From a small northwestern observatory…

Finance and economics generally focused on real estate

Manufactured Housing

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A great report crossed my desk this morning from Marcus & MillichapManufactured Home Communities National Report. These communities generally occupy a niche below apartments and rental houses. Housing shortages and climbing costs have increased demand across all of the residential sectors, including this one. In recent years, there has been a very real stagnation in the supply manufactured home communities, and so rents have climbed accordingly, although not as fast as for apartments and houses. Regional vacancy rates range from the low-teens in the Great Lakes region to below 2% on the west coast. Accordingly, average rents range from $460 to $488 in the Great Lakes and Gulf Coast regions (up from about $439 last year) to nearly $1000 per month on the west coast. In some high-cost areas, for example Santa Cruz, rents are nearing $2000.

Many of these communities appeal to retirees, and there is a sub-sector of “age restricted communities” among manufactured home communities. Vacancies are even tighter in this subsector, but rents tend to be somewhat lower.

According to Marcus & Millichap, investor interest “continues to grow” with “robust property fundamentals.” I would note that several REITs invest in this sector, including UMH Properties (UMH), Equity Lifestyle (ELS), and Sun Communities (SUI). UMH has enjoyed a 1-year total return of 26.51% as of this writing, while Equity Lifestyle has returned 22.52% and Sun Communities 21.61%. Note that this is not a recommendation to invest but reported for informational purposes only.

As always, if you have any questions about this or real estate in general, please don’t hesitate to reach out. I look forward to hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

April 11, 2022 at 7:09 am

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ACCRE Report, March, 2022

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For you newcomers to my blog, ACCRE is Greenfield’s in-house REIT fund-of-funds. It’s a carefully curated fund, aiming for a 130-30 long-short strategy (although that’s a tough metric to meet in a generally upward trending market). Before I got bogged down in the winter, I generally reported on ACCRE monthly. I’ll see if I can get back in the swing of things again.

The last few moths have been great for ACCRE, and so-so for real estate in general. We benchmark ACCRE against the S&P500 as well as against S&P’s Global Real Estate Index. The question is how much would your dollar be worth today had you invested in each of these three indices. As you can see below, from the inception (March, 2017) until early 2021, ACCRE generally dominated all three indices. Then the S&P 500 took off on a tear and we’ve worked to keep up. Notably, the broad S&P real estate index has been positive, but with returns considerably lower than ACCRE. Why? Novice real estate investors often fail to appreciate the fact that different real estate sectors behave differently. The pandemic, for example, led to terrible returns in some areas (hospitality or campus housing, for example) but great returns in others (single family housing, data centers). As such, ACCRE has nearly erased about a year and a half of S&P advantage, and continued to outperform the broader real estate index.

We also track the SHARPE index for ACCRE and the S&P as well as the correlation coefficients between the two. The former gives a good measure of how much return an investor gets for a certain level of risk (measured as standard deviation of daily returns). The latter gives evidence of how a well constructed REIT portfolio can help attenuate risk by diversifying the overall investment portfolio.

S&P 500
Average Daily Excess Return0.0476%
Standard Deviation1.2424%
Sharpe Ratio3.8313%
Average Daily Excess Return0.0461%
Standard Deviation1.1724%
Sharpe Ratio3.9313%
Correlation Coefficient (life of the fund)48.5164%
Correlation Coefficient (month of March)11.6763%

Even though the S&P has enjoyed slightly higher returns over the life of the fund, the lower volatility in ACCRE makes it a more attractive investment on a risk-adjusted basis. Further, ACCRE has only been about 48% correlated with the broader market over the past 5 years, and almost totally uncorrelated this past month, boding well for portfolio diversification.

As always, if you have any questions about ACCRE, about REIT investing, or real estate in general, please drop me a note. I’d enjoy hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

April 1, 2022 at 9:59 am

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Dysfunction in the housing market

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Yes, inflation’s bad. I just bought two racks of ribs at my local grocery store. For that price, Chef Gordon Ramsey should bring them over to my house.

