WeWork CEO Adam Neumann (Credit: Getty Images)

WeWork’s announcement this week that it has filed preliminary paperwork to pave the way for a public offering is a signal of its plans to expand further. But in Europe, the company faces a more competitive field where local firms dominate market share in many cities.

Flexible office space has doubled in Europe in the past five years, driven in part by WeWork’s entrance to the markets there, according to Bloomberg. Citing a Colliers report, the outlet reported that WeWork and IWG have close to 78 percent of the flexible office space in the continent.

By the end of last year, WeWork reportedly had about 6.5 million square feet of space in Europe, a figure that surpassed IWG’s footprint.

But in many cities such as Paris and London – the latter of which is Europe’s largest flexible office market – smaller local players collectively have the largest slide of the market, according to Colliers. Some of those companies include Blackstone Group’s The Office Group and Germany’s Design Offices, which each has about 260,000 square feet of space.

“The IPO is a great milestone in the evolution of the flexible work-space scene,” Tom Sleigh, a Colliers flexible office industry consultant, told Bloomberg. “It’s a signal to other operators that they’re able to expand.”

In central London, WeWork has 50 locations, a number that made it the largest office tenant in the city, a title it also has in New York and Washington D.C.

The majority of European office space is centered on a handful of cities, including Amsterdam and London, Berlin, Rome and Paris. [Bloomberg] — David Jeans 

President Trump, Federal Reserve chairman Jay Powell, and the Federal Reserve (Credit: Getty Images and iStock)

The Federal Reserve said Wednesday that it will hold interest rates steady amid signs that the housing market is slowing down.

The Fed will keep rates at 2.25 percent to 2.5 percent, stating the economy rose at a solid rate, but that inflation fell below its 2 percent target.

The decision was expected after the Fed signaled in March that it would not raise rates for the rest of the year over signs that the economy was cooling down.

The decision marks a shift from the Fed’s policy over the last few years. Last year, the Fed increased rates four times — and a total of nine times since December 2015.

Since the end of 2018, one indictor of the economy, the housing market, has showed continued signs of a slowdown. In March, new home construction in the U.S. fell to its lowest level since May 2017, according to U.S. government data. In addition, March marked the 10th consecutive month that home price growth slowed.

Still, the Fed painted a more positive picture of the economy than in its March’s statement. It said job gains have been solid and the unemployment rate has remained low. It did state, however, concerns over inflation, which could lead the central bank to reduce rates in the future.

In March, the Fed also announced that it would take a step back on its previous plans to downsize its huge portfolio of government-backed securities. The Fed has a $4 trillion asset portfolio of securities that it purchased during the financial crisis in order to boost the economy. It’s been trying to reduce that portfolio for two years as the economy has improved by letting notes mature. It said it will stop the runoff in September as the economy is slowing down.

The Fed’s latest announcement comes during heightened scrutiny of the bank’s decisions by President Trump, who recently suggested on Twitter that the Fed start cutting rates by as much as 100 basis points or 1 percent.

Sellers are thinking outside of the box to close deal (Credit: iStock)

Finding a buyer for a 1.5-acre residential portfolio in Sunset Strip has proved far more difficult than expected.

When the owner of the portfolio first pondered a sale in 2017, selling the three contiguous lots in one deal seemed like a wise choice. The market was hot, and developers had been paying top-dollar for tear-down properties they could transform into multi-million-dollar mansions.

But when the listing broker’s advised breaking them up in order to attract more buyers, the St. Ives Drive homes hit the market in October 2017 for $16.5 million, $7.3 million and $6.3 million. There were no takers and in January, prices were lowered. A second price chop last month dropped the asking to $12.5 million, $5.5 million and $3.9 million, respectively.

How low can they go?

Amid a nationwide cool-down in the housing market, even wealthy buyers in Los Angeles are in no particular hurry to jump at the first or second price cut. Now, sellers and their brokers have begun coming up with other solutions to move properties that have been languishing for months or longer.

As a way to draw attention to the Sunset Strip properties, the buyer’s agent will get a full 3 percent commission compared to the 2.5 percent cut.

The view from St. Ives compound Sunset Strip (Credit: Nourmand)

The broker on the listing, Michael Nourmand, said they are among a handful of luxury homes offering a bigger commission for agents. The split would have been unheard of two or three years ago, he said. Now, it’s necessary.

“It definitely catches the agent’s attention,” said Nourmand, of Nourmand & Associates. Adding, “it definitely helps.”

But that’s just one of the tactic sellers and brokers are using to avoid constant price chops, a move that can also send a signal to potential buyers that a property is undesirable.

With the encouragement of a savvy broker, sellers are also increasingly paying a percentage of closing fees — which could mean thousands of dollars — or agreeing to a buyer’s risky contingencies, in order to encourage a sale. Often, these incentives are being employed for houses under $10 million, brokers said.

Ladd Jackson, an agent at Hilton & Hyland, said a seller paying some of the buyer’s closing fee is an accepted practice. While it tends to vary, sellers might pay a chunk of the fees, which typically range from 2 to 5 percent of the purchase price.

“We didn’t see that for many years and all of a sudden, it’s been popping up a lot” Jackson said.

In other cases, sellers are agreeing to contingencies where the deal will depend on the buyer selling his or her own home first.

