Embattled Wells Fargo: What’s The Commercial Lending Impact?

A mini Wells Fargo bank branch inside of a Pav...

Funding commercial mortgages with customer deposits is a central purpose for any huge bank. But when a big bank plays fast and loose with its reputation to the degree Wells Fargo has, it creates a special risk to the entire commercial lending ecosystem that should be understood.

Wells Fargo’s recent scandal is the living definition of “fast and loose”. The bank was outed as an identity thief and slapped with a $185 million fine for the fraud of signing up millions of its customers for programs without their knowledge or consent. But that’s a mere traffic ticket compared to what may be coming from market recrimination.

A recent study by consulting firm CG42 spoke to 1,000 of Wells Fargo’s customers and found, unsurprisingly, that people don’t like doing business with a bank they can’t trust. The study identified a potential loss of deposits totaling $99 billion as customers head for the door.  From the CG42 study:

Our findings show significant damage has already been inflicted on the bank’s reputation. Over 85% of consumers surveyed are aware of the scandal, and positive perceptions of the brand sunk from 60% before the scandal to 24% post-scandal. More tellingly, negative perceptions of the brand increased from 15% before the scandal to 52% post-scandal. This blow to Wells Fargo’s reputation will hamstring the bank’s ability to retain customers and attract new ones, as our study reveals.

While only 3% of Wells Fargo’s customers report being affected by the scandal, a full 30% claim they are actively exploring alternatives and 14% have already made the decision to switch banks as a result of the scandal. This represents $212B of deposits and $8B of revenues at risk. Our projections indicate Wells Fargo will lose $99B in deposits and $4B in revenues over the next 12-18 months as a direct result of the scandal, dealing a hard blow to the bank’s finances.

Consistent with findings from our past Retail Banking Vulnerability Studies, community and regional banks stand to gain the most from the fallout of the scandal, with a projected $38.7B in gained deposits and $1.6B in gained revenues over the next 12-18 months. Chase and Bank of America will also profit from the fallout, largely due to their national presence which makes them a viable alternative for customers who seek the convenience of a bank with branches across the U.S.

The chain of cause and effect goes like this: $99 billion of deposits walk out the door, depriving Wells of its least expensive capital, leading to higher capital costs for its borrowers financing new commercial mortgages.  Add to this the (unknown at press time) potential for angry commercial borrowers currently financed through the bank to re-finance and take their business elsewhere.

Is there a mass exodus of commercial customers through refinance in the cards for Wells Fargo?  Some believe not, with one Wall Street analyst referring to Wells’ customer base as “incredibly sticky”, meaning the overhead cost of changing lenders is too steep for customers.

But that perspective may fade as the scandal continues to expand from the retail side and into the commercial side of the bank’s business. Coming to light now are tales of Wells’ shabby treatment of its business customers.  In other words, Wells appears to have been just as abusive in the cultural and economic space where commercial financing lives. From Reuters:

Reuters also spoke to a former Wells employee, and a lawyer representing former employees and a former and current Wells customer, who described abusive sales practices with multiple business accounts. Jose Maldonado, a restaurant owner in Southern California who banked with Wells Fargo for 15 years, said he discovered seven accounts after enlisting the help of his accountant. He initially closed extraneous ones, and ultimately moved his remaining business to Bank of America Corp and JPMorgan Chase & Co.

“I don’t like Wells Fargo anymore. I don’t feel comfortable,” Maldonado said in an interview. “In the past, there were sometimes crazy accounts without my permission.”

Langan declined to comment on Maldonado’s accounts.

An ex-Wells Fargo business banker, who declined to be identified, said employees at his former branch were required to sell products to small business customers such as hair-salon owners and carpet cleaners in packages of three – regardless of whether they needed them.

Those typically included accounts for checking, credit card processing and payroll, and were often linked to additional savings accounts, said the former Wells banker. Bankers also tacked on business credit cards and were pressured to call a Wells insurance unit, with the customer present, to push business liability policies. 

