NYC Commercial Real Estate Sales Plunge Over 50% As Owners Lever Up In The Absence Of Buyers

So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years?  Well, you lever up, of course. 

As Bloomberg notes this morning, the "smart money" at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while "dumb money" buyers have completely dried up.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes -- from banks and insurance companies to hedge funds and private equity firms -- are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.

“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.

But don"t concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning...they"ve just "hit the pause button" while they wander out in search of the ever elusive "price discovery."  

At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.

“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.

The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.

Of course, this isn"t just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.

The tough sales market has put some property owners in a bind -- most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.

Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a "red flag" that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.

Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.

But, it"s probably nothing...

Here's The Most Alarming Sign Yet That Manhattan Real Estate Is Heading For A Crash

The Chinese government’s latest crackdown on capital outflows and corporate leverage is intensifying, and that’s bad news for Manhattan’s property market.

According to a report by Morgan Stanley cited by Bloomberg, new restrictions being imposed on the most acquisitive Chinese companies will likely lead to an 84% drop in Chinese overseas property investment this year, and a further 18 percent drop in 2018.

The markets most vulnerable to this slowdown, according to MS, are the US, UK, Hong Kong and Australia, with commercial properties the most vulnerable.

Manhattan commercial real-estate prices could fall sharply.

“Manhattan is a particular worry, with about 30 percent of transactions in the borough that’s home to Wall Street involving Chinese parties in 2017. In Australia, China is the largest foreign real estate investor, accounting for as much as 25 percent of office property transactions in the last two to three years, according to Morgan Stanley.”

As we reported on Tuesday, the Chinese government is pushing Chinse insurance company Anbang – the company that was in talks with Jared Kushner to buy his company’s stake in 666 Fifth Ave. -  to liquidate most of its overseas holdings and repatriate the proceeds of the sale. The company, whose chairman was detained by Chinese authorities in June, responded by saying it has no plans to comply...but we think the Communist Party will find a way to convince the company’s executives that deleveraging is in their best interest.

Chinese authorities appear to be trying to reverse the global M&A binge that helped aggravate capital outflows, leading to a massive drawdown of the country’s foreign-exchange reserves.

Back in June, China’s Banking Regulatory Commission dealt an embarrassing blow to Anbang and three of the country’s other top conglomerates by demanding that banks examine “systemic risks” posed by Anbang, HNA, Dalian Wanda and Fosun International before lending to them. The announcement triggered a sharp drop in the share prices of companies controlled by these conglomerates.

Since 2015, the four companies completed a combined $55 billion in overseas acquisitions, 18% of Chinese companies’ total.

Anbang also got caught up in a crackdown on “improper innovation” in the securities markets after it helped finance its expansion with sales of lucrative wealth-management products that offered among the highest yields compared with peers, a key spoke of China"s $9 trillion shadow banking universe. The move forced regulators to implement restrictions on high-yield, short-term investments.

Weakening demand from Chinese individuals and corporations represents another headwind for real-estate markets in the most expensive US cities, which are facing a boom of new supply in the coming quarters. Commercial real-estate sales in New York fell to a six-year low during the first quarter in anticipation, as we’ve previously reported.

Residential real-estate markets are already feeling the pinch of the Communist Party’s efforts to suppress foreign real-estate deals with new capital controls. Already, New York City is seeing fewer apartments sell for above the listing price, a sign that demand in one of the world’s hottest residential markets is cooling. In a nightmare scenario for New York real-estate developers: Demand is ebbing just as an influx of new supply is hitting the market. You can probably guess what kind of impact that will have on prices.
 

Tillerson Flies To Gulf To Resolve Qatar Crisis As Ties Emerge Between Kushner And Qatar's Richest Man

In the latest US attempt to mediate and resolve the Qatar crisis, Secretary of State Rex Tillerson flew to the Gulf on Monday for talks aimed at ending the standoff between a coalition of Arab states led by Saudi Arabia and the wealthy nat gas exporter, which has led to more than a month of economic, financial and naval blockade. The State Department said Tillerson, who forged extensive ties in the Gulf as CEO of ExxonMobil, would hold talks with leaders in Kuwait, Qatar and Saudi Arabia. He was flying from Istanbul where he attended an international petroleum conference. R.C. Hammond, a senior adviser to Tillerson, added that the former Exxon CEO would explore ways to end a stalemate following Qatar’s rejection of 13 demands issued as condition for ending sanctions.

