Upending a long-standing norm, it’s now cheaper to rent an apartment in Los Angeles County, but pricier in San Bernardino and Riverside counties.
Recent data from Apartment List found estimated rents for vacant apartments in L.A. are down 5.3 percent from the beginning of the year, according to the Los Angeles Times. Conversely, rents are up 6.9 percent in Riverside County and 9.1 percent in San Bernardino County since January.
Agents and experts say the differing patterns are a function of how renters are dealing with the economic impacts of the pandemic.
Renters who can afford to buy home in L.A. are taking the opportunity to score a deal, which could account for the increase in home prices and the number of sales in the county. Some renters are also chasing cheaper prices and larger units in the Inland Empire now that they don’t have to worry about commuting to an office.
“It was really when people recognized, ‘I may be working from home for more than a month or two,’” said Randall Lewis of Lewis Management Corp, which owns 6,000 units in the Inland Empire.
Apartment List research associate Rob Warnock said the pandemic and its impact on the economy is slowing migration to big cities, the Times reported. L.A. and other large metros didn’t see the summer influx of new residents this year.
“It’s not so much that people are moving from L.A. to Rancho Cucamonga, but rather the people who were planning to move to L.A. are thinking, ‘Do I really need to move to L.A.?’” Warnock said. [LAT] — Dennis Lynch
That’s true in Los Angeles, where video game developer Electronic Arts has left its 100,000-square-foot space in Playa Vista to ink a long-term lease for 58,000 square feet in Del Rey.
The new building at 4820 Alla Road was completed in 2019 by Continental Development and Mar Ventures, both L.A.-based real estate investors.
Parties to the deal declined to say what EA is paying on the 10-year-lease. CBRE’s Jeff Pion, Drew Pion, and Michelle Esquivel-Hall represented the building’s owners. Tony Morales at JLL worked on behalf of EA.
The building is listed on LoopNet as valued at $57 million, or $995 per square foot.
Redwood City-headquartered EA had twice previously renewed 10-year leases at the Playa Vista building, owned by Rockwood Capital.
But sources close to EA say that the maker of “Madden NFL” and “Battlefield” series and other lucrative video games decided it could maintain its current staffing at the smaller office. The new building was billed in a release as “modified to respond to Covid-19 concerns, including the addition of Bluetooth touchless entry systems,” along with “multi-point thermal cameras at building lobbies to read temperatures of multiple people concurrently.”
In L.A., landlords are weathering an office market that saw a 61 percent year-over-year decline in third quarter leasing.
Meanwhile, EA’s market value, revenue and net income have all increased during the pandemic, in which video game sales overall have soared. The company’s third quarter income indicated it has $243 million in operating lease commitments for 2020, a number the report said would drop in the next year as multiple leases expire.
Ivanka Trump and Jared Kushner with the Trump National Golf Club in Bedminster (Getty; Trump Org)
New Jersey could be getting some part-time neighbors back on a full-time basis.
Ivanka Trump and Jared Kushner are expanding their “cottage” by the Trump National Golf Club in Bedminster. In the plans are four new pickleball courts, a relocated heliport, and a spa and yoga complex, the New York Times reported.
The renovations are taking place as Manhattan awaits the couple’s decision about returning there with their three children when they exit Washington. Speculation has been rampant that the power couple would not be welcomed back by New York high society after their defending of Ivanka’s father, President Donald Trump, the past four years.
Sam Nunberg, a former Trump campaign adviser, told the Times that though he isn’t offering the couple advice, “I’m moving to Florida next year for taxes and lifestyle.” But Kushner Companies, Jared’s former and perhaps future real estate firm, is based in New York City and has extensive holdings in New Jersey.
Trump and Kushner previously updated the cottage in 2016, adding a basement and a fireplace sitting room. Now they are expanding the master bedroom, bath and dressing room, as well as adding two new bedrooms, a study and a ground floor veranda.
Plans also call for adding five more 5,000 square foot cottages to the property, a recreation complex with spa treatments and a “general store.”
The Economic Innovation Group identified 145 real estate investments in Opportunity Zones (iStock)
Investment in Opportunity Zones is growing at a rapid pace, and so is skepticism about the program — and whether its incentives for pouring cash into low-income communities amount to a tax dodge.
The Economic Innovation Group, a policy group that’s a proponent of the program, identified 186 real estate and business investments in Opportunity Zones in the United States. Of those, the majority — 145 — are in real estate, the New York Times reported.
Critics have said that operational projects would create more jobs for locals and that the program doesn’t meaningfully help residents of the “distressed” communities. But investors often need incentives, and proponents are pushing back.
“When we make investments, we look at impact. And in this case, we’re taking an old, 500,000-square-foot abandoned building, giving it a second life, and bringing people into the area,” Michael Tillman, chief executive of PTM Partners, whose firm is raising $250 million for its second Opportunity Zone fund, told the publication.
PTM, along with Douglas Development, developed a mixed-use complex with luxury apartments in an Opportunity Zone in Washington, D.C.
“We’re also bringing in a school that lost its lease elsewhere,” he added. “All of that has a positive impact on the community.”