Nourmand said he’s had three recent deals in Westside, Beverly Hills Post Office and Sunset Strip where he’s seen such contingencies in place. In that case, a way to compensate for some of the risk, buyers will typically offer a bit more than the asking price on the home, he added.

“If you would’ve told someone that two or three years ago, they would have laughed at you,” Nourmand said.

The creative solutions are a response to the undeniable slowdown in L.A.’s luxury home sales, a stark contrast to those go-go days, when it was perhaps the hottest market in the country. In the first quarter of 2016, there were 118 single-family luxury home sales, according to a report from Douglas Elliman. This year, that number has dropped to 57 sales, a 31 percent decrease from last year.

With that reality having set in, some sellers are going as far as providing financing for a deal.

Joyce Rey, a luxury agent at Coldwell Banker, said she recently sold an $11 million home in Hidden Hills where the seller provided a loan to the buyer to help close the deal. The 9,500-square-foot home had been on and off the market since 2017, according to records. Rey said she hadn’t seen that financing arrangement since the 1980s.

Brokers said they have also seen an uptick in home stagings to attract attention and separate from the competition. Some of the more elaborate open houses have also taken on a carnival-like atmosphere with camels, a cannabis edibles bar and fire dancers.

Sellers who have had trouble adjusting to the new normal in the luxury market are now beginning to consider other options to close the deal, Jackson said. It wasn’t so long ago that a seller had 10 offers on the first day of listing the property. But those days are gone.

“Buyers are getting more picky because they can be, and sellers see that,” he said. “They’d rather get more for it by doing something than let the property drop in price five or six times.”

Firms are now aggressively enforcing clawbacks.(Credit: iStock)

For the 200-person boutique firm CORE Real Estate, losing 35 agents to Compass last year was a body blow.

As it hemorrhaged agents, CORE updated its agent policy manual — reflecting the new steps it would take to prevent agents from leaving and taking their listings with them.

In addition to rolling back commission splits to 40 percent (an industry standard) on all pending deals for agents who announce that they’re leaving, the manual now contains a new and extensive section describing “returnable costs” that agents owe if they leave.

In addition, CORE claims ownership of all photos paid for using agents’ earned marketing budgets. “You have no choice but to sign it,” said one former agent.

These type of clawback policies have been around for years, but firms are now tightening up their rules and getting more aggressive with enforcement.

“The firm puts a lot into [agents], and then the firm doesn’t want to get screwed when they leave,” said one brokerage head. “We work hard to train these agents and grow them.”

Late last year, the Corcoran Group also modified its longtime policy for departing agents, requiring some to return already-paid commissions.

At Corcoran, agents who negotiate a higher split than outlined by the company’s official commission split schedule are required to repay the difference on all deals that have closed in the last 18 months — if they leave for a rival firm. A spokesperson for the firm declined to comment on internal policies.

New York City brokerage chiefs said these policies are a response to fierce and unprecedented competition to lure agents with bonuses and high splits.

“Before Compass it was Town,” said Frederick Peters, CEO of Warburg Realty Partnership Peters, referring to the venture-backed firm and the flashy-but-now-shuttered residential brokerage.

Peters said four or five years ago, Warburg started rolling back the commissions for departing agents to 40 percent in response to “hyper-aggressive recruiting environment.”

Peters — whose firm also gives agents who are leaving 40 percent on pending deals — said the status quo is nothing short of “predatory” and that “everyone would like to defend themselves.”

In 2018, the city’s top residential firms saw massive agent churn.

Over a 12-month period, Douglas Elliman lost 497 agents citywide but gained 525 for a total of 2,696, according to a recent analysis by The Real Deal. Corcoran lost 380 but gained 372 for a total of 1,837.

Meanwhile, Compass ended the year with 1,568 agents — an 80 percent jump from 2017.

More recently, Corcoran lost more than 30 agents to Compass, as the latter firm ramped up hiring in New York. In early April, Compass also struck a deal to buy Stribling & Associates, a boutique operation with nearly 300 agents.

Other firms are also holding brokers accountable when they defect.

According to a copy of Elliman’s 2018 Independent Contractor Agreement (ICA), the firm may “recoup advertising dollars expended on exclusives” that are released when the agent leaves. And Elliman can collect money it spent on an agent’s assistant for the year leading up to a departure.

Meanwhile, last year, Brown Harris Stevens — which had been paying departing agents at a 50 percent split — adopted the industry standard of 40 percent.

“Because of all the change, we were like, ‘It’s very lonely on the high road and the rent is very expensive,'” said CEO Bess Freedman.

A comparison of CORE’s policy manuals from 2015 and 2018 underscores the push brokerages are making to take more ownership of their agents and their intellectual policy.

CORE’s 2018 manual states that agents who leave the company within 12 months must repay 100 percent of their expenditures under the Core Agent Marketing Allocation, which is calculated at 1.5 percent of their gross commission income. The amount drops to 75 percent for agents who remain at CORE for 12 to 24 months, and 50 percent for agents who stay between 24 and 36 months.

CORE’s Shaun Osher declined to comment on the company’s policy. But the head of another brokerage insisted that firms are doing nothing wrong by recouping money they invested in agents.

“If you have been given stock options, and you leave before they vest, you give them back,” said one brokerage head. “They don’t vest.”

Several sources also said Compass — with lucrative bonuses and high splits — has fueled competition, forcing firms one-up job offers.

