Year in Review: The 10 Biggest Real Estate Stories of 2015
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Phew, what a year. The Fed finally raised interest rates, the REIT spinoff loophole is now closed and Airbnb won in court… again. To give 2015 a proper sendoff we’ve gathered up all the stories that shook up the front page this year in one place.
10. Tax Law Puts an End to REIT Spinoffs
The year of the spinoff. Even though McDonald's wasn't lovin' it, large corporations with big real estate portfolios—mall operators, restaurant chains and casinos—explored the benefits of placing real estate assets into REITs.
Sears, MGM Resorts, McDonald's and Macy's all completed or entertained the idea, a strategy spurred by activist investors to unlock billions of dollars in tax savings.
In fact, Sears' REIT got a nice boost, jumping by 17% overnight—pushing the market value above $1B—after news broke that billionaire Warren Buffett was an investor in the trust.
However, the party ended on Dec. 17 when the House of Representatives approved a bill to put an end to the tax-free REIT spinoffs, leaving many big companies in a limbo.
Meanwhile, a massive lobbying push by companies like Hilton, Caesar’s Entertainment, Darden Restaurants and others meant that spinoffs in the pipeline will be allowed to go through, putting off the effects of the bill. At least for a bit.
9. $5B, $10B, $20B?! WeWork’s Explosive Growth
In early 2014, WeWork’s investors valued the co-working start-up at roughly $1.5B. Yet, by the end of 2015, that number had jumped to an eye-popping $15-$20B, signaling an incredible growth spurt, even in a hot market
In essence, the start-up’s business model is pretty simple: buy low, sell high. (Or lease, anyway.)
WeWork takes out long-term leases, tricks it out with hip décor, common areas and amenities like ping pong tables and free beer on tap, and then re-leases the space on a month-to-month basis to start-ups and small businesses.
The success of that business model has made waves in the real estate world, though WeWork will be under a lot of pressure to demonstrate the sustainability of its incredible growth.
After all, the Wall Street Journal reports WeWork’s valuation is about 100 times its operating income, a far cry from the 20 times earnings valuation common for more traditional landlords.
With 12 locations overseas—and more in the works—talks are already heavy that WeWork will continue its international expansion in 2016.
8. Airbnb Wins… Again.
Airbnb's been winning in 2015 like Tom Brady and the New England Patriots in the Super Bowl. In June, the home-sharing platform scored a financial touchdown, earning a massive $25B plus valuation in a funding round. (It earned another $100M in November, just for good measure.)
Airbnb picked up another W when it prevailed in a landmark battle with opponents in San Francisco when Measure F—which would’ve restricted short-term rentals in the city—was defeated by voters by a 55% to 45% margin.
Despite racking up wins left and right, New York's considering a similar short-term rental crackdown. And with reports of widespread discrimination by Airbnb hosts, the juggernaut could be facing stiff challenges in 2016.
7. Merger Mania: Cushman & Wakefield and DTZ Merger Shakes Up the Industry
Earlier this year, top firms Cushman & Wakefield and DTZ completed a $2B merger, creating a new real estate behemoth.
Named simply Cushman & Wakefield, the new and improved C&W boasts $5B in revenue, 250 offices in 60 countries, 43,000 employees and 4.3B SF under management.
The deal closed just months after both giants each picked up smaller rivals; DTZ bought Cassidy Turley for $550M while C&W bought Massey Knakal Realty Services for $100M.
The news shook up the industry in many ways, including corporate shakeups and opportunities for rival firms. In what was dubbed the "Cushman effect," Colliers International Group capitalized on the merger shakeup to bolster its roster.
6. Blackstone and Wells Fargo Complete the Largest Post-Crisis Transaction, Picking Up $23B of Real Estate From GE Capital
2015's been the year that Blackstone bought...well, pretty much everything, firmly establishing the private equity firm as the largest owner of real estate in the world.
(Here's a recap of Blackstone's biggest deals in 2015, ICYMI.)