News of Wells Fargo’s business practices isn’t done doing damage. The question is: will the commercial mortgage finance marketplace hold Wells alone responsible, or will all too-big-to-fail banks be looked at skeptically in the future?

With the expected flight to community banking, and with so many alternative financing options arriving every quarter, it wouldn’t be a surprise.

(Photo credit: Wikipedia)

Boo Diligence: Evaluating The Halloween Industry

With over 4,000 haunted houses and horror attractions running across the United States, chances are there’s one serving your scarea. Ever wonder what goes into site selection for these specialty properties? Plenty of boo diligence.

The holiday’s economic impact is spooktacular: according to the National Retail Federation, Americans spent over $8 billion on Halloween in 2012. October brings not only p-eek foot traffic for haunted attractions, but also a wave of retail pop-ups to sell costumes and party supplies. Chopping center managers know: these seasonal pop-ups can produce a distinct upward pressure on NOI (net op-boo-rating income) for the fourth quarter balance sheet.

And why not?  Vacant commercial space screams out for an inexpensive solution, one without capit-owl expenditure. Landlords can cash in on the holiday, but must be careful to not leave themselves exposed on costs for CAM (cauldron area maintenance), especially for properties financed with steep groan-to-value terms or that that depend on high IRR, (interment rate of return). As always, sound business principles should win over witchful thinking.

List of haunted commercial sites

The haunting industry — yes, it’s actually called that — appears to have a nerve center online called Hauntworld.com.  There you can find a North American directory of haunted house operations, suitable for a quick dip of real estate market research as we find ourselves in the trick-or-REIT season. Use it to spot an opportunity: maybe you can put some of your vacant invent-eerie to work next year.

Fed: Commercial Real Estate, Employment Improved

The Federal Reserve Beige Book, the eight-times-yearly published compendium of anecdotal information about current national economic conditions, has once again arrived.  This time around, the national story on commercial real estate is about modest growth, improvement and expansion. Based on information collected before October 7 of this year, the Fed states:

Home price appreciation continued at a modest pace in general, and commercial real estate activity and construction improved since the last report. Demand for business and consumer loans increased, aside from some seasonal slowing, and credit quality remained strong or improved. Agricultural conditions were mixed, as low commodity prices pressured farm revenues despite generally strong crop yields. There were signs of stabilization in the oil and natural gas sector, while reports of coal production were mixed.

[…]

Commercial real estate leasing activity generally improved, and outlooks were mostly optimistic, although contacts in a few Districts expressed concern about economic uncertainty surrounding the upcoming presidential elections. Commercial rents were flat to up, and vacancy rates were generally low and/or declined in reporting Districts, except in the Houston metro area where office vacancies increased further. Sales of commercial properties were characterized as robust in the Chicago, Minneapolis, and San Francisco Districts but softened in the greater Boston area. Commercial construction increased on net, with contacts in the Cleveland and Atlanta Districts reporting increased or high backlogs. Shortages of skilled labor remained a constraint on construction activity in some Districts, such as Cleveland and San Francisco.

On employment:

Employment expanded at a modest pace over the reporting period. Reports of hiring were strongest in the Richmond, Chicago, St. Louis, and San Francisco Districts. Layoffs in the manufacturing sector were noted in the New York, Philadelphia, Cleveland, and Richmond Districts. The Dallas District reported that energy-sector layoffs had abated, and manufacturing employment was stable following payroll reductions in recent months. Labor market conditions remained tight across most Districts. While reports of labor shortages varied across skill levels and industries, there were multiple mentions of difficulty hiring in manufacturing, hospitality, health care, truck transportation, and sales. The Richmond, Dallas, and San Francisco Districts noted a lack of construction workers with some contacts noting these shortages were constraining construction activity.

While the color beige may be popularly known as the color people use when they don’t want to use color, this report’s findings do point to our industry’s recent health — and to the green of dollars.