But I digress. This is about real estate, and Axios this morning had an excellent article by Neil Irwin with the opening line, “The U.S. housing market this spring selling season is looking like a multi-car collision…” Irwin’s focus is on mortgage rates, which “…have spiked more rapidly than they have in decades…” He’s right, but that only tells half of the story.

Let’s start with house prices, which are utterly on a tear. Since the troughs of the 2008-2011 period, house prices have rebounded amazingly. Indeed, annual price increases in the 2013 period were at nearly the same level as they were during the peak of the “bubble” (remember the bubble?). Fortunately, annual price increases settled out for most of the last decade, at the somewhat normal level of about 2% to 3% above CPI inflation. Then COVID came, and suddenly home ownership was a way to achieve social distancing, home schooling, working from home, and smart investing all at the same time. Seemingly, the urge to own a home hasn’t been so viscerally felt since the period immediately after WW-II. Supply simply couldn’t keep up with demand, and construction materials and labor prices went thru the roof as well, putting amazing price pressure on homes. If you had a $100,000 house in an average city in America in January, 1991, it was worth $382,700 at the end of 2021. Of course, that’s an a average. If that house was in Austin, Texas, it went up to $640,230. In Boise, ID, the price today would be $578,260. In Salt Lake City, it’s $625,720. These are high demand cities, folks, and people want to move there and pay whatever price it takes.

Now, add to that Irwin’s article, which is all about mortgage rates. Three weeks ago, a 30-year, fixed rate mortage was 3.76%. Today, it’s 4.42%. That means that a family which could afford a $2,000 per month house payment could have borrowed $424,000. Today, they can only borrow $375,000. Yet, prices continue to rise. We measure this with something called the Housing Affordability Index. If the HAI equals 100, then the median household in America has exactly enough income to buy the median house. Thanks to record low interest rates the past few years, the affordability index has been in positive territory (that is, above 100) since 2000, and indeed this positive affordability has fueled the run-up in house prices. However, that crashing sound you just heard was the index dropping remarkably from 169 to 151.9, the biggest year-over-year drop since the peak of the 2010-2012 recession (marked by the disappearance of extraordinarily favorable lending). While the raw numbers aren’t that bad, the trend direction, particularly coupled with all the other economic issues, does not bode well for the health of the housing market.

As always, if any of you would like to chat about this or have any comments, please reach out. I look forward to hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

March 28, 2022 at 8:45 am

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Long time gone…

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It’s been an extraordinarily busy winter! Yes, I’ve neglected this blog, my newsletter, and a host of other basic research. Why, you ask? Busy with that day-to-day “work” thing.

Whew, now that my mea culpa is out of the way, I wanted to comment on an article today by Derek Thomas in The Atlantic titled “Russia’s Economic Blackout Will Change the World.” It’s a great piece, and I encourage you to read it. However, it suggests some issues in the real estate sphere worth considering.

First, Thompson suggests that the world petroleum disruption results in the “green energy revolution goes into warp speed.” This will be particularly true in Europe, which is very much re-assessing their dependency on Russian oil. Europe has already been a lot more tolerant of nuclear than the US, despite the Chernobyl disaster, and its relatively stable energy demand (compared to Asia’s rapid demand growth) may give it the impetus to take a leading role in this transformation.

That leads a bit to his next point — Russia is about to become an economic dependency of China. China can certainly use Russia’s oil, and Russia can use just about everything China provides. Russia will rather quickly become a very large North Korea, and China will extract a steep price in terms of oil and natural gas from their new step-child. Unlike Korea, however, which shares certain cultural ties with China, this will be a tough relationship tied only by economic necessity. Further, Russia won’t be able to switch from Euro-centric oil deliveries to Chinese oil deliveries instantly. Putting in a pipeline infrastructure, particularly in the tough Asian terrain, will take years. Right now, all of Russia’s pipelines run in the opposite direction.