Following Qatar"s refusal to comply with the ultimatum, which included the closure of Al Jazeera and a Turkish militarybase in Qatar, Saudi Arabia and its backers have threatened further sanctions against the emirate.

In Doha, a Western diplomat told Reuters that the creation of a "terror finance monitoring mechanism" would feature in the talks without elaborating. As a reminder, on June 5th Saudi Arabia, Bahrain, UAE and Egypt imposed sanctions on Qatar, accusing Doha of aiding terrorism, something it denies.

"The trips to Saudi Arabia and Qatar are about the art of the possible," said Hammond, who added that the 13 demands "are done" and "are not worth revisiting as a package. Individually there are things in there that could work."

The crisis has hit travel, food imports to Qatar, ratcheted up tensions in the Gulf and sown confusion among businesses, while pushing Qatar closer to Iran and Turkey which have offered support. Furthermore, the US is worried that the crisis in Qatar - which hosts Udeid Air Base, the largest U.S. military facility in the
Middle East - could affect its military and counter-terrorism operations and increase the regional influence of Tehran, which has been supporting Qatar by allowing it to use air and sea links through its territory.

Meanwhile, President Donald Trump has expressed support for Saudi Arabia in the dispute, which may emerge as a new potential scandal for the presidency. 

Earlier on Monday, the Intercept reported that in what may be seen as a conflict of interest, Trump"s son in law Jared Kushner tried, and failed, to obtain a $500 million investment to refinance and fund the expansion of his 666 Fifth Avenue property, where the family is severely underwater, from one of Qatar"s richest men, the former prime minister and former head of the local sovereign wealth fund, Sheikh Hamad bin Jassim al-Thani.

Throughout 2015 and 2016, Jared Kushner and his father, Charles, negotiated directly with a major investor in Qatar, Sheikh Hamad bin Jassim al-Thani, known as HBJ for short, in an effort to refinance the property on Fifth Avenue, the sources said.

HBJ ultimately agreed to invest at least $500 million through Al Mirqab, on the condition that Kushner Companies could raise the rest of a multibillion refinancing elsewhere. The negotiations continued long after the election, carried out as recently as this spring by Charles Kushner. “HBJ basically told them, we’re good for 500, subject to a lot of things, but mainly subject to you being able to raise the rest,” said one source in the region with knowledge of the deal. The talks were confirmed by two additional sources with knowledge of the talks. One of those sources claimed that the potential deal was not contingent on the rest of the money being raised and that the HBJ investment was on hold as the overall structure of the financing was reconsidered.

The deal ultimately died when Anbang, which was supposed to be the major partner, and co-investor, as well as provide a $4 billion loan, pulled out, after the deal was critized as a conflict of interest, although there is now the implicit speculation that Trump"s greenlighting of the blockade of Qatar was in retaliation for the collapse of the 666 Fifth investment.

Of course, it is worth recalling that in addition to seeking to cooperate with Trump, Sheih Hamad Bin Jassim Jabr Al-Thani was also one of the most prominent Clinton Foundation donors.

Taking a more diplomatic stance, Hammond said it was critical that not only Qatar, but Riyadh and its allies take steps to halt any financial support flowing to extremists groups, especially following the defeat of Islamic State in the northern Iraqi city of Mosul. "It’s a two-way street,” he said. “There are no clean hands here."

"We want progress on terrorism financing. The president strongly believes that if you cut off financing, you cut off the ability of terror to take hold in new areas," Hammond said.

Moreover, he said, "the longer that this struggle is in place, the more opportunity there is for Iran.” Yet, ultimately, behind the facade of a united front behind "the war on terrorism", it now appears that the motive behind the Qatar crisis may have once again been nothing more than settling of old financial scores.

"We Can't Have Massive Trade Deficits": Trump Warns Of "Very Difficult" Meeting With China

One day after Kushner"s family confirmed they had ended talks with China"s Anbang Insurance Group concerning their interests in 666 Fifth Avenue in New York, a deal that would have netted the Kushner"s $400 million in cash, President Trump has decided to strike an aggressive tone ahead of his first meeting with China"s President Xi Jinping scheduled for next Thursday and Friday at his Mar-a-Lago resort in Florida.

After recent reports suggested that his administration may be softening on trade-related issues, Trump once again took to twitter to caution that his meetings with Xi may get a little turbulent, saying "we can no longer have massive trade deficits and job losses. American companies must be prepared to look at other alternatives."

"The meeting next week with China will be a very difficult one in that we can no longer have massive trade deficits and job losses. American companies must be prepared to look at other alternatives."

The meeting next week with China will be a very difficult one in that we can no longer have massive trade deficits...

