholders like Paulson could upend the $5 trillion market for the bonds they issue. By extension, that tumult might hurt homebuyers, whose low interest rates hinge on demand for the mortgage securities.

“I don’t think you could sell virtually any of this debt overseas if it wasn’t government-guaranteed,” said Scott Simon, who until 2013 managed billions of dollars in mortgage-backed securities for Pacific Investment Management Co. Some of his former foreign clients would have reacted to a limited backstop by asking him to “sell it all,” he said.

Fannie and Freddie play a pivotal role in the housing market by providing liquidity. They do so by purchasing mortgages from lenders and wrapping the loans into debt with assurances that investors will be made whole if borrowers default. U.S. regulators seized Fannie and Freddie during the financial crisis and bailed them out at least partly because of bond investors’ concerns over what would happen to their holdings if the companies collapsed.

‘Protecting Taxpayers’

Paulson and the other investors hope the Trump administration will see the plan as meeting its housing-finance objectives. “The key to protecting taxpayers and limiting the amount of a government backstop is to build sufficient private capital,” the company said in a statement. “This is what the Moelis blueprint does.”

The proposal comes as Congress revives efforts to overhaul the housing-finance system, which has been a goal of many lawmakers since the 2008 meltdown. Holders of Fannie and Freddie legacy shares, such as Paulson, fear that such an effort could take years and possibly result in legislation that mostly wipes them out. Moelis says its plan offers a better alternative, because it could be executed quickly with support from President Donald Trump and regulators.

Pre-Crisis Perspective

Before the crisis, many investors assumed the U.S. government would make good on the guarantees even if the two companies collapsed. That wink and nod, given not only by company executives but also federal officials, drove down rates on Fannie and Freddie debt, which led to better mortgage rates for borrowers.

The government did end up standing behind the companies, ultimately injecting them with $187.5 billion in taxpayer funds. Now, the question is what would happen if the U.S. released them with a limited backstop or none at all.

Under the current regime, Fannie and Freddie have almost no capital on their balance sheets and $258 billion to draw on from the U.S. Treasury if needed. Under the Moelis plan, the companies would eventually have combined capital of as much as $180 billion, plus another $150 billion if needed from taxpayers.

Since the total funds standing behind Fannie and Freddie guarantees would be greater in the new system, bond investors should feel just as safe, the Moelis executives said.

‘Unintended Consequences’

“The unintended consequences of putting into place a full mortgage-backed guarantee are enormous,” Moelis Senior Advisor Landon Parsons said at a Cato Institute event last week. Mortgage bond investors want a full guarantee to get better capital treatment on Fannie and Freddie securities, but such a guarantee could drive up rates on other kinds of mortgages, Parsons said.

It’s unclear whether the Trump administration agrees. Treasury counselor Craig Phillips told attendees at an Urban Institute event last week that the administration believed the government should no longer implicitly guarantee Fannie and Freddie but instead explicitly guarantee mortgage bonds, according to people who attended. The change could be difficult without legislation.

Government support for housing should be explicit where it exists, Federal Reserve Vice Chairman Stanley Fischer said Tuesday during a speech in Amsterdam where he cautioned against forgetting the lessons learned from the 2008 crisis.

“An explicit guarantee would be good for mortgage investors and homeowners,” said Brian Norris, a senior portfolio manager at Invesco Ltd., which manages more than $850 billion. A limited backstop wouldn’t be enough for many investors and an unlimited guarantee would have a side benefit of driving down mortgage rates for some borrowers, Norris said.

Unlimited Support

On the other hand, under a limited backstop many bond investors might keep the assumption that if push came to shove, the U.S. government would make available unlimited support, essentially reverting to the implicit guarantee that existed before the crisis, said Larry Penn, chief executive officer of Ellington Financial, a mortgage-bond investor.

“You are kidding yourself if you think the government is going to walk away from the companies even if they are privately owned,” said Penn, whose firm also wants to see the government offload more risk to private investors.

The Securities Industry and Financial Markets Association, whose members include some of the bond market’s biggest asset managers, has spent millions of dollars in recent years lobbying Congress on issues including housing-finance reform. One of Sifma’s longstanding goals has been to make the guarantee of Fannie and Freddie securities explicit and unlimited, which would likely raise the value of their members’ investments while making loans cheaper for borrowers.

Chris Killian, head of Sifma’s securitization group, said he believed mortgage-bond investors would react negatively to a limited backstop.

An average investor in Fannie and Freddie bonds “is not somebody who wants to ponder whether or not there’s credit risk or ponder how the government is going to react if something happens,” Killian said. Bond investors want legislation to reform Fannie and Freddie “that’s final and stable,” he said.

