FinCEN Alert Notes CRE Sector’s Vulnerabilities to Russian Sanctions Evasion

CRE Worldwide Posted on by

The Financial Crimes Enforcement Network (FinCEN) has issued an alert to financial institutions regarding potential investments in the U.S. commercial real estate (CRE) sector by sanctioned Russian individuals and entities.

Because of the highly complex financing methods and opaque ownership structures (such as trusts, shell companies and pooled investment vehicles) that are common in CRE investment, the CRE market presents unique challenges for financial institutions in detecting sanctions evasion, according to the alert, which notes nine red flags for financial institutions to consider.

Citing an NAR survey, the alert states that 8.4 percent of those surveyed reported that they closed a sale with a foreign client residing abroad, and this figure was above 10 percent for several years prior to the pandemic.

The Impact of Market Factors on CRE Prices

CRE Worldwide Posted on by

A new IMF Working Paper by Alter, Mahoney and Badarinza concludes that—focusing on the long-run trends—a one percent increase in vacancy rates leads to a temporary drop of 0.5 percent to 0.6 percent in CRE prices over the following quarter. Furthermore, a one-standard deviation (one sigma) tightening in financial conditions is associated with a 2.5 percent to three percent decline in CRE prices, according to the paper.

bb.q Chicken To Open in Arlington’s Virginia Square

CRE Worldwide Posted on by

Permits and notices posted at 3503 Fairfax Drive indicate that the entity Haly Group Inc. will open a franchise of bb.q Chicken at the retail space formerly occupied by Cosi. The space is located on the campus of FDIC’s L. William Seidman Center.

According to a Franchise Disclosure Document, BBDOTQ USA, Inc. (the franchisor) began offering franchises in August 2014; it does not own or operate any businesses of the type being franchised; and it identifies its parent company as being Genesis BBQ Global Co., Ltd. – a restaurant franchisor and food distributor located in Seoul.

In 2019/2020, Boston-based Cosi Inc. closed more than two dozen of its U.S. restaurants, including the one in Virginia Square, according to Boston Business Journal.

Former Cosi space in Arlington’s Virginia Square neighborhood.
Photo: Ramin Seddiq

Gaming in the Old Dominion

CRE Worldwide Posted on by

A law passed in 2019 (Va. Code § 58.1-4100 et. seq.) allows for up to five brick-and-mortar casinos in Virginia. In November 2020, voters approved casinos in Bristol (Hard Rock), Danville (Caesars), Norfolk (Pamunkey) and Portsmouth (Rivers), according to 500 Nations. Since Richmond voters rejected their casino referendum in 2021, there has been an effort to allow the city of Petersburg (located about 25 miles south of Richmond) to acquire the license originally intended for Richmond, according to Play USA.

House Bill No. 2499, offered on January 20, 2023, proposes to amend § 58.1-4107 of the Code of Virginia with new locality criteria. The bill proposes to allow any county in the state with a population of at least a million people to hold a voter referendum on the issue of gaming, according to Play USA. The bill also states that “the site of the casino gaming establishment shall be limited to a location that is (i) within one quarter of a mile an existing station on the Metro Silver Line, (ii) part of a coordinated mixed-use project development, (iii) outside the Dulles airport flight path, and (iv) outside the Interstate 495 Beltway.”

Rivers Casino in Portsmouth celebrated its grand opening on January 23, making it the Commonwealth’s first full-service permanent casino.

The Net Lease Market in Q4–2022

CRE Worldwide Posted on by

The Boulder Group reports that between Q3–2022 and Q4–2022, single tenant cap rates increased to 5.95 percent (+9 bps) for retail, 6.95 percent (+15 bps) for office and 6.65 percent (+4 bps) for industrial. During the same time period, the number of properties on the market increased in all three sectors (+11.73 percent in retail, +4.96 percent in office and +11.93 percent in industrial) as did the median national asking versus closed cap rate spread, according to the report.

The “Sur”

CRE Worldwide Posted on by

Brazil and Argentina have expressed a desire to advance discussions on a common South American currency to be used for financial and trade flows, according to Reuters. The currency would not circulate within Brazil or Argentina but rather would be used in clearing houses to execute trade payments between the two neighbors, helping in part to reduce reliance on the dollar, according to the report.

FT estimates that a currency union covering all of Latin America would represent about five percent of global GDP whereas the euro—the world’s largest currency union—covers about 14 percent of global GDP when measured in dollar terms. Trade between Brazil and Argentina (South America’s two largest economies) reached $26.4bn in the first 11 months of 2022—almost 21 percent higher than the same period in 2021, according to FT.

Buenos Aires
Photo: Ramin Seddiq

Decreasing Value of New York’s CRE Assets Impacts City’s Tax Revenue

CRE Worldwide Posted on by

The New York Post (citing the City’s Finance Department) reports that the total value of New York City’s commercial real estate is nearly $9 billion short of its most recent high. Tax revenue from commercial real estate transactions is expected to fall by approximately 43 percent this fiscal year and tax revenue from residential transfer taxes is expected to drop by 27.3 percent, according to the report. Revenue from real estate taxes make up about a third of New York City’s $106.7 billion budget.

Continued Growth Expected in Central Europe’s Institutional Residential Property Market

CRE Worldwide Posted on by

Poland’s overcrowding rate—a measure of whether homes have sufficient rooms for the number of people in the household—is 37 percent, whereas the European Union average is 17.5 percent, according to Reuters (citing Eurostat data).

Rising interest rates, limited housing supply and a gap in the quality of leases between private/individual and institutional landlords have led to growth and a positive outlook for central Europe’s institutional residential property market. Residential rental investments (mainly in Poland and the Czech Republic) increased by 38 percent to 130 million euros ($138 million) in H1-2022, according to Reuters (citing a CMS and CBRE report).

Current private rented sector yields in central Europe are 100 to 200 basis points higher than in western Europe, with Warsaw at five percent and Prague at 4.10 percent, compared to 2.70 percent in Berlin, three percent in Amsterdam, 3.25 percent in London and two percent in Zurich, according to the report (citing data from Cushman & Wakefield).

U.S. CMBS Delinquency Rate Expected To Increase in 2023

CRE Worldwide Posted on by

Higher interest rates, persistent inflation and weak economic growth will contribute to more maturity defaults in 2023, according to Fitch Ratings. Fitch projects its U.S. CMBS loan delinquency rate will increase to between 4.0 percent and 4.5 percent by YE 2023 from 1.89 percent as of October 2022.

In the retail sector, Fitch expects the bulk of maturing Class B and C mall loans will default next year. However, it states that servicers may grant modifications in cases where the borrower remains committed. Tenant demand for industrial space will soften and rental growth will moderate as new supply increases and tenants scale back on space, according to the report.

Fitch forecasts that the U.S. economy will enter a mild recession in mid-2023.

Five Proposals Received in Response to Richmond City Center Request for Interest

CRE Worldwide Posted on by

Five proposals have been submitted by the December 20 deadline for the first-phase development of Richmond’s City Center Innovation District Project (“City Center”), according to Virginia Business. The project’s aims include, among others, the demolition of the Richmond Coliseum, the creative adaptive reuse of the Blues Armory building, upgrading infrastructure and the development of a minimum 500-key hotel.

According to the announcement the submissions are from Capstone Development LLC, City Center Gateway Partners, Lincoln Property Company, Richmond Community Development Partners and Sterling Bilder LLC. The press release states that the City Center Evaluation Panel will assess each submitted proposal based on the evaluation criteria in the RFI document and will announce a short list in the winter.