— Donald J. Trump (@realDonaldTrump) March 30, 2017

...and job losses. American companies must be prepared to look at other alternatives.

— Donald J. Trump (@realDonaldTrump) March 30, 2017

Of course, these tweets follow a similar tone from Sean Spicer earlier today during his daily press briefing in which he said "there are big issues of national and economic security that need to get addressed."  Per Reuters:

U.S. administration officials say the need for China to do more on North Korea, the large U.S. trade imbalance with China, and Beijing"s pursuit of expansive claims in the South China Sea will top the agenda. Trump has sharply criticized China on all of the issues.

White House spokesman Sean Spicer told a news briefing the meeting was be an opportunity for Trump "to develop a relationship in person with President Xi."

"He"s spoken to him on the phone a few times, but we have big problems ... everything from the South China Sea, to trade, to North Korea. There are big issues of national and economic security that need to get addressed."

"Right now we"re not worried so much about slogans as much as progress. There"s a lot of big things that we need to accomplish with China, and I think that we will - we will work on them."

The summit will follow a string of U.S.-China meetings and conversations aimed at mending ties after strong criticism of China by Trump during his election campaign.

Meanwhile, China has also been irritated at being told repeatedly by Washington to rein in North Korea"s nuclear and missile programs, or face U.S. sanctions on Chinese businesses trading with North Korea, and by the U.S. decision to base an advanced missile defense system in South Korea. 

Beijing is also deeply suspicious of U.S. intentions toward self-ruled Taiwan, which China claims as its own, after Trump broke with decades of U.S. policy by taking a phone call from Taiwanese President Tsai Ing-wen and saying that Washington did not have to stick to a "one China" policy.

Of course, only time will tell if Trump will take the same approach with China that he did with Merkel and pass Xi a bill for the present value of past trade deficits.

Chinese Elites Scramble To Apply For US 'Golden Ticket' Visa

As members of Congress in Washington debate raising the minimum required to obtain a U.S. immigrant investor visa from $500,000 to $1.35 million, Bloomberg reports concern about the hike has set off a scramble among wealthy would-be participants in China.

China’s wealthy, using not-always-legal means to skirt capital controls to get their money out and at the same time gain residency in the U.S., are continuing to dwarf all others as the largest participants in the EB-5 program, despite heightened measures by the Chinese government.

Chinese investors, several thousand a year, have made up as much as 85 percent of the annual EB-5 investor total, according to U.S. data provided by Rosen Consulting and the Asia Society. In 2015, China overtook Canada as the biggest foreign buyer of U.S. homes.

Because Chinese individuals are limited to exchanging $50,000 worth of yuan a year, a 10th of what the EB-5 program requires, Bloomberg reports that some agents are advising clients who don’t already have assets offshore to use a means nicknamed "smurfing" to move their money.

"Our suggestion to the client is to open three to four personal accounts in the U.S. or line up three to four friends’ accounts, so they can split the money and wire it to different personal accounts without being put on a blacklist by the Chinese authorities," said a Shanghai-based real estate agent who gave the surname Dong.

"It may require a trip to the States to do so to facilitate the process."

While the government in Beijing spent much of 2016 working to stop its citizens sending money abroad in order to stabilize its declining currency and foreign reserves, Chinese investors’ use of EB-5 continued anyway, totaling $3.8 billion in the fiscal year that ended Sept. 30, according to data from the U.S. State Department.

EB-5 started decades ago as a way to create jobs in needy U.S. neighborhoods by attracting foreign investment. But it has run into political opposition amid charges the program is benefiting billionaire developers and being dominated by wealthy Chinese.

"EB-5 has been a key program for capital flight that has been abused by Americans and Chinese people seeking to game the system," said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA.

While there’s no suggestion of wrongdoing by developers that receive funding from EB-5 (including the family of Jared Kushner, President Donald Trump’s son-in-law and senior adviser, who is seeking $850 million in EB-5 fundingrefinance and reconstruct its New York office building at 666 Fifth Avenue), a series of Securities and Exchange Commission cases against EB-5-linked immigrant investor centers led the U.S. Citizenship and Immigration Services to announce last week that they would audit the centers amid concern about fraud.

Changes to the EB-5 minimum would affect property developers who rely on the program as a funding channel, said Michael Shaoul, chief executive officer at Marketfield Asset Management in New York.

"Any interruption of the program or reduction in Chinese participation would have a meaningful effect on a development cycle that is already showing signs of strain in certain key U.S. cities," he said by email.