While some states and cities are attempting to track investment in opportunity zones, there is no such data at the federal level. This summer, however, the White House estimated that $75 billion had flowed into Opportunity Zones because of tax incentives.
In Baltimore, for example, some 80 projects are in the works in 42 zones.
“We have enough examples at this point to show that Opportunity Zones are helping projects that either would not have happened or would have taken a very long time to move forward,” said Benjamin Seigel, the Opportunity Zone coordinator for Baltimore’s economic development agency. “We’ve also learned that we’re not going to achieve the outcomes we care about by doing nothing.”
President-elect Joe Biden has suggested reforms to the program, including incentivizing developers to partner with community organizations, and a more robust system for reporting on the impacts of developers’ investments.
As workers trade in suits for sweatpants, 1 in 6 dry cleaners has closed or gone bankrupt (Getty)
At J’s Cleaners, business had clawed up to 40 percent of pre-pandemic levels last month. But now, with Covid-19 soaring again, that number is expected to plummet.
“If this thing keeps dragging, many small businesses will close. Maybe I could be one of them,” owner Albert Lee, who plans to permanently shutter four of his 15 locations, told Bloomberg. He is losing $1,000 to $2,000 monthly per store.
As workers abandon suits for sweatpants, dry cleaners are having an existential crisis, the publication reported.
One in six dry cleaners has closed or gone bankrupt in the U.S. already, and many won’t survive without more federal stimulus, according to the National Cleaners Association. The industry’s revenue is half of the $7 billion it enjoyed pre-Covid.
“It’s an ugly, ugly time,” said Nora Nealis, executive director at the trade group, which has more than 2,000 members. “Most of them are holding on with their fingernails in hope of help.”
Zillow’s Rich Barton and CoStar’s Andy Florance (JD Lasica via Flickr; Getty)
Having cornered commercial real estate, CoStar has a new target.
The data giant’s $250 million purchase of Homesnap, announced Sunday, gives it a foothold in residential sales, where it will go head-to-head with Zillow, Realtor.com and others. Until now, CoStar’s focus was limited to rentals.
The deal brings CoStar’s bet on the residential sector to more than $2 billion, and represents a huge expansion opportunity for the data giant.
As CoStar CEO Andy Florance put it: “The estimated value of commercial real estate assets in the U.S. is $16 trillion.” By comparison, the residential sector has $27 trillion in assets. “With the new addition of clients and information … we are almost tripling the size of our addressable markets,” he said in a statement.
Homesnap is a national search portal that serves 240 multiple-listing services nationwide. It gets listing data from those platforms and 500 other data sources. It currently has 1.3 million active listings on its platform, which is free. And it claims 300,000 agents use it regularly, including 50,000 who pay extra for a “pro” version.
Guy Wolcott, John Mazur and Steve Barnes launched Homesnap in Bethesda, Maryland, in 2008. The company, which raised a total of $32 million from investors, started off as an app that let consumers access MLS and public data just by snapping a picture of a home. In 2017, it partnered with listings services around the country to create a consumer-facing listings portal.
“In some ways, Homesnap’s public residential real estate portal … has essentially become the front-end solution for many MLS providers,” Stephen Sheldon, an analyst at William Blair, wrote in a Nov. 22 research note.
The purchase price works out to more than six times Homesnap’s projected revenue of $40 million this year. But Wall Street analysts noted the startup has been growing hand over fist. In 2019, Homesnap generated $28 million in revenue, a 55 percent year-over-year jump. The company’s $18 million in 2018 revenue was double the prior year.
Sterling Auty, an analyst at J.P. Morgan, said Homesnap doubles the number of listings available across CoStar’s brands, from 1.35 million to over 2.6 million. He also said the deal appeared to be one where CoStar identified good technology in a business that is “suboptimal in its monetization,” he wrote in a recent research note.
CoStar has been circling the residential space over the last six years. In 2014, it shelled out $585 million for Apartments.com, followed by ApartmentFinder ($170 million in 2015), ForRent ($385 million in 2017) and Cozy Services ($68 million in 2018). In February, it shelled out $588 million to buy RentPath, the parent company of ApartmentGuide.com, Rentals.com and Rent.com.
It also recently emerged as one of the bidders interested in taking over CoreLogic, one of the country’s biggest residential real estate data companies. Talks were said to stall in late October.
With Homesnap, however, CoStar is going after the for-sale market or the so-called “meat of the residential market,” said Brett Huff, an analyst at Stephens. In a Nov. 22 research note, Huff emphasized Florance’s point: The residential housing market — with $27 trillion in assets — is significantly larger than the commercial sector, with $16 trillion.
To industry observers, the deal left little doubt that CoStar was going after Zillow.
“You’ve got three or four big residential data companies that all want to find a way to monetize residential real estate information and customer information,” said Steve Murray, founder of research firm Real Trends, referring to Zillow, Realtor.com and Redfin.
With a market cap of $34.5 billion (compared to Zillow’s $25 billion), CoStar is a formidable competitor. But Zillow has the consumer eyeballs. During the third quarter, it reported 2.8 billion visits to its website and mobile app, compared to CoStar’s 69 million visits.