Map courtesy:, as of 2017

Thompson also notes that this war will significantly disrupt agriculture. Russia and Ukraine together produce about 30% of the world’s wheat and 20% of the corn. Russia and Belarus are also major fertilizer exporters. Thompson suggests that this isn’t entirely a bad thing in the long run for poor farmers in the world. About half of households in Sub-Saharan Africa are family farmers, living a subsistence existence. If this drives up crop commodity prices, a lot of the third could be lifted from poverty, albeit at the expense of consumers developed nations. However, this scenario suggests a long-term systemic disruption, and it is hard to imagine this war, or Ukraine’s disruption as a breadbasket, stretching out for the long-haul.

Anyway, I’ll try to be more attentive to my blog duties. See you again soon!

John A. Kilpatrick, Ph.D. —

Written by johnkilpatrick

March 10, 2022 at 8:11 am

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Some end of the year tax madness

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This is generally a fairly slow time around Greenfield Advisors, and I mostly use these last two weeks of the year to get ready for tax filings and just generally get my paperwork house in order. It’s been a great year for real estate investing, and as such you may want to give some thoughts to how to position yourself in these last few tax days of 2021.

First, are you a passive or active investor? For most of you, you’re “passive” which essentially means you can’t use real estate depreciation to shelter non-real estate income. (It’s a little more complicated that that, but you get the idea.) Probably the hardest hurdle to cross as an active investor is documenting that you spent 750 hours or more on your real estate portfolio. Unless you’re an active property manager, that’s probably not going to happen, but if this describes you, then be sure to spend any down time over the holidays documenting that 750 hours. The IRS may want to see the paperwork sometime down the road.

Oh, and if you’re a property “flipper”, then none of this probably matters. The IRS will generally treat your real estate as merchandise inventory, anyway.

By the way, if you ARE an active property manager, and need a new vehicle or such, consider the Section 179 deductions that are available for end-of-year purchases.

If you can accelerate any payments this week or defer any income into next month, now is the time to think about that. However, be careful of major repairs that may need to be capitalized and depreciated rather than expensed this year.

As always, I cannot stress too much that I’m NOT your tax or investment advisor. If you are active in the real estate investment arena, you really do need to have a good advisor helping you navigate the shoal waters of tax filings.

Early next month, I’ll do a year-end recap of the performance of various property sectors. Here’s a sneak peek — everything’s up, across the board, including laggards such as lodging and health care. Most sectors had a terrible 2020, and so the star performers this year were generally the ones that did the worst last year. The best two-year holds, however, have been industrial, self-storage, and data centers. More on this in January.

Finally, now is a great time to view your overall investment situation. I’ve always posited that real estate is an important component of a well-diversified portfolio, so how does that diversification mix change going forward? If you and your advisors think you need to make some changes, consider the tax implications of sales/swaps now versus January.

Best wishes for a great holiday season, and we’ll see you next year!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

December 22, 2021 at 4:39 pm

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ACCRE Report, November 2021

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It was a rough month for the S&P 500, but a great month for ACCRE. This was exactly the sort of roiling market for which ACCRE was designed, and it paid off handsomely.

To be specific, the S&P 500 declined 0.83% in November. Don’t get me wrong, though, we hate to see that as much as anyone. Real estate in general also took a hit — the S&P Property Index was down 2.12%. However, ACCRE was up 8.44%, the second of two very solid months of returns. Thus, a dollar invested in ACCRE at the inception would be worth $1.85 today.

Overall, the S&P continues to best ACCRE for the life of the fund, stemming from a very powerful bull run in 2021. ACCRE continues to be only partially correlated, although the monthly correlation numbers have moved into positive territory again from last month’s aberration.

S&P 500
Average Daily Excess Return0.0513%
Standard Deviation1.2397%
Sharpe Ratio4.1377%
Average Daily Excess Return0.0468%
Standard Deviation1.1758%
Sharpe Ratio3.9817%
Correlation (life of the fund)49.6285%
Correlation (month of November)39.5733%

Best wishes to you all for a great holiday season! As always, if you have questions about this or any other real estate related topic, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

December 6, 2021 at 3:56 pm

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Economics — Following the Bouncing Ball

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We hope all of you had a great Thanksgiving, and any indigestion you felt Friday was from too much turkey rather than too much stock market.

