Monday Morning Quarterback (Monday, April 11, 2022)

Monday Morning Quarterback

(Monday, April 11, 2022)

All wars end. And as difficult as it is to envision, the war in Ukraine will also end. I don’t know if it ends this month, this year, or this decade, but it will end. The only question is how does it end? According to Sun Tzu’s “Art of War,” war ends when all sides gradually converge towards an agreement to stop fighting. As it stands now, the end of war will not be an all-out victory for either Russia or Ukraine. More likely, some kind of ceasefire, truce or armistice. What that will look like is anyone’s guess. But there are some clues that are becoming more visible as each day passes. In fact, that may already be happening as diplomats from both sides are currently negotiating in Istanbul, Turkey. Any peace treaty will obviously require Russian’s cessation of all military activity in Ukraine, and withdrawal of all troops. That will be a major concession by Putin after months of rhetoric demanding regime change in Kyiv. In return, Zelensky would have to pledge that Ukraine would drop its goal of joining NATO. Ukraine would further ensure that it would remain “non-aligned and non-nuclear.” Further, Ukraine would also have to relinquish its claims on Crimea and Donbas (which is already a reality within the Ukraine government). But perhaps most importantly, Putin will demand that Zelensky call off the dogs, both financial and diplomatic. Clearly, sanctions, freezing bank accounts, and international condemnation has not stopped Putin. But a peace treaty will likely require an immediate cessation of sanctions and Zelensky bringing the world back to Russia. That’s Zelensky leverage in these negotiations. That will be hard to stomach, but if he agrees to encourage companies and countries to re-engage with Russia, Putin will go along and accept peace. Then the real work begins, because after the obligatory signing ceremony, Zelensky will have to convince the Ukrainian people that the peace treaty is fair and worth the horrible sacrifices millions of people endured and whose lives were destroyed. With that sobering thought, let’s look at this week’s real estate economic news…

The Treasury Yield Curve Has Inverted Ahead of Every Recession Since 1950s. The bond market’s most reliable gauge of the U.S. economic outlook for the past half-century is hurtling toward inversion at a faster pace than it has in recent decades, raising fresh worries about our economy’s prospects (as the Federal Reserve begins to consider aggressively hiking interest rates). The widely followed spread between 2-year and 10-year Treasury yields shrank to as little as 13 basis points on Tuesday. It stood at roughly 21 basis points on Wednesday, after two Fed policy makers followed in Chairman Jerome Powell’s footsteps and opened the door to raising benchmark interest rates by more than a quarter percentage point at a time. The spread is down from as high as 130 basis points last October. Investors pay close attention to the Treasury yield curve (or the slope of market-based yields across maturities), because of its predictive strength. An inversion of the 2s/10s has signaled every recession since the 1950s, according to Principal Global Advisors. That’s true of the early 1980s recession that followed former Fed Chairman Paul Volcker’s inflation-fighting effort, the early 2000s downturn marked by the bursting of the dot-com bubble, the 9/11 terrorist attacks, and various corporate-accounting scandals, as well as the 2007-2009 Great Recession (triggered by a global financial crisis), and the brief 2020 contraction fueled by the pandemic. “The yield curve has the best track record within financial markets of predicting recessions,” says one economist. Ordinarily, the curve slopes upward when investors are optimistic about the prospects for economic growth and inflation because buyers of government debt typically demand higher yields in order to lend their money over longer periods of time. The contrary is also true when it comes to a flattening or inverting curve: 10- and 30-year yields tend to fall relative to shorter maturities when investors expect growth to cool off. This leads to shrinking spreads along the curve, which can then lead to spreads falling below zero in what’s known as an “inversion.” An inverted curve can mean a period of poor returns for stocks and hits the profit margins of banks because they borrow cash at short-term rates, while lending at longer ones.