There’s another key difference. Despite its push into iBuying, Zillow generates nearly $1 billion in annual revenue from agent advertising. Homesnap’s revenue comes from MLSs that display listings on its site.
In Sunday’s statement, Florance took a thinly veiled dig at its chief rival. “We will continue to differentiate our residential real estate portal and solutions by working solely to help agents market their listings and their brands, which is in sharp contrast to other portals that increasingly advertise on top of agent listings and offer brokerage services directly,” he said.
During an Oct. 28 earnings call, Florance said the U.S. is an “oddly underdeveloped country” when it comes to residential marketplaces. A company like Australia’s REA Group, which is majority owned by News Corp., could be a $200 billion company in the U.S., he said. “You’d create $1 billion-plus of EBITDA in that area and yet no one’s really doing a good job.” (News Corp. also owns Realtor.com, which in recent years has moved to compete with StreetEasy, Zillow’s New York City-focused subsidiary.)
Murray said the Homesnap deal alone isn’t enough to shake Zillow. In fact, Murray, who has close ties in the brokerage world, speculated that CoStar would be hard-pressed to retain Homesnap’s clients. CoStar charges steep membership fees, whereas Homesnap is free for many brokers.
“There are any number of entities in the industry that do not see this as a positive development,” he said.
But if CoStar also buys CoreLogic, Murray said the combination of CoreLogic’s data and Homesnap’s search tool would be serious competition.
“If they get that done and I’m Zillow, now I start to get worried,” Murray said. “Now they’d have a formidable competitor with access to as much data as Zillow has.”
Despite mounting opposition from some cities and businesses, the Los Angeles County Board of Supervisors narrowly voted to uphold its three-week suspension of outdoor dining. It is set to take effect Wednesday night.
The board voted 3-2 against a measure brought by Supervisors Kathryn Barger and Janice Hahn to allow restaurants to fill half their outdoor seating before the state-imposed 10 p.m. curfew, according to the Los Angeles Times.
The county Board of Public Health had announced the outdoor dining suspension on Monday after certain metrics showed enough of an uptick in the spread of coronavirus to trigger more restrictive measures.
That decision drew immediate pushback from some officials around the county. The Pasadena City Council voted to allow outdoor dining to continue, which it has the authority to do.
The L.A. City Council voted 11-3 to seek a repeal of the measure. The City of L.A. is by far the biggest and most populous jurisdiction in the county.
On Tuesday, the county also began outlining a new “Safer at Home” order. The name was used for the stay-at-home order imposed in March when the pandemic first took hold in the L.A. area. It appears the new order will be less restrictive.
“Nonessential businesses will be very much open; gyms will be open outdoor; zoos will be open; hair salons; mini-golf and go-karts will be open with reduced capacity,” Hahn said.
Last week, California adopted its own stay-at-home order for counties where the virus is spreading rapidly, including in L.A. County.
That order functions more like a curfew, which remains in effect from 10 p.m. to 5 a.m., through Dec. 21. [LAT] — Dennis Lynch
As the holiday season kicked off, buyers and homeowners got hungry for home financing.
An index tracking the number of mortgage applications to purchase homes increased 4 percent last week, seasonally adjusted, compared to the prior week, according to the Mortgage Bankers Association’s weekly survey.
It was the second consecutive weekly increase for the metric, known as the purchase index. The index had not grown for seven straight weeks until the second week of November.
Refinancing activity was also up: MBA’s index tracking applications to refinance increased 5 percent from the week before.
Joel Kan, MBA’s head of industry forecasting, attributed the jump in home loans to the drop in the average 30-year, fixed-rate mortgage rate to 2.92 percent from 2.99 percent. That rate was the lowest in the 30-year history of MBA’s weekly survey.
“The decline in rates ignited borrower interest, with applications for both home purchases and refinancing increasing on a weekly and annual basis,” Kan said in a statement.
The unadjusted purchase index was up 19 percent year-over-year, while the refinance index was up 79 percent year-over-year. Jumbo purchase rates increased, however, to 3.18 percent from 3.11 the week before. Many lenders are tightening lending criteria for jumbo loans, particularly in densely populated urban markets.
Overall, applications for all home loans increased by nearly 4 percent last week. Refinancing requests made up more than 71 percent of home loan applications, according to MBA’s report.
The total supply of single-family homes declined 40 percent to 3.3 months in October (iStock)
Sales of new, single-family homes ebbed last month, but are still far ahead of where they were a year ago.
October sales fell to a seasonally adjusted annual rate of 999,000, a 0.3 percent drop from September’s revised estimate of 1.002 million. But home sales are still up 41 percent from a year ago, according to government data.
Americans are continuing to take advantage of record-low mortgage rates to buy new homes, squeezing existing supply. The total supply of single-family homes declined 40 percent to 3.3 months in October, meaning that’s how long it would take buyers to exhaust the new homes on the market.
More than half of all home sales in October — 580,000 — occurred in the southern half of the United States.
As demand rose last month, so did home prices. The median sale price of new houses sold in October was $330,600, up from $322,400 a year earlier.
