Archive for March 2009
3/30/09 — It’s coming fast and furious now!
My normal weekly posting is quickly becomming daily, as a result of the rather rapid changes in the landscape. I’d recomment reading:
http://www.becker-posner-blog.com/archives/2009/03/the_governments.html
From the Becker-Posner blog. It’s — along with the commentary — is a great explanation of the issues surrounding the toxic assets plan. Good reading!
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3/29/09 — and two more things….
Two more very quick things….
First, the best description of the various Federal bail-out choices comes to us… no surprise, from the TV show Southpark:
http://www.southparkstudios.com/clips/222638
Second, this comes to me from Greg Mankiw’s excellent blog. Prof. Mankiw teaches introductory econ at Harvard and is the former chair of the President’s Council of Economic Advisors.
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3/29/09 — Rolling Bottoms
I got some strange looks last week when I was speaking at a real estate investment group. The “theme” of my talk was on the structural shifts in the economy, which I’ve talked about here as well as in our monthly newsletter. However, when asked about the “bottom” of the recession, I told everyone I thought we were looking at a rolling bottom. The equities market would bottom out first (and we’re probably there right now). The real estate market would bottom second, sometime later this year. The employment/GDP picture would bottom third.
Now, I think I’m on pretty safe ground with the first and the third. The dire predictions of a 5000 DJIA seem to be behind us, and some recent analyses of options market pricing suggests that the market puts less than a 10% probability on a “depression era” type crash. As for the third prediction, I’m relying primarily on the Livingston Forecast, produced by the Philadelphia FED. This semi-annual survey of leading economists gives us both the central tendency of their opinions as well as the degree of consensus around those opinions (more or less a measure of dispersion). Generally, they’re looking at GDP growth and employment bottoming this year, with GDP growth turning positive again by the last quarter and employment turning positive in the first quarter of 2010. (Note: I’m a huge fan of this survey — while they don’t always get it “right” , they get it “less wrong” than other forecasts.)
The audience of real estate professionals and investors was a bit skeptical of the middle component of my forecast. Some skeptics even suggested that real estate should lag the rest of the economy, and won’t rebound until after employment and the GDP bottom out.
Economy.Com, in their recent report Housing in Crisis projection that the Case-Shiller index will continue to decline into the 4th quarter of 2009, bottoming out some 36% lower than the recent peak. While even that would suggest that real estate prices (at least housing) will bottom out before the employment sector, it still seems somewhat on the pessimistic side.
Current evidence suggests the bottom may be nearer than these projections imply. For one, a report this week from CNBC provides three important clues to the near-term. First, the National Association of Realtors reports that 45% of all residential transactions in 2008 were distress sales. That’s a pretty large number of sales, and wringing the distressed market dry is a necessary precursor to a recovery. Anecdotally, this would suggest that the bottom feeders have pretty much found their bottom. Second, much of the U.S. has not been hit as hard as reports indicate — particularly “middle America” which were never truly overbuilt or badly overpriced, and where price-declines have been moderate. Finally, some of the hardest-hit areas — Florida and the Phoenix/Scottsdale area — are receiving significant interest, even in the hard-hit second home market.
This all portends good things for the residential market, but what about commercial? Construction lending is nearly dead today, and permanent financing for all but “sure bets” (or low income housing) is a tough sell. Nonetheless, pricing seems to be accomodating both the increased cap/discount rates as well as forward-looking fundamentals. Some markets will continue to suffer (residential development, big-box retail) while others are already getting some upward pricing pressure (apartments). However, the market seems to have a pretty good consensus pricing on this, we’re not seeing nearly the “distress sale” pricing in commercial assets that seem to have plagued residential, and in general the damage may pretty much have already been realized.
Does this imply buying opportunities? Probably, but only for the most patient investors. If we are seeing a bottom, that doesn’t imply a return to a steep upward slope on prices just yet. Both investment demand and occupancy demand are going to stay low for a while, the former as funds and investors lick their wounds and the latter as corporate America comes to terms with what the post-recession economy will look like.
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3/22/09 — Newsletter this week
The past two weeks have been busier than usual due to a pair of expert-witness trial testimonies in Kansas City. (Congrats to our clients, by the way, who prevailed with flying colors!). This coming week is slightly relaxed, then I’m off to the races again for a couple of weeks, including a trip to Louisiana and some other projects here in Seattle.
