The Billions Of Loans Exposed To A Potential WeWork Bankruptcy

With the WeWork IPO now dead and buried, and as attention shifts to the company which for years was world consciousness elevating Adam Neumann’s personal piggybank (he cashed out to the tune of $740 million, while stranding his thousands of employees with worthless stock) many are noticing what we highlighted last week, namely that WeWork now has just a few months of cash left.

Scott Galloway @profgalloway

We Co. had $2.5 billion of cash as of June 30. At its current rate of cash burn—about $700 million a quarter—it would run out of money some time after the first quarter of 2020 @eliotwb https://www.wsj.com/articles/wework-faces-cash-needs-as-botched-ipo-scuttles-planned-infusion-11569846537 …

WeWork Needs Cash as Botched IPO Scuttles Planned Infusion

Following a botched IPO attempt and the ouster of its CEO, WeWork is planning thousands of job cuts, putting extraneous businesses up for sale and shedding some luxuries to stop bleeding cash.

wsj.com

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11:37 AM – Sep 30, 2019

As we noted recently, the most immediate task facing WeWork is that once the IPO was called off, it unraveled a $6 billion financing package. It is also the gargantuan challenge facing the company’s two new co-CEOs brought in to replace Neumann – Sebastian Gunningham and Artie Minson – who have to find a way forward for a company that was until just a few weeks ago one of the world’s most valuable private startups with a valuation of $47 billion… but has not only never made a penny in profit but saw its losses grow the more its revenue increased.

Meanwhile, as we also reported, in an attempt to shore up its rapidly shrinking cash balance, WeWork has been in talks with Goldman and JPMorgan about a new $3 billion loan, but that’s as good as dead: any new deal requires the company to successfully IPO, which we now know is not happening.
There is one final option: going to Masayoshi Son’s, SoftBank, the Japanese company that has already pumped in more than $10 billion, hat in hand and begging for a bailout. But is Son willing to jeopardize the future of his VisionFund, and perhaps his entire organization, to throw even more money after what is clearly a terrible investment?
For now, the answer is unknown. What is known is that the company lost $690 million in the first six months and is expected to generate a loss from operations approaching $3 billion as it burns through tens of millions in cash daily. Which means that according to analyst estimates, with its existing $2.5 billion in cash as of June 30, the company could run out of money by mid-2020.

And then there is the real liquidity crisis staring everyone in the face: as part of its tremendous growth, by the end of 2019 WeWork will have not only burned $6 billion since 2016, but will have accrued $47 billion of future rent payments due in the form of lease liabilities. On average it leases its buildings for 15 years. Yet as Bloomberg reported previously, its tenants are committed to paying only $4 billion, and on average have leases for 15 months.
In short, a WeWork solvency crisis (read: bankruptcy) would send a shockwave across the US Commercial Real Estate market. Correction, it would send a shockwave across the global commercial real estate market. The reason is that with over $47 billion in lease liabilities, WeWork is already one of the world’s largest lessees, trailing only oil exploration giants Petrobras and Sinpec, an astonishing feat for the flexible office space provider “which was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.”

And then there is the not so subtle fact that WeWork is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.
Said otherwise, a WeWork insolvency would send the Commercial Real Estate market in New York, London, and most major metropolises into a tailspin.
Which brings up the next logical question: who is exposed?
Luckily, commercial real estate expert TREPP has already done work when it comes to WeWork’s US-facing exposure in the CRE realm and has found that co-working giant is flagged as a top five tenant behind $3.3 billion in CMBS debt across 36 properties. Courtesy of Trepp, here is a summary of WeWork’s exposure by state, which as expected, shows New York and California as the top CMBS markets with WeWork exposure.

Drilling down on some of the key properties, we find the following Top 10 locations that will find themselves scrambling to undo their billions in contractual exposures to a potentially insolvent WeWork:

Here is a different way of representing the exposure, this time from the Deal side perspective:

Readers seeking the full list of WeWork exposure are urged to contact Trepp  directly.
For those asking why is any of the above information relevant, the answer is simple: in a year when a record 11,000 stores are expected to shutter…

… as a result of the ongoing “retail apocalypse” which today claimed its latest victim, fast-fashion pioneer Forever 21, which is set to close as many of 350 of its 800 stores around the world…

… commercial real estate is looking at an unprecedented rental payment “hole” as countless tenants file for bankruptcy and put their lease payments on indefinite halt.
Throw WeWork – and its $47 billion in lease obligations in the mix – and CRE is facing a CREsh of epic proportions, because in a bankruptcy, all those obligations would be frozen and squeezed among all the other pre-petition claims, which of course means that the commercial real estate market of cities where WeWork is especially active – like New York and London – would suddenly find itself paralyzed, as a deflationary tsunami is unleashed among one of the strongest performing markets since the financial crisis.
Whether that will in fact happen remains to be seen: after all, with so much hanging on whether the cashflow burning WeWork lunacy can continue, one could argue that when it comes to the commercial real estate market, the company has become too big to fail.
That’s precisely what Boston Fed president Eric Rosengren said on September 20, when he warned just how serious WeWork’s leveraged debacle has become. In a speech delivered to New York University, the Boston Fed head seems to have seen the light, fearing financial instability from WeWork and its ilk:
Mr. Rosengren noted the risks posed by commercial real estate, which have long been a concern of his, as a possible vector to amplify trouble.
Without naming any firms, Mr. Rosengren noted the particular concerns posed by co-working companies. He made this comment as the parent of office-sharing firm WeWork postponed its initial public offering amid investor doubts about its valuation and concerns about its corporate governance. Office-sharing firms are particularly exposed to risks should the economy run into trouble, and could wound landlords in the process, Mr. Rosengren said.
“In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building,” he said.