Rents Soaring Across America. Across our country, recent real estate analyses have found severe rental spikes, with Miami and Tampa highest on the list, as well as Phoenix; Scottsdale; Las Vegas; San Diego; and the New York City area. In Florida, renters living below the poverty line are being hit particularly hard. The National Low Income Housing Coalition estimates that there are only 28 affordable rental homes in the state for every 100 extremely low-income renters (people who make less than 30 percent of their areas’ median income). That’s the worst ratio in the Southeast and one of the lowest nationwide. The problem is especially acute in the Tampa Bay market, where the population is about 3.1 million. The pandemic beckoned thousands more people to its beachside communities and the rental vacancy rate fell, creating a pronounced housing shortage that experts don’t expect to improve any time soon. The staggering rise in rents is squeezing people across the socioeconomic spectrum, housing experts say, and fueling a crisis in which tenant advocates, the real estate industry and local political leaders are clashing over potential solutions.  Central Florida’s Gulf Coast has become a prime relocation destination, with Tampa ranking behind only Miami and Phoenix as the top U.S. cities where people want to move, according to a “Homebuyer Migration Report” by Redfin released last week. Housing experts say the population influx is driven by Florida’s loose pandemic restrictions and a shift to remote work, as well as the lure of lower taxes and a warmer climate. And it comes at a moment when the local real estate market is hot: The typical Tampa home is worth nearly $375,000, up by more than 31 percent from a year ago, compared to a 20 percent increase in home values nationwide. Frank LoTurco, vice president of the Picerne Real Estate Group, acknowledges that the company has recently raised rents after it limited increases during the pandemic. The reason? “Simple economics,” he said, pointing out that more people are clamoring for limited housing. St. Petersburg officials have also recently discussed changing zoning regulations and increasing the density that developers can build. In 2019, the City Council enabled homeowners to build small apartments on their land, often known as in-law suites, ADUs, or granny flats, which can be rented out. But tenant advocates want more, including rent control. However  rent control faces opposition from industry groups, including the National Apartment Association (which lobbies on behalf of property owners).

How Airbnb Reinvented Itself As the World’s Crisis-Housing Provider. Earlier this month, as millions of refugees fled the war in Ukraine, a website launched in 2008 by a couple of guys looking to monetize an air mattress on the floor became an unlikely vector for direct monetary aid. Inspired by a handful of influencers, Airbnb users started booking stays in cities like Kyiv, encouraging their hosts to pocket the money. Screenshots of Ukrainians thanking their benefactors circulated across the internet, and the company took notice. To better facilitate this unconventional use of their platform, Airbnb waived service fees in Ukraine. It also announced a program that would house up to 100,000 Ukrainian refugees for stays it expected to last several weeks. All of this becoming the most recent extension of Airbnb.org (the hospitality start-up’s 501(c)(3) charitable arm). A few days after Airbnb launched the pledge, former president Barack Obama tweeted an endorsement. Launched two years ago, the nonprofit organization (a spinoff of Airbnb.com, the massively profitable business last valued at  over $100 billion) is inspired by what the company characterizes as “the natural generosity of Airbnb hosts.” The company’s founders donated millions of dollars, and both hosts and employees are encouraged to give, a canny re-routing of profits into a program that reimagines the company as something akin to Silicon Valley’s “Office of Refugee Resettlement.” The pivot seems to have worked. With Airbnb.org, the company has elevated itself to the level of critical infrastructure, stepping in to offer its services in times of disaster as disparate as an ill child, or a hurricane, or a war. In its initiative for Ukraine, the millions of dollars Airbnb.org has raised to date is routed back to existing aid organizations, and some of those refugee-placement services will use Airbnb.org money to pay Airbnb.com hosts. (The company waives service fees in Airbnb.org transactions.) This arrangement conveniently splits donations in a way that lends a philanthropic sheen to its brand and also supports its core business of compensating people who have a room to rent out.