Since the onset of the pandemic, demand for new homes has skyrocketed. In addition to low mortgage rates, buyers are also motivated by a desire for larger homes with work-from-home space.
Homebuilding confidence also reached new highs in October. Housing starts jumped 4.9 percent to 1.5 million in October, seasonally adjusted, compared to 1.4 million in September, according to the Census Bureau’s monthly report on residential construction.
Joel Kan, the Mortgage Bankers Association’s head of industry forecasting, noted that the increase in housing starts was driven by single-family home construction, which he said is at its highest level since 2007.
Avril Lavigne and 6453 Guernsey Avenue (Getty, Realtor)
Avril Lavigne purchased a Scott Gillen-renovated home in Malibu.
The singer paid $7.8 million for the home, which was built in 1960, according to Variety. Gillen essentially rebuilt the entire property a few years ago.
It sits at the end of a long gated driveway on more than a half-acre lot near Lady Gaga’s six-acre compound.
The home spans 3,500 square feet, and is finished with the sort of high-end materials Gillen commonly installs at his properties.
That includes exposed wood-beam ceilings and custom woodwork, along with a wine closet, an outdoor dry sauna, a pool, fire pit and a deck. The home’s backyard overlooks the Pacific. There is also a detached car garage with an additional bedroom.
Lavigne sold a Sherman Oaks home earlier this year for $5 million. She had bought the property with her then-husband Chad Kroeger in 2015. They first listed it in 2018 for $8 million.
She also owned a home in Bel Air for five years before selling to NBA star Chris Paul in 2012. [Variety] — Dennis Lynch
Jeffrey Allen and Canyon Drive Manor apartments (Google Maps, iStock)
Raintree Partners has picked up a 551-unit apartment portfolio, whose properties stretch across Los Angeles and Ventura counties.
The firm paid $142 million and plans to renovate the units at a cost of $5,000 to $30,000 a unit, according to Commercial Observer. Four of the five properties are in L.A. County; the other is in Ventura County. The deal was pegged at $257,700 per unit. It is Raintree’s third portfolio transaction in the last 18 months, according to the Commercial Observer.
The largest of the complexes is the 137-unit Canyon Drive Manor, at 1738 Canyon Drive in Hollywood.
The sellers were entities managed by Jeffrey and Harry Root. CBRE’s Dean Zander, Stew Weston, and John Montakab represented the sellers.
It is Raintree’s third portfolio transaction in the last 18 months, according to the report. In June 2019, it bought a seven-property portfolio in Glendale for $79 million. In December, Raintree bought a 92-unit complex outside Glendale.
Compass has tapped underwriters for a potential public offering that would be among the most buzzed-about IPOs in the residential world.
The SoftBank-backed firm, which jolted traditional brokerages when it launched eight years ago, has hired Morgan Stanley and Goldman Sachs as underwriters, Bloomberg reported. It is looking at a potential IPO sometime in 2021.
Founded in New York in 2012, Compass has raised more than $1.5 billion from investors including SoftBank, Fidelity, Wellington Management, Dragoneer and others. After raising $370 million in July 2019, Compass was valued at $6.4 billion — a figure that prompted rivals to question whether it was overvalued.
Compass bills itself as a real estate firm that uses technology to make agents more efficient. It currently has more than 18,000 agents who sold $91.2 billion worth of real estate last year, according to research firm Real Trends.
For years, Compass co-founders Robert Reffkin and Ori Allon said an IPO was likely, but claimed they were not in a rush to go public.
Like other residential firms, Compass has benefitted from a quicker-than-expected housing turnaround in recent months. Forced to lay off 15 percent of its staff in March, the firm claimed it saw record revenue in June, July and August.
Meanwhile, the IPO market has gotten hot with other real estate players lining up to go public, including Airbnb, Opendoor and Porch.com.
Brookfield CEO Brian Kingston and the Northridge Fashion Center at 9301 Tampa Avenue (Brookfield, Google Maps)
Another mall owned by Brookfield Property Partners has fallen behind on loan payments — this time in Northridge.
A $209.4 million commercial mortgage-backed securities loan on the Northridge Fashion Center has become 30 days delinquent for the first time, according to a report from Trepp. According to servicer commentary from September, the special servicer had previously agreed to provide Covid-tied relief for the property by allowing Brookfield to cover payments using reserve funds.
“Given the forbearance approval, it was surprising to see the loan flip to delinquent this month,” Trepp analysts wrote in Wednesday’s newsletter. The loan was not transferred to special servicing.
The two-story, 1.5 million-square-foot super-regional mall at 9301 Tampa Avenue is anchored by Macy’s and JCPenney, which are not part of the loan collateral. Former anchor Sears closed its store at the mall in January, according to Kroll.
Within the 644,000 square feet of retail space backing the CMBS loan, the largest tenants are Dave & Buster’s, Pacific Theatres, Ross Dress for Less, Forever 21 and Old Navy, according to Trepp.
Brookfield and Old Navy parent company Gap Inc. are suing each other over rent obligations at several malls, including the Northridge Fashion Center, with Gap arguing that the pandemic has made the core purpose of its leases “illegal, impossible, and impracticable.”