“I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model,” Mr. Rosengren said.
“The fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession. This also raises the issue of whether bank loans to property owners in cities with major penetration by co-working models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically.”
Ironically, unless some last ditch source of emergency WeWork funding emerges – and there is about 6 months for that to happen – Rosengren’s warning about a crash in the commercial real estate market will come true. Why ironic? Because it will be none other than the Fed which will be “forced” to provide said emergency funding, making the global moral hazard hole even deeper in a world in which not even one too big to fail zombie company is allowed to fail ever again.
https://www.zerohedge.com/economics/here-are-billions-loans-exposed-potential-wework-bankruptcy

Brooklyn’s blight years: From the birth of ‘the projects’ to death of Ebbets

When the 35-tower Fort Greene Houses project opened to much fanfare in 1942, it replaced a blighted area near the Brooklyn Navy Yard that was awash in prostitution and crime.
At the time, the vision for the project, the first of its kind anywhere in the world, was as an “austere array of high-rise towers set amidst a field of landscaped lawns.” Its intent was to provide low-rent housing and a strong community for more than 13,000 people.
Success was virtually assured. The project’s architects had designed Rockefeller Center. Its staff included “trained housing assistants” to solve tenant issues. The well-read Brooklyn Eagle newspaper called it “comfortable housing for workmen … streamlined for happy homemaking.”
Almost immediately, similar projects were put into motion throughout the city.
But as Thomas J. Campanella reveals in his comprehensive new history of the borough, “Brooklyn: The Once and Future City” (Princeton University Press), the Fort Greene Houses, doomed by ill-advised government policies, turned sour almost overnight, instead ushering in the concept of the projects — high-rise communities throughout the city that would drown for decades in violence and blight.

Signs of trouble appeared as soon as 1944. A visiting reporter noted broken windows and hallways filled with trash, and that summer saw racial battles, including more than a hundred white teenagers “descending on the project … armed with clubs and baseball bats” to beat up black teens.

Problems were exacerbated when, in 1947, the city declared that only residents making less than $3,000 a year could live there, evicting families that approached higher income.
“Fort Greene’s more prosperous families were a stabilizing force; purging them was like pulling a keystone out of an arch,” Campanella writes. “ ‘Those are the families we need to keep,’ pleaded resident activist Olivette Thompson, ‘the kind we can’t afford to lose.’ ”
As families achieving a measure of success were evicted, the projects became dangerous.
“The rule incentivized inertia, and bent ambition and enterprise toward crime,” Campanella writes. “The result, [according to New York Times writer Harrison Salisbury], was ‘a human catchpool that breeds social ills and requires endless outside assistance.’ ”
In 1949, after six women were victims of rape or attempted rape on the grounds, residents stormed the local police station, begging cops to take action against soaring crime. But the police could do little, since they were barred from entering the complex unless responding to specific calls. The project had its own security guards, but they were “older and poorly trained,” and carried no guns.
The “projects” became one of the worst failed experiments in the history of housing.
“Born of good intentions but ruined by ill-considered policy,” Campanella writes, “the celebrated city-in-a-city became more feared than the infamous jungle it had replaced.”
Campanella’s book does a masterful job of showing how individual egos or ill-planned decisions of long ago set the stage for the city we know today.
He describes how New York’s parks commissioner and power-mad master builder, Robert Moses, destroyed certain neighborhoods and tricked others, only to leave us with the Brooklyn-Queens Expressway.
“For Moses, lacing Gotham with modern parkways linking the metropolis by road to the nation at large was a keystone ambition of his career,” Campanella writes.
After he created the Henry Hudson and Belt parkways, Moses’ premiere goal was the development of a 23-mile motorway called the Brooklyn-Queens Connecting Highway, later changed to the BQE.
But in attempting to create a more accessible city, Moses destroyed thriving neighborhoods, as achieving his highway visions involved “punching through some of the most densely built urban terrain on the Eastern Seaboard.”
Sunset Park, in particular, was decimated by the roadway’s construction. To build the Gowanus Parkway, which Moses saw as a transitional roadway to the BQE, “hundreds of buildings had to come down on both sides of [Third Avenue],” which had “flourished as the commercial core of Sunset Park’s large Scandinavian neighborhood.”
The parkway doomed the surrounding streets to permanent darkness. Moses then widened the avenue “from four lanes to 10 to handle all the truck traffic generated by the still-busy industrial waterfront.”
“Within a decade,” Campanella writes, “not only Third Avenue — once home to seven movie theaters, scores of shops, stores, restaurants and cafes — but much of Sunset Park would be spiraling toward abandonment and blight. Whatever survived was finished off by the late 1950s, when the Gowanus [Expressway] was widened from four to six lanes.”
For the section of the BQE running through what is now Carroll Gardens, Cobble Hill and Brooklyn Heights, Moses used underhanded tactics, tricking residents to get his way.
The poorer residents of what was then South Brooklyn had little clout to prevent Hicks Street from being converted into the expressway. But wealthier Brooklyn Heights, where Hicks was “lined with mansions,” had that clout, and intended to use it in 1942 to prevent their neighborhood from being similarly invaded.
Residents wrote sharply worded editorials, and the Brooklyn Heights Association campaigned against it to city officials.
But Campanella writes that Moses always knew that taking over Hicks Street in the Heights wouldn’t fly, and floated the possibility as a ruse, guaranteeing that his “compromise” — the less-moneyed Furman Street — would find quick approval.
“There is no evidence that Moses seriously meant to run his road up Hicks Street,” Campanella writes, noting that “given his penchant for grudges,” the rumor might have been Moses’ revenge for Heights residents battling construction of a Brooklyn-Battery Bridge through the neighborhood, as he had proposed years earlier.
“Introducing Furman Street as the substitute made Moses seem to be yielding to community will, while Heights residents convinced themselves their timely action saved the day.”
Campanella also includes a section about the famed desertion by the Brooklyn Dodgers, which he blames on “the mass exodus of Brooklyn’s middle and working classes after World War II.”
Co-owner Walter O’Malley began studying a possible new ballpark to replace the decaying Ebbets Field, the Dodgers’ Flatbush home since 1913, as early as 1946.
“Ebbets Field, already past its expected 30-year life span, was fast becoming a maintenance liability and could barely handle the huge crowds the Dodgers were drawing,” Campanella writes. “Seats were splinter-prone, bathrooms were obsolete, and parking in the surrounding neighborhood was scattered, scarce and costly.”
Given the project’s prestige, the nation’s top architects and designers clamored to help create the team’s new home.
Norman Bel Geddes, the best-known American designer throughout the ’30s and ’40s, proposed a retractable-roof ballpark that would include “rubberized seats, vending machines on every third seat back, [and] an early version of Astroturf . . . which can be painted any color.”
But Bel Geddes and O’Malley clashed and never moved forward with the project.
Geodesic-dome creator Buckminster Fuller was also briefly involved, proposing a dome-like, all-weather structure for a new Dodgers stadium “skinned with translucent fiberglass petals opening and closing to the sky.”
But the Ebbets Field site was too small, and O’Malley couldn’t afford to both buy new land and build a new stadium. He appealed to Moses for urban-renewal funds to buy the land where Barclays Center is today, but Moses refused.
O’Malley struggled for years to track down both a site and the funding, ultimately succeeding in neither. In 1957, seeing no alternative, he announced that the team was moving to Los Angeles.
O’Malley became the most hated man in Brooklyn — a trope of the time called the three worst humans beings to ever live “Hitler, Stalin and Walter O’Malley” — although the 1974 release of Robert Caro’s book “The Power Broker” revealed that Moses played a significant role in the team’s leaving as well.
But Campanella writes that the Dodgers’ sinking attendance even in winning years coincided with Brooklynites’ exodus to suburbia in the 1950s, and that the real culprit was the disintegration of the Dodgers’ fan base.
Dodger attendance fell 33 percent from 1947 to 1956 — “a difference of 800,000 attendees” — despite the team winning four pennants and one World Series title during that time.
“Not even that most elusive of dreams — a Dodger world championship, captured at long last in 1955,” Campanella writes, “would stem the inexorable tide of flight.”
https://nypost.com/2019/09/30/brookyns-blight-years-from-the-birth-of-the-projects-to-death-of-ebbets/