The broader stock market indices had a terrible day Friday — the S&P 500 was down about 2%, although as of this writing it has re-gained about half of its loss. Our in-house REIT fund, ACCRE, was developed in no small part to attenuate such falls. We lost only 0.9% on Friday, and we’ve re-gained all of that and then some today.

More to the point, though, what’s happening? Consumers (and yes, the stock market, too) hears about “the Omicron variant” and “inflation” and not surprisingly reacts defensively to unsettling news. We’re no experts on the Covid virus (although we listen carefully to the folks who are legit experts!) but perhaps we can sort out some of the noise with the aid of some charts from CNN Business and some others.

First, let’s look at inflation. If you’re under, say, 55, for your entire adult life inflation has hovered around a very manageable 2% to 3%. In the 1970’s and early 80’s, of course, inflation was a big deal and double-digit annual price increases weren’t unusual. In the past few years, both pre- and post-COVID, inflation has actually been on a downward trend, getting very close to zero in early 2020. However, the flood of stimulus money in the economy, and the rebound after over a year of semi-lock-down, has triggered prices. On an annualized basis, prices in October were about 6.24% above a year earlier.

So, how big of a danger is this? In other words, is this inflation both real and permanent? A peek at the interest rate market may be insightful. Both the US Treasury long-bonds and the 30-year mortgage market have barely reacted. Both are up from their COVID-recession doldrums, but neither seem to have reacted to consumer prices.

10-year Treasuries and 30-Year Fixed Rate Mortgages

So, bottom line, is the economy healthy? In most respects, yes. As of October 1, the economy was adding about 148,000 jobs per month, which is near the high end of the “healthy” range (100,000 to 150,000). The unemployment rate stood at 4.6%, not quite at the pre-pandemic lows, but about where it was five years ago. Real gross domestic product stood at $19.5 Trillion (annualized) as of the end of the 3rd quarter, which is a new record high and nearly back on the pre-pandemic trend line. Consumer spending — which is driving the inflation fears — is also at a record high of $13.9 Trillion and has been back on its pre-pandemic trend line for most of 2021. All of these are healthy signs of a stable but growing economy.

That said, there are a few clouds on the horizon to be watched carefully. The S&P Case-Shiller home price index sets a new record high each month, but annualized housing starts are actually somewhat lower (1.6 million) than the peak of about 1.7 million set earlier this year. However, housing starts are still well above the 1.2 million level we saw for most of the past four years. It remains to be seen if accelerated housing starts will ameliorate housing prices. Retail inventories as a percentage of sales are lower than we’ve seen any time in the past five years, standing at about 126% (the pre-pandemic average was about 140%). This suggests more consumers chasing fewer goods with commensurate price pressure.

The stock market is a pretty good gauge of economic expectations. Looking at the trends for the past five years, the hic-cup on Friday appears to be nothing more than post-Thanksgiving indigestion. We hope that is the case.

As always, we enjoy hearing from you folks. If you have any questions about economic topics, particularly with a bent toward real estate, please let us know!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

November 29, 2021 at 9:46 am

Posted in Uncategorized

Economies of Scale in Real Estate

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In MBA school, students learn about economies of scale. The concept is pretty simple — the more of something you do, the more you can flatting out overhead. Let’s put this in the most basic terms. Joe owns a small plumbing company. He has to buy a truck and tools and a supply of plumbing gadgets. If he only services one customer a day, he may barely break even. However, if he can service 10 customers per day, he might be able to hire a cheap apprentice and make a lot of money. Economies of scale. Get it?