To contact the reporters on this story: Joe Light in Washington at jlight8@bloomberg.net ;Matt Scully in New York at mscully17@bloomberg.net To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net Gregory Mott

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© 2017 Bloomberg L.P

Another top Chinese real estate executive steps down from his role, reports The New York Times. The Wall Street Journal examines how T.J. Maxx has managed to outperform in the current retail environment. These are among today’s must reads from around the commercial real estate industry.

1. Vanke Founder Wang Shi, Chinese Property Developer, Steps Down “The chairman and founder of China’s largest property developer said on Wednesday that he would step down, ending a career that mirrored the country’s giddy embrace of privately owned real estate but stumbled after his company became the target of an unprecedented Chinese corporate takeover battle. Wang Shi, the chairman of China Vanke Group, said in a post on a personal social media account that it was time to let the next generation take over.” (The New York Times)
2. How T.J. Maxx Is Bucking the Crisis in Retailing “Traditional retailers are in crisis, damaged by rapidly shifting consumer tastes, technological change and cut-throat price competition. And then there’s TJX Cos., which is defying gravity with the simple idea that under the right circumstances people still like to shop in stores. The owner of T.J. Maxx and Marshalls has seen sales at stores open at least a year rise for 33 straight quarters.” (Wall Street Journal, subscription required)
3. Commercial Real Estate Owners Are Missing Their Big Opportunity “What is the biggest, most obvious opportunity for the future of commercial real estate? What? Not enough patience or time? Do you just want to scroll until you see the bold type and figure it out in two sentences? I could lay it out in fifty words or less but would you understand it completely? Here is my problem, I have been screaming about this as loud as I can for how long now? It’s to the point where I’m starting to question your ability to see what’s right in front of your face. It’s also obvious to me that the rest of the world has already figured out what you have not.” (cre.tech)
4. Deep in the Malls of Texas, a Vision of Shopping’s Future “Several shopping centers in Texas give a peek into how mall owners and developers are responding. In spots where the shopping activity has slowed, the response is clear: Move away from strictly shopping, and expand the mix to include more restaurants and entertainment, or health care and education. Or, in the case of Valley View Center, start over from scratch.” (The New York Times)
5. Despite a $17B Valuation and Expanding Business, How Long Can WeWork Work? “Its success—and potential for more—has divided real estate professionals in New York: Those who are willing to accept WeWork’s vision of its place in the real estate firmament and those who are not willing. Sam Zell, the chairman of Equity Group Investments, which includes major office properties, put it like this during a May appearance on CNBC: ‘We have yet to find out what happens to WeWork when the office market softens, which is probably not too long from now.’” (Commercial Observer)
6. New York REIT Taps RKF to Sell Retail Holdings “New York REIT hired RKF’s investment sales division to oversee the selloff of its standalone retail properties as the troubled real estate investment trust liquidates its $2.78 billion office-and-retail portfolio. RKF vice chairman Jeff Fishman will lead a team marketing the assets, the bulk of which are concentrated on Bleecker Street. The buildings are located in such neighborhoods as Midtown West, Tribeca and Greenwich Village.” (The Real Deal)
7. LA Job Growth Spurs Office Leasing Activity “While one may think sound stages and theaters would be most in demand in Los Angeles, office space is thriving in the area due to a growing presence in the tech, engineering and financial sectors. The U.S. capital of the entertainment industry is also one of the largest markets in the country, with almost 254 million square feet of office inventory, according to Yardi Matrix’s second quarter report on the Los Angeles office market.” (Commercial Property Executive)
8. Kroger Should Challenge Amazon and Make Whole Foods a Sweeter Offer “Watch out, Amazon. Kroger could give Jeff Bezos a run for his money. At least that’s what one analyst is saying, issuing a note to clients Wednesday morning explaining why a competing bid by Kroger for its rival grocer Whole Foods makes sense. This, after Amazon announced plans last Friday to acquire Whole Foods for $13.7 billion — a deal that’s expected to close in the second half of 2017. Unless, of course, a rival bidder steps into the picture.” (CNBC)
9. Plan Would Bump Playground for $1B Real Estate Project “In a move critics say circumvents zoning laws to assist powerful developers, state and city officials plan to relocate an East Harlem children’s playground to accommodate a $1 billion project that would include one of the tallest buildings outside midtown. At the request of the City Council and the de Blasio administration, state Sen. Jose Serrano (D-Bronx) and Assemblyman Michael Benedetto (D-Bronx) are pushing bills that could be approved as early as Wednesday to discontinue the use of the Marx Brothers Playground on Second Avenue and East 96th as parkland.” (New York Post)
10. Atlanta’s ACS Building Commands $166M “Carter Validus has acquired the American Cancer Society Building, a 995,728-square-foot property in downtown Atlanta, Ga., from Cousins Properties for $166 million. Cushman & Wakefield represented the seller in the transaction. Cushman & Wakefield’s equity, debt & structure financing group, led by Mike Ryan and Brian Linnihan, arranged the acquisition financing.” (Commercial Property Executive)