Another Major Landlord Is Launching Its Own Flexible Office Arm

Bisnow/Andrew Nathanson

The tallest building in the country, One World Trade Center looms over Lower Manhattan.

One of New York City’s best-known landlords, the Durst Organization, is inserting itself into the flexible office leasing world with its brand-new offering, “Durst Ready.”

The leasing arm is due to launch next week and will offer spaces between 2,500 and 25K SF, The Real Deal reports. Asking rents for the locations will be in the mid-to-high $80s per SF.

The company is planning to go head-to-head with coworking firms for small to midsized companies’ business.

“[Companies] go to a WeWork or one of their competitors because they don’t want the hassle of the fit-out,” Durst spokesperson Jordan Barowitz told TRD. “That’s a place that, with a little bit of ingenuity, we can compete.”

Last year, WeWork was reportedly in negotiations to take a massive space at Durst’s One World Trade Center, but the deal fell through.

WeWork has since embarked on a widely panned attempt to go public that has resulted in its valuation being slashed and its CEO, Adam Neumann, stepping aside.

Durst Ready wasn’t the reason WeWork’s lease at One World didn’t make it, per TRD. However, the company has heard from potential tenants seeking flexible space, and wasn’t able to find the right partner, so decided to go it alone. Tenants can sign leases in Durst Ready spaces for between six months and 15 years, and it will debut with locations including One World Trade Center, 114 West 47th St., 733 Third Ave. and 1155 Sixth Ave.

Coworking and flexible workspace has become a fixture in the New York City office leasing market in recent years, and traditional landlords have been rushing to adapt.

Durst certainly isn’t the only landlord to provide its own coworking offerings. Tishman Speyer set up Studio, its own flexible workspace provider, last year. Silverstein Properties has its own flexible workspace arm, Silver Suites, which occupies a floor in 7 World Trade Center. https://www.bisnow.com/new-york/news/office/durst-breaks-into-flexible-office-space-with-new-leasing-arm-101045

What’s In AOC’s National Rent Control Proposal

Rep. Alexandria Ocasio-Cortez of New York has introduced a bill to the U.S. House of Representatives that would, if enacted, bring rent control — traditionally a local and state matter — to the federal level. It would bring some form of rent control to the vast majority of places nationwide that do not have it.

What’s In AOC’s National Rent Control Proposal

The bill, formally known as “A Just Society: A Place to Prosper Act of 2019,” would establish a national cap on annual rent increases, restrict evictions and guarantee right to counsel for tenants facing eviction.

Specifically, the Place to Prosper Act calls for a cap of 3% or the annual U.S. Consumer Price Index increase, whichever is greater, for rents in housing markets nationwide.

Small-scale landlords (those with fewer than five units) would be excluded. Even so, that is a tighter standard than provided for in a new state rent control law awaiting the governor’s signature in California, City Lab reports. California’s law will limit annual rent increases to 5% a year plus the consumer price index, but no more than 10% annually. It also requires landlords to cite “just cause” for evicting a tenant, such as failing to pay rent or damaging the property.

Oregon’s statewide cap on rent increases, passed earlier this year, is 7% plus inflation.

Ocasio-Cortez’s bill would also make public data that has been previously been the private domain of landlords. Namely, it would force large apartment landlords — those who own 100 or more units in a single market — to disclose their eviction rates, median rental rates, how many and what kind of code violations their properties have incurred, and other data points.

The measure would make it illegal for landlords to discriminate against potential tenants who receive federal housing assistance. Also under the bill, the Department of Housing and Urban Development would oversee a grant program to fund state and local programs offering counsel for tenants in their eviction proceedings.

The Place to Prosper Act also aims to influence local zoning codes by holding back highway funds for jurisdictions not supporting “equitable development,” and increasing them for those supporting equitable development. A number of criteria in the bill define equitable development, such as streamlining the approval processes for affordable developments.

Though there is no chance that any of the AOC bills will pass the current Congress — setting aside the impeachment inquiry and the upcoming presidential election, Republicans control the Senate and would oppose the policies — they are seen by supporters and opponents as moving rent control further into the realm of possibility, for good or ill. As populations in the world’s cities swell and housing costs spiral, rent control is being heralded as the answer by many housing advocates and politicians.

“We can … build popular support in acknowledging how bad the problem already is. In doing so, we can actually begin to fundamentally address those problems,” Ocasio-Cortez told NPR.

“The economists are right, and the populists are wrong,” the Washington Post wrote in an editorial. “Rent-control laws can be good for some privileged beneficiaries, who are often not the people who really need help. But they are bad for many others.”