Mostly, students are shown graphs that look like this:

The implication is pretty straightforward — if we can just build a bigger and bigger algorithm, we can own the universe. Indeed, some real estate companies have certainly tested the boundaries of this idea. Until the mid-1990’s, most REITs were fairly small, compared to today. Sometime around 1996, there was a systemic shift upward in the size of REIT IPOs, and today, REITs are orders of magnitude larger than they used to be.

Nonetheless, in some corners of the real estate field, smaller still seems to be better. Brokerage, for example, benefits a bit from some aggregation, but is still very much a local hand-shake sort of business. Less-than-investment-grade investing (“B” and “C” properties) is still a localized business. Brownfield redevelopment and other niches are have proven difficult to aggregate. Indeed, in some niches of nearly every field of endeavor, the economies of scale equation looks more like this:

Beyond a certain point of inflection, the cost of doing business actually rises. Span of control is a difficult problem, particularly in complex fields. The more something can be commoditized, the further out that point of inflection is. However, there are limits to commoditization.

I was brought to think about this by the recent embarrassment of Zillow and their iBuying experiment. It was a very simple idea, really — local “flippers” were making tons of money buying dog properties in good locations, spending a few bucks on cosmetics, and selling into the rising price market. Indeed, my pet Pomeranian could have made money in residential real estate in the past 2 years. However, when markets start to flatten, some localized talent is needed. “You gotta know when to hold ’em, know when to fold ’em” as the old song goes. When markets shift, the economies of scale inflection point scales with it.

For those of you who weren’t keeping up with the Zillow news, the company set up a buying service a few years ago and started simply cutting a check on properties that their algorithm indicated could be flipped for a profit. I would argue that in normal markets, this is the sort of business that requires extensive localized knowledge. In rapidly changing markets, even more so. This isn’t a critique of mass appraisal models. Indeed, I’m a big fan of those, and they prove useful in many situations. However, the act of taking an individual property thru the “flip” process is complex and fraught with risks. A mass appraisal model can inform the participant, but can’t be a substitute for entrepreneurial effort.

Reportedly, Zillow had quite a few billions of dollars on the table, so this isn’t a small undertaking. Zillow is laying off about 1000 people — around 25% of their entire workforce. The investments were in about 25 or so secondary sunbelt cities, like Phoenix and Las Vegas. They’re said to be dumping about 18,000 residences, expecting to take a 5% to 7% loss on the transactions.

About 5.64 million homes sold in America in 2020, so 18,000 isn’t a real macro market mover. Of course, this is a pain for the 1,000 Zillow employees who are losing their jobs, and Zillow stock is down about 40% from the peak in late October. Conversely, the housing market is still pretty good and Zillow’s exit may create niches for local entrepreneurs. We’ll keep you posted.

As always, if you have any questions on these issues, please don’t hesitate to reach out. We look forward to hearing from you!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

November 16, 2021 at 6:53 pm

Posted in Uncategorized

ACCRE Report, October, 2021

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It’s been a busy month, both for the stock market and here at Greenfield!

First the S&P 500 — our primary benchmark — scored one of it’s best months all year, up 6.91% by our metrics. Note that puts the broad market up 22.6% on the year. ACCRE was no slacker this month, up 4.75%, besting the S&P Real Estate index which was up 3.93%.

These are of course reflective of monthly returns. When we dig in a bit to daily returns, a somewhat different picture emerges, as shown in the Sharpe Ratio metrics, below:

S&P 500:
Average Daily Excess Returns:0.0529%
Standard Deviation:1.2463%
Sharpe Ratio (life of the fund)4.2449%
Average Daily Excess Returns:0.0402%
Standard Deviation:1.1769%
Sharpe Ratio (life of the fund)3.4160%
Correlation of Daily Returns (life of the fund)49.8497%
Correlation of Daily Returns (month of October)-19.3963%

Well, THAT was interesting! ACCRE and the S&P 500 are generally positively correlated, both overall and on a month-to-month basis. We want ACCRE to serve a diversifying role within a larger overall portfolio, and correlations in the 50% range, while not a target, are certainly viewed positively. Further, one month does not a market make, but given the long bull run in both the broader market and real estate, is a one-month negative correlation telling us something? Particularly in light of the fact that both indices ended up the month on a positive note?