GGP secured the refinancing for the shopping center from Wells Fargo Bank in 2011, and the 10-year debt — which is split across two CMBS deals — is set to mature next December. GGP was acquired by Brookfield in 2018.
As one of the country’s largest mall owners, Brookfield has seen many of its properties come under financial pressure due to the pandemic. A recent Trepp analysis found that Brookfield has expressed a willingness to give up the keys to several of its properties — in markets like Tucson, Arizona; Louisville, Kentucky; Las Vegas; and Grand Rapids, Michigan — to CMBS lenders.
But it hasn’t all been bad news.
Amid record-low interest rates, the mall owner recently secured a $475 million refinancing for the 2.2 million-square-foot Oakbrook Center near Chicago, as well as a $250 million refinancing for the 1.4 million-square-foot Mall in Columbia, between Washington D.C. and Baltimore. Both loans were securitized into single-asset CMBS deals.
When Deutsche Finance Group looked to crack the U.S. real estate market, it set its sights on a prime Manhattan corridor.
In August 2018, the German investment firm’s new U.S. subsidiary picked up the top floors of the Gucci building with New York-based developer Michael Shvo and Turkish real estate mogul Serdar Bilgili for $135 million. The partners are planning to redevelop 25 floors at 685 Fifth Avenue into Mandarin Oriental-branded luxury residences with views of Central Park and the Midtown skyline.
Over the last 24 months, Deutsche Finance — no relation to Deutsche Bank — has partnered in 13 U.S. real estate deals from Boston to San Francisco, totaling about $2 billion in equity. That marks one of the largest foreign buying sprees in recent years, after Chinese investors pulled back.
The group’s recent spate of direct investments in the United States has led to a dramatic expansion in the company’s scale. Deutsche Finance has quadrupled its assets under management to €6.9 billion from €1.5 billion at the end 2017. While the firm has invested in 47 countries since 2005, its recent growth has been concentrated in the more developed markets of the U.S. and Europe.
“They had been thinking about North America, and I think the Shvo-Bilgili thing was a catalyst for it — it allowed them to have a deal and create a platform around it,” said a source familiar with the firm’s history who asked not to be named. Deutsche Finance declined to be interviewed for this article.
Even as the pandemic has slowed transaction volume and made property owners and lenders alike question valuations, Deutsche Finance appears to be sticking to its strategy. In October, the firm and a group led by Shvo closed on the $650 million acquisition of the Transamerica Pyramid in San Francisco. And some of the German firm’s recent investments, such as a Boston life-sciences project, may even stand to benefit from the current environment.
Once the ball started rolling in the U.S., the massive amount of German capital waiting to be deployed — driven abroad by low to negative interest rates at home — would soon lead to one blockbuster deal after another.
“They have lower yield requirements and a lot of capital, so if they trust you — like they do with Deutsche Finance — then it’s a pretty interesting capital source,” the source said.
Birth of the club deal
The nature of Deutsche Finance’s business isn’t that easy to pin down.
The group has been active in the real estate, private equity and infrastructure space since its founding in 2005. “We are a business platform and not a business in the classical sense,” the firm’s founder and chairman Thomas Oliver Müller told a German trade publication in a January 2019 interview.
Deutsche Finance is backed by at least 15 financial institutions, including some of Germany’s largest pension funds, as well as more than 35,000 mom-and-pop retail investors in Germany.
Since 2008, Deutsche Finance has closed more than a dozen funds for private investors. But as part of its U.S. expansion, the group is experimenting with what it calls “club deal” funds, which allows small investors to invest alongside financial institutions.
The first such fund was launched in 2019, to raise $40 million in equity for a life sciences development near Boston. The fund raised its target within three weeks.
“This is a truly entrepreneurial real estate investment, in which the investors take an active part,” Theodor Randelshofer, head of Deutsche Finance’s sales division, said in an interview with German trade publication Finanzwelt early this year. “Retail investors had no access to this — until our first club deal in November 2019.”
Deutsche Finance is not alone in raising significant amounts of capital from retail investors in Germany. For example, Jamestown L.P. — an affiliate of Germany-based Jamestown US-Immobilien GmbH — has closed 38 U.S. real estate funds with capital from more than 80,000 small investors over the past three decades.
(Click to enlarge)
Pursuing investment opportunities around the globe, Deutsche Finance built up a sprawling network of properties spanning from Brazil and Chile to Indonesia and Vietnam, including not only office and residential properties but also hospitals, gas stations, casinos and ports.
“Fundamentally, all countries are on our investment shortlist,” Müller said in a 2018 interview. “There’s certainly always temporary attention on a specific country, but that has less to do with the country itself than with an asset manager on the ground that is offering us an interesting investment opportunity.”
But after taking significant book losses in Turkey amid that country’s currency crisis, Deutsche Finance began laying the groundwork for its big push into the U.S.
“We will make more Euro investments and overall focus more on Europe and the U.S.,”Deutsche Finance chief investment officer Sven Neubauer said in a 2018 interview. “That also means there will be fewer emerging markets in the portfolio.”