In Ocasio-Cortez’s home of New York, where progressive Democrats passed a sweeping update to the state’s rent regulations, apartment landlords have called the measures “devastating” and “irresponsible,” and real estate groups are suing to try to overturn the laws in federal court. https://www.bisnow.com/national/news/multifamily/whats-in-aocs-national-rent-control-proposal-101041

Blackstone to buy U.S. warehouses from Colony Capital in $5.9 billion deal

Blackstone Group Inc said on Monday it would buy U.S. industrial warehouses from real estate and investment management firm Colony Capital Inc in a $5.9 billion deal, to capitalize on the e-commerce boom.

Shares of Colony Capital jumped 14% to $6.72 before the bell.

The deal by one of the world’s biggest property investors comes at a time when companies are spending billions of dollars to snap up logistics assets as a surge in e-commerce activity spurs demand for delivery and warehouse services.

Blackstone said in June it would buy U.S. industrial warehouse properties from Singapore-based logistics provider GLP for $18.7 billion, in what the companies billed as the largest private real estate transaction globally.

The Colony Capital deal consists of 60 million square feet across 465 warehouses in 26 U.S. markets, with particular concentrations in Dallas, Atlanta, Florida, northern New Jersey and California, the company said.

The deal, which is expected to close in the fourth quarter, is expected to garner net proceeds in excess of $1.2 billion to Colony.

Morgan Stanley and Eastdil Secured were the financial advisers and Willkie Farr & Gallagher was the legal counsel to Colony Capital. Simpson Thacher & Bartlett was the legal adviser to Blackstone.

https://www.marketscreener.com/news/Blackstone-to-buy-U-S-warehouses-from-Colony-Capital-in-5-9-billion-deal–29312691/?countview=0

WeWork formally withdrawing IPO filing

WeWork (WE) announces it will file a request to withdraw its S-1 statement that was initially filed with the SEC on August 14.

Co-CEOs Artie Minson and Sebastian Gunningham: “We have decided to postpone our IPO to focus on our core business, the fundamentals of which remain strong. We are as committed as ever to serving our members, enterprise customers, landlord partners, employees and shareholders. We have every intention to operate WeWork as a public company and look forward to revisiting the public equity markets in the future.”

https://seekingalpha.com/news/3502623-wework-formally-withdrawing-ipo-filing

Fannie, Freddie will be allowed to stash more cash

Fannie Mae (OTCQB:FNMA) will be allowed to hold $25B of capital and Freddie Mac (OTCQB:FMCC) will be allowed to keep $20B of capital, the U.S. Treasury Department and Federal Housing Finance Agency announce, taking a key step in the Trump Administration’s plan to release the mortgage giants from government control.

The agencies agree to modify the preferred stock purchase agreements that currently allow the GSEs to each hold onto only $3B of capital reserves.

The agencies plan to make additional changes to Fannie and Freddie’s capital structures.

To compensate Treasury for the dividends that it would have received absent these modifications, Treasury’s liquidation preferences for its Fannie and Freddie preferred stock will gradually increase by the amount of the additional capital reserves until the liquidation preferences increase by $22B for Fannie Mae and $17B for Freddie Mac.

The Treasury, Fannie, and Freddie also agreed to negotiate additional amendments to the PSPAs that would further enhance taxpayer protections by adopting covenants that are broadly consistent with the recommendations for administrative reforms contained in the housing reform plan the Treasury submitted earlier this month.

Previously: Fannie, Freddie poised to pause Treasury sweeps soon – WSJ (Sept. 23)

https://seekingalpha.com/news/3502582-fannie-freddie-will-allowed-stash-cash

House Flipper Lending Hits 13-Year High

Home flipping is up and so is flip financing. Flippers sing the praises of increased leverage.

The flippers are back and the competition fierce as there are fewer and fewer foreclosed properties to bid on. Haven’t we been down this road before?
As the competition heats up, Lending to House Flippers Hits a 13-Year High.

• It is getting much harder to profit on house flipping today. Home prices are high, there are very few distressed or foreclosed properties available to buy cheaply, and the competition among investors is fierce.
• The good news is, mortgage rates are historically low for bank lending, and private lenders are eager to invest their cash somewhere other than the volatile stock and bond markets.
• The dollar volume of financed flip purchases in the second quarter of this year jumped 31% annually, from $6.4 billion to $8.4 billion, according to ATTOM Data Solutions.That is the highest level since the third quarter of 2006.

Smart to Use Leverage!?
Vipin Motwani an investor with Iron Gate Development in the Washington, D.C. area expects to flip about 15 homes this year.
“It’s always smarter to use a mortgage because you get leverage, you can do many more deals, right?” said Motwani. “Also the banks have become a little bit more easy in lending on this flip business. It used to be a lot tougher.”
Housing Bubble Reblown

The Fed has re-blown the housing bubble.

The Last Chance for a Good Price Was 7 Years Ago
Yet, it’s “always smarter to use leverage to get more deals.”
“Right?”
What can possibly go wrong?
https://moneymaven.io/mishtalk/economics/house-flipper-lending-hits-13-year-high-what-can-possibly-go-wrong-jXvGQ8sKfUmnRNr-RZZF1w/

Citing climate risk, investors bet against mortgage market

David Burt helped two of the protagonists of Michael Lewis’ book The Big Short bet against the U.S. mortgage market in the run-up to the 2008 financial crisis. Now he’s betting against the market again, but this time, the risk is not from underwater subprime mortgages, it’s from homes sinking under water.

As he did then, Burt has given up his full-time job to make that bet. He left his role as a portfolio manager at the $1 trillion (£813.80 billion) Wellington Management last year to start an investment firm, DeltaTerra Capital, which aims to help clients manage climate risk, and, where possible, take advantage of ways the market has not yet priced in that risk. His first investment strategy is targeting residential mortgage-backed securities, or RMBS, with exposure to climate hot spots like Texas and Florida.

In doing so, Burt is joining the ranks of a small number of investors who have become worried that climate risk is underpriced in these securities, which are pools of home loans sold to investors.

“The market’s failure to integrate climate science with investment analysis has created a mispricing phenomenon that is possibly larger than the mortgage credit bubble of the mid-2000s,” Burt wrote in a presentation to prospective clients.

