From a small northwestern observatory…

Finance and economics generally focused on real estate

A quiet Sunday

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Tariffs are back in the news.  Do I REALLY have to comment on why this is a bad idea?

First, go read about the Law of Comparative Advantage.  It’s nearly as old as the study of economics itself.  It explains why a society is better off with unfettered trading.  Admittedly, there are micro-dislocations.  A worker who was skilled at making stuff may need to learn to make other stuff.  However, the best and quickest way to kill an economy is to start a trade or tariff war.  The Smoot Hartley Tariff Act of 1930 is universally recognized as deepening the Great Depression.  Anyone who is in favor of tariffs was apparently laying out with a hangover the day they taught that in Econ 101.

Written by johnkilpatrick

June 3, 2018 at 12:42 pm

Posted in Economy, Finance

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Boring stuff for a Sunday morning

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Any reasonably good education in finance or economics will include a discussion of the term structure of interest rates.  It’s important to understand — in normal times, short term rates (both borrowing and lending) are lower than long term rates.  However, these rates move all over the map, and at times the relationship can be inverted, as it was back in 2000 (see below).

(By Farcaster – Own work, CC BY-SA 4.0,


Why do these rates move around so much, and how can they become inverted (yes, that IS illogical)? Ahhh…. that’s important, but still terribly boring. In general, there are three theories — market expectations, market segmentation, and liquidity preference. Today, I’m interested in the third. In short, in times of trouble, investors (that’s you and me, by the way) want to stay liquid. As such, shorter term rates are artificially pushed down and longer term rates pushed up. The 2011 experience is an example.

So why is this of interest (pun intended) on a boring Sunday morning? Because I made the mistake of reading the news this morning, and happened upon a story from Quentin Fottrell of, reprinted in Yahoo Finance (yes, THEY’RE still around!) titled “Americans are hoarding money in their checking accounts — and that could be a problem.” In short, yes it could. To quote, “When times are good, Americans feel confident by keeping little in checking, but when times are difficult consumers store money in checking accounts, effectively pulling back on spending on retail and restaurants.” It’s an excellent article, and I highly recommend it.

Written by johnkilpatrick

May 27, 2018 at 8:10 am

Collapsing Price of Alternative Energy

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Most — nearly all — of our work is in real estate, but energy has a huge real estate component, so major shifts in the energy market have significant implications for real estate investment.

A recent report out of Lazard reflects just such a major shift.  Specifically, among five major sources of energy, wind and solar are now the low-cost alternatives.  Indeed, since 2009. the cost of solar energy (at a utility scale — not just what’s on the roof of your house) has declined by 86% to about $50 per megawatt hour.  Coal, for example, has declined in price only 8% during that period, and is now $102/MWh, or double the cost of solar.  Wind is even cheaper, at $45/MWh.

Thanks to Lazard for the accompanying graphic.

Lazard estimates

The implications for real estate are obvious. If and as utilities shift supply sources, and focus on alternative energy to meet increasing demands, there will be an accompanying demand for solar farms, wind farms, and new transmission lines.  Accompanying this, we’ll probably see a decreased utilization of coal mines, and certainly a reduced demand for new coal mines.

Written by johnkilpatrick

May 9, 2018 at 8:39 am

Commercial Real Estate — Prices vs Values

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Anyone involved in real estate knows that commercial prices and values have been on a constant uptick since the trough following the recession.  The very length and breadth of the recovery has caused nervousness among investors, appraisers, and lenders.  Today, I’m looking at two somewhat disparate views on the subject.

First, Calvin Schnure, writing for NAREIT, looks at four measures of valuation:

  • Cap rates and cap rate spreads to Treasury yields
  • Price gains, either from increasing NOI or decreasing cap rates
  • Economic fundamentals, such as occupancy and demand growth
  • Leverage and debt growth

At present, none of these is giving off warning signals, according to Schnure.  Cap rates continue to be low compared to other cycles, but so are yields across the board.  There continues to be room for cap rate compression, in Schnure’s assessment.  As for price changes, every sector is showing growing or at least stable NOI, with the proportion of price changes coming from NOI now equal or exceeding price increases coming from cap rate declines.  Across the board, REIT occupancy rates are high and on the rise, with industrial and (surprisingly) retail at or near 95%.  All equity REITs are in the low 90% range, compared to the high 80’s at the trough of the recession.  Finally, debt levels are rising, but at a lower rate than valuations.  Ergo, this is not, in his opinion, a debt-fueled cycle.  Right now, debt/book ratios are significantly lower than in the previous FOMC tightening cycle (2004-2006).  For a full copy of Schnure’s article, click here.

