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Nobody Can Beat Our CRE Financing

Fantastic Financing by Regal Properties!

JUST FUNDED — Neighborhood Shopping Center Loan in Visalia, CA!

$5,730,000 Loan

3.85% Fixed for 10 years

Interest-only for 10 years

30-year amortization


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Overleveraged — Corporations vs Commercial Real Estate

Many corporations continue to binge on cheap debt to inflate their stock prices — enriching their current executives and shareholders at the expense of future growth and earnings.  However, when interest rates inevitably rise and/or earnings fall, stock prices will plummet and workers (i.e. consumers) will be fired so those companies can continue paying the interest to avoid default on their debt. This explains why the Fed keeps dropping the rates despite full employment and a seemingly robust economy.  This time around commercial real estate has not become overleveraged. Nor has excessive inventory development occurred in most product types in the majority of U.S. metro areas. Any increases in property valuations are now primarily reflective of increasing property income through rising, but not excessive, rent increases. Property value increases resulting from CAP rate compression have ceased in most areas of the country. Since 2005, commercial loan-to-value ratios have dropped from about 71% to about 62% on average, while average debt-service coverage ratios have increased from approximately 1.53% to 1.73% — meaning lenders are requiring borrowers to have more cash flow relative to the underlying debt payments.

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Recession indicators which overwhelmingly signal a major economic slowdown brought on by slower growth abroad and Trump’s escalating trade war with China include:

  • The U.S. bond market and the inverted yield curve — the yield on the benchmark 10-year Treasury note has fallen below the 2-year yield multiple times in the last month, and this inversion has preceded the last 7 recessions.
  • Gross domestic product in the U.S. is slowing. The economy expanded by 2% in the second quarter, which is the lowest growth rate since the fourth quarter of 2018 and down from 3% growth in the first three months of this year.
  • Corporate Earnings growth estimates have come down drastically this year from previous estimates for the S&P of 7.6% to current estimates of 2.3%.
  • U.S. manufacturer growth slowed to the lowest level in almost 10 years in August, such that the reading is below the neutral 50.0 threshold for the first time since September 2009. Any reading below 50 signals a contraction.  The Trump/China trade war, coinciding with global growth worries, continues “to weigh on business confidence and firms’ capital expenditure plans,” according to minutes from the Fed’s July meeting.
  • The economic outlook from Freight’s perspective looks grim, as the Cass Shipments Index fell 5.9% in July, following a 5.3% decline in June and a 6% drop in May, “signaling an economic contraction,” the July report said, and “we see a growing risk that GDP will go negative by year’s end.”
  • Copper, known as a barometer of economic health because of its use in homebuilding and commercial construction, is down over 13% in the last half year.
  • Gold prices have soared more than 20% since May when and Trump and China escalated their tariff fight. Similar to government bonds, gold is known as a safe haven trade in times of economic uncertainty.
  • The Global Economic Policy Uncertainty Index, an index designed to measure policy-related worries around the world, hit its all-time highest level, 342, in June.
  • Business spending tumbled 5.5% in the second quarter, the worst since the fourth quarter of 2015, according to the Commerce Department’s quarterly GDP report.  Coming off of a sugar high from Trump’s 2017 tax windfall, businesses are hesitant to invest in future initiatives due to uncertainty.
  • Confidence in US policymakers has reached historic lows, while wealth becomes increasing concentrated and wages stagnate.
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Amazon Kills and Then Revives Malls as Fulfillment Centers

Online retailer Amazon has spent the past two decades luring shoppers out of stores and onto the internet, leading a retail transformation resulting in a wake of dead malls. Now the Seattle-based company is buying more of those empty shopping centers, converting them into warehouses for processing deliveries to consumer doorsteps.  The company plans to open two more Ohio warehouses, including one at the site of a closed mall in Akron, the third shopping center in northeastern Ohio the company has bought and converted into a fulfillment center. Around the country, at least 24 projects exist where developers have turned closed malls and shopping centers into logistics properties since 2016, with almost 8 million square feet of retail either converted to or replaced with 11 million square feet of new industrial space.  Among the advantages of converting malls to logistics facilities are their locations near population centers, making it easier to provide next-day or same-day delivery to customers, with easy access to highways and mass transit and water, sewer and parking systems already in place.