Most mainstream investors remain sceptical of the impact of climate change on their portfolios or argue that they are diversified enough not to have to worry about the risks.

Burt and at least three other investors said in interviews with Reuters that they think the risk is real. They argue that a growing body of academic research and data shows that hurricanes, flooding and other disasters pose a far larger threat than is currently being priced into mortgage securities.

“I don’t think you need any new climate effects to come to draw these conclusions. The ones I see happening right now, I just need to get a little unlucky with them and I’m in trouble,” said Thomas Graff, head of fixed income at Brown Advisory. Graff abandoned a riskier type of RMBS after Hurricane Harvey hit Houston in 2017.

FLOOD MAPS

Climate researchers and investors say a key culprit for the mispriced risk in the U.S. mortgage market is outdated flood maps drawn by the federal government.

These maps determine the premiums on government-sponsored home insurance policies. Due to budget cuts, more than three-quarters of the maps have not been updated in at least five years, according to First Street Foundation, an organization that is developing a publicly accessible database of up-to-date flood risk information.

Outdated maps mean far fewer people are required to have flood insurance than are at risk, the investors and researchers say. A University of Bristol estimate put the actual figure at around three times the 13 million Americans currently living in designated flood zones.

The gaps are evident: About 70% of all damages to homes that were flooded during Harvey were not covered by insurance, according to CoreLogic.

The federal government provides most flood insurance in the United States and the gaps mean the risk is not properly priced. The cost for an average policy in low-risk Green Bay, Wisconsin, for example, is three times that in Gulfport, Mississippi, a town devastated by Hurricane Katrina, according to Burt.

The Federal Emergency Management Agency has said it aims to fix some of these problems with a major risk re-rating on Oct. 1, 2020.

Burt’s bet is that the move will result in significant cost increases. That in turn will lead to home price declines and mortgage losses, which would increase volatility in RMBS prices.

He expects a correction beginning in the next 6-18 months.

“The bet I’m making is that many regional markets will experience large price declines in response to increasing costs related to the geography-specific risks,” Burt said.

CLIMATE LOSSES

There are many risks to Burt’s thesis. In the past few years, RMBS prices have recovered after disasters such as Harvey. The federal government has stepped in with aid when losses were not covered by flood insurance.

David Goodson, head of securitised fixed income and senior portfolio manager at Voya Investment Management, said he does not dismiss RMBS deals that have significant concentration in flood hot spots like Miami or Houston.

“While there are more vulnerable population centres that are at greater risk, I think it would be imprudent to out-of-hand dismiss deals that have a concentration in a particular” area, he said.

Burt thinks the mainstream view will be proven wrong. Some of the conditions that allowed prices to recover after Harvey, such as redevelopers bailing out homeowners, could disappear if there is an economic downturn.

Investors also have been taking on more risk. Some RMBS issued by Freddie Mac and Fannie Mae since 2017, called credit risk transfer (CRT) deals, move the risk of default to the investors. In traditional agency RMBS, Fannie and Freddie cover those losses.

Between 2% and 4% of the loans in outstanding CRT deals were located in Houston and other areas badly hit by Hurricane Harvey, according to Bank of America. While prices of these securities recovered, investors in lower tranches of the capital structure in some deals took losses they did not recover.

This is because the most junior tranches have little or no protection. The lowest tranche of the most recent Freddie Mac CRT will start losing principal if mortgage pool losses exceed 0.1%.

“It has been building up,” Burt said, “and so when the correction comes, it will probably come in a more meaningful way than people are expecting.”

https://www.marketscreener.com/UBS-GROUP-19156942/news/Citing-climate-risk-investors-bet-against-mortgage-market-29274914/

Compass Joins WeWork As SoftBank-Backed Startups With C-Suite Turmoil

Courtesy of Compass

Compass founder and CEO Robert Reffkin and Compass Sports and Entertainment director Kofi Nartey

The turmoil at the top level of brokerage and tech startup Compass must be familiar to its biggest investor.

Compass released a statement Wednesday that Chief Operating Officer Maelle Gavet had left the company, The Wall Street Journal reports. The departure was a mutual decision, a spokesperson for Compass told the WSJ, while declining to comment further.

In the past 18 months, Compass has experienced a mass exodus from the highest levels of its corporate leadership: Its chief financial officer, chief technology officer, chief people officer, chief marketing officer, general counsel and head of product have all left over that period, the WSJ reports.

Nearly a year to the day before Gavet’s departure, Compass announced a $400M fundraising round led by SoftBank Vision Fund and the Qatar Investment Authority, an infusion which took its valuation up to $4.4B. This past July, it raised a further $370M from the same two sources, as well as the Canada Pension Plan Investment Board, The Real Deal reported at the time.

Compass has raised a total of $1.5B since it was founded seven years ago, the WSJ reports, and SoftBank Group’s venture investment vehicle has been the largest source of capital.

Compass has rejected comparisons to WeWork, with employees complaining to the WSJ that SoftBank capital is the only reason the two are ever mentioned together. Yet SoftBank Vision Fund’s investment director has lumped the two together as hard-driving companies looking to use tech to disrupt how their industries operate. Due to its robust online listing platform, Compass styles itself as a PropTech company, but its core business has been residential brokerage like Zillow and RedFin.

As it raked in funding, it has aggressively expanded to fulfill its ambitions in the past year and a half. Those have included: The launch of commercial investment sales and commercial leasing arms in the summer of 2018. Myriad acquisitions, including that of California’s Pacific Union International, which made Compass the largest residential brokerage in the state. Doubling the size of its product and engineering departments since the start of 2019, according to the WSJ. Offering stock options for commissions to lure brokers.

Now, Compass’ C-suite turnover is making news the same week as The We Company’s leadership has dissolved amid an unraveling IPO plan. That the period of heightened activity has corresponded with a high rate of executive turnover is no accident, the WSJ reports. At least some of the departures reportedly stemmed from a disagreement over whether to focus growth on technology or traditional brokerage services.