Concerns about labor shortages and rising labor costs are of paramount importance to seniors housing operators and owners.

It’s a good time to be a worker. With the national unemployment rate falling to 4.3 percent in May, the jobless rate is at a 16-year low. Moreover, a broader measure of joblessness, which includes those who are working part time, but would prefer full-time jobs and those that have given up searching—the U-6 unemployment rate—fell to 8.4 percent in May, its lowest level since 2007. Since February 2010, which marked the low point of the employment recession, 16 million jobs have been created, 7 million more than the pre-recession peak. Since October 2010, the economy has consistently added jobs every month.

Job growth has been broad-based, but health care has been a significant contributor. Of the 16 million jobs created, one of every eight jobs has been in health care (12.0 percent or 2.0 million). And breaking this down further, 8.0 percent of the health care jobs have been generated in seniors housing.

Tightening labor markets. Further evidence of tightening labor market conditions was reported in the Federal Reserve’s beige book, a June report based on anecdotal information collected across the central bank’s 12 districts. In the report, the Fed said that “most districts (were) citing shortages across a broadening range of occupations and regions.”

Additional downward pressure on the unemployment rate is likely to occur in the coming months as job growth continues to exceed labor force growth. This will put the unemployment rate further below the so-called full employment or natural equilibrium level; indeed, today’s unemployment rate is already below the official estimate by the Federal Reserve of the full employment level, which is 4.7 percent.

Rising wage rates. A rate much below the natural rate of unemployment is believed to fuel inflation through upward pressure on wage rates. And this is becoming evident in a number of wage measurements. In the 12 months ending in May, average hourly earnings rose 2.5 percent, on par with the 2.6 percent average monthly gain in 2016, and up from 2.3 percent in 2015 and 2.1 percent 2014. Other wage rate indicators are also strengthening. This includes the year-to-year increase in private sector wages and salaries, as measured by the Employment Cost Index (ECI), which grew to 2.6 percent as of the first quarter.

For seniors housing operators, average hourly earnings are rising at a faster clip and were up between 3.8 percent (skilled nursing workers) and 4.2 percent (assisted living workers) as of first quarter 2017, according to estimates provided by the Bureau of Labor Statistics (BLS). Concerns about labor shortages and rising labor costs are of paramount importance to seniors housing operators and owners because labor expenses can account for up to 60 percent of their expenses.

Sluggish output growth. Despite the reasonably robust pace of employment growth, GDP growth has been lackluster and has averaged 2.1 percent since the bottom of the recession in 2009.The explanation for the disparate growth rates can be partially traced to uninspiring labor productivity growth. Indeed, from 2011 to 2016, annual growth in productivity has averaged less than 1 percent, the slowest five-year pace since the 1977-82 period. Without productivity growth, it’s hard to gain traction in the pace of economic growth. By definition, output growth is the sum of productivity growth and labor force growth. So either productivity growth has to accelerate from today’s low levels or the labor force has to expand at a more rapid rate.

In a report issued by the Congressional Budget Office (CBO) in January, average GDP growth was projected to be less than 2.0 percent per year between 2017 and 2020 due to sluggish growth in the labor force of 0.5 percent and productivity growth of less than 1.5 percent per year. By comparison, during the 1991 to 2001 period, when GDP growth averaged 3.3 percent per year, the working population was expanding at a 1.2 percent annual rate and growth in output per hour averaged 2.0 percent per year. The 3.3 percent figure is notable because it is near the rate being discussed by some in the Trump Administration.

Productivity growth as the solution. Without aggressive immigration policies, the labor force is not likely to accelerate appreciably—much of the slowdown has to do with demographics and the aging population. This leaves productivity growth as the solution for faster output growth and the benefits associated with it, such as greater prosperity and wealth. Federal government policies that promote capital, R&D, educational and infrastructure investment are solutions that could support stronger productivity growth and subsequently the economy’s long-term potential. A boost in productivity could also potentially have the added benefit of holding back inflation and allowing the Fed to keep interest rates lower for a longer period.

