Category: Finance & Investment

A New Approach for Real Estate Diversification

“Like-kind” exchanges may permit clients to defer capital gains taxes.

The forecast for real estate is highly uncertain in the COVID-19 era, with many experts expecting dramatic change in commercial, residential and industrial markets. However, this much is clear: the portfolios of many older Americans contain a respectable amount of investment real estate, and it’s something advisors need to consider as they help clients pivot their holdings toward an appropriate asset mix for retirement.

American households held $6.4 trillion in investment real estate, exclusive of the value of their primary home in 2016, according to analysis of Federal Reserve data by Realized Holdings, a company that manages investment property wealth. And Realized found that approximately 10.2 families with net worth ranging from $1 million to $15 million had more than 20% of their assets accumulated in investment properties.

This is an area where many financial advisors are outside their comfort zone, according to David Weiland, CEO of Realized. “It’s a giant pool of wealth that has gone unnoticed by most advisors and real estate professionals, generally because they don’t understand real estate at the granular level, and real estate professionals don’t understand wealth management.”

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States Hardest Hit by Closures Could See Property Valuations Fall by Low Double Digits

A new report from Reonomy looks at where property valuations might dip the most.

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.

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.

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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Opportunistic Capital Prepares for Distressed Investment Spree

Investors across the board are interested in co-investment opportunities in distressed assets and loans.

Even as COVID-19 continues to wreak havoc with the global economy—putting the majority of commercial real estate investment activity on pause—entities are lining up gobs of capital to pounce on distressed real estate opportunities expected to arise in the coming months.

“Billions of dollars are being plowed into new real estate funds created to buy distressed debt backed by hotels, malls, office buildings and other commercial properties suffering significant losses of value during the coronavirus crisis,” says Michael D. Underhill, chief investment officer at Capital Innovations. The global real assets investment management firm is receiving inquiries from investors across the board who are interested in co-investment opportunities in distressed assets, including institutional investors, sovereign wealth funds and family offices. “We are seeing significant pent up demand for credit investors to invest in liquid securities and hard assets, including loans and real estate, as many have been biding their time for the last several years,” says Underhill.

Private equity firms such as Blackstone, KKR and Terra Capital Partners are among those firms that have closed on or are currently raising capital for distressed funds. Apollo Global Management Inc. plans to raise up to $20 billion for distressed opportunities.

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Billionaire Sam Zell Sees Economy Permanently Scarred by Pandemic

Zell expects some amount of social distancing and working from home to persist long after the acute phase of the outbreak is over, possibly for years.

(Bloomberg) — Sam Zell, the billionaire known for buying up troubled real estate, said the coronavirus pandemic will leave the same kind of impact on the economy and society as the Great Depression 80 years ago, with long-lasting changes in human behavior that imperil many business models.

“Too many people are anticipating a kind of V-like recovery,” Zell said in an interview with Bloomberg Television. “We’re all going to be permanently scarred by having lived through this.”

Just as the depression left behind a generation that couldn’t shake the experience of mass unemployment, hunger and desperation, the burdens this crisis has forced on society may be similarly hard to forget. Zell, 78, said it won’t be easy for people to live as they did before the “extraordinary shock” of the pandemic.

He expects some amount of social distancing and working from home to persist long after the acute phase of the outbreak is over, possibly for years. Retail, hospitality, travel, live entertainment and professional sports are some of the industries he sees continuing to struggle.

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Blackstone Sees Prospect of Buying Opportunities in Crisis

“We are already seeing actionable opportunities appear from the dislocation initially in structured credit and liquid markets,” according to Jon Gray.

(Bloomberg)—Blackstone Group Inc. expects to see plenty of investment opportunities once the current economic crisis abates — and is already taking steps to deploy capital on downtrodden assets.

Current dislocations spurred by coronavirus pandemic, while painful, will allow the company to benefit in the long term, President Jon Gray said Thursday. The shares rose as much as 7.3% in New York.

“We are already seeing actionable opportunities appear from the dislocation initially in structured credit and liquid markets,” Gray said on the company’s first-quarter earnings conference call. “Since the crisis began we bought $11 billion of public equities and liquid debt across the firm and we are well positioned to do more.”

Blackstone will be able to put its dry powder to work in areas that have been most impacted by the economic freeze. These include lodging, location-based entertainment and the travel industry, executives said on the call.

The positive outlook came after the private equity firm reported that asset values across most of its business segments plunged in the first three months of this year as the coronavirus spread.

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Private Funds, REITs Seek to Curtail Capital Outflows Amid COVID Crisis

In recent weeks several fund managers temporarily suspended redemptions and froze or cut cash distributions.

Real estate investment entities were welcoming a steady stream of capital inflows with open arms just a few weeks ago. But now some are doing their best to hold onto cash amid the economic uncertainty generated by the COVID-19 pandemic.