2,200 Year Old Lease Literally Written In Stone

Stone tablet containing 2,200 year old lease agreement

2,000 years ago on the western coast of Turkey, the ancient Greek city of Teos stood. A Mediterranean port and center for regional commerce, Teos’s two harbors brought people and goods throughout the Anatolian region of modern Turkey. The commerce brought with it law and paperwork, although a great deal of the “paper” twenty centuries ago was actually stone.  Teos is today an archaeological goldmine thanks to so many written — or chiseled — words.  Discovered this year: a 1.5 meter-long inscribed stone tablet containing a detailed 58-line commercial lease complete with a few disturbing clauses. From the Ars Technica piece on the discovery:

Carved into a 1.5 meter-long marble stele, the document goes into great detail about the property and its amenities. We learn that it’s a tract of land that was given to the Neos, a group of men aged 20-30 associated with the city’s gymnasium. In ancient Greece, a gymnasium wasn’t just a place for exercise and public games—it was a combination of university and professional training school for well-off citizens. Neos were newbie citizens who often had internship-like jobs in city administration or politics. The land described in the lease was given to the Neos by a wealthy citizen of Teos, in a gift that was likely half-generosity, half-tax writeoff. Because the land contained a shrine, it was classified as a “holy” place that couldn’t be taxed. Along with the land, the donor gave the Neos all the property on it, including several slaves.

Use Of Premises Clauses

Beyond enshrining the brutal custom of slavery, the lease agreement also describes a tax-deductible donation of property and numerous clauses concerning punishments if the property was misused.  From the Hurriyet Daily News:

In order to meet the expenses of this land and to get income, the Neos rented the land. The inscription tells us who owned the land in the past and what it includes. It also mentions a holy altar. The Neos express in the agreement that they want to use this holy place three days a year. In this period, the state collected tax from lands. But since the land was defined ‘holy,’ it was exempted from tax. It is understood that the land was rented at an auction and the name of the renter is written on the inscription,” [Archeology professor Mustafa] Adak said.

[…]

Almost half of the inscription is filled with punishment forms. If the renter gives damage to the land, does not pay the annual rent or does not repair the buildings, he will be punished. The [property-owning] Neos also vow to inspect the land every year,” said the Akdeniz University professor. 
 “There are two particularly interesting legal terms used in the inscription, which large dictionaries have not up to now included. Ancient writers and legal documents should be examined in order to understand these words mean,” Adak said.

As I’ve written here before, the ancient world’s commercial property business was a fascinating and sometimes depressing thing. So the next time you’re convinced the commercial lease on your desk is difficult to understand as well as being hard to break, think of  the landlords of Teos, their human property and their stone lease.  Today’s tenant has it relatively easy under that comparison.

Photo credit: Ars Technica

 

Fed: Foreign Lending For Commercial Real Estate Highest since 2010

English: Globe icon.

It’s an old argument, and it goes something like this: the newest federal regulations on commercial real estate lending standards in the wake of the 2008 financial crisis are too onerous for US banks to adapt to. Sarbanes-Oxley and Dodd-Frank regulatory packages taken together, the line of thinking goes, are strangling US banking and threatening efficient capital allocation by introducing piles of red tape. Too many commercial deals slow down and die waiting for capital, and it’s all thanks to these regulations, say many.

An equally old argument is its opposite:  that the culture of banking, from too-big-to-fail banks down to community banks, is terrible at self-regulation. That systemic risk in lending and repackaging is a real thing that came astonishingly close to burning down the world eight years ago. That evidence is plentiful for this side — from Wells Fargo’s recent sham-account fraud and criminality to the total fines levied on big banks breaking the $200B mark.

No matter what side you find yourself on, a fact remains: to get commercial real estate deals financed, an increasing number of players are looking beyond the regulatory footprint of the US. The winners this are foreign lenders, who are enjoying eye-popping growth over the past six years of commercial mortgage lending.