Second, I was at the American Real Estate Society’s annual meeting in Ft. Myers, FL, last week, and had the great pleasure to sit in on a presentation by my good friend Dr. Glenn Mueller of Denver University, the author of the widely acclaimed Market Cycle Monitor.  He tracks property types and geographic markets by occupancy, absorption, and new supply statistics, and for years has proffered a very accurate measure of commercial real estate, both nationally and locally, across four potential phases:

  • Recovery (rising, although unprofitable rents and occupancy)
  • Expansion (rising and profitable rents and occupancy, stimulating new construction)
  • Hypersupply (oversupply of new construction and declining rents and occupancy)
  • Recession (unprofitable and declining rents and occupancy)

Most markets cycle through these phases in a fairly predictable fashion.   Right now, most markets (property types and geography markets) appear to be in the expansion mode, with some (notably, apartments) potentially crossing the line into hypersupply.

In short, commercial real estate markets look healthy, absent the sort of exogenous shocks that sent us into the most recent recession.  That said, many of those same metrics read positive prior to the mortgage market melt-down.  Of course, commercial real estate actually faired pretty well during the recession, compared to many other asset classes, supporting the notion that in times of economic trouble, real estate equities can be great storers of value.

Written by johnkilpatrick

April 16, 2018 at 9:50 am

An important story on trade

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Alexis Crow, who leads the geopolitical investing practice at Price Waterhouse Coopers, has a stunningly important article on trade in today’s Washington Post.  I recommend you read it here.  In short, Trump’s trade war misses a very important point — the U.S. economy has matured from manufactured goods to services, and actually runs a net surplus of such services to the rest of the world.

As she notes, “Providing services is the heartbeat of America’s new economic growth, including IT and communications services, logistics, warehousing, leisure, hospitality, health care, business and legal services.“. She goes on to note that wealth created by America’s trading partners — China, Japan, etc. — translates into purchase of American services, including travel, media, IT, logistics, and entertainment.  By 2026, fully 81% of American jobs will be in such service areas, and our trade surplus in these areas is already nearly $300 Billion per year.

Written by johnkilpatrick

April 11, 2018 at 11:55 am

Damage to Reputation/Brand

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In my last post, I commented about AON’s Global Risk Management Survey.  I want to continue on that theme today, and continue to compliment the great folks at AON for a super job.

Number one on their list was Damage to Reputation / Brand.  The open the chapter on that with a wonderful story, which I will briefly retell here (with full attribution).  A worker in China purchased an electronic device and while charging it, the device caught fire.  He videotaped the incident and uploaded it to the internet.  The clip was soon viewed millions of times around the world.  Other customers reported similar defects.  Even though less than 0.1% of the devices sold were defected, widespread panic followed.  the company was forced to issue a world-wide global recall costing an estimated $5 Billion.  Ironically, this tech company became a victim of the tech revolution.

AON notes that widespread fake news, the lack of fact checkers on social media, and the political cross-fire following the US 2016 elections all have risk for brand damage.  AON estimates that there is an 80% chance a company could lose at least 20% of its equity value in a month over a 5 year period doe to a reputation crisis.

Eight years earlier (2009), Damage to Brand / Reputation was ranked number 6 among risks by respondents.  Today it is number one.  Reputation / Brand events often arrive with little or no warning, to cite the survey, and organizations are forced to respond quickiily.  As such, it is critical that companies have comprehensive reputation risk control strategies in place.  Such strategies include meticulous preparation and executive training, to help maximize the probability of recovery.

Thanks again to the good folks at AON for providing this information.

Written by johnkilpatrick

April 9, 2018 at 3:29 pm

AON’s Global Risk Management Survey

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The good folks at AON just shared with me their very detailed Global Risk Management survey for year-end 2017.  It’s a terrific document, very thoroughly researched, and I commend them for the effort they put into this.  (Full disclosure – neither I nor Greenfield, nor any of its affiliates, have any interest in AON.).  This is the sort of study that should be on the desk of every CEO who has globally-affected interests, and certainly real estate and private equity fall into that category.

The document is chock-full of good stuff, and I’ll revisit this in future posts.  Two interesting comments, however, hit me right up front.  First, and I’ll simply quote from the survey, “…developed nations, which were traditionally associated with political stability, are becoming new sources of volatility and uncertainty that worry businesses…”. Of course, they’re taking about the U.S. and its misguided trade war, BREXIT, the elections in Northern Europe, and the impeachment of the South Korean president.

Second, what are the top concerns for global businesses and wealthy families?  The list may come as a surprise to those who don’t follow these important sectors, but these certainly make sense in today’s climate:

  1. Damage to reputation/brand
  2. Economic slowdown / slow recovery
  3. Increasing competition
  4. Regulatory / legislative changes
  5. Cyber crime / hacking / viruses / malicious codes
  6. Failure to innovate / meet customer needs
  7. Failure to attract or retain top talent
  8. Business interruption
  9. Political risk / uncertainties
  10. Third party liability

I can tell you Greenfield is deadly serious about these issues.  You should be, too.

Written by johnkilpatrick

April 4, 2018 at 11:51 am