Rory Golod, Compass’ general manager in New York, rejected that argument. “You can’t force someone to be at a company they don’t want to be at,” he said. “If someone believes there’s an opportunity to grow their business at a different firm … that’s not going to hold them back. Ultimately, what you’re trying to do is to the detriment of the agent.”

But even Compass doesn’t hand out job offers without strings attached.

One Compass ICA signed in 2018 — a copy of which was reviewed by TRD — offers a 90 percent commission split for a certain period of time, plus a $50,000 initial marketing budget and a $75,000 signing bonus. But it also states that if the agent leaves Compass within two years, the agent must pay back the incentives.

As for agents’ listings, Compass introduced a “key-person clause” to contracts in 2015 stating that agents who leave can take clients and listings with them without paying a referral fee to Compass.

However, the current policy manual stipulates that a departing agent’s commission split on pending deals reverts back to 40 percent. And while the firm still allows agents to take their listings, the policy manual now says that “Compass shall be paid the commission it would have retained had the transaction closed through Compass.”

Golod said Compass initially introduced the key-person clause to “get out in front” of the industry’s clawback policies, which penalize agents who switch firms. “Unfortunately, we just did not see much traction and buy-in from other firms to get behind this,” he said.

He said early last year, Compass also modified the key-person clause to include a referral fee from other firms, which he noted is in line with the market standard.

“We’re still true to our word that we will release listings,” he said. “We’re just saying if everyone is asking for a referral fee, we’re going to do the same.”

Ultimately, the burden will fall on the new firm rather than the agent. “That stands in contrast with what we’ve seen with other firms, which haven’t released listings at all regardless of the referral fee offered or request to negotiate.”

But oftentimes, agents don’t fully grasp the company policy until it’s too late.

Earlier this month, a group of ex-Corcoran agents received letters threatening legal action if they did not pay backs sums as high as $100,000.

“I have no issue with them looking to get reimbursed for certain things like marketing… but the notion that they’re trying to recoup commission that you’ve rightfully earned is preposterous,” said one agent who requested anonymity.

Another former Corcoran agent said the new policy contradicts agents’ independent contractor status by handcuffing them to firms. “That’s the crux of this entire matter,” the agent said.

The issue has sparked discussion within the New York Residential Agent Continuum (NYRAC), a broker advocacy group that launched last fall.

Co-founder Heather McDonough, who joined Compass from CORE in 2018, said the group hasn’t yet formed a policy position. But, she said, “We are definitely here to be an advocate for agents; if people are being harassed and bullied, we’re strongly against it.”

“Agents are independent contractors,” McDonough added, “but they’re individuals versus large corporations.”

Rexford co-CEOs Howard Schwimmer and Michael Frankel and the entrance to the San Fernando Business Center

Rexford Industrial Realty continued its active investing this year with the purchase of a San Fernando industrial park.

The Brentwood-based real estate investment trust paid $118 million for the 590,570-square-foot San Fernando Business Center in an off-market transaction. It worked out to about $200 per square foot. About 88 percent of the multi-tenant space is occupied at below-market rate rents, according to a company release.

The seller was Barings Real Estate. CBRE’s Darla Longo, Barbara Perrier, Rebecca Perlmutter, Brett Hartzell and Eric Cox represented Barings.

Connecticut-based Barings is the investment management wing of the Massachusetts Mutual Life Insurance Company.

San Fernando Business Center is nearly 29 acres across five industrial buildings. Three are single-tenant spaces, while the other two are three-tenant spaces. Rexford plans to improve the properties with cosmetic and other upgrades with the goal of securing higher rents.

Rexford is one of the most active industrial investors in the L.A. area in an industrial market that is one of the hottest in the country. Last year saw 7.5 percent rent growth and a steady stream of large deals. Vacancy across L.A. was around 1.4 percent at the close of last year. Though growth slowed somewhat in the fourth quarter, experts are confident that 2019 will be another big year for the sector.

Rexford spent around $500 million last year on acquisitions and is keeping up the pace this year. Recently, it acquired half a million square feet of real estate, mostly in industrial-heavy markets in southern L.A. County, in four transactions.

Mark Parrell

Multifamily investor Equity Residential reported higher earnings in the first quarter thanks to continued demand for rentals and a “sizeable drop in new competitive supply” in its properties in the New York and Boston markets.

The Chicago-based REIT reported first-quarter revenue of $662.3 million, up from $632.8 million in the first quarter of 2018. It was also an increase from the fourth quarter’s $652.6 million.

Funds from operations per share were up 14.1 percent and net operating income per share was up 6.5 percent year over year.

Mark Parrell, who took over as the firm’s CEO Dec. 31, said during a Wednesday earnings call that New York and Boston were particularly strong markets in the first quarter.

“We’re really bullish on New York long term,” he said.

But he added he is optimistic about the outlook in all of the REIT’s markets.

“We like the demand picture across the board. We feel really good,” he said.

While it didn’t acquire any new properties during the first quarter, Equity has since closed on the sale of a 266-unit building at 800 Sixth Avenue in New York to Greystar for $237.5 million, Parrell said.

Equity did spend nearly $259 million on three properties totaling 579 units in Jersey City, N.J., Seattle and Denver. In April, after the quarter closed, it picked up a 366-unit property in Rockville, Maryland, for $103.5 million.