With regard to seniors housing and care, labor force growth and the low jobless rate are expected to make it increasingly difficult to attract and retain qualified and trained staff at all levels of operations. In order to grow NOI, operators will need to boost their operational efficiency and staff productivity, likely through technology, training and mentoring.

Changes in the current GSA procurement and the CFIUS review processes involving foreign entities could increase the costs and uncertainties associated with deals.

Foreign ownership of property has become a key touchstone in the debate over national security, especially as government agencies and contractors are regular tenants in buildings controlled by non-U.S. investors or owners. Thus, it’s not surprising that the Government Accountability Office (GAO) recently undertook an independent review of leasing practices of the General Services Administration (GSA), to assess how the GSA mitigates risks when it leases space to high-security tenants in foreign-owned buildings where concerns of espionage or influence-peddling could be elevated.

A new bill is now before Congress proposing to change the process by which federal leasing agencies, including the GSA, gather information on the actual beneficial owners of foreign-owned real estate. Three U.S. senators are attempting to examine the Committee on Foreign Investment in the United States review process and the types of real estate transactions that fall under the committee’s jurisdiction.

The GAO report highlighted the challenges facing the federal government. The report focused primarily on the risk of espionage, cyber-attack and money laundering that could arise when high security federal tenants lease space in buildings owned or controlled by foreign entities. After reviewing the GSA’s 1,406 high security leases (facilities with security levels III, IV and V), the report found that 20 of the leases were in buildings with direct foreign ownership.

The report also found that, in addition to not having complete information on the ownership structure of the buildings, the GSA had no information on beneficial ownership in one-third of the leases reviewed. The GAO noted that lacking knowledge of the identities of the beneficial owners, whether foreign or domestic, presented a potential risk that money laundering and other illegal activities could go undetected.

According to the report, these shortcomings stem from the fact that, under current law, the GSA is only required to determine whether a prospective lessor is a “responsible party,” a review that focuses mainly on the potential lessor’s financial ability to perform. Although some requirements currently exist to deal with potential national security risks (such as restricting access to the leased space by owners and other parties and certain informational certifications by potential lessors), the GAO concluded that these provisions do not adequately address its concerns. In response to the GAO report, Reps. Stephen F. Lynch (D-MA) and Peter King (R-NY), the co-chairs of the Task Force on Anti-Terrorism & Proliferation Financing, introduced H.R. 2426, the “Secure Government Buildings from Espionage Act of 2017” to address the issues highlighted by the GAO report.

1. R. 2426

H.R. 2426 would require the GSA (and other non-military federal agencies with independent statutory leasing authority)—prior to awarding any leasing contract for a high security government tenant—to identify each beneficial owner of a potential lessor and identify any beneficial owner who is a foreign person or entity. Further, the bill would require that such information be obtained when a proposal in response to a “solicitation for offers” is first submitted to the GSA, and that such information be updated within 60 days following any change in the information initially provided.

Notably, the bill does not specify the size of the ownership interest that must be held by a beneficial owner before information must be divulged or how the information is to be analyzed for purposes of awarding leasing contracts. On introducing the bill, Congressman Lynch cited six FBI offices and three Drug Enforcement Administration offices in buildings owned by foreign interests, and noted that his bill has the support of Global Witness, an advocate for greater transparency in financial transactions.

Senators ask GAO to review CFIUS analysis of real estate transactions

Apparently unrelated to the House Bill, on May 16, Sens. Ron Wyden(D-OR), Sherrod Brown (D-OH) and Claire McCaskill (D-MO) sent a request to the GAO to review how CFIUS analyzes real estate transactions. Currently, CFIUS has jurisdiction to review any “covered transaction,”i.e. any acquisition, merger or takeover that could result in foreign control of a “U.S. business.” CFIUS only has the ability to review a real estate transaction if a foreign person acquires control of a U.S. business. This could include the purchase of a company that operates real estate, or the purchase of assets that, taken together, constitute a “U.S. business,” as might be the case, for example, with a purchase that includes a building, contracts and personnel used to operate the building. National security issues are rife if the property includes sensitive government tenants or is located near a sensitive government facility.

With specific reference to Chinese investors with ownership structures and political ties that are “murky at best,” the senators’ request asks, among other things, for the GAO to:

• assess whether CFIUS has adequate resources to review foreign real estate transactions, given the rise in foreign investment;
• identify the information on beneficial ownership that CFIUS uses and the sources from which it receives such information; and
• identify the types of real estate transactions that do not currently fall within the committee’s jurisdiction for review.

