In The Headlines
House Flipping Returns, Pressuring U.S. Real Estate Markets
After cooling off in 2014, home flipping is on the rise again—its share of all home sales is up 20% in the first three months of this year from the previous quarter and up 3% from the same period a year ago, according to a new report from RealtyTrac, which defines a flip as a property bought and resold within a 12-month period. While flipping today is nothing like it was during the housing boom a decade ago, when investors used risky mortgages, it is reaching new peaks in 7% of the nation’s metro markets, including Baltimore, Buffalo, New Orleans, San Diego, and Seattle.
“While responsible home flipping is helpful for a housing market, excessive and irresponsible flipping activity can contribute to a home price pressure cooker that overheats a housing market, and we are starting to see evidence of that pressure cooker environment in a handful of markets,” said Daren Blomquist, senior vice president at RealtyTrac. That is because flippers today largely use cash—71% did in the first quarter of this year. Compare that to just 27% who used cash at the height of the housing boom. That helps keep most flippers conservative, but it also exacerbates the problems for entry-level homebuyers, who are facing one of the tightest housing markets in history. They simply cannot compete against all-cash buyers.
Usually flippers look for distressed properties either in the foreclosure process or already bank-owned. These are not always listed on public sale sites. There are fewer of those today, so flippers are moving to the mainstream market, creating new price pressure. “A telltale sign is when flippers are acquiring properties at or close to full market value. Those markets are so competitive that even the off-market properties that flippers are looking to buy are not selling at much of a discount —and there may be very few distressed properties available,” said Blomquist.
Examples of these markets include San Antonio, where Blomquist says flippers are actually purchasing at a 7.8% premium above estimated full market value, as well as Austin, Texas; Salt Lake City; Naples, Florida; Dallas and San Jose, California.
Despite the premium to buy, flippers are still seeing growing gains in profit. Home flippers realized an average gross profit of more than $58,000 in the first quarter of this year, the highest since the third quarter of 2005, according to RealtyTrac.
Real estate agent Dana Rice and her husband flip houses in the Washington, D.C. suburb of Bethesda, Maryland. Prices there are well above the national median, and there are few distressed properties. Instead, they target old, small fixer-uppers. Even those command a hefty purchase price up front, but they can also offer big rewards. “I didn’t want a teardown. There is so much character in this part of Bethesda,” said Rice. “I don’t think that everybody wants a brand new build. There is a hole in the market because not everyone wants to do a renovation. If you put a little bit of effort in, these numbers can be huge.”
Rice purchased her latest project, a very small colonial, within walking distance to shops and Metro, for $680,000. She expects to put half a million dollars into the renovation, adding both square footage and high-end finishes. She is confident that in this competitive market she will see an 18-25% return on investment.
The lack of inventory is certainly a double-edged sword for flippers. Their initial investment price can be high, and flippers are often competing against local builders, who may want to tear the house down and put something up that is twice the size. On the other hand, not everyone wants or can afford a huge, new, expensive home, and that gives flippers the edge. “The key here is that there is particularly a dearth of listed inventory in good condition,” said Blomquist. “That is the inventory flippers are competing against when they sell.”
Citations
1. http://bit.ly/1Y8omGz – RealtyTrac
2. http://cnb.cx/1sqKD6f – CNBC
With their Merger Off, Staples and Office Depot Weigh Options
A little over a year after Staples announced it would acquire rival Office Depot for $6.3 billion, the deal effectively ended in mid-May, when U.S. District Court Judge Emmet Sullivan granted the Federal Trade Commission’s (FTC) request for an injunction over concerns that the combined company would wield too much power and influence in the business contracts space, impeding competition. Now Staples and Office Depot, once again rivals, are each trying to figure out what comes next.
Office Depot CEO Roland Smith said the company is considering selling some of its European operations, increasing markets like break room and cleaning supplies, and possibly making its own acquisitions. Staples said it will work to dominate in key office supply categories like ink, toner and paper, and possibly divest its European operations while exploring other acquisitions.
The competition from other segments of retail has increased dramatically. “Traffic is the single biggest issue these chains face,” Keith Anderson, Vice President of Strategy and Insights at retail intelligence firm Profitero, told Retail Dive. “There is no in-store experience good enough to overcome steadily declining store visits.” Office Depot’s Q1, 2016 sales dropped 9% and same-store sales declined 1%, primarily due to lower transactions, according to its first quarterly report for 2016. Meanwhile, in the comparable period, Staples’ same-store sales fell 4%, reflecting a 2% decline in average order size and a 2% decline in traffic over the prior year. And the threat from Amazon Business is growing.
Part of the problem is that legacy retailers like Staples and Office Depot are forced by shareholder concerns to focus on short-term gains rather than long-term strategies and risk-taking. “It used to be that having this legacy and history as a company in retail—the brand and relationships that came with it—was a huge structural advantage,” said Christian Magoon, CEO of Amplify Investments. “But now it’s becoming a huge structural disadvantage because it’s hampering innovation. We see all the risks for traditional retailers. They may see what’s coming, but they have little to no flexibility to address it.”
In addition to their business customers, Staples and Office Depot also must figure out the consumer side of their business, and what to do with all their stores—most of them huge, big-box structures that dot the American suburban landscape. In recent months, Office Depot and Staples each announced that they will close at least 50 stores in North America this year. Even with those closures, as e-commerce rises—especially for commodity goods—it is difficult to fathom what these retailers will do with all that space. Certainly, their respective networks of stores could be useful as mini-warehouses as they ramp up their e-commerce efforts or introduce more omni-channel options like “click-and-collect,” Magoon suggests.