Mall Giant Selling $13.2B Portfolio In Exit From U.S. Retail. Does Westfield know something about retail we don’t? The reason I am asking this provocative question is because mall giant Unibal-Rodamco-Westfield (“URW”) has decided to sell all of its U.S. retail assets, which might fetch considerably less than the company paid for them (especially the $14 billion URW paid for Westfield and its American mall portfolio four years ago). URW’s CEO, Jean-Marie Tritant, told investors that the company wants to divest most of its U.S. properties by the end of next year, the Wall Street Journal reports. The company has been planning the exit for more than a year. Paris-based URW values its U.S. mall holdings at about $13.2B, but it isn't clear whether the properties will be able to command that sum in the current investment environment. "Unibail likely will have a hard time finding buyers by next year and almost certainly won’t get what it paid for its U.S. portfolio," Green Street Advisors Senior Analyst Rob Virdee told the WSJ. In the Americas, the retail sector accounted for only 11% of total investment volume in Q4 2021, though that was its highest share since Q2 2020. Investors are far more interested in apartments (which captured 45% of investment dollars for the quarter), and industrial (which accounted for 22% of investment volume). URW has 34 properties in the United States, including 24 standalone malls and 10 retail outlets in U.S. airports. The standalone malls include high profile specialty malls in Century City, Arcadia, Woodland Hills, and Santa Clara, All of its non-airport malls are branded Westfield. Going forward, the company's focus will be on its European assets. Its heaviest concentration of properties is in France, where it has 39 properties, (including 21 malls), plus a number of office buildings and convention centers. “By 2024, we will have successfully reshaped the business to capture future growth, centered on our portfolio of flagship destinations in the wealthiest cities and catchment areas in Europe," Tritant said in a formal statement. In other words, goodbye American, we hardly knew ya.

Tentative ‘Settlement’ in Homelessness Lawsuit Leaves Many Questions. Remember that Federal lawsuit filed back in 2020 by the LA. Alliance for Human Rights against City of Los Angeles city and the County of Los Angeles to end homelessness in skid row and elsewhere. Well, there is an update and possible settlement. The city’s five-page term sheet filed with U.S. District Judge David O. Carter essentially has the city pledging to create “sufficient shelter and/or housing” to accommodate 60 percent of the city’s homeless population. But that pledge contains a major caveat: The city won’t shelter homeless people if they’re seriously mentally ill, chronically homeless or diagnosed with a substance use disorder, or if they have a chronic physical illness or disability that requires professional medical care. Wow, then who’s left! According to the city, any homeless people who meet one or more of these qualifications is the responsibility of the county. The city’s filing specifies the county isn’t part of the proposed deal, but it still devotes nearly 1 1/2 of its five pages to outlining the county’s obligations. That includes “funding and providing wrap-around and supportive services” for people in city housing and shelter, increasing outreach and engagement, and “providing housing and treatment services” for all homeless people who the city has deemed not the city’s responsibility. City officials are pledging to open 14,000 new beds, but they admit 13,000 of those beds were already planned before the deal was struck, though without secured funding. The term sheet states that no enforcement of “public regulation ordinances,” such as the anti-camping laws the city enacted last year, will be taken unless an unhoused person has first been offered shelter, which is already the law based upon the legal holding in the 2018 9th Circuit case Boise v. Martin. Other terms of the proposed deal are also vague, including, “The parties agree to cooperate to identify and reduce barriers to building more affordable housing” and to “consider expediting public/private partnerships that utilize private capital and which require no up-front costs to City." Announced on April Fool’s Day, the purported deal comes at a tumultuous time for the lawsuit. The case has undergone a wildly non-traditional judicial odyssey since it was filed right before the pandemic took hold in March 2020. There’s never been a formal evidence discovery process as is typical in civil procedure, and court hearings for about a year consisted of city and county officials sharing updates with Carter as he peppered them and lawyers with questions, comments and ideas while conducting his own after-court tours and meetings. Carter still has to approve the city’s final settlement, but the 60 percent threshold for shelter beds versus the total homeless population is a figure he’s floated from the beginning.

