From a small northwestern observatory…

Finance and economics generally focused on real estate

Sears, I’m gonna miss you…

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Yeah, I grew up in one of those households.  Mom would pack me in the car and drive 40 miles to the nearest Sears to be at the door when they opened at 9am.  Christmas shopping always involved The Catalog (THE Catalog).  Except for a car, a house, and a dog, if Sears didn’t sell it, we probably didn’t own it.

As of this writing, it appears that they may — or may not — emerge as a shell of their former self.  Many (most?  all?) of the stores will close.  Every retail pundit in the universe is trying to explain why the business went into bankruptcy.  I have my own ideas, but that’s not the issue here.

One of the more interesting stories, though, is how badly Sears has apparently managed its real estate holdings in the last few years of its life.  There are a lot of claims on the assets out there (one argument is that Sears’ expensive defined benefit retirement program is taking it under).  Intriguingly, however, Sears owns a very valuable asset which, in bankruptcy, it will simply throw away.  That asset is a nationwide network of below-market leases on very valuable real estate.  The current Board Chair, Eddie Lampert, is making a $1.8 Billion bid for this real estate, although there is some question as to whether the court will accept his bid.  In fact, many of the landlords are clamoring to evict Sears and turn the assets over to more profitable tenants.

Imagine you own a shopping mall, and you can rent 140,000 square feet of Sears space (the average size of a Sears store) for $15 per square foot.  Instead, however, Sears currently rents that space for $5 per foot, due to a favorable lease they negotiated when the mall was first built.  Imagine that Sears still has 20 years remaining on said lease.  At a 7% rate of return, the difference is almost $15 million in present value.  In real estate terms, that’s called a Leasehold Estate.  Multiply that by hundreds of stores, and… well… you get the picture.

Leasehold Estates may or may not be transferrable, but often can be subleased.  Indeed, Sears in its hey-day made quite a bit of money sub-leasing portions of the store to third-party merchants (many big retailers still operate this way).  When Woolworth’s realized that they were not long for this world, rather than head down the bankruptcy path, they carefully managed their long-term leasehold assets.  Indeed, some analysts argued that Woolworths was worth more as a real estate holding company than as a retailer.  In Sears case, that may have been a possibility at one time, but sadly that ship has sailed.

I’m currently writing a book chapter on the importance of differentiating between the business value and the real estate value in the analysis of a closely held enterprise.  The melt-down of Sears is a shining example of the failure to do just that.

Written by johnkilpatrick

January 7, 2019 at 10:18 am

Posted in Uncategorized

Apartments — better than predicted

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Home ownership rates have plummeted from pre-recession “bubble” peaks, and have recently begun stabilizing around the pre-bubble levels.  Before, during, and particularly after the recession, apartment construction and absorption soared.  Many (most?) analysts feared an overbuilding in apartments, necessitating a retraction in construction until excess units could be absorbed.

The one very small black swan we all missed in that prediction was the shortage of homebuyer credit and the difficulty for buyers — particularly first-time homeowners — to accumulated down payments.  Admittedly, the zero-down world of the housing bubble was unhealthy for the stability of the market, but the job-market of the past few years has made it difficult for younger buyers to enter the homeownership market.

Diana Olick Olick wrote a great piece for CNBC over the holidays about the unexpected strength of the apartment market.  She details both the current state of the apartment market as well as the causes and trends in that arena.  You can view the original article here.

Written by johnkilpatrick

January 2, 2019 at 5:49 am

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Returns versus volatility

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As many of you know, I manage a small hedge fund here at Greenfield called ACCRE, which is invested in a managed portfolio of publicly traded Real Estate Investment Trusts (REITs).  My companion blog on that is ACCRE.COM.  Returns on ACCRE have been quite good — a dollar invested in ACCRE at its inception back in April, 2017, would be worth $1.40 as of the end of November, while that same dollar invested in an S&P 500 index fund would only be worth $1.17.

That said, both the S&P and ACCRE have had a couple of bad weeks, although ACCRE has not suffered as much as the broader market.  I made some comments about that this morning, if you’re interested.  You can read those comments here.



Written by johnkilpatrick

December 18, 2018 at 10:38 am

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Meet my new neighbors!

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The Puget Sound Business Journal just revealed that Facebook is about to lease 1.3 million square feet in Seattle’s exploding South Lake Union neighborhood.  I might add that Expedia is moving from nearby Bellevue into a new campus in the Interbay Neighborhood (to the northwest of the map below).  They will occupy the 750,000 SF waterfront site formerly used by Amgen, but will add about 200,000 SF of new space to house up to 9,500 staff.  These announcement would be huge for any other top-20 market, but Seattle has it’s 1000 pound gorilla in the form of Amazon, which occupies a stunning 8,100,000 square feet, almost 20% of the downtown office space.  By the beginning of the next decade (that’s in about a year, folks), Amazon will employ about 55,000 people in my immediate neighborhood.