In the meantime, our monthly newsletter, The Greenfield Advisor, is slated to come out this month. We had planned to unveil our new trophy property index this month, but now I believe we’ll defer that for a couple of months. This month, our newsletter will summarize our economic forecast for the 1st quarter, with emphasis (of course) on the implications for real estate. I’ll unveil this forecast at a luncheon presentation to Seattle’s “Belden Club” at the Seattle Yacht Club on Tuesday.
The crux of the forecast depends on which of two economic theories you buy into — is this recession “normal” (albeit far deeper and longer than usual) or are we looking at a real structural shift in the economy?
It’s hard to point to specific phenomenon and say, “Aha! We have a structural shift on our hands!” because these events are so rare and ideosyncratic. Recessions are easy to spot, at least in the rear-view mirror. String together a couple of quarters of negative GDP growth, and you have, definitionally, a recession. However, once a recession is over, people go back to their jobs, asset markets make-up for lost time, and generally all of the trend lines are back where they were before the recession began.
There’s a lot to suggest that this time will be different. The obvious one is the housing price bubble — Moody’s Economy.com in a report released last month predicts that the Case-Shiller Index will retreat a total of 36% before it bottoms-out in the 4th quarter of 2009. That’s not only unprecidented, it also implies a massive loss in household wealth which will take many years to re-coup. Unfortunately for many families, time is not on their side, since the crest of the baby-boom — currently in their 50’s — were looking at this accumulated equity as a major source of retirement cushion. Coupled this with the declines in the stock market — household wealth buried in the equity market (either directly or indirectly) was another significant source of retirement cushion.
Some economists think the real clincher is the pay-down in household debt, which began last year and will probably accelerate this year. There’s a double-whammy there — much (most?) of the pay-down is being done by the most credit-worth households, leaving credit card companies seeing a real shift in the aggregate credit-worthiness of their borrowers. This is happeneing at the very time when the credit card companies themselves are seeing significant retrenchment in their lines of credit. Credit card companies are left with no choice but to curtail credit limits, thus forcing less credit-worth households to either pay-down or default. Since many households were already running permanent balances, and using the monthly pay-down as their revolving purchase line, the impact on household consumption is obviously severely negative.
If we ARE in a structural shift, then the impacts will be felt differently in the U.S. and abroad. Domestically, we’ll look a lot more like the 1970’s but without the inflation. The stock market will trade in a narrow band, and without inflation, bonds will look better than equities. Younger workers coming into the job market will see stagnating expectations, with older workers deferring retirement and an economy that won’t sustain significant job growth.
Abroad — Asia and Europe will be basket cases. The more conservative oil countries (Saudi Arabia comes to mind) will fare well enough, but the economies that bet the whole farm on $100 oil (Venezuela comes to mind) will quickly go into downward spirals. Don’t even start talking about sub-Sahara Africa. Japan — already suffering — from an aging population and a stagnant economy, will face political turmoil. China may be the worst hit — they’re more than happy today to loan us whatever money it takes to get the U.S. economy rolling again, since we are the engine that pulls their 8+% GDP growth. The U.S. could face two choices — either fund our domestic recovery with severe devaluation of the dollar (a distinct possibility) or hunker-down with protectionist legislation (anyone read what a good idea this was in the 1930’s?). Either case leaves China headed back to subsistence rice farming. A significant structural shift in the U.S. away from a consumption-driven economy basically puts us and China in the same position anyway, albeit indirectly rather than directly.
I’m personally leaning 60-40 in favor of a believing in a structural shift. The Obama Administration, at its core, believes in stronger domestic-spending by the U.S. government on things like education, health care, and domestic infrastructure. All of this shifts money away from consumption and toward government expenditures. GDP grows, but the mix of components that gets us there is lower consumption (or at least lower growth in consumption), higher growth in government spending, and a dampening of the import/export red ink.
What are the implications for real estate? More on that in my next post.
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3/14/09 — For Finance Students About to Graduate
On March 6, I had the real pleasure of meeting with a room full of Washington State University finance majors, most of whom are getting ready to graduate in the Spring. This may be one of the toughest markets to graduate into in many years — perhaps tougher than any since the mid-1970’s (when, coincidentally, yours truly graduated). Ever cognizant of the metaphores which will stick with college seniors, I offered up a Six Pack of Ideas for their consideration. Since then, I’ve had a couple of inquiries about this list. I’ll admit right up front that none of this is particularly magical or original. None-the-less, I’ve reproduced my comments here for any and all to read or ignore, as the case may be.
1. The economy will rebound. The real question for fresh graduates, at the beginning of their careers, is how to react both during the slump as well as during the recovery. The latter of these is probably more important than the former — there will be tremendous opportunities during the recovery, and choices made in preparation for that will really set the stage for the trajectory of their careers.