Compass co-founder and CEO Robert Reffkin has publicly promised an initial public offering, though he has never committed to a timeline, TRD reports. So many high-level executives at a company generous with stock options leaving before what is generally considered to be the payoff for early investment has raised eyebrows, the WSJ reports.

https://www.bisnow.com/national/news/home/compass-executive-departure-softbank-101027

New Regulations Allow Closer U.S. Scrutiny Of Foreign CRE Investments

The U.S. Treasury Department has proposed new regulations to tighten government scrutiny on foreign investments in the United States, including a wide range of real estate deals. The rules will take effect early next year.

The question now is whether the new guidelines will discourage investment in U.S. commercial real estate, particularly from China, where investment volume has already contracted as the trade war grinds on.

New regulations would give the government stronger review power over non-U.S. investments in CRE near military facilities and other places. Though the details are complex, the thrust of the new rules is straightforward: they give stronger authority to the Committee on Foreign Investment in the United States — an interagency body led by the Treasury Department with members from the departments of Justice, Homeland Security, Defense, Commerce and State — to put the kibosh on business transactions in areas that the government deems protected.

Much of the new authority given to CFIUS doesn’t involve real estate deals, but rather investment transactions that involve critical technologies, critical infrastructure and data. Those sort of deals have received widespread attention, especially when Chinese investors buy, or try to buy, companies with access to cutting-edge information technology.

On the other hand, part of the new rules specifically address non-U.S. entities doing real estate deals in the United States.

“Along with many real estate investors both inside and outside the U.S., we’re monitoring the current period of public comment for CFIUS,” said Gunnar Branson, the CEO of AFIRE, which represents international investors in U.S. real estate.  Branson added that whether the intention is there or not, the new rules might discourage investment.

The new regulations represent entire new categories of transactions previously not subject to CFIUS jurisdiction, Goodwin partner Richard Matheny said. He advises clients on a broad range of U.S. regulatory issues concerning international trade and investment, including CFIUS reviews.

“The real estate provisions of the proposed rule are significant, as they dramatically expand CFIUS’ jurisdiction to review even certain leases of property to foreign persons, even of vacant property with no U.S. business attached, assuming certain conditions apply,” Matheny said.

CFIUS will have the right to review such deals, for example, if a property is within one mile of any of more than 100 specific military installations, or within about 100 miles of 32 other military installations. Also covered is real estate within, or which functions as part of, airports and ports.

There are some exceptions. CFIUS will not (in most cases) exercise jurisdiction over real estate investments in single housing properties or office space in a multi-unit commercial office building.

Also, the committee won’t be involved in deals in census-designated “urbanized areas” or “urban clusters,” unless the real estate is within an air or maritime port or within a mile of a military installation.

“The rules identify scores of particular military facilities and establish a perimeter, whether one mile or 100 miles, within which foreign person control of real property can confer CFIUS with jurisdiction to review and, where appropriate, take action to counter the transaction,” Matheny said.

The new rules, which are now in their comment period, give more teeth to the Foreign Investment Risk Review Modernization Act, which was signed into law by President Donald Trump last year.

Although the increased oversight applies in theory to any non-U.S. investor, the clear intent of the bill was to scrutinize Chinese investors more than before.

“By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies,” Sen. John Cornyn (R-Texas) said when the bill was introduced.

Originally created as an advisory body, CFIUS took on more regulatory functions in the 1980s, when Congress gave the president authority to suspend or prohibit certain types of foreign investments. (CFIUS’ authority is thus delegated from the executive branch.) In the Foreign Investment National Security Act of 2007, Congress further refined its structure and purpose.

Robert Williams, executive director of the Paul Tsai China Center at Yale Law School, describes CFIUS as an interagency committee that reviews “covered transactions” — mergers, acquisitions and takeovers by or with any foreign entity — that could result in foreign control of a U.S. business to determine the effect of the proposed deal on U.S. national security.

The new regulations refine the committee’s role even further, perhaps with unintended consequences.

“One important development not stated in the rules, but which we anticipate, is that financial institution lenders are likely to pay much closer attention to real property acquisitions they finance, to understand whether the borrowers have filed with CFIUS,” Matheny said. “This could impact the value of the security those lenders take for the loan, so we expect a proliferation of reps/warranties about CFIUS in real estate-associated loan documents.”

Since the tighter rules focus more on China than other nations, the near-term impact might be to further depress Chinese investment in U.S. commercial real estate.

But the pullback of Chinese dollars from the U.S. is already happening. Mainland Chinese investors spent $3.8B on real estate outside the country in the first six months of 2019, the lowest figure since 2012, and down 66% from the first half of 2018, according to data from Cushman & Wakefield and Real Capital Analytics.

China’s pullback isn’t related to a lack of appetite for U.S. real estate. AFIRE’s most recent annual investor survey, released in the spring, found that overseas investors are generally confident in a strong U.S. economy, solid real estate market fundamentals, and continued capital inflow to U.S. real estate.  The Chinese government placed strict controls on Chinese nationals and companies moving money out of China in 2017, which effectively turned off a spigot of money that fueled years of record-breaking deals in 2014 and 2015, particularly in New York.

Foreign investors, Chinese and otherwise, are paying close attention to potential near-term risks, such as changing interest rates, global political considerations and policy concerns, AFIRE’s survey showed. The proposed new rules clearly fall into the latter category.

“While all the long-term impacts of the proposed regulatory changes are difficult to forecast, the concern with any regulatory expansion is the potential unintended consequence of dampened benign cross-border investment activity,” Branson said.

“As global institutions hold assets over an extended time, often in excess of 10 years, they adjust their strategies accordingly,” he added. “It is essential for regulators to be specific and aware of the significant contribution of global institutional investments to the U.S. economy.”

https://www.bisnow.com/national/news/investment/new-regulations-allow-closer-us-scrutiny-of-foreign-cre-investments-100998

How KKR, Blackstone, SL Green See The Real Estate Market Right Now

Amid unprecedented global political turmoil, a possible recession on the horizon and record amounts of capital looking for a shrinking number of good deals, the world’s biggest real estate players are shifting their strategies to prepare for what uncertainty may lay ahead.

“When we were coming out of 2012, 2013 and 2014, when we were more early stages of the recovery, we would execute on maybe on a gut renovation of an asset, an adaptive reuse from an office building to a hotel,” KKR Head of Real Estate Americas Chris Lee said on a panel at Bisnow’s National Finance Summit Tuesday.