Landlords And Tenants View Commercial Rent Debt With Trepidation. With commercial tenants often owing tens of thousands of dollars in back rent from two years of deferrals and in many cases only recently starting to see income rebound, a wave of commercial evictions may be looming that can only be averted by tenants and landlords coming to terms beyond what the rules require. As a result, city leaders are exploring what can be done to help small businesses, which make up an estimated 96% of businesses in the city, to resolve the back rent they owe. It is hard to know exactly how much money is needed. A report from city staff aimed at finding ways to help small businesses bounce back from the pandemic used data from the city, the county, and Los Angeles City Council District 4, to attempt to ballpark the amount of rent debt that LA’s small businesses might have. Their findings ranged broadly. One city source indicated that average rent debt for small businesses that applied for a city program in District 4 (which includes parts of Silver Lake, Los Feliz and the Hollywood Hills as well as parts of the San Fernando Valley neighborhoods of Sherman Oaks, Encino and Van Nuys) found that the majority of the 81 respondents had more than $40k each in rent debt. Some of the factors landlords are weighing when considering whether to negotiate with a tenant include whether the tenant is paying a below-market rent, their history as a tenant prior to the pandemic, and long-term projections for that tenant’s success. Local landlord, Greenbridge Group, has a portfolio of mostly office with some ground-floor retail, but tenants include medical offices, lawyers, other traditional office tenants and retailers. Business is largely back to normal for their tenants now, but “normal” might have started very recently (like after the omicron variant died down). They estimate that roughly 10% to 15% of their tenants needed payment plan-style help that would allow them more time to repay what they owe. Some tenants simply won’t be able to pay what they owe without help, and the most useful thing the city can do is to offer some kind of financial relief, whether that is money to cover those losses or something else monetary, like property tax forgiveness. An approved and forthcoming rental assistance program for small businesses in LA is part of a series of relief efforts approved last June. The program would provide grants of up to $15K or six months’ rent, whichever is less, for approximately 800 businesses (only a fraction of the city’s estimated 128,784 small businesses). 

Tyra Banks Lists Her Sprawling Pacific Palisades Home for Sale. The 6,160-square-foot residence is topped with a massive rooftop deck that looks out over the Pacific coastline with an outdoor kitchen, multiple seating areas, a hot tub, and a fire pit. Tucked between the Santa Monica Mountains and the Pacific Coast in Pacific Palisades is a sprawling, ocean-view residence owned by my favorite fix and flipper, supermodel–turned–television host Tyra Banks. The three-story property is among a handful of homes Banks has flipped since 2018 in the affluent neighborhood, where the 90272 zip code consistently ranks among the priciest in the country. The 6,160-square-foot home features five bedrooms and six bathrooms, in addition to a gym, two-car garage, two offices, and a media room with a 120-inch projection screen. The outdoor areas include a rooftop deck with a kitchen and dining area, multiple gathering spaces, and a fire pit and hot tub. A grassy backyard with a deck, infinity pool, and limestone terrace connects to the chef’s kitchen, living, and dining area on the main floor. Fleetwood pocket doors facilitate a seamless indoor/outdoor flow throughout the home. After owning the residence at 15301 Whitfield Avenue for three years (renovating the kitchen and making various decor updates) the former model is listing the Pacific Palisades property for $7,895,000.