In recent weeks several fund managers temporarily suspended redemptions and froze or cut cash distributions. The move to batten down the hatches to conserve cash has been a common theme across a variety of public and private investment structures, including private equity real estate funds, publicly traded and non-traded REITs and crowdfunding sourced eREITs. “The business decisions that asset managers are making right now are primarily focused around preservation and protection of the underlying portfolio and sustaining liquidity,” says Anthony Chereso, president and CEO of the Institute for Portfolio Alternatives (IPA).

Early examples include some well-known names. It was reported in April that AEW Capital Management would suspend redemptions in its $7.2 billion Core Property Trust, an open-ended diversified real estate fund that invests in U.S. multifamily, office, industrial and retail assets. Fundrise announced in early April that it was suspending redemptions across its mature eREITs and eFunds.

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Weathering Extreme Markets with Real Estate Investments

Inherent illiquidity can be a boon in times of panic.

Recessions present financial advisors with one of the biggest professional challenges they can face. Imbalanced and rudderless portfolios are exposed. Securities plummet as panic selling ensues. Clients and investors often lose a lot of money.

We all know how tough it can be to predict such events—or at least, predict them timely enough to dodge the oncoming financial freight train. Given this inherent risk, strategies should be adopted to prepare for a recession by balancing client portfolios with assets that historically experience less volatility than securities.

The price of stocks and other securities often exhibit fat-tailed distributions. Extreme events tend to hide behind a sample mean that does not predict the actual population mean, so advisors sometimes forget that these events have a much higher probability of occurring than they do in a normal distribution. These “black swan” events often cause economic recessions: the 2001 dot-com bubble, the 2008 financial crisis and the current COVID-19 pandemic.

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Libor Plunge Risks Wreaking Havoc in $670 Billion CLO Market

If three-month LIBOR sinks below 1 percent, it would be a major headache for the market.

(Bloomberg)—Tumbling interest rates are throwing a wrench into the collateralized loan obligation market that could eventually lead to dust-ups between different stakeholders, market watchers say.

At the heart of the issue is the plunging London interbank offered rate. Buyers of CLOs, which are tied to the gauge, are increasingly factoring the prospect of negative fixings into their due diligence as the Federal Reserve slashes its benchmark to near zero and three-month Libor sinks below 1%. While the likelihood of it going negative remains small, it would be a major headache for the $670 billion market that buys more than half of all leveraged loans.

That’s because roughly one in five CLO tranches lacks any sort of Libor floor — thresholds that guarantee minimum payouts to debt investors should the reference rate plummet. If Libor were to eventually fall below the spread on these structures, the negative all-in coupon could mean CLO debt holders would in fact owe money back to the issuer. That may benefit buyers of the equity portions of the capital stack, but industry veterans say CLOs are simply not legally or operationally equipped to handle a reversal in cashflow.

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Retail Investors Fuel a Surge in Non-Traded REIT Fundraising

Most recent fundraising has gravitated to non-traded NAV REITs, which provide additional transparency and liquidity than traditional non-traded REITs.

After weathering a rocky patch that sent many investors to the sidelines, non-traded REITs appear to be back on track with steady gains in capital flowing into the sector.

Non-traded REITs raised $11.8 billion in 2019, which is the highest fundraising total since 2014, according to industry data from Robert A. Stanger & Co. Inc. The firm is predicting another strong year of fundraising ahead with a further 27 percent jump to $15 billion for 2020.

Certainly, there are any number of unforeseen events that could derail that prediction, such as an increase in interest rates that would dampen investor appetite. But, for now, the industry appears to be on solid footing with a number of factors contributing to strong fundraising. Part of the credit is due to continued evolution within the sector that is resonating with its core base of retail investors.

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Libor Transition Hits Hurdle as SOFR-Linked Bond Sales Slump

Market watchers say the change of tack is unlikely an indictment of SOFR itself.

(Bloomberg) — The biggest issuers of bonds tied to the benchmark tapped to replace U.S. dollar Libor are suddenly pulling back. That’s a potential blow to efforts by regulators to wean America’s financial system off a much-maligned reference rate.

The Federal Home Loan Banks, which have priced about $170 billion of debt tied to the Secured Overnight Financing Rate since its inception in 2018, have virtually turned off the spigot in recent months. They’ve sold roughly $13 billion of SOFR-linked notes since the start of November, down from more than $70 billion over the preceding three months, according to data compiled by Bloomberg.

Market watchers say the change of tack is unlikely an indictment of SOFR itself. Rather it may simply be the lenders capitalizing on shifts in investor demand. But they also note the vital role these banks — which support housing, economic development and infrastructure projects — have played as standard-bearers in the nascent SOFR market. And there is a risk to wider adoption among issuers should they keep retrenching.

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