Foreign Lenders Growth in CRE Outstrips CRE Growth Rates US-Chartered Banks 

The Federal Reserve’s Financial Accounts of the United States includes a subsection called “L.220 Commercial Mortgages”.  And on line 13 of the table that illustrates that since 2010, foreign lenders have increased their amount of money lent to commercial mortgages by a little over 80%. Second quarter 2016 has this number at $55.8 billion.

Screenshot of FRB commercial mortgage numbers

Meanwhile, US-chartered institutions increased their business in commercial mortgages by 15% on a portfolio of over $1.4 trillion.  Note the two lines highlighted next to each other in the table above (click to expand).

So while the US banks lead foreign lenders by more than 30-1, the steepest commercial mortgage business growth volume by far is non-US lenders.

The Why And The What

While there’s no Fed data that puts the cause of the sharply increased foreign lending at the feet of recent regulatory attempts, that won’t stop market-ideologues from claiming that regulation is the reason.

But when they do, we have to remember that on a volume basis, under current regulation, the growth increase alone in commercial mortgage lending by US banks absolutely dwarfs the entire total foreign lending commercial mortgage market by almost 4-1.

So recent regulation is by no means fatal to commercial mortgage lending in the US. Even if we assume regulation explains the sharp rise in foreign lending, the period in question has merely eroded the huge lead US lenders have, by moving the ratio of foreign commercial mortgage lending vs US commercial mortgage lending from its 2010 level near 50-1 favoring US lenders vs. a 30-1 ratio today.

When capital markets change, it’s certainly something to keep an eye on. But rushes to judgement about cause and effect just aren’t in the Fed’s own numbers about commercial mortgage lending.

Refi Roundup: Ten Notable Refinance Deals This Month

As long as the Federal Reserve continues to hold down the cost of borrowed capital, the market to trade in old financing for better terms on commercial property remains hot. Nationally, here are ten notable refinance deals in commercial real estate. Some went to fixed-rate, some went to floating-rate, but all went to the closi one more time.

 

Parking Ratios: The Next Great Correction?

English: Photo of parking spaces in an America...

Determining the parking ratio for a commercial property project isn’t complex arithmetic. The number of parking spaces per 1,000 square feet of gross rentable space is the parking ratio. Sometimes a property’s type calls for a minimum number of spaces, sometimes local zoning regulations call for a minimum.  But these minimums are getting a second look in the near future as driving becomes less popular and cities stress walkable development.

A University of California study on parking in 2011 found that the US sports over 800 million parking spaces, taking up 25,000 square miles of land, or about the equivalent of the entire land area of West Virginia — or four New Jerseys.

With a commitment like that, it’s a fact that a huge amount of value is locked up in parking lots.  And now, cities across the US and the world are rethinking the level of commitment to parking.

The Guardian’s recent piece “Lots to lose: how cities around the world are eliminating car parks” takes a drive around the issue, looking for a future less committed to yellow painted lines on asphalt and more committed to green — both the sustainable and the folding kind.

As cities across the world begin to prioritise walkable urban development and the type of city living that does not require a car for every trip, city officials are beginning to move away from blanket policies of providing abundant parking. Many are adjusting zoning rules that require certain minimum amounts of parking for specific types of development. Others are tweaking prices to discourage driving as a default when other options are available. Some are even actively preventing new parking spaces from being built.

[…]

To better understand how much parking they have and how much they can afford to lose, transportation officials in San Francisco in 2010 released the results of what’s believed to be the first citywide census of parking spaces. They counted every publicly accessible parking space in the city, including lots, garages, and free and metered street parking. They found that the city had441,541 spaces, and more than half of them are free, on-street spaces.