With online shopping increasing at roughly four times the rate of total retail sales and cutting deeper into spending at physical stores, owners are stepping up the sale or conversion of dead malls and distressed shopping centers, particularly in suburbs and rural areas most vulnerable to the effects of e-commerce and store closings, CoStar Portfolio Strategy Managing Consultant Drew Myers said in the midyear State of the U.S. Retail Market report.  The converted malls and big-box retail stores favored by Amazon and other logistics developers are mostly in areas with lower median household incomes than the national average where industrial space is also in short supply, which makes the properties more valuable as industrial space than retail.

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Housing Bubble Burst Ahead?

Data from the National Association of Realtors suggests a housing bubble may be on the verge or bursting in some markets, like coastal California. Overall, U.S. home prices in the second quarter were up 4.3% vs. a year earlier to $279,600, with 16 markets posting declines. That’s a slight appreciation dip from averaging 5.5% annual gains in 2016-2018, a period when just eight U.S. markets were losers.  Silicon Valley prices in California took the nation’s second-biggest loss in the quarter: a 5.3% year-over-year decline, which is a huge contrast from 2016-2018, when the San Jose-Santa Clara market’s prices averaged 15.7% annual gains — the No. 1 gain nationally. San Francisco suffered the seventh-biggest U.S. decline of 1.9% in the year, which is again quite the decline from 9.6% annual increases. Three other coastal California markets had eroding gains: (1) Orange County with 0.6% gain, down from 5.8%, (2) San Diego with a 1.6% increase, down from 6.7%, and (3) Los Angeles with a 1.8% increase, down from 8%. California’s more affordable inland markets fared better at 5.6%, but still dipped from a previous 8% yearly rate.  These declines may be attributed to the steep run-up of prices in recent years and a recent cooling of the state’s business growth pace. However, California has company, as second-quarter depreciation also occurred in markets in Illinois, New York, Wisconsin, Florida, Oklahoma, Hawaii, Colorado, Kansas and Connecticut.

People talk about the need for more “affordable” housing in California, but the creation of relative bargains with price cuts on existing homes often scares off the same house hunters who claim they want to pay less — fearing overpaying as a price slide begins, and choosing to wait to buy in hopes of steeper discounts. This wait-and-see mentality can amplify an already souring situation. 

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Regal Properties Represents 5 TIC Exchange Buyers of Strong Credit Retail Center in SoCal for 8.37% Cap

Regal Properties represented 5 TICs in multiple 1031 exchanges in the recent purchase of a 54,750 square foot shopping center, predominantly leased by national credit tenants, located within the desired Southern California retail market of Hemet.  The below replacement cost price of $8,600,000 equates to an 8.37% cap rate with a 13% leveraged cash on cash return for a high-performing retail center shadow anchored by Stater Bros Supermarket (NAP), a regionally dominant grocer, and junior anchored by CVS and Dollar Tree. 

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2019 Housing Outlook

Expect housing in 2019 to be flat. The recent decline in mortgage rates from 5% to 4% for the 30-year-fixed provides some support for housing.  However, the tax-law change, which took away many of the tax benefits of homeownership, weighs on demand. The impact of the new tax law is still filtering through the housing market, particularly in more expensive markets like California, and Florida, where those tax benefits are more important.

Affordability remains an issue. The runup in house prices over the last six years makes housing less affordable for many entry-level buyers, even with the lower mortgage rates.

A slight increase in new home construction this year, particularly at lower price points, seems likely. In terms of price growth for houses, 2019 will likely be weaker than recent years, probably in the 3% range due to affordability issues and the tax-law change.  Government dysfunction, geo-political risks, possibilities of more government shutdowns relating to immigration and the debt ceiling, trade wars and resulting stock market declines, further add to the uncertainty and decreased demand of potential home buyers.

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