The first signature deal of Deutsche’s new Euro-American strategy closed in early 2017, when its newly founded London-based subsidiary, Deutsche Finance International, acquired the British capital’s landmark Olympia Exhibition Centre for €330 million in partnership with U.K. private-equity firm Yoo Capital, Bayerische Versorgungskammer and Versicherungskammer Bayern.
The acquisition and planned redevelopment of the Olympia marked “the successful start to a number of interesting ‘club deals’ and joint ventures for investors,” Neubauer said at the time.
That pipeline would include Deutsche Finance’s first direct investments in the U.S.
By August 2018, the firm launched Deutsche Finance America, headed by former Amstar Group president Jason Lucas.
Boots on the ground
It was a Turkish connection that brought Deutsche Finance to its first deal in the U.S.
Shvo and Bilgili sat at dinner with the broker who would ultimately help the partners line up financing they needed to get the Gucci building deal over the finish line.
Mitch Sikora, CEO of Manhattan-based JTP Capital, suggested Bilgili reach out to Deutsche Finance, with whom the developer has an existing relationship. (One of Deutsche Finance International’s co-founders, Frank Roccogrande, had co-founded and spent seven years as senior managing partner of BLG Capital, according to the firm’s website.)
The Munich-based private equity firm then brought Germany’s biggest pension company into the deal.
The Shvo-led group then expanded its reach, buying up three hotels in Miami’s South Beach for a total of $243 million and a 54-unit residential and retail development site in Beverly Hills for $130 million in 2019.
The group then pivoted to prime office properties, starting with the Coca-Cola Building at 711 Fifth Avenue in Manhattan, which they acquired for $937 million just months after Coca-Cola had sold it to another buyer.
Deutsche Finance’s last pair of office buys were different from the earlier deals in one respect: Bilgili’s BLG Capital was no longer involved.
Over the summer, the Turkish developer filed two lawsuits against Shvo and Deutsche Finance, accusing them of scheming to cut him out of a $376 million deal to buy Chicago’s “Big Red” office building at 333 South Wabash Avenue and the $650 million acquisition of the Transamerica building.
In Bilgili’s second suit against Shvo, which has already been discontinued, his lawyers claimed that Bilgili was “instrumental in securing” the group’s German institutional investors, which were “initially reluctant to do business with Michael Shvo because he had been indicted for and pleaded guilty to tax fraud.”
Shvo’s lawyers have rejected those claims, arguing that the suit was “a transparent attempt to cloak his defamatory allegations against Mr. Shvo with judicial immunity.”
Meanwhile, the pandemic has also led to another legal headache for Shvo and Deutsche Finance, in the form of a lease dispute with a major retail tenant at 530 Broadway, which they bought for $382 million in March.
Ralph Lauren subsidiary Club Monaco, which accounts for one-fifth of the mixed-use property’s annual base rent, sued the landlord entity in September to prevent its lease from being terminated, claiming the purpose of the lease had been frustrated by the pandemic. In mid-October, the court granted an injunction blocking Shvo from evicting the tenant.
This rent dispute has also caused some complications for the $210 million mortgage which LoanCore Capital provided to finance the acquisition.
In response to the suit, Shvo said in an October affidavit, “It is wholly inequitable and contrary to law that [the] landlord must continue to pay the mortgage for the building, with its significant monthly debt service, while [the] tenant deliberately deprives [the] landlord of its rent stream, which is essential to paying the debt service.”
An $80 million piece of that debt was set to be included in a commercial mortgage-backed security deal. But in June, the loan was removed from the package, according to Fitch Ratings.
Better together
Mom-and-pop investors still seem to be backing Deutsche Finance’s U.S. investments, even amid the pandemic.
The firm is partnering with developers DLJ Real Estate Capital Partners and Leggat McCall on part of the Boynton Yards complex in Somerville, Massachusetts, including a 289,000-square-foot laboratory building at 101 South Street, and a nearby parcel with 600,000 buildable square feet.
The Boston development is a proof of concept for a new offering Deutsche Finance is pitching. The company raised $40 million in equity for the project through a “club deal” fund, accepting contributions from investors of as little as $25,000 each — and managed to close the fund in just three weeks.
While Deutsche Finance’s first club deal fund gave retail investors a chance to bet on a new development in an up-and-coming asset class, the group’s second such offering — once again backed by property in the U.S. — is more traditional.
The company is now in the process of raising $50 million in equity for the Big Red building, an iconic 45-story, 1.2 million-square-foot office tower in the Central Loop of Chicago.
German rating agency Scope Analysis has given the fund high marks for tenant creditworthiness, a recent renovation by the previous owners, and Deutsche Finance’s highly developed competence in structuring club deals. But it also warned that the impact of coronavirus on the U.S. office market remains unclear.
Beyond Deutsche Finance, German institutional investors in general have long been big players in U.S. real estate. In the first three quarters of 2020, Germany was the second largest source of foreign investment in U.S. property after Canada with $2.2 billion in deals closed, according to Real Capital Analytics.