Staples is experimenting with some new retail concepts. Its partnership with co-working startup, Workbar, intrigues some experts because it could be not just a way to maximize its space, but also to enhance the retailer’s brand. The Workbar spaces, currently in pilot in three Boston-area stores, take up between 2,500 and 3,500 square feet of unused Staples space and offer remote workers, freelancers, and other professionals a mix of high-end workspaces, conference rooms, private phone rooms, fast and secure Wi-Fi, printers, and unlimited coffee and tea. “This is a new concept in the sense that it crosses categories—office-within-retail,” Jerry Hoffman, President of real estate services firm, the Hoffman Strategy Group, said. “The Workbar/Staples arrangement is different from pop-ups and store-within-a-store. Pop-ups are temporary tenants. The Workbar partnership appears to be more than a pop-up. It’s a strategy by a retailer to boost in-store sales. And it’s a business model that can help ‘incubate’ new businesses and the freelance/entrepreneur ecosystem.”
However, in the end, the answer to the biggest question—just what comes next for Staples and Office Depot—may be “Not much.” “What you might start to see is a shrinking number of stores and shrinking size of stores,” said antitrust law firm Bilzin Sumberg’s Scott Wagner. “But I think both Staples and Office Depot will continue plugging away, with both sides of their business, as they did before.”
Citations
1. http://on.wsj.com/1WAfGJe – Wall Street Journal
2. http://bit.ly/20RCh2C – Retail Dive
The Good News Is . . .
• Case-Shiller’s 20-city index of home prices jumped 0.9% for March in what is the best gain since November. Nineteen of the 20 cities show monthly gains led by Minneapolis at 1.3% and four cities at 1.0 percent—Detroit, San Diego, Seattle, and Tampa. Home-price appreciation is central to household wealth. Consumer spending surged in April, as detailed in the consumer income and outlays report, and much of that can be attributed to confidence in home prices.
• Lowe’s Companies, Inc., a leading home improvement retailer, reported earnings of $0.87 per share, an increase of 24.3% over year-earlier earnings of $0.70 per share. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $15.2 billion, an increase of 7.8%. Management attributed the company’s results to strong growth in the overall number of customer transactions, as well as increased average sales per customer.
• Great Plains Energy, the parent company of Kansas City Power and Light Company, said that it had agreed to acquire Westar Energy for $8.6 billion in cash and stock. Under the terms of the deal, Westar investors would receive $51 in cash and the equivalent of about $9 in Great Plains Energy stock for each share of Westar. The transaction would create an energy provider with more than 1.5 million customers in Kansas and Missouri.
Citations
1. http://bloom.bg/1Dl6vPO – Bloomberg
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/24p7MBL – Lowe’s Companies, Inc.
4. http://nyti.ms/1TUjXHi – NY Times Dealbook
Planning Tips
Tips for Saving on Vacation Lodging Costs
While lower gas prices and cheaper airfares have helped make vacation travel a little less expensive this year, hotel rates are countering the trend. Hotel prices have been creeping upward. In March, domestic hotel prices were up 2.9% from a year earlier and international rates, 1.2%, according to a report from Adobe’s Digital Price Index. In the most popular destinations, summer hotel rates are up an average 17%, according to Orbitz.com. Below are some strategies you can use to keep higher lodging costs from breaking your summer travel budget.
Reassess your destination – If you have not settled on a getaway spot yet, look to “reverse destinations” that are more popular at other times of the year. For example, ski resorts often have great year-round activities, but drop their prices in the summer. If you can stand the heat, try desert resorts in Southern California and Arizona as well as Las Vegas. Prices can be as low as a quarter of those you would have seen in the winter season.
Factor in fees – Depending on how you book, daily hotel charges like resort fees, parking and Wi-Fi might not be disclosed upfront. On vacation rentals, there can be added fees for cleaning, access to amenities like a community pool, or use of equipment like beach gear. Make sure you know what to expect ahead of time, because that can add $20, $30, or even $40 a day to your final bill. That makes for easier apple-to-apples comparisons. You might find that the pricier rate of a competing property includes more, and is actually the better deal.
Broaden your search – Hotels are not the only lodging option. Vacation rentals can be a smart option in hot markets, especially for big groups. In some of the most popular cities for rentals, savings compared to nightly hotel prices ranged as high as 63%. A recent Pew study found that only half of Americans were aware of home-sharing services like Airbnb and Couchsurfing.com; only 11% have used such a service. Another option: Vacatia.com, which lets resorts and owners list open time-share rentals and resort residences. The savings here can top 50% compared to local hotels with similar ratings.
Book direct – There can be valuable perks to booking directly through a hotel’s website instead of a third-party site. You might be able to get a better rate or free extras, and avoid fees and tight cancellation policies. With many chains, booking direct is now also the only way to accumulate loyalty points toward free nights.
Monitor the market – Even after you book, pay attention to sales at that property and others. Unless you booked a nonrefundable rate, policies may allow penalty-free cancellation up to a few days before check in—letting you chase that cheaper rate. Booking site Tingo.com does the watching and rebooking for you, refunding the price difference to your credit card.
Citations
1. http://bit.ly/1WAnivt – MoneyTalkNews.com
2. http://fxn.ws/1UpfZAr – Fox Business
3. http://cnb.cx/20B8nzl – CNBC
4. http://bit.ly/1WAnRpb – Money Crashers
5. http://bit.ly/1WAnRpb – US News & World Report