— Network: I was at a Seattle Hedge Fund Society meeting a few nights ago, and the panel of speakers were all from institutions or “funds of funds”. They were fairly unanimous that very few deals would get done this year, but that it was a great time to build new relationships and to line up funding and investment banking sources for 2010. The very same thing is true for individuals in their careers — 2009 and particularly the first half of the year) will be a survival time for businesses, but networking during these lean times will pay huge dividends during the recovery.
— Don’t Compromise Your Resume: It’s OK to take “a job” during this recession to pay the bills, but make sure that choices fit into the overall career trajectory. For example, one woman asked if now was a good time to go straight into an MBA program. I counseled against this. Even though it may be convenient right now, the MBA is best left for a point 2 to 5 years into your career, when you have built the experience on your resume to fully take advantage of the advanced education. Instead…. well, see point #2
2. Position yourself in the best environment possible, even if you have to take a huge cut in financial expectations. At this point in your career, a very high level internship is better than a high-paying job out in the corporate boondocks. Network with people who can jump-start your career, get mentoried by people who understand how to do this, and contstantly be on the lookout for opportunities.
By the way, it’s almost trivial to mention mentoring — everyone talks about it, but very few do it right. In the arc of a successful career, you’ll need more than one mentor. Looking back on it, at the end of your career, your best mentors won’t be the folks who held your hand and made you feel good about yourself. Your best mentors will be those bosses (and sometimes collateral people) who stressed you, who made you think outside your comfort zone, and who made you react to messy situations and clean up the messes. THOSE mentors are golden. You’ll learn to treasure your time with them.
3. Chase the money — not personally, but within the business. Where is the firm’s core business? Stick close to that. Last month, I was talking with a woman who’s in corporate sales with a major, 5-star hotel chain. She reminded me that even though we’re in a recession, her job is safe. The marginal revenue generated by one additional room-night is huge, so the sales force are the star players during the recovery.
Lee Iacocca was a graduate student in engineering at Lehigh University. At the time, Lehigh was basically a training ground for Ford Motors — they hired neary every engineering graduate. At the end of the program, Iacocca realized that the core of Ford wasn’t engineering, it was sales, and he requested a lateral transfer. Needless to say, his superiors weren’t happy, but he managed the shift anyway. Indeed, his engineering background gave him great credibility with the dealership network. Iacocca, of course, is the only person to ever head two of the big-three auto makers (Ford and Chrysler). He gave us not one but two category-killer new autos (the Ford Mustang and the Chrysler Mini-Van), is credited with saving Chrysler from bankruptcy, and was seriously considered as a candidate for President of the U.S. All because he chased the money.
4. Tackle the tough jobs.
Douglas MacArther was one of the greatest generals in the history of warfare. One of his biographies — written by William Manchester, who really didn’t like MacArther — is titled American Caesar. MacArthur not only became the highest ranking general of his time, but also was the son of one of America’s great generals, Arthur MacArthur. The two of them are the only father-son team to ever both win the Medal of Honor (father for the Civil War, son for WW-II). When the younger MacArther graduated number one in his class from West Point, he could have any job in the Army. As was the practice at the time, he rotated through a number of small posts, and at each one, his commander was a bit in awe of the MacArther name. Nonetheless, whenever the post commander would offer MacArther the job of heading up the best platoon or company in the regiment, MacArther would instead ask to be given the worst assignment. Why? He noted that if given the best platoon to lead, then the absolute best he could do was stay the course — keep them #1. On the other hand, if given the worst platoon to lead, simply moving them from the bottom up one notch would be a huge success.
5. Develop communications skills. Business leaders consistently stress the need for excellence in this area. It really is a career-maker (or breaker!) for young business students. Three areas need to be stressed:
— Get that “elevator pitch” down pat. Be able to say what you do or who you are in a short, forceful way. Be prepared to sit across the boss’ desk and give short, direct answers to tough questions. This is essential for a good job interview, but in fact essential every day of the rest of your career.
— Hone your presentation skills. Learn how to get up in front of an audience (of either ten or a thousand) and make that killer 15 minute presentation with as few notes as possible. Taking a drama class or two isn’t a bad idea for learning stage presence, body language, and eye contact.
— Learn how to write a succinct, pithy, and compelling one-page memo. No one ever reads page 2.