Founded by Sam Zell, Equity Residential has a portfolio of more than 80,000 apartments in 310 properties primarily in New York, Southern California, Boston, Washington, D.C., Seattle and San Francisco.

Occupancy was at 96.6 percent at the end of the quarter, up from 96.3 percent during the same period last year.

Parrell said the firm is not deterred by the growing chorus of affordable housing advocates pushing for greater rent control across the country. The company is taking a wait-and-see approach on potential changes, he said. That is particularly the case in New York, where lawmakers are debating revisions to the rent regulation laws.

“Rent control is a risk, just like climate change, just like the financial strength of the municipality,” Parrell said, He added that Equity focuses more on demand, quality of potential tenants and the ability to build when assessing where to invest.

Still, the industry has a vested interest in being part of the rent control debate, he said.

“We need to continue to get the point across that continuing to limit the incentives for the private side to create new housing will not solve the problem,” Parrell said.

Kutzer’s new Whole Foods

South Pasadena-based investment firm the Kutzer Company picked up a Whole Foods-leased retail property and two acres of neighboring real estate in an off-market deal.

The transaction was part of a 1031 exchange for the seller, which property records identifies as the Beverly Hills-based Marc Ittah Trust. The property stretches along Route 66 from 577 South Arroyo Parkway north to the Whole Foods at the corner of Bellevue Drive. In all, the assemblage is about three acres.

Whole Foods has occupied the 80,000-square-foot retail space on the property since 2007. It’s the largest Whole Foods on the West Coast, according to broker David Ickovics, who repped the Ittah trust in the deal. Ickovics is principal of Commercial Asset Group.

A restaurant and other low-rise retail spaces occupy the other parcels sold in the transaction.

Kutzer primarily owns properties in Pasadena, but also has one retail property in Orange County.

Seller Marc Ittah Trust has made two other deals this year, acquiring another supermarket property in Pacific Palisades and a Target-leased space in Santa Barbara. Together those deals totaled around $78 million.

While the Kutzer acquisition is one of the largest retail property sales in the area of late, Pasadena has seen a recent uptick in leasing deals for creative office space. Biometrics Firm Gemalto Cogent Inc. leased a new space in the city in March, while autonomous car company GM Cruise signed a lease for an outpost there in February.

Compass and co-working firm Spaces leased space at the Pasadena Playhouse office building, about 10 minutes from the Arroyo Parkway Whole Foods, in January.

Industrious’ Jamie Hodari and Tech Space’s Vic Memenas (Credit: iStock)

New York-based flexible office firm Industrious has acquired another firm in its expansion quest.

Industrious, which partners with landlords to manage office space in revenue sharing agreements, said Thursday it had acquired TechSpace, a California-based firm with seven locations. The firms declined to disclose the acquisition price. Industrious said there are no current plans to rebrand TechSpace locations.

The move signals an effort by Industrious to grow alongside its competitors, which are expanding at breakneck speed, while indications of a slowing demand for commercial office space emerge. The parent company of WeWork, which has over 400 locations, this week filed paperwork that would allow it to file for an IPO, and The Real Deal reported last week that Knotel, with more than 200 locations, is in talks for a $200 million funding round.

“Consolidation is going to accelerate as our industry matures and Industrious will continue to evaluate additional opportunities as they arise,” said Jamie Hodari, Industrious’ chief executive and co-founder.

The firm, founded in 2013, has raised $142 million, in rounds led by Fifth Wall Ventures and Riverwood Capital. It has 65 locations in about 40 U.S. cities. TechSpace is the firm’s second acquisition, following its August 2018 purchase of Chicago-based co-working company Assemble, with three locations.

TechSpace, which launched in 1997, has seven locations, including one in New York at 41 East 11th Street on Union Square. Its other posts are in California, Texas and Virginia.

Trulia Chief Economist Issi Romem and a Metro Gold Line train at Atlantic Station

In notoriously car-centric Los Angeles, homebuyers are increasingly willing to pay a premium to live near transit.

A Trulia study of listings from 2013-2018 found that those mentioning public transit — trains in particular — sold at an average premium of 4.2 percent, according to the L.A. Times. Mentions of public transit also doubled over that period, and now and is now up to 4.5 percent of the total, according to the L.A. Times.

That is also an indication that brokers are learning to hype up access to transit in their listings. Transit isn’t desirable in all neighborhoods however.

The statistics seem to confirm the city’s move to encourage residential properties near transit hub lines, and include affordable components. The city implemented its Transit Oriented Communities program in 2017 to that kind of push multifamily development near transit.

State Sen. Scott Wiener wants to upzone parcels near transportation with Senate Bill 50.

Trains in particular appear desirable, since mentions of bus lines didn’t grow over the same five-year period that Trulia studied. Mentions of the Metro’s Gold Line increased the most, the Times reported, according to the study.

Developers have been building along the Gold Line, including along its extension. Legacy Partners just completed a 261-unit complex at the Gold Line’s Monrovia Station.

The City of Duarte recently boosted the number of buildable units at an industrial site near its Gold Line Station. [LAT] — Dennis Lynch 

Eva Gabor and Frank Sinatra with the estate (Credit: Getty Images)

A Holmby Hills estate whose residents have included some of old Hollywood’s leading women and men sold — with a price cut — after several years on the market.

The 1.1-acre gated property on Delfern Drive sold for $11 million, the Los Angeles Times reported. It was first listed for $16.95 million in 2015.

