Rising Corporate Cash Reserves

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The amount of cash held by U.S. companies has increased from $1.6 trillion in 2000 to about $5.8 trillion in 2022, according to the Kellogg School of Management. Thirteen non-financial companies in the S&P 500, including Apple, Alphabet and Microsoft, are holding cash and investments in excess of $1 trillion, accounting for almost 40 percent of the $2.7 trillion held by all of the companies in the S&P 500, according to Investor’s Business Daily.

There are a number of reasons why companies decide to hold cash, including covering unexpected payments and preparing for M&A activity. Short-term, liquid investments, such as money market funds and Treasury Bills, are often considered to be cash reserves, whereas long-term investments, buybacks and dividends are ways for companies to reduce cash reserves and return value or cash to shareholders.

Shanghai-Based Developer Defaults On Bond Payment

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Shanghai-based real estate developer Shimao Group Holdings Ltd. has missed the interest and principal payment of a $1.02 billion offshore bond due on Sunday, according to Reuters. This was the first missed public offshore payment for Shimao, which has an outstanding $6.1 billion international bonds and is the sixth largest issuer among Chinese developers, according to the report (citing Refinitiv).

Shimao develops large-scale residential projects, hotels, and other commercial real estate. It owns Shimao International Plaza, a 1,094-ft tall skyscraper in Shanghai’s Huangpu District. In March, the company estimated that its 2021 net profit had dropped by about 62 percent from a year earlier, according to CNN. Three of the top five Chinese property developers – Evergrande, Kaisa Group and Sunac China – have already defaulted their dollar bonds, according to Reuters.

Kohl’s Evaluates Its Real Estate Portfolio and Considers Sale-Leaseback

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Wisconsin-based Kohl’s is a department store retail chain with roughly 1,150 stores. According to CoStar, as of January, the Kohl’s Corporation owned 410 locations, leased 517 locations and operated 238 stores at ground leased sites.

Kohl’s is considering monetizing its real estate portfolio by engaging in sale-leasebacks. In June, Kohl’s entered into a three-week exclusive negotiating period with Franchise Group (the owner of a number of brands including Sylvan Learning, The Vitamin Shoppe and Pet Supplies Plus). Finance Group was looking to finance the acquisition (at a price of $60 per share) by selling Kohl’s real estate assets and contributing $1 billion in capital to the transaction, according to CoStar.

Although the exclusive negotiation period with Franchise Group ended without a sale, The Real Deal reports that Kohl’s continues to evaluate the possibility of monetizing some or all of its $8 billion real estate portfolio.

Legal Industry Outpaces All-Industries Average in Post-Pandemic Return to Office

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The legal industry is returning to the office at higher rates than other businesses, according to research from Kastle. In metropolitan Chicago, legal office usage is at 86 percent of pre-pandemic levels compared with 41.9 percent for all industries. Nationally, the number is 76.2 percent for law firms, compared with 44.2 percent for all industries.

1201 Brickell Bay Drive

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The 2.5-acre vacant lot at 1201 Brickell Bay Drive (in Miami’s Brickell neighborhood) sold on April 20, 2022 for $363 million ($145,200,000/acre), according to Miami-Dade Office of the Property Appraiser. TWJ 1201 LLC, an entity linked to Tibor Hollo’s Florida East Coast Realty, previously purchased the lot in October 2000 for $15.5 million, affording it a gain of over two thousand two hundred percent. Bloomberg (citing “people familiar with the matter”) reports that Kenneth C. Griffin and his company Citadel are the true/end buyer.

According to The Next Miami, in 2016 the Federal Aviation Administration (FAA) approved plans to build a supertall tower rising 1,049 feet on the property and those plans were resubmitted in 2020 after approval expired.

1201 Brickell Bay Drive
Image: Miami-Dade Office of the Property Appraiser

IHG To Cease All Operations in Russia

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British multinational hospitality company IHG announced today that it is “in the process of ceasing all operations in Russia consistent with evolving UK, US and EU sanction regimes and the ongoing and increasing challenges of operating there.” The company had previously announced the suspension of future investments, development activity and new hotel openings in Russia and it had closed its corporate office in Moscow.

IHG owns 17 brands under four collections. As of 2019, the company had 33 hotels operating under six brands in Russia, CIS and Georgia.

Housing Price Inflation in the UK

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Average house prices in the UK increased by 12.4 percent to £281,000 ($344,097) over the year ending April 2022, according to the UK Office for National Statistics. Among the countries that comprise the UK, England has the highest average house price at £299,000 ($366,139) and Northern Ireland has the lowest at £165,000 ($202,050).

London remains the English region with the lowest annual house price growth (twelve-month percentage change of 7.9) and the highest average house price (£529,829 ($648,799)).

The Impact of Adaptive Reuse on the Housing Market

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Adaptive reuse is the process of updating an existing structure and adapting it for a new use. In 2020 and 2021, a total of approximately 32,000 converted apartment units were delivered to market, according RentCafe, with Philadelphia and Washington, DC leading in total conversions. Forty-one percent of these 32,000 units (13,120) are in former office buildings, according to the report, and it is estimated that in 2022, office to multifamily conversions will produce an additional 12,300 apartments units.

Office pricing would have to go down by 25 to 50 percent from current rates for an adaptive reuse wave to have greater than a marginal impact on housing production and commercial property use, according to The Wall Street Journal (citing analysis from Moody’s).

The Affordable Housing Shortage in the U.S.

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Eleven million renter households with extremely low incomes (those with incomes at or below the poverty line or 30 percent of the area median income (“AMI”), whichever is greater) account for 25 percent of all renter households and nine percent of all U.S. households, according to the National Low Income Housing Coalition. Extremely low-income renters in the U.S. face a shortage of approximately seven million affordable and available rental homes with only 36 affordable and available homes in existence for every hundred extremely low-income renter households, according to the report.

Adjusted for inflation, from 2001 to 2018, the median renter household income increased just 0.5 percent while rents climbed by almost 13 percent, according to the Center on Budget and Policy Priorities.

Source: Center on Budget and Policy Priorities

Impact of Remote Work on the Commercial Office Sector

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According to a paper by Gupta, Mittal and Van Nieuwerburgh, the pandemic has had large effects on both current and expected future cash flows for office buildings. Revaluing the stock of New York City commercial office buildings and taking into account pandemic-induced cash flow and discount rate effects, the paper finds a 32.95 percent decline in office values between the end of 2019 and the end of 2020 and a 28 percent decline in the longer-run, the latter representing a $500 billion value destruction.