6. “Stay ahead of the airplane”. The U.S. Air pilot, Capt. Sully Sullenberger, has been in the news lately for his amazing landing in the Hudson River, saving all of the passengers and crew. Every pilot, starting with the first day of flight training, is taught to stay ahead of the airplane — anticipate where the plane is going and what it’s going to do, and be prepared for the next curve, the next bump, or the next potential thing to go wrong. This doesn’t just apply to pilots — race car drivers, athetes (particularly people who “run with the ball”), surgeons, and for that matter everyone on the front-lines of everything develop the skills to be prepared for the next thing that will happen (both good and bad). A lot of this takes practice and experience, but a lot of it is just thinking ahead — what can happen from this point? Donald Trump says to always understand the downside of every decision, and the up-side will take care of itself.
Finally….
I jokingly noted to the students that a six-pack never seems to be quite enough, so I offered one more…
RELAX. Have some fun. Very few people, in their 50’s or 60’s and at the peak of their career, wouldn’t swap places in an instant with a 22 year old just getting started. It’s a great adventure. The people who do the best at business are the ones who learned to enjoy the journey.
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3/13/09 — “All the lights are on….”
I’ve been traveling this week, and actually surprised to be in the office today — I was supposed to be in court today testifying in a case. Fortunately, the case went quicker than we’d planned, and I get an “extra” day in my schedule. It’s sunny outside, with mild temperatures. Naturally, that means I’m sitting at my desk. Oh well….
But anyway, I have to share this semi-boring story with you from my travels this week. It’s 100% true, only with the name of the city and the “offending” corporation blotted out. I found it fairly humorous. You may find it terribly boring, but I thought it was emblematic of the current investment malaise.
I was in a major central-time-zone city, far away from Wall Street. I flew in late Sunday night, and checked into a hotel which I’ve frequented in the past. I’d never paid attention to it in the past, but next door to the hotel is an art museum, and next door to IT is a fairly blank, open field of perhaps 4 – 6 acres or so. As I drove past the field late at night, I couldn’t help but notice that there were some odd looking light fixtures out in the field all turned on. The fixtures themselves were fairly decorative, but they were positioned as if they were supposed to illuminate something else — but there was nothing else in the field besides the lights.
The next day, I had a few minutes to kill and went for a walk. Across the street is the very massive, multi-building headquarters for a very major mutual fund company. Full disclosure here — until mid-2008, this mutual fund company had a tidy sum of Ms. K’s money invested. They still have her money, it’s just about 1/3 less than it was a year ago. Anyway, the field, as it turns out, is the “Mutual Fund Company Sculpture Garden”, a part of the art museum paid for by the folks across the street as a gesture of good citizenship.
But… ahem…. where’s the sculpture? The lights are all there, but the supposed sculpture pieces which are to be illuminated by said lights are all gone. What’s even more galling (where’s Al Gore when you need him…), the lights were on at night even though there was nothing there to illuminate.
Seriously. A mutual fund sculpture garden, fully illuminated, with no sculptures. If that’s not emblematic of the current investment world, I don’t know what is.
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3/7/09 — Time Flies When You’re Having Fun
Sorry it’s been so long since I’ve posted. It’s been a terrifically busy few weeks. I will say this, I haven’t been totally incommunicado — I wrote the March issue of The Greenfield Advisor, which you can read for free by visiting here and clicking on “newsletters”. We use the monthly G/A to summarize our thinking on the real estate economy and to look more in-depth at what’s going on around us.
One of my frequent reads is Dr. Glenn Mueller’s Market Cycle Monitor, published quarterly by the folks at Dividend Capital. It’s based off of a journal article he wrote back in the 1990’s in which he observed that the timing of the investment characteristics of commercial real estate could be analyzed in terms of a cycle through four occupancy/supply quadrants: recession, recovery, expansion, and hypersupply. (After hypersupply, a market declines back into recession as supply outstrips demand.)
From that core thought, Dr. Mueller is able to analyze real estate not only nationally, but also by subsector (apartments, suburban office, limited service hotel, etc.) and by geographic region (about two dozen or so major markets).
In markets at equilibrium, this model works very well. Naturally neither it nor any other model is very good at picking up “shocks” to the system. As a result, his model shifted dramatically from third quarter, 2008, to fourth quarter, 2009, the latter of which was just published in February. Today, of course, the model pretty much lumps everything in “recession.
The important point is, that doesn’t at all invalidate Dr. Mueller’s work. Indeed, his model provides an excellent launch point for investors, as we peel back the layers of the empirical onion to determine which sub-sectors and geographic markets will rebound first, and which will be laggerds as a result of oversupply and under-demand.
From a small northwestern observatory... 