It was owned by a trust belonging to Margaret M. Black, records show. The buyer’s name was not known.

The two-story, Southern Colonial-style mansion has been home to Frank Sinatra and Mia Farrow when they were together, as well as Audrey Hepburn and David Niven. Most recently, actress Eva Gabor lived in the house for almost 20 years until her death in 1995.

The compound was built in 1938 by architect Paul Williams. It comprises four structures and a total of 8,750 square feet. The main house is almost 7,000 square feet with six bedrooms, four bathrooms, a library, and a screening room. There is a pool, a pool house, greenhouse, and a tennis court.

Brokers regularly use connections to Hollywood celebrities from years past — and sometimes present — to boost interest in a property. [LAT] — Gregory Cornfield

Lorne M. Buchman, president of ArtCenter College

The ArtCenter College of Design is continuing its expansion by taking control of exhibition and event space at the former Main Museum in Downtown.

ArtCenter is leasing the space — for 10 years at $1 a year — from development firm Gilmore Associates. Its principals Tom Gilmore and Jerri Perrone opened The Main Museum in October 2016. It featured performances and installations by local artists. The pair had plans to expand into a 40,000-square-foot space but the museum closed suddenly last year, leaving future plans unclear, the Times reported.

ArtCenter DTLA will occupy the two-story building at 114 W. 4th Street. It has 6,250 square feet of gallery space. Starting this month, the new space will feature shows, public speaker events and other programs by ArtCenter College. The school will have an option to renew its lease.

Last year, ArtCenter secured $103 million in bonds to expand with new buildings, classrooms, art galleries and housing for as many as 1,500 students. It opened near MacArthur Park in 1930, and it now has a campus in Pasadena. [LAT] — Gregory Cornfield

Macerich executives Tom O’Hern and Scott Kingsmore and a rendering of co-working space at One Westside

Macerich continues to feel the bite of the retail rattlesnake as the mall landlord posted declines in first quarter revenue and funds from operation compared to the same time last year. It has been dealing with store closures — particularly Sears — and tenant bankruptcies across its portfolio, while trying to redevelop other lagging properties.

The Santa Monica-based real estate investment trust’s net income for the quarter was $7.8 million, an improvement on the $33.6 million net loss from January through March 2018. But that first quarter net income was down from the $11.7 million the company posted in the fourth quarter.

Funds from operations dipped to $122.3 million over the first quarter, from $123.5 million last year. The company also reported declines in leasing, which contributed to a drop in revenue, to $226.5 million from $236.7 million year over year.

The company continues its push to redevelop poor-performing properties. It is seeking construction financing on one of its largest redevelopment projects, a joint venture with Hudson Pacific Properties to turn the Westside Pavilion mall in Los Angeles into a co-working space. HPP announced in January that Google would lease the entirety of the 584,000-square-foot co-working space at the mall, now rebranded as One Westside.

One of Macerich’s biggest hurdles going forward is dealing with shuttered former Sears anchor stores. Macerich had 21 Sears stores at its malls as of the fourth quarter of 2018. The company has said it wants to demolish or repurpose those stores once it gains control of them. That will cost Macerich $250-$300 million, it has said.

Despite the gloom, there were a couple of bright spots for Macerich in the first quarter. Occupancy was one of them. Occupancy was 94.7 percent across its properties, up from 94 percent at the same time last year. Rents were also up, 3.9 percent, to $60.74 per square foot.

At Thursday’s earnings call, Macerich CEO Tom O’Hern said it has been able to back fill 55 percent of mall spaces vacated by retailers or from those that have declared bankruptcy. But there was a caveat. Some of that space has been filled be temporary tenants, he said, which typically pay about a third as much as those with long-term leases.

Macerich’s quarter stands in contrast to mall REIT Simon Property Group, which on Tuesday reported higher earnings for the quarter. The company, which acknowledged that the continued wave of retailer bankruptcies has taken a toll, reported funds from operations of $1.08 billion in the first quarter, up from the nearly $1.03 billion in the first quarter of 2018.

CFO Scott Kingsmore suggested that the company wasn’t looking back, saying some of those retailers that closed had “no in-store experience.” They did not adapt to the rapidly evolving industry, he said, so they “became obsolete.”

As it is doing with the former Westside Pavilion, Macerich is overhauling other properties and bringing in new types of tenants. Co-working firm Industrious opened a location at its Scottsdale Fashion Square property in Arizona recently.

Waze CEO Noam Bardin

Los Angeles residents hate it when navigation apps like Waze route drivers through local streets to avoid traffic on larger roads. The ensuing congestion on the side streets can have a long-term effect on property values, some homeowners claim.

It seems city officials have gotten the message.

The City Council requested the Department of Transportation enlist map apps in a pilot program, which would limit the streets those navigation devices route drivers through, according to Curbed.

The roads could include some hillside roads, those designated by the city as “local thoroughfares” and access roads.

Compass last year partnered with Waze to show ads for homes for sale along drivers’ routes.

DOT transportation engineer Brian Gallagher suggested in recent Council testimony that the hills of Encino and the often traffic-packed area around the Hollywood Bowl were good candidates for the program, according to the report.

Such a policy would answer near-constant calls from homeowners for relief from “cut-through traffic” that many claim is a major nuisance, and say affects their property values.