Knowing the parking inventory has made it easier for the city to pursue public space improvements such as adding bike lanes or parklets, using the data to quell inevitable neighbourhood concerns about parking loss. “We can show that removing 20 spaces can just equate to removing 0.1% of the parking spaces within walking distance of a location,” says Steph Nelson of the SFMTA.

The data helps planners to understand when new developments actually need to provide parking spaces and when the available inventory is sufficient. More often, the data shows that the city can’t build its way out of a parking shortage – whether it’s perceived or real – and that the answers lie in alternative transportation options.

 

Getting Demand Right

Using dynamic pricing, San Francisco managed to reduce the demand for parking by nearly half.  But sometimes demand falls without changing pricing, as in Philadelphia:

Since 1990, the city of Philadelphia has conducted an inventory of parking every five years in the downtown Center City neighbourhood, counting publicly accessible parking spaces and analysing occupancy rates in facilities with 30 or more spaces. Because of plentiful transit options, a walkable environment and a high downtown residential population, Philadelphia is finding that it needs less parking. Between 2010 and 2015, the amount of off-street parking around downtown shrank by about 3,000 spaces, a 7% reduction. Most of that is tied to the replacement of surface lots with new development, according to Mason Austin, a planner at the Philadelphia City Planning Commission and co-author of the most recent parking inventory.

What becomes plain as more cities line up to improve infrastructure and walkability, or use technology to re-jigger pricing as demand fluctuates: parking as we’ve known it — and priced it — is nearing the end of its era. Fixed minimums or quotas may lag behind the new reality, but developers and property owners will need to stay vigilant as old, reliable parking ratios no longer find space in reality.

(Photo credit: Wikipedia)

 

 

Cornstalks In The Big Box? Target To Add In-Store Vertical Farms

English: Logo of Target, US-based retail chain

Major metropolitan areas are making an effort to distance themselves from the traditional food supply chain. Cities, dreaming of achieving food independence from the farms that surround them, are increasingly turning to vertical farming projects that grow food in urban settings.  Thanks to giant advances in green engineering and sustainable agricultural technologies, these vertical farms are gaining industrial scale efficiency.

Marking this progress is news that Target stores will debut vertical farms inside some of their stores this spring.  According to Business Insider, the big box retailer will add vertical farms to some of its stores this spring.  Customers will be able to pick their own leafy greens — or have store staff take on the task. From the piece in Business Insider:

In January, Target launched the Food + Future CoLab, a collaboration with design firm Ideo and the MIT Media Lab. One area of the team’s research focuses on vertical farming, and Greg Shewmaker, one of Target’s entrepreneurs-in-residence at the CoLab, says they are planning to test the technology in a few Target stores to see how involved customers actually want to be with their food.

“The idea is that by next spring, we’ll have in-store growing environments,” he says.

During the in-store trials, people could potentially harvest their own produce from the vertical farms, or just watch as staff members pick greens and veggies to stock on the shelves.

Most vertical farms grow leafy greens, but the CoLab researchers are trying to figure out how to cultivate other crops as well.

“Because it’s MIT, they have access to some of these seed banks around the world,” Shewmaker says, “so we’re playing with ancient varietals of different things, like tomatoes that haven’t been grown in over a century, different kinds of peppers, things like that, just to see if it’s possible.”

Space And Indoor Agriculture

Does your property portfolio include a potential vertical farm? For ideas on vertical farming space configurations, these concept videos from architects help to visualize indoor farming on a profitable scale. To overcome the big spread between cost of land in urban vs. rural areas, most vertical farming has to emphasize the vertical and get more yield per ground square foot than traditional dirt.  In the case of a big box or supermarket devoting a portion of its footprint to vertical farming, that requirement might not apply, suggesting there’s a market developing for modular indoor farming operations that insert smoothly into traditional food retailing floor plans.  If you’re aware of developments in this area, leave a comment and let’s both keep an eye on this technology.

 

Construction: The Employment Crisis (Almost) Nobody Talks About

Commercial development without skilled construction workers is a recipe for no development whatsoever. Yet the country’s educational system appears to be failing the construction industry – along with commercial real estate.