“We have adjusted our strategy over the last couple years, as this cycle has pushed on … [Now] we want to see the majority of value creation happen in the first 12 to 18 months,” Lee added. “A lot of that is really around the uncertainty we see in the environment … If you look at an office building, for instance, leasing three years from now, a lot of people have a very different view of what that may look like.”

Lee believes there is already evidence that growth outside the United States has been slowing down, though it is impossible to know when the next recession will happen.

Wesley LePatner, the global chief operating officer of Blackstone’s Core+ Real Estate business and the COO of Blackstone Real Estate Income Trust, agreed that at this point in the cycle, it is prudent to be focused on opportunities where you see high-growth potential in order to “insulate” yourself for the future.

“Some of our highest-conviction investment themes right now are last-mile logistics, office and housing,” she told the audience, adding Blackstone is focused on cities in the U.S. and around the world that have job and population growth, universities, research centers and a growing life sciences industry. She noted Blackstone has been increasingly active in the West Coast markets.

“We are really focused on those markets and those asset classes where we see tailwinds from disruption,” she said.

Blackstone has doubled down on industrial in the last year. In June, it announced the purchase of a 179M SF portfolio of U.S. industrial assets from Singapore-based GLP for $18.7B. It has also been snapping up industrial assets in New York City, paying at least $129M for a group of properties near John F. Kennedy International Airport.

Meanwhile, it has continued to raise enormous amounts of capital. Just this month, Blackstone closed a $20.5B raise for its ninth global real estate fund, the largest property fund ever raised. The new fund will be able to buy $41B of assets, and most of the money will be deployed in North America.

Panelists Tuesday discussed debt and equity in the current climate, the impact of New York’s stricter rent regulations on asset values, making the most out of the opportunity zone program and how a downturn could affect markets across the country in different ways.

SL Green co-Chief Investment Officer David Schonbraun said over the last few years, the New York City-focused REIT has “been moving more towards a development model where you can build to a higher yield.”

He pointed to One Vanderbilt, the firm’s ground-up, 1,410-foot-tall office tower in Midtown East that is now topped out, and renovated buildings like 460 West 34th St., as the sort of offering tenants are demanding.

“You are getting paid more to take out a bit of development risk, and the returns are much higher and there is a lot more demand in New York for that new delivery,” he said, while acknowledging you can never be sure exactly what kind of market you will be leasing into. “You have to be comfortable that in today’s world, it works.”

Recession talk has dominated financial headlines in recent months. The inversion of the 10-year U.S. Treasury yield curve sparked alarm, and this week the United Nations’ trade and development body released a report saying a downturn next year is a real possibility. The types of assets best equipped to weather the next cycle, however it plays out, was a major topic of discussion at the summit.

Square Mile Capital CEO Craig Solomon said his firm is now focused on what he calls the intersection of “tech and media” and the types of real estate opportunities that presents.

“Content is being provided through streaming, and that has changed the market,” he said, adding that providers are spending big on content, and companies want to control their space — and want their senior executives in the same location as the studios.

Last month, Square Mile joined with Hackman Capital Partners to buy MBS Group’s portfolio from the Carlyle Group, which includes the MBS Campus, a 587K SF studio facility in Manhattan Beach, as well as MBS’ service platform. Last year, Square Mile also joined with Hackman to buy CBS Television City in Los Angeles for $750M.

“It’s become a real estate business, and we are trying to follow that trend. It’s cycle-resistant, it’s not immune, but it’s cycle-resistant,” he said. “If we are in a recession, people don’t go to dinner as much, they don’t travel. They watch more content.”

https://www.bisnow.com/new-york/news/capital-markets/finance-101000

WeWork halts all new lease agreements with property owners

WeWork is halting all new lease agreements with property owners as the U.S. office-sharing startup looks to curtail costs, the Financial Times reported on Thursday citing people briefed on the matter.

Parent firm We Company postponed its initial public offering last week after investor scrutiny over widening losses and corporate governance, as well as a business model that relies on long-term liabilities and short-term revenue.

https://www.reuters.com/article/us-wework-ipo-leases/wework-halts-all-new-lease-agreements-with-property-owners-ft-idUSKBN1WC02V

Vacant Retail Space In NYC Has Doubled Since 2007

Retail in New York City has been in trouble for some time. Now there is more evidence of just how bad it has become and how deeply landlords are feeling the pain. Between 2007 and 2017 the amount of vacant retail space has gone from around 5.6M SF to over 11.8M SF, according to a new analysis from New York City Comptroller Scott Stringer’s office.

The report notes that 1M SF of that vacancy came from better reporting from landlords.  The report also found the city’s vacancy rate also jumped, going from 4% in 2007 to 5.8% in 2017. And even though it is a citywide issue, Staten Island saw the greatest jump — its vacancy rate went to 11% in 2017 from 4.3% a decade earlier.

“Even as our economy has grown, many mom-and-pop stores have been left behind, transforming spaces once owned by local small businesses into barren storefronts,” Stringer said in a statement. “This isn’t just about empty buildings and neighborhood blight, it’s about the affordability crisis in our city.”

The impact of retail’s new world order has been felt across the city. Several retailers have closed doors on flagships — more than 350K SF of retail vacancy is concentrated in Fifth Avenue’s ZIP code. Major landlords like Brookfield, which owns a string of stores on Bleecker Street, have rushed to try and find innovative ways to inject life into the empty shops.

Stringer’s report suggests the city offer tax credits for independent retailers and make it easier for retail space uses to be adapted and it says planners should carefully consider retail demands and offerings when they shape what can be built or changed in city neighborhoods.

“We need to use every tool in the box to tackle affordability, support small businesses and ensure New Yorkers are equipped to succeed in the new economic reality,” Stringer said.

The report points to the global online shopping phenomenon as a major driver, along with a significant jump in rents. Across the city, average retail rents jumped 22% in the decade the report analyzed.

In some places the increases were even more dramatic; SoHo’s average rent more than doubled, from $60 per SF in 2007 to $126 in 2017. On the Upper East Side, average retail rents jumped 87%, from $79 per SF to $146, according to the report. Property taxes tenants are paying have also soared, with retailers paying $2.3B in 2017, up from $1.1B 10 years before.