It would be a major blow to map apps like Waze, whose main selling point is that they reduce driving time by evenly dispersing drivers, including those to side streets.

A similar measure has been attempted in a New Jersey town, which started fining drivers who use side-streets to get around traffic. [Curbed] — Dennis Lynch 

Edward Lampert and HPS CEO Scott Kapnick

A New York-based private equity group is betting big on Sears, after Edward Lampert’s multibillion-dollar takeover of the ailing retailer from bankruptcy earlier this year.

HPS Investment Partners, a former subsidiary of JPMorgan, led a group of investors in providing Sears with an $800 million refinancing package, secured by a national portfolio of Sears and Kmart stores, The Real Deal has learned.

The deal closed in April and was recently filed in public records. HPS served as the administrative agent on the loan, which was backed by “four institutional investors,” according to a letter that Sears management sent to its partners in April explaining the deal.

In February, Lampert’s hedge fund ESL Investments bid $5.2 billion to buy Sears out of Chapter 11 bankruptcy. Transform Holdco, an entity created out of that transaction, is now Sears’ parent company and was the borrower in the recent loan.

Transform will use the debt to pay down and restructure Sears’ exit financing at a more favorable rate, while also letting the company take out some liquidity from the assets it acquired from Sears, according to the letter.

The deal “demonstrates the confidence of our financial partners,” the company said in a statement.

Not everyone is happy with Lampert’s stewardship of the once-mighty retail chain.

Sears last month filed suit against Lampert, claiming he and other company officials made billions off the failing retailer as it slid into a “death spiral” that ended in bankruptcy. The suit alleges Lampert and others sold off Sears assets and pocketed the proceeds in their roles as major company stockholders, even as the company struggled to pay its bills.

Sears and Kmart had some 3,500 locations when they merged under Lampert in 2005. His successful takeover bid earlier this year included plans to sell or sublease some of the just 425 stores that remained.

The new debt is secured by 161 Sears and Kmart stores scattered across 37 states, making for a large chunk of the portfolio that JLL has been marketing for sale since December.

Ten of those locations are in Illinois, including one that is part of the Woodfield Mall in Schaumburg.

Texas had the biggest share of the portfolio, with 23 locations, followed by Michigan with 13. Florida tied Illinois with 10, while Georgia and California had eight apiece, according to a schedule of the properties recorded with the loan in Jacksonville, Florida.

HPS started out in 2007 as a JPMorgan subsidiary named Highbridge Capital Management, according to the firm’s website. The company’s real estate strategy focuses on “stabilized and transitional real estate assets,” which include a “joint venture with The Related Companies.”

The work of recording the mortgage in all 37 states fell to the New York law firm Milbank, which recently took up space in Related’s 55 Hudson Yards.

Hudson Pacific Properties CEO Victor Coleman and a rendering of Maxwell redevelopment in the Arts District

Hudson Pacific Properties signed 1 million square feet of leases in the first quarter and posted a 13-percent rise in revenue, the company announced on Thursday.

One reason for the robust numbers? After months of rumblings, the office and production studio operator finally executed its long-term leases with Google and WeWork in the first months of the year. But as the prolific developer makes deals with the co-working giant, it’s also plotting its own entry into the arena.

In an earnings call Thursday, Hudson Pacific’s [HPP] CEO and Chairman Victor Coleman said the firm has had “multiple conversations on multiple levels” about how to enter the crowded space. “I believe that’s something we will do either independent of WeWork or in conjunction with WeWork,” Coleman added.

WeWork, which recently filed paperwork for an IPO, leased all of Hudson Pacific’s 95,000-square-foot Maxwell development through 2031, as well as another 66,000 square feet in San Francisco. Roughly half of the space in the Arts District will be used for its enterprise brand.

Hudson Pacific’s revenue in the first quarter increased 13.4 percent year-over-year to $197.4 million. Funds from operations — the key metric for REITS — totaled $76.7 million. That’s up 9.5 percent from the first quarter of 2018.

The company reported a net loss of $39.4 million, which it attributed to the pending sale of Campus Center office campus, near San Jose. It’s expecting to offset that loss with its anticipated sale of the adjacent land and development rights, set to occur in the second quarter.

At this time last year, Hudson Pacific reported net income of $48.6 million.

Much of Thursday’s call focused on Hudson Pacific’s foray into Vancouver, a market which it plans on becoming “an active player” in. The firm recently teamed up with Blackstone Property Partners to buy and renovate a 1.5 million-square-foot office and retail complex, dubbed Bentall Centre, in the Canadian city. Blackstone will own 80 percent, while Hudson Pacific claims 20 percent.

As for its studio business, Hudson Pacific reported higher occupancy and rental rates across its three Hollywood studios. Revenue in that segment rose 22.4 percent year over year to $21.5 million.

While the company explores other markets for studio space, such as Vancouver, Coleman said the firm’s focus remains in L.A. The company also expects to benefit, either in its office or studio operations, as major streaming services like Netflix and HBO spend billions to ramp up their content, Coleman added.

As a way to accommodate growing demand, the firm is expanding at Sunset Gower Studios, as well as Sunset Las Palmas. Coleman said the firm is in the design development phase for a 467,000-square-foot addition at Gower, expected to secure approval in about a year. Things are moving slower at Sunset Las Palmas, where a 128,000-square-foot office building is expected for approval in about 18 months.