The system seems content to allow millions of students at for-profit colleges to be simply fleeced and abandoned, no more employable than they were before going into debt for their education. This is the for-profit education industry’s choice: a grab for the short-term, subsidized buck over the long-term benefit to the student and to the country.  Rather than orient itself toward trade education that actually meets the demands of the wider economy, the secondary educational system’s choice to turn away from the trades appears to have placed it on a direct collision course with the needs of the commercial development industry. Those needs are near all-time highs: the latest employment forecasts from the US Department of Labor say that the national need for these workers ranks higher than the needs for workers in all other categories save one (heath care).

Annotated table showing construction job growth

Programs To Patch The Gap

Correcting the course isn’t going to be automatic, or even easy. Construction mogul Bill Gilbane’s piece in Commercial Observer highlights the gap between industry needs and trade education by talking up investing in programs that address high school students in the funnel for careers in construction and design. Gilbane sings the praises of the Ace Mentor Program, an afterschool program that brings high schoolers into careers in architecture, construction management, engineering and other disciplines.

Beyond programs like Ace, development and real estate firms have opportunities to address the issue on their own.  As Gilbane writes about his company’s internal efforts:

But we must still do more to bring young people onboard and keep them long term. In order to meet future demand, we need to develop the pool of workers in our industry now. Developing the skills of younger professionals helps create our leaders of the future.

That is why we launched a two-year Management Candidate Acceleration Program (MCAP). The MCAP program allows younger employees to gain first-hand experience in each department at Gilbane Building Company and once they’ve completed the program, participants are prepared to step up into those roles full time—and their paths often lead to project or executive management.

This is essential to ensuring current young professionals become our next generation of leaders. It also supports our long-term employees on a path to continuous improvement. By providing technical and educational programs, we help our staff learn new skills to support their current roles and develop their leadership abilities.

These educational and mentoring models — both external and internal — are worth looking at, throughout the commercial real estate and construction industries as the economy surges forward.  Let’s not let “business as usual” today serve to shut down huge business and employment opportunities in the future.

Introducing Spaceful by Xceligent: Space Tours Made Easy

Screenshot photo of Xceligent Spaeful

When it’s time for a business to investigate new locations for itself, decision-makers have a big job. Commercial real estate brokers and their tenant clients need to tour locations and experience spaces in ways big and small.  Putting together tour books — the right mix of location information and space experience — is a major challenge. Yesterday,  a new software tool arrived that smooths out and radically speeds up the process of building, distributing and collaborating on space tour books.  Introducing Spaceful by Xceligent.

What used to take hours now takes minutes with Spaceful. “The space-tour is a critical step on a broker’s path to closing a deal,” said Doug Curry, Xceligent CEO.  “So, we created a tool  that makes that process fast and hassle-free.  Brokers can now assemble digital tour books in minutes – not hours – and edit or update them in real time based on feedback from colleagues and clients,” Curry said.

Spaceful delivers dynamic tour books that contain easy-to-view, detailed information on spaces and buildings, area information including notable companies nearby, retailers, restaurants, and public transportation options.

Assemble Tours Easily

Screenshot of Spaceful by Xceligent
Click to expand

If plans change, reordering tour stops is a snap – real time map updates reflect property information contained in past tour books, third-party data providers.  Include information about notable neighbors and area amenities with ease.

Send Tour Books To Clients The Way They Want Them

Click to browse a sample tour book — no more paper! Spaceful’s sharp digital interface presents the books to clients’ smart phones, pads or computers – send out links to participants in a snap.

Collaborate Easily On Tour Books

Spaceful allows you to share work-in-progress tour books with collaborators.  Leverage your entire team’s knowledge of the area and bring it to bear at exactly the right time and place.

Try Spaceful For Free

Create your first tour book with Spaceful by Xceligent at this link.