The report also suggested vacancy has been caused by intense regulations, like landmark status, as well as long wait times for liquor licenses or building permits. Landlords dealing with empty stores have turned to pop-up shops, boutique fitness operations, dividing space into smaller offerings and accepting flexible lease terms.

Food and beverage concepts have long been considered the savior of retail in the city, but as Bisnow reported earlier this year, those kinds of tenants are now facing tightening margins and rising costs, which is threatening their viability.

https://www.bisnow.com/new-york/news/commercial-real-estate/vacant-retail-space-has-doubled-in-nyc-over-the-last-decade-101012

WeWork Is a Mess for JPMorgan. Jamie Dimon Is Cleaning It Up

WeWork co-founder Adam Neumann often refers to JPMorgan Chase & Co. Chief Executive James Dimon as his personal banker. This week, he was.

In several days of meetings at the bank’s Midtown Manhattan headquarters, Messrs. Dimon and Neumann discussed how to contain the crisis gripping the startup following its decision to delay its stock-market debut, according to people familiar with the matter. Mr. Dimon, as the leader of the bank underwriting the offering, was advising Mr. Neumann on his options, the people said.

In the end, Mr. Neumann, under pressure from investors and board members, decided to step down as CEO of WeWork parent We Co., The Wall Street Journal reported Tuesday.

Mr. Dimon’s involvement in the deal is unusual, but so is JPMorgan’s relationship with We. The bank is one of the office-space company’s biggest lenders. Funds it manages are, in aggregate, We’s third-biggest outside investor. It has extended nearly $100 million in mortgages and other loans to Mr. Neumann personally. It’s one of the lenders behind the $500 million credit line that allowed Mr. Neumann to cash out a big chunk of his shares.

All this means that Mr. Neumann’s problems are Mr. Dimon’s problems.

Their lengthy conversations this week signal an escalation of the bank’s attempts to salvage a deal that has deteriorated rapidly due to concerns about We’s steep losses, Mr. Neumann’s level of control and his unpredictable behavior. The bank and other advisers on the IPO had persuaded Mr. Neumann to make some governance changes, but they weren’t enough to keep the offering from going off the rails.

Investors and rivals are asking if the bank was too tangled up with We and Mr. Neumann to push for the kind of moves necessary to keep the IPO on track. The deal’s many setbacks — before it postponed the offering, the company was preparing to go public at a third or less than the $47 billion valuation it once claimed — could jeopardize Mr. Dimon’s efforts to make JPMorgan the go-to bank for promising Silicon Valley startups.

“The governance reflects there are no adults in the room,” said Sam Zell, the longtime real-estate investor, who isn’t involved with We. “The underwriters are as guilty as the board for instituting a preposterous governance.”

For JPMorgan, the We IPO was supposed to be cause for celebration.

The bank has struggled to win the top job on recent big IPOs, placing third for much of the past decade behind Morgan Stanley and Goldman Sachs Group Inc. For Mr. Dimon, cultivating closer ties to startup founders and investors has become a big priority.

At a news event last year in San Francisco, Mr. Dimon described the bank’s approach to winning their business: Technology bankers, he said, are the “Navy Seals” hunting for promising entrepreneurs. Once those relationships were established, the bank sent in its “army” to supply the young companies with bank accounts, credit cards and other financial services. Private bankers would manage the founders’ money; investment bankers were standing at the ready to offer advice on deals.

WeWork was an early test case for the strategy.

In early 2014, a fund managed by JPMorgan invested in the young company at a $1.5 billion valuation. Around the same time, famed JPMorgan deal-maker James B. Lee Jr. struck up a friendship with Mr. Neumann.

Mr. Neumann penned a tribute to Mr. Lee after his sudden death in 2015. The banker, he said was quick to grasp WeWork’s promise. “He was a living testament to the fact that being a member of the We Generation is a state of mind and a commitment to a higher-level existence,” Mr. Neumann wrote.

Mr. Neumann also turned to Mr. Dimon for counsel, according to people familiar with the matter. Mr. Dimon, in turn, took some advice from Mr. Neumann.

In 2015, when JPMorgan was rethinking its office space, Mr. Neumann took Mr. Dimon on a tour of some WeWork buildings. Mr. Dimon was so taken with them that he tore up the design for a new space near Manhattan’s Hudson Yards for the bank’s tech operations and had plans drawn up that closely resembled WeWork spaces, people familiar with the matter said. JPMorgan paid WeWork $600,000 for design work on the building, according to a document reviewed by The Wall Street Journal.

By this time, the bank was lending to both WeWork and Mr. Neumann. It arranged a $650 million line of credit for WeWork in 2015. The next year, JPMorgan lent Mr. Neumann $11.6 million to buy a 60-acre estate in the New York City suburbs.

In October 2017, WeWork announced it was buying the Lord & Taylor flagship store in New York in a splashy deal for a company that, despite being in the real-estate business, owned few buildings. JPMorgan led a group of banks that committed $900 million in debt to fund the deal. The day the purchase was announced, Mr. Neumann closed on a $21 million mortgage from the bank to buy property in Manhattan’s Gramercy Park neighborhood.

JPMorgan funds, meanwhile, continued to invest in the company as its valuation soared.

Earlier this year, as We’s IPO plans began to take shape, Mr. Neumann bragged to friends and associates that he was meeting with Mr. Dimon to discuss a massive debt deal that would get people’s attention ahead of the offering.

It was a $6 billion credit line, arranged by JPMorgan and Goldman Sachs. A laundry list of banks agreed to fund it, provided We raise at least $3 billion in the IPO.

While such arrangements are common for companies on the verge of going public, We’s credit line was unusually large — reflecting, in part, the company’s latest private-market valuation of $47 billion.

As the IPO neared and We’s valuation ticked lower, some bankers worried they were extending too much credit to the company and pushed for a delay, according to people familiar with the matter. The credit offer expires if We doesn’t go public by Dec. 31. JPMorgan is in line to collect a $50 million fee for arranging the loan.

https://www.marketscreener.com/business-leaders/Jamie-Dimon-2566/news/WeWork-Is-a-Mess-for-JPMorgan-Jamie-Dimon-Is-Cleaning-It-Up–29249094/