I can’t help but note that ACCRE and its two benchmarks have all continued on a positive trend thus far in November. We’ll watch this closely, and keep you updated.

Best wishes for a great upcoming Thanksgiving Holiday! As always, if you have any questions about REITs or real estate in general, please don’t hesitate to reach out!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

November 10, 2021 at 7:34 am

Posted in Uncategorized

Chinese Real Estate

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In many ways, the explosive growth of the built environment in China has been breathtaking. In my adult life, they’ve moved about 500 million people out of rural peasantry into urban dwellings. The social impacts of this are a matter for another day, but one has to marvel at their industriousness.

That said, Chinese real estate, like so very much of the Chinese economy, is terribly unbalanced. From the outside looking in, we may think that the emergence of “Chinese Capitalism” (very different from what we practice in the west) is a step away from central planning. In fact, Chinese Capitalism, and particularly in real estate, has created all too many too-big-to-fail businesses. In a well ordered, balanced economy, risk taking is a good thing and it is balanced by a small number of businesses failing and a small number hitting home runs. However, when businesses are too big to fail, there is enormous up-side and little down-side. These huge entities are enabled to take on inappropriate risks, leaving it to others to pick up the pieces.

Real estate in the west is surprisingly atomistic. While there are a lot of big players, none of them, individually, has the size to impact the market. The 2008-2010 recession came about because of systematic factors, not any idiosyncratic failures. However, real estate in China has become aggregated in a handful of multi-tiered companies that have taken on enormous debt, are financed operationally by supplier credit, and have had no disincentives regarding risk-taking. Four of them are now approaching the edge of bankruptcy:

Evergrande — This real estate developer and property manager became the most valuable real estate developer in the world in 2018. However, it now has roughly $300 Billion in total liabilities, including $20 Billion of international bonds. Last week they reportedly failed to make a $148 million interest payment on these international bonds, and this appears to be the third missed payment in a row.

Evergrande’s 10-year Growth

Fantasia — A luxury apartment developer that failed to make $315 million in payments to lenders last week and announced that they would probably default on external debts. Rating agencies have already Fantasia a “default” rating.

Modern Land — This developer has appealed to lenders for extra time on a $250 million bond which is due on October 25, and the Chairman and President of the company are making personal loans to support the business.

Sinic Holdings — This homebuilder has announced that they will likely default on at least some of $250 million in bond payments due October 18. It’s stock is down 90%, and last week, Fitch downgraded their credit rating to ‘C’.

These problems will most likely reverberate throughout the Asian economy, if not beyond. Obviously, the bank lenders and other bond holders will feel the pain, but these developers are also in-hoc to suppliers, subcontractors, and even employees. However, Natixis, the French multi-national investment house, has stated that the Chinese government will avoid such failures in the lead-up to the 2022 National Congress of the Chinese Communist Party. They note, however, that this means the failures may snowball down the road. Chinese generic economic growth has bailed them out of past large-scale financial failures, but experts believe this will not be the case today. These failures may have very real impacts on Chinese GDP growth.

In the short-run, the Chinese will probably see a managed restructuring in which other developers take over uncompleted projects in exchange for land holdings. However, in the longer run, this will make it increasingly difficult for Chinese entrepreneurs to have unfettered access to global debt markets, and I would suspect that, like their western counterparts, Chinese entrepreneurs will be expected to have more “skin in the game” in the future.

Back in the hey-day of pedal-to-the-metal real estate development here in the US, there was a saying among developers, “A penny borrowed is a penny earned.” The 2008-2010 bubble burst was a real wake-up call for western developers. It may be that the events unfolding in China could be a similar eye-opener for Chinese entrepreneurs.

As always, we look forward to your comments and questions!

John A. Kilpatrick, Ph.D., MAI —

Written by johnkilpatrick

October 12, 2021 at 6:23 am

Posted in Uncategorized

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