In addition to deals involving Deutsche Finance’s institutional partners, that figure was boosted by the sale of an office tower at 330 Madison Avenue in Midtown Manhattan, which German insurer Munich RE bought from the Abu Dhabi Investment Authority for $900 million in March.
German investment has slowed down significantly since the outbreak of the pandemic, dropping the country into third place behind South Korea. And all of Deutsche Finance’s recent acquisitions were already in contract prior to the pandemic.
Still, in early October, Deutsche Finance announced that it had already raised $41 million for the Big Red fund, a sign that the fund is on track to close ahead of its planned year-end deadline.
“Will German investors continue to invest in the U.S. in the foreseeable future? It would seem to me that their investment activity will still be limited in the near term … because of the ongoing Covid-19 mayhem,” Real Capital Analytics’ Jim Costello said. “That said, to the extent that cross-border capital is coming to the U.S., German capital will continue to be a leading source of capital.”
Editor’s note: All quotes in the story from German trade publications were translated.
Los Angeles City Councilwoman Monica Rodriguez (Wikipedia Commons, iStock)
Landlords and restaurateurs say Los Angeles County’s decision to suspend outdoor dining for three weeks because of spiking Covid cases will have dire economic consequences.
“Restaurant operators that thought they could pay 30 to 35 percent of rent are now saying they can only pay 15 to 20 percent of rent,” said Lorena Tomb, CEO of Urban Lime brokerage. Those numbers could keep dropping the longer the ban lasts, she said.
Throughout the coronavirus pandemic, L.A.’s restaurant industry has grumbled about various pandemic-related restrictions, but it has mostly complied.
That has begun to shift, and the outdoor dining ban is a flashpoint. The move has already led to a lawsuit, resistance by city governments — Pasadena is not complying — and outrage among commercial brokers and landlords.
“Outdoor dining was enabling many tenants to pay their rent, barely,” said Jay Luchs, vice chairman at Newmark. “This ban is a blow that sets them off track.”
But L.A. County maintains the ban, which took effect Wednesday, is a matter of life and death.
“Covid-19 hospitalizations continue to accelerate at an alarming speed,” the county said in a release on Tuesday. It said 1,575 people countywide are now hospitalized with Covid-19 and a quarter of those patients are in intensive care. The total number hospitalized is twice the number recorded two weeks ago, according to the release.
Barbara Ferrer, director of the county department of public health, has repeatedly implored residents to “stay in as much as possible.”
But restaurant owners say they are not the cause of the hospitalization spike. A lawsuit filed last week by the National Restaurant Association seeking to prevent the ban from taking effect claims that less than 5 percent of the county’s Covid cases that come from “nonresidential settings” come from restaurants.
“The Department of Public Health has identified more Covid-19 cases at a single Northrop Grunman facility in Palmdale than in the entire restaurant sector,” according to the lawsuit. On Tuesday, an L.A. County Superior Court Judge denied the bid to immediately halt the ban.
Business groups claim they did not have a seat at the table when the L.A. County Board of Supervisors and Gov. Gavin Newsom issued recent Covid restrictions. The state imposed a 10 p.m. to 5 a.m. curfew that lasts through Dec. 21.
“Public officials have chosen not to talk to us,” said Rachel Michelin, executive director of the California Retailers’ Association. “Unfortunately, the only recourse is to file a lawsuit,” in reference to the restaurant association’s complaint.
Restaurant operators and landlords have also been negotiating deals to keep tenants from closing up. “Businesses are hanging on by a thread,” said Matthew Fainchtein, a retail broker at JLL.
Many landlords are also in a difficult position, Fainchtein said, with deals that often include tenants paying a percentage of their earnings instead of a base rent.
The city of Los Angeles, by far the largest municipality in the county, must nonetheless follow all county health edicts because it does not have its own public health supervisor.
“We’re doing our damnedest to help the restaurant industry,” said Monica Rodriguez, an L.A. City Council member who opposes the outdoor dining ban. But, Rodriguez added: “The ball is in the county’s court.”
By contrast, Pasadena and Long Beach, which each has a public health officer, can make their own restaurant policy. Pasadena has already announced it will maintain outdoor dining.
John Wayne and the Riverside County ranch (Getty; Land and Farm)
A sprawling Riverside County ranch once owned by actor John Wayne is back on the market for $8 million.
The 2,000-acre property dubbed Rancho Pavoreal in the town of Sage was last on the market in 2018, according to the Los Angeles Times. It was marketed for cannabis cultivation, among other things. It also asked $8 million at the time.
Now Rancho Pavoreal is being touted as an equestrian compound, cattle ranch, shooting range, camp or private retreat.
The property is home to a three-bedroom, three-bathroom stucco ranch house totaling 3,000 square feet. There’s also a barn and three wells. The property is fenced and crisscrossed by horse trails.
The ranch borders a ranch property once owned by Walt Disney. Tatiana Novick with Coldwell Banker Realty has the listing.