Morgan Management’s Robert C. Morgan and the Avon Commons apartment complex in Avon, N.Y. (Credit: Rochester Institute of Technology)

Rochester-based Morgan Management nearly tripled its apartment holdings over the past decade, building a giant rental portfolio of 140 properties across 14 states with more than 34,000 units.

But amid a massive mortgage fraud investigation which has already led to two guilty pleas, the company has started to shed properties.

Under pressure from creditors who hold about $3 billion in the company’s debt, Morgan is close to transferring the management of nearly its entire portfolio to Harbor Group International, the Wall Street Journal reported.

Prosecutors in the case, one of the largest mortgage fraud investigations since the financial crisis, allege that Morgan executives and their mortgage brokers secured about $500 million in financing fraudulently, both by falsifying documents and by dressing up apartments to look occupied.

Company executive Kevin Morgan, nephew to founder Robert C. Morgan, pleaded guilty to conspiracy to commit bank fraud late last year. Mortgage broker Patrick Ogiony plead guilty to the same charge in March, saying that his crimes involved 20 Morgan properties in New York, Pennsylvania, Illinois, Texas, South Carolina and North Carolina. Robert Morgan has not been charged.

The investigation has raised questions about whether multifamily lenders, including Fannie Mae and Freddie Mac, examine borrower income closely enough. Multifamily loans are not subject to the stricter rules that were introduced for single-family mortgages post-crisis.

In New York, Morgan has already lost one property in Syracuse to a lender, while another complex in Watertown is facing foreclosure. Though few of Morgan’s loans are delinquent, most mortgages have provisions that they are in default if obtained through fraud, which creditors believe empowers them to take action. [WSJ] — Kevin Sun

The Tel Aviv Stock Exchange and a rendering of The Epic in Dallas (Credit: iStock)

Investors on the Israeli stock exchange appeared to sour on U.S. real estate companies last year, after several firms saw their bond values collapse amid troubling disclosures. But a recent offering shows Tel Aviv might still have some appetite left for American bonds.

Dallas-based Westdale Asset Management debuted on the Tel Aviv Stock Exchange last week with a $140 million (or 500 million shekel) bond offer, raised with an interest rate of 4.8 percent, Commercial Observer reported. This made Westdale the first new entrant to the bond market since last year’s crash.

“The market was closed for half a year, and we opened up the market,” consultant Amir Giryes, who advised Westdale on the deal, told CO.

According to a prospectus filed in February, more than half of the proceeds will be used to pay down existing debt, while the remainder will help fund the office portion of the 8-acre Epic complex in downtown Dallas, Westdale’s flagship development.

The bonds, which began trading on Easter Sunday (a work day in Israel), are secured by three properties, including the office portion of the Epic development.

The British Virgin Islands-registered entity that issued the bonds, Westdale America, has a portfolio of 37 assets valued at $1.4 billion, or about one third of Westdale’s $4 billion in real estate holdings. Twenty seven of those properties are located in Texas, while the others are in Georgia, North Carolina, Virginia and Washington state.

Elsewhere in the country, Westdale is seeking to build a 202-unit apartment complex in the Wynwood district of Miami.

Giryes told CO that although the portfolio is heavily residential, some office assets were included to show the firm’s track record in both asset classes. Instead of a more common dutch auction, the deal was done as a book building deal, in which the underwriter committed to hold some of the bonds and can choose which investors to include.

Though it was the first debut, Westdale’s was not the first U.S. bond offering in Tel Aviv this year. Silverstein Properties, which raised about $175 million in its debut last May, raised another $50 million in February, a first sign that the bond markets may have calmed down somewhat.

Meanwhile, other U.S. firms continue to face fallout from last fall’s market meltdown. Boaz Gilad’s Brookland Capital was recently hit with an eviction notice at its Brooklyn office, while Barry Sternlicht’s Starwood Capital Group is facing a class-action lawsuit brought by Israeli bondholders over the firm’s struggling mall portfolio. [CO] — Kevin Sun

Mohamed Hadid and his Bel Air spec mansion (Credit: Getty Images and Manatt, Phelps & Phillips via Curbed)

One of Bel Air’s most controversial and costly spec mansions is coming down — some of it at least.

The third floor of Mohamed Hadid’s partially-built estate on Strada Vecchia Road is about 75 percent demolished, according to a court filing published this week.

Hadid has been at the center of civil, criminal, and FBI cases over the 30,000-square-foot project, which he has touted will be worth $100 million upon completion. The case dates back to 2014, when a judge ordered Hadid to stop construction because of building code violations. The city then ordered him to demolish the home a year later. But Hadid never did. That prompted four Bel Air neighbors to sue him and the city, seeking the to tear down the property.

In the most recent civil lawsuit brought by neighbors, which has stretched for months, lawyers negotiated over how to safely demolish the third floor. As part of a plan that was reached, Hadid agreed to pay for the city’s unannounced inspection visits, which take place three times a week.

Crews have now removed most of the third-floor roof, along with a portion of windows and electrical and plumbing lines. Demolition of the remaining floor is expected to be completed later this month. Next on the list is the expansive pool deck, which the court ordered removed by Sept. 15.

In January, a judge overseeing the case ordered demolition work to start by February. The neighbors who filed the suit filed a temporary restraining order, claiming Hadid should not be allowed to perform any demolition work without city supervision.

None of the parties could not be reached for comment.