Yet, in a year of countless deals, Blackstone completed its biggest in April, teaming up with Wells Fargo on a $23B blockbuster deal to purchase GE Capital's real estate portfolio, the biggest real estate transaction since the financial crisis.
The GE deal was right up there with the biggest ever, including its $39B purchase of Equity Office Properties in '07 and $26B takeover of Hilton Worldwide that same year.
Once among the biggest property investors in the world with close to $100B in assets, GE Capital had moved to debt investments as it sold off its properties.
5. Millenials Make a Splash in Real Estate Markets
With 30% in projected nationwide spending by 2030, Millennials have sent shockwaves through most industries over the past few years. It looks like 2015 might be the year that fact finally sinks in for the real estate sector.
Retail firms have begun pandering to Millennials’ love of the online experience by downsizing their floor space and doing a better job of integrating the online and in-store shopping experiences.
Meanwhile Amazon is investing in a new fleet of storage and distribution centers, in an effort to further reduce shipping times.
In the housing market Millennials have spearheaded demand for smaller, cheaper rental options that are close to public transportation and entertainment options.
And although they’ve famously opted out of homeownership in record numbers so far, housing developers are licking their lips at the prospect of the pent up demand that could be released if that trend eases in the coming years.
4. EB-5 Reform Lives On...For a Bit Longer, Anyway.
2015 saw massive inflows of foreign capital to the US market, with the EB-5 visa program becoming a major source of capital for major projects nationwide.
In a nutshell, the program grants green cards to foreign investors who invest $500k in a US project while generating 10 jobs in the process.
The program has taken off in recent years, dominated in large part by wealthy Chinese investors. (Around 90% of all EB-5 visas are granted to Chinese.) The program hit capacity last year, leading to talks of reforms (and criticism)—much to the chagrin of developers.
Money talks, though, and when push came to shove, a multi-million dollar lobbying push stopped lawmakers’ efforts to restrict the program, extending the EB-5 with no changes—at least for the time being.
3. Regulators Crack Down on Risky Lending
Despite an industry-wide upturn this year, US regulators were less than thrilled by what they saw in commercial lending this year: loosened underwriting standards, lax risk management practices and overly optimistic loan-loss provisioning, Bloomberg reported this month.
The three top regulators--the Federal Reserve, FDIC and OCC--say banks have dropped lending standards to what they were before the 2008 crash, as a way to snag market share.
Standards are especially low in high risk, leveraged loans—to the point where UBS strategists say we may have a $1.2 trillion debt gap on our hands, as the Fed is "condoning rising default rates."
2. The Chinese-Led Foreign Real Estate Invasion Reaches New Heights
This year’s $70B of foreign cash in NYC shattered previous records, with Chinese investors led the charge--beating out Canada as the top foreign buyers of US property.
Chinese investors poured an unprecedented $5.1B into US hotels this year, more than triple the amount of the previous four years combined--thanks to trophy buys like the $2B Waldorf Astoria purchase by China’s Anbang Insurance Group.
Chinese buyers are reaching out beyond gateway markets to lesser markets (like Dallas suburbs) in their effort to get out of China's property glut—which has Chinese developers ditching real estate for avant-garde art. (Seriously.)
1. The Fed (Finally) Raises Rates for the First Time in a Decade
After a year of will-they-won't-they, the Fed finally raised interest rates in December in what was the biggest talking point of the industry. While the bump itself—25 bps—was pretty modest, it was a big deal symbolically, marking the first jump in nearly a decade.
While many naturally cringed at the thought of higher mortgage rates—not to mention the pressure on REITs—several market insiders are calling the rate hike a good thing for the real estate sector.
Mortgage rates should hardly budge, Freddie Mac says, meaning real estate transactions should be relatively unaffected in the short run. In fact, a Cushman & Wakefield report said the rate hike should be music to the ears of those in the commercial real estate industry.
That’s because a rate hike means a strong economy, and a strong economy means more hiring, fewer vacancies and higher asking rates on rent. It's "something that should be celebrated," Cushman & Wakefield said.