Wayne was born in Iowa as Marion Robert Morrison but spent most of his youth and young adulthood in Palmdale and Glendale. Wayne lived in Encino for some time and spent the last 20 years or so of his life in Newport Beach, where he also docked his yacht, “Wild Goose.” [LAT] — Dennis Lynch
Istanye Park in Istanbul (Photo via Wikipedia Commons)
Turkish investment giant Dogus Holdings AS has agreed to sell a 30 percent stake in a high-end Istanbul shopping mall to a wing of Qatar’s sovereign wealth fund.
The deal is said to value the Istanye Park property at $1 billion, Bloomberg News reported. The buyer is Qatar Fund, which is owned by the Qatar Investment Authority.
Dogus is expected to use the $300 million or so in proceeds to pay its bank lenders, per a $2.7 billion debt restructuring deal that closed last year. Dogus committed to sell assets to meet those debts.
Dogus is negotiating agreements with banks to delay payments on the debt restructured last year. The conglomerate has businesses in numerous sectors, including auto dealerships and construction. Among its holdings is the Nusr-Et chain of steakhouses run by Nusret Gökçe, better known as Salt Bae.
Dogus was one of a number of Turkish companies that hit troubles with its debt obligations following the rapid devaluation of the Turkish lira in 2018. The coronavirus pandemic has complicated any recovery.
In the past few years, the Qatari government has pledged as much as $15 billion in investment and credit to the Turkish government. [Bloomberg News] — Dennis Lynch
The tax break allows foreign visitors to reclaim a sales tax of 20 percent on items bought in the country for more than £30 (Getty; Unsplash)
A popular tax break is expiring in the United Kingdom in January, threatening the country’s status as a shopping destination and potentially dealing another blow to struggling retailers.
The scheme allows foreign visitors to reclaim a sales tax of 20 percent on items bought in the country for more than £30, or roughly $40, according to the Wall Street Journal. That can add up, especially for foreign visitors dropping serious coin in pricey shops on London’s high streets — which are already seeing an exodus of retailers — and premier shopping districts.
The tax break expires after the U.K. formally withdraws from the European Union Customs Union and European Single Market on Dec. 31.
British business owners worry that shoppers will stop coming to the U.K. in favor of other European destinations, such as Paris or Milan, that have similar tax schemes. Visitors from outside the European Union can claim 20 percent of their spending in France and 22 percent in Italy.
A recent survey of tourists found that at least 70 percent of visitors from Asia and the Middle East, along with 70 percent of Americans, are less likely to visit the U.K. after the tax break expires.
The coronavirus pandemic is also putting pressure on British retailers. More than 7,800 retail stores closed in the first half of the year.
The owners of Heathrow Airport are leading a legal challenge against repealing the tax refund, claiming in the British High Court that the government failed to consult parties most affected by the change and for miscalculating the financial details of the repeal. [WSJ] — Dennis Lynch
Several industry CEOs are leaving the Bay Area as their companies announce they’ll embrace remote working, even after the pandemic subsides and allows for safe office working once again, according to The Information.
Henrique Dubugras and Pedro Franceschi, the co-founders of fintech company Brex, have both left for Los Angeles and plan to let their company’s office lease in San Francisco expire next year.
Meanwhile, DropBox CEO Drew Houston and Splunk CEO Douglas Merritt bought homes in Austin and plan to move there permanently.
CBRE’s Dan Harvey said that moves at the top of the tech food chain could spur employees to follow them. Splunk employees have already asked management if they should move to Austin as well.
The pandemic is already having a significant impact on San Francisco’s housing and office markets. Office vacancy hasn’t been as high as it was in the third quarter since 2011. Apartment rents are down by as much as 31 percent for some types of units, year-over-year.
Senior level moves at big tech firms could have a more lasting impact on the Bay Area economy. Bay Area cities have seen steep declines in new job postings, according to Indeed.com.
A more dispersed tech economy could mean lower tax revenue for those cities, but it could also open up room for other types of businesses for the first time. [TI] — Dennis Lynch
Singapore’s housing market has rebounded from the lows brought on by the pandemic earlier this year, even with fewer foreign buyers.
Since January, 2,177 apartments have sold in central Singapore, compared to 1,797 in the same period last year, the Wall Street Journal reported.
Some developers dropped prices as much as 10 percent during a partial lockdown this summer, but the median price per square foot in central Singapore is up 7.5 percent year-over-year to $1,705.
The country is one of most expensive places to live in the world, but these days, homes priced on the lower end of the market are moving quicker than those at the higher end.
Agents say the $3.5 million mark is the dividing line; units below that price are selling, but the market is slower above it.
Because of government restrictions on foreigners owning large plots of land, those wealthy buyers tend to buy the most expensive real estate in the country: apartments in luxury towers.
The dearth of foreign buyers is contributing to the bifurcation of the market. Some agents say that wealthy Chinese buyers in particular are beginning to shop again.
The Chinese government’s crackdown on political dissent in Hong Kong is also driving some wealthy residents of that territory to Singapore.
Singaporean government policy has also helped stabilize the country’s housing market. Property tax rebates helped the market earlier this year.
The government also caps debt to 60 percent of a real estate buyer’s gross monthly income and promotes gradual price appreciation through measures including stamp duties, according to the Journal. [WSJ] — Dennis Lynch