RE/MAX CEO Adam Contos (Credit: iStock)

RE/MAX earnings jumped 35 percent in the first quarter — but the franchise brokerage remains cautious about the slowdown in the housing market.

The company reported revenue of $71.2 million, compared with $52.6 million a year earlier, according to a statement. But RE/MAX noted the increase came “almost exclusively due to acquisitions” — namely driven by the ad and marketing platform Marketing Funds, which the brokerage acquired in January.

Recurring revenue streams, which mainly include franchise fees and annual dues, were essentially flat. Net income was $4.4 million, down from $4.83 million a year earlier.

RE/MAX’s mortgage business and international growth has helped “offset lower revenue in the first quarter stemming from challenging housing market conditions in the U.S. and Canada,” CEO Adam Contos said in a statement. “Looking ahead, we’re cautiously optimistic about the housing markets in the U.S. and Canada.”

Heading into the spring homebuying season, the brokerage noted that this year had the slowest start since 2014. Closed transactions in March slid 8.6 percent year over year, as the median sales price rose 3.4 percent to $246,000.

The results come as RE/MAX has been making a bigger tech push. Earlier this year, the company announced a partnership with discount brokerage Redfin. The deal gives RE/MAX agents exclusive access to Redfin’s agent referral program across 5,000 U.S. ZIP codes and Canada. Agents will get a discounted rate — and the initial partnership will last two years, with the two firms re-evaluating whether to continue beyond 2021.

If a RE/MAX agent closes a deal from a referral, Redfin gets 25 percent of the commission. That fee is otherwise 30 percent. Each referral is sent to one agent — who has an hour to accept it. To stay in the program, the report said the RE/MAX agent has to accept an undisclosed percentage of referrals.

Meanwhile, the brokerage also continued to increase its overall agent count, which fell slightly in the U.S. and Canada. The total count increased 3.9 percent to 125,532 agents, while the number of agents in the U.S. and Canada decreased 0.9 percent to 84,031 agents.

Home buyers in front of a house (Credit: iStock)

Do you want to buy a house but worry that your credit profile will disqualify you for a mortgage? Take another look: A new study suggests that you might find lenders a little friendlier and more flexible than you thought. According to the Urban Institute Housing Finance Policy Center’s latest quarterly credit availability report, mortgage lenders are reaching out to borrowers who might have been marginal — or rejectees — in the past. Lenders are increasing their appetite for at least slightly riskier applicants — people with lower credit scores, higher debt-to-income ratios, smaller down payments and other issues.

The institute’s study, released last week, suggests that Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk “steadily since the financial crisis.” The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Department of Agriculture’s rural home loans program have pushed risk to “the highest level since 2009.” Portfolio and “private label” lenders — a category that ranges from giant banks to independent mortgage companies — have also been reaching deeper into the credit pool, but risk for them remains near record lows.

If you’re a credit-strained buyer, this may sound just fine. But there’s potentially a darker side: If you’re a taxpayer worried about more billion-dollar bailouts, this can look ominous. Could this steady increase in risk put us on course to another toxic-loan crisis? Laurie Goodman, vice president of the Housing Finance Policy Center, says not to worry. She told me that current lender risk levels are still well below historical norms, specifically the “reasonable lending standards” that prevailed in 2001 through 2003, before the boom. “Significant space remains to safely expand the credit box,” according to Goodman’s analysis in the latest report.

Great. But not everybody in the mortgage industry is convinced by such assurances. John Meussner, executive loan officer with Mason-McDuffie Mortgage Corp. in San Ramon, California, sees hints of trouble ahead. “I have definitely noticed a fast uptick in ‘creative’ [loan] products coming out,” he told me. “Recently we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600.” The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. “This is something we haven’t seen since before the crash,” said Meussner.

He said some lenders are dumbing down on FICO scores as well, soliciting applications with scores in the mid-500s in combination with relatively skimpy down payments and “varying degrees of risk layering.” FICO scores, which are used in most home-loan financings, run from 300 to 850, with the highest risks of future default associated with low scores. Scores below 620 indicate noteworthy credit issues in the borrower’s past. Average FICOs for home-purchase loans acquired by Fannie and Freddie hover close to 750.

Within the past 18 months, Meussner said he has seen a sizable jump in loan offerings that contain layers of risk piled on top of one another, plus “increasingly ‘creative’ documentation standards.” He emailed me one example of how documentation rules — the bedrock of sound underwriting practices in the post-crash era — can be compromised. In an online lenders’ chatroom, a sales representative of a wholesale mortgage company said his firm would approve a loan to borrowers who can’t or won’t document their earnings — essentially a “stated income” loan harking back to the Wild West days of 2005 and 2006 when they were commonplace but later led to massive defaults and foreclosures. “Stated income” back then meant: You tell the lender what you earn and the lender accepts it, no verification needed.

“Typically,” said Meussner, “this is how the trouble begins.”

Other lenders see things starkly differently. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says documentation is still a big deal for most lenders reaching out to home buyers who are marginal credit risks. “They continue to scrutinize applicants and their documents in unbelievable detail,” said Skeens.

That may be why they’re generally not seeing a lot of defaults. Angel Oak Mortgage Solutions, the largest volume company specializing in “non-qualified mortgage” loans that allow borrowers more generous terms than permissible at Fannie or Freddie, says its default rate is exceptionally low, but it did not provide a specific figure.