Inside the Drama of a Real-Estate Billionaire’s Divorce. Life is tough if you’re a billionaire. Take for example Michael Fuchs. Imagine the horror of having to share your $1.7 billion with someone else. This is the nightmare facing Michael Fuchs, the billionaire co-owner of (among many other things) the Chrysler Building, and his soon to be ex-wife Alvina Collardeau-Fuchs in their divorce proceedings. According to Bloomberg, Collardeau says Fuchs is making her life “intolerable and unfair” by capping her monthly spending at $25,000. Previously, she had been running through more than $200,000 a month (back when life was fair). If she kept that up, Fuchs could see his wealth all but disappear within the next 708 years. (Relatable problems all around!) Collardeau’s lawyer told Bloomberg News (who enjoy covering these absurdities) that before the divorce, the couple “ran a number of fully staffed homes in fashionable areas of the world, traveled extensively and spent according to their means, which were effectively unlimited.” She would prefer that things go back to the way they were, but Fuchs would prefer not to have his vast wealth shared by someone who is not him. Just another story about the obscenely wealthy squabbling over their obscene wealth? Maybe — or maybe it’s the latest manifestation of the Chrysler Building “curse.” Follow me as I highlight some simple facts: Its developer began construction in 1928 — a year before the Great Depression kicked off. It was the tallest building in the world — but for less than two years. (Then the Empire State Building came along.) In 1975, the building went into foreclosure. The previous owners of the building sold it to Fuchs for $150 million, a huge loss from the $800 million they paid in 2008. Its basement was once filled with “an estimated 1,200 million cubic yards of trash.” Is owning the Chrysler Building cursed? No one except the Lord herself can know for sure. All I’m saying is I personally would not choose to own the Chrysler Building or marry someone who does. Just saying...

Is This a House or a Boat? The owners of this houseboat say, “Our house is really a boat.” But officials in Miami disagree, saying the boat is really a house, and are taxing it accordingly. And that is a substantial difference in dollars! Now the owners are suing to prove the “boatness” of their houseboat, the Miami Herald reports. The houseboat in contention is an enormous rectangular structure that is docked off of Star Island in Miami Beach. It has floor-to-ceiling (hull-to-hardtop) windows and a deck (both in the house sense and the boat sense). It floats and it moves, albeit very slowly. It’s solar powered and has two stories. The agents market the “livable yachts” as combining the “best attributes of yachts, floating houses, and waterfront villas.” “All the government has going for it is the shape,” the owners’ lawyers say. They claim the stakes of the case are high: “If this boat is a floating structure, that means all the other yachts docked around Star Island that are not used every single day to go cruising are subject to taxation.” (The horror.)

“An Evening with Brad Sumrok.” When it comes to multi-residential properties, there is no one more experienced and popular than Brad Sumrok. Visiting us from Dallas, Texas, Brad is the number #1 authority on finding, evaluating, buying, financing, and managing apartment buildings. Every year his presentation is the most attended of all our meetings. Brad will be our special guest at our April 14^th meeting, at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LARealEstateInvestors.com.

Vendors Expo Returns! Our world-famous super-duper "Real Estate Vendors Expo" returns on Thursday night, April 14, 2022. The Vendor Expo will be open starting at 6:30 pm. We'll have a collection of 35+ of the finest vendors featuring real estate products and services you will need as a successful investor. Our Vendor Expo will be held at our new home, the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LARealEstateInvestors.com.

Weekly “Rubbing Elbows” Podcast. LAC-REIA hosts the weekly podcast, “Rubbing Elbows” staring our very own Chuck Dorfman, and his co-host, Lior Yehuda. Every Thursday live at 8:00 pm (and streaming anytime thereafter), Chuck and Lior interview real estate professionals sharing their insights and advice. Its real estate uncensored and unfiltered. These guys may be unorthodox, but they know what they’re talking about. You can enjoy “Rubbing Elbows” (i.e. YouTube, Facebook, Google), or www.LARealEstateInvestors.com/RubbingElbows.

This Week. Looking ahead, investors will continue to closely follow news on Ukraine and will look for additional Fed guidance on the pace of future rate hikes and balance sheet reduction. Beyond that, the Consumer Price Index (CPI) will be released on Tuesday (4/12). CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Retail Sales will come out on Thursday (4/14). Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. 

Weekly Changes:
10-year Treasury:               Rose  020 bps
Dow Jones Avg:                  Fell    100 points
NASDAQ:                            Fell    300 points

Calendar:
Tuesday (4/12):                   CPI
Thursday (4/14):                  Retail Sales
Thursday (4/14):                  Import Prices

For further information, comments, and questions:

Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
www.LARealEstateInvestors.com
LloydThis email address is being protected from spambots. You need JavaScript enabled to view it.

310-409-8310