Given the tenor of the letter and its references to beneficial ownership issues, it is likely intended to establish a predicate for legislation to expand CFIUS’s review of real estate acquisitions to include, for example, simple asset buys. It is not clear at this writing whether the GAO will undertake the assignment. Importantly, the GAO is currently in the midst of a comprehensive review of CFIUS authority that was requested by several members of Congress in September 2016. A report is expected later this year. This review could readily include the questions raised by the three senators in their May 2017 letter.

Potential Impact of H.R. 2426 and GAO CFIUS review

Although H.R. 2426, if enacted, would only directly affect GSA leases that post-date enactment—perhaps increasing the length of the procurement process—such contingencies can be accounted for if taken into consideration early enough in the process. Practically, however, problems could arise in transactions involving multiple properties, even if only one is a building with a GSA lease, or in the merger context if the target entity owns GSA-leased property. If the proposed legislation were to become effective, both of these scenarios would require disclosure of all beneficial owners of the acquiring entity; the impact on a larger deal is unknowable at this time.

It is worth noting, of course, that the GSA needs no new legislation to request and obtain information on the beneficial ownership of bidders, especially for lease agreements involving sensitive tenants. Nevertheless, the legislative proposal and the GAO report could prompt such actions. Complications could also arise in the acquisition of properties that have existing GSA tenants. Potential purchasers of properties with current GSA leases should be aware that the GSA Global Lease Form L100, while requiring the lessor to notify the GSA within five days after title to the property changes, also grants the GSA the right not to recognize a potential transferee entity under a GSA lease on the grounds that the transferee “will not be in the government’s interest.” In that event, the original lessor will remain liable for all obligations under the lease. Although we have not seen this in practice, with the increased scrutiny concerning foreign beneficial ownership in government leased buildings, it is possible that potential acquirers might not be recognized as transferees, creating immense issues in real estate transactions large and small. Again, this potential roadblock can be accounted for if taken into consideration early in a transaction and properly addressed in the deal documents.

Taken together, changes in the current GSA procurement and the CFIUS review processes for real estate transactions involving foreign entities could increase the costs and uncertainties associated with deals. For this reason, it is important to take the CFIUS process into account in any transaction that could result in foreign control of a U.S. business that involves real estate, large or small. Although most transactions that go through CFIUS review are approved, successful reviews require careful planning, especially when the target firm is the landlord to sensitive government tenants, or where real property is located in close proximity to sensitive government installations, such as forts or training facilities. Similarly, real estate firms with significant foreign ownership need to be aware that their foreign ownership could become a factor in proposals for U.S. government leases involving sensitive government tenants. Access restrictions could be the price of doing business.

Jeff Keitelman serves as co-managing partner of Stroock’s Washington, DC office and co-chair of the national real estate practice group. Stroock partner Chris Griner is the chair of the firm’s national security/CFIUS/compliance practice group. He previously served as an attorney advisor in the Office of the General Counsel of the Department of Defense and is a Lieutenant Colonel, USAF, Retired.

Federal Reserve Vice Chairman warned against forgetting the crisis of 2008.

(Bloomberg)—Federal Reserve Vice Chairman Stanley Fischer said a long period of low interest rates may have contributed to “high and rising” home prices in several countries, cautioning against forgetting the lessons of the 2007-09 housing crisis.

“There is more to be done, and much improvement to be preserved and built on,” Fischer said, speaking at an event in Amsterdam on Tuesday that was closed to the press. “The world as we know it cannot afford another pair of crises of the magnitude of the Great Recession and the Global Financial Crisis.”

Fischer emphasized that much has been achieved to shore up the global financial system since the last recession. His remarks struck a cautionary tone at a time when the value of residential real estate is climbing from Canada and the U.K. to Australia.

“House prices are now high and rising in several countries, perhaps as a result of extended periods of low interest rates,” Fischer said in the prepared remarks, without specifying any particular frothy markets. He also noted that in the U.S., Fannie Mae, Freddie Mac and the Federal Housing Administration are “now the dominant providers of mortgage funding.”

Government support for housing should be explicit where it exists, he said, and its costs should be balanced against its benefits. Likewise, rules and expectations for mortgage modifications and foreclosure “should be clear and workable.”

In the U.S. and around the world, “much has been done,” he said. “The core of the financial system is much stronger, the worst lending practices have been curtailed, much progress has been made in processes to reduce unnecessary foreclosures.”

Fischer made no mention of the path forward for monetary policy or the economic outlook in his speech.

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net ;Alister Bull at abull7@bloomberg.net

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