Facebook and Amazon

The attached map is courtesy the folks at the Seattle Times.  It’s about a year old (I’m too lazy to spend anymore time on this — journalists do great work.) but still more-or-less valid.  It is simply astonishing how much space Amazon occupies in one city.  For reference, in NYC, the biggest single private sector tenant is Citi, with only 3.7 million SF.  As for dominating a percentage of the skyline, Amazon’s 19.2% is also in first place, with the next highest being Nationwide Insurance which occupies 16% of downtown Columbus, OH.

This is even more stunning when you think of how many brand names are in Seattle or the Seattle suburbs — Microsoft, Boeing, Costco, Paccar (they make Peterbilt and Kenworth trucks), the Russell Group, Starbucks, Weyerhaeuser, Holland America, and T-Mobile, to name a few.  Add to that the Port of Seattle, which provides thru-put for Washington’s huge agriculture industry, and the associated expeditors, and hopefully you get the point.

I try to keep this blog from being too parochial, but it’s hard not to admit that Seattle is a pretty cool place to do business.  However, this comes with some drawbacks.  Morning commutes can be brutal — we have some of the worst traffic in America, and it’s getting worse by the day.  Rents are going thru the roof.  We are geographically constrained and the soil conditions make construction astronomically expensive.  Eight or nine months of the year, the weather is retched (but truth be told, it’s the most beautiful place in the world in the summer time).   The cost of living here is awful.  That said, the Creative Class, as the urban economist Richard Florida would call them, flock here by the bus load.  There is a lot to be learned from how we do things here.


Written by johnkilpatrick

November 29, 2018 at 9:27 am

Posted in Uncategorized

Happy Thanksgiving, everyone!

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All of us at the Kilpatrick family, and from our extended family at Greenfield, wish you and yours the best of holidays and a great holiday season.

With that, I want to take one minute for business — here is a post from yesterday on my sister-site, ACCRE.COM.  I hope some of you find this useful.  Best wishes —

Written by johnkilpatrick

November 22, 2018 at 10:09 am

Posted in Uncategorized

Homebuilder Confidence Slides

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The NAHB / Wells Fargo Homebuilder Confidence Index slid from 68 to 60 in a report  just released this morning.  This index is a composite of current builder expectations, buyer traffic, and 6-month sales expectations.   While a reading about 50 is considered positive, this drop — to its lowest level since 2016 — is widely considered a bearish indicator.  The monthly drop is the greatest since 2014.


This announcement contributed to a down stock market open this morning, and with good reason.  Most investors do not appreciate the degree to which homebuilding permeates the broader economy, in terms of both direct expenditures (building supplies, equipment) and secondary and tertiary effects (payrolls, land investments, permitting and fees, insurance — the list goes on). Economists estimate that homebuilding contributes about 15% to 18% to overall GDP.

New home construction tends to be skewed toward first time buyers, and the shortages of such buyers has plagued the market for some time now.  This signal suggests demand is seriously worsening.

On the positive front, commercial real estate looks pretty good this morning.  My sister blog, ACCRE.COM, will have some commentary on that later this week.

Written by johnkilpatrick

November 19, 2018 at 7:33 am

Posted in Uncategorized

Political picture of America

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I tend to avoid political commentary on this blog, save for issues concerning the economy.  However, this morning I stumbled on some data — or more specifically, data presentation — which will be of interest whether you are a republican, democrat, or something else entirely.

Robert Allison, writing on the SAS Learning Post this morning, has a great piece titled, “Building a Better Election Map“.  Allison notes that we are all confronted with a congressional election map that looks something like this:


This is misleading on a lot of levels.  From a republican perspective, it implies that they still have control of the vast expanse of America.  For democrats, this map makes them question whether or not they really took control of the House of Representatives.  It’s simply not a good way to combine the population distribution of the U.S. with the data on House representation, which is supposed to be apportioned according to that population distribution.  Allison experimented with a number of formats, and ended up with a great interactive map that divides the U.S. up into 435 equal sized representational images and then color codes them according to the current representation.  Note that this map also shows where “flipped” seats happened this year.


Well, ain’t THAT neat!  This immediately lets the reader see where geographic trends are happening.  Several interesting pieces of data come out instantly.  For one, Texas is “bluer” than one might think.  Second, the largest number of republican-to-democrat flips happened in pivotal Pennsylvania (not in California, where one might have thought listening to the newscasts).  Third, the old Confederacy is a lot “bluer” than one might have thought, with democrat-to-republican flips happening in Virginia (2), South Carolina, Florida (2), Georgia, and Texas (2 thusfar).

As noted, Mr. Allison’s work is interactive, and I highly recommend you read his entire piece.  It’s a great article on both politics as well as data representation.

Written by johnkilpatrick

November 15, 2018 at 6:25 am

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