From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for November 2010

Post Thanksgiving, time to go back to work…

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In past years (say, pre-2008), the Thanksgiving thru New Years period at Greenfield was always slow, as clients and projects seemed to hunker down for the holiday season. Naturally, 2008 was an aberration on a number of levels — the real estate let-down was in full force, and while our business flow was down, we were busy “hunkering down” for what we projected would be a long recession trough.

Last year (2009) was unpredictable. The first half of the year was dreary, but the last half was a rebuilding period for us, as has been 2010. We’re not yet where we want to be (that is to say, back on our pre-recession growth curve), but the accumulations of lessons-learned have put us in a great position for the future.

I’m commenting on our specific experience at Greenfield for a reason. I think our own company experiences are emblematic of what is happening at tens of thousands of other businesses across the U.S. and other countries, and has significant implications for the future of real estate, the economy, and finance for the next few years. I’m always reluctant to get into the prediction business (I’ll leave that up to Faith Popcorn and her ilk), but I can make a few generalizations, particularly as the parallel what I saw back in the 1970’s —

1. Business profits (and valuations — as we see from the stock market) are headed upward, not so much from increased sales (flat across the board) but also thru extraordinarily increased efficiency. One might wonder, if firms are so doggone efficient today, why weren’t they acting efficiently a few years ago? Simply put, “efficient” firms don’t grow very well. Growth usually requires a significant degree of wastage. Hewlett Packard was famous for this — they would budget engineers a certain amount of time and support to just tinker with things, knowing that the sort of Edison-esque profitability that came out of such tinkering. At one time, Xerox was so inventive that they thru away lots of great ideas, the Graphical User Interface being the best known example. Additionally, efficient firms cut wa-a-a-a-a-y back on hiring, training, and marketing. We see this now on college campuses, as new graduates (even in the “vocational” schools like business and engineering) are getting no offers or offers far beneath what their big brothers and big sisters got a few years ago.

2. This “hunkering down” not only cuts the demand for commercial real estate, but also means we may have a substantial excess supply of offices, warehouses, and shopping centers for some time to come. Ironically, business travel is coming back (as executives work harder to sell the same amount as before) but everyone is going “down” a notch on the hotel food chain — executives who used to stay at a Ritz Carleton are now at Marriotts, and former Marriott customers are now at Courtyard Marriotts. (Intriguingly, the Marriott organization is highly vertically integrated, and so actually takes great advantage of this phenomenon). The interesting off-shoot is that while aggregate hotel room counts are up, hotel employment lags (as customers move from “full-service” to “limited service” stays). The same is true with hotel restaurants, as dining-out budgets get slashed.

3. The “trainee” employment picture is worsening in some ways, but may actually improve in others. As noted, new graduates are having real problems getting placed, and are having to accept entry-level jobs far below expectations. I spoke with a young woman recently who graduated in 2010 in Finance. She had great grades and a stellar resume, and fully expected to get an entry-level job commensurate with her expectations. Guess what? No one is hiring. After several frustrating months, she accepted a job as a teller at a Credit Union at about half the starting salary she’d previously expected. Is there a silver lining in this? Yes, two. From the business’ perspective, they’re getting entry-level talent at bargain basement prices, and if they’re willing to mentor and foster these kids, they’ve got talent who will have a much greater familiarity with the nuts-and-bolts of the business once expansion does return. From the “hiree’s” perspective, a foot in the door builds experience and puts her at the starting gate ahead of the rest of the pack.

4. The early 1980’s recession was actually the last of a series dating back to the late 1960’s (the period was called “stag-flation”). While the early-80’s recession was the worst of the bunch, it seemed to have wrung the last of the “bad stuff” out of the economy, and set the stage for two decades of nearly continuous growth. Many credit the pro-business agenda of the Reagan Administration, but that ignores the tremendous pent-up inventiveness which had been waiting for an opportunity. Gates, Allen, Jobs, and Wozniak had been tinkering with computers and software for a decade, but needed a business expansion to really get themselves going. Sam Walton had great ideas about merchandising, but the explosive growth of WalMart depended in no small part on the availability of cheap construction and development credit to build mega-stores at seemingly every street corner. We decry the sloppiness of the mortgage market of the past few years, but no one seems to complain about the millions of construction workers and realtors who rode from apprenticeship to retirement on the wave of the housing boom. Recessions do not last forever, although this one does have the symptoms of lasting for a while longer. When 4% GDP growth returns (and remember, folks, that’s really all it takes), we should be poised for a period of expansion not-unlike the one that started in the mid-1980’s.

Well, folks, that’s really it. Like most of you, I have a lot to be thankful for. I live in a fairly free country, with an economy that considers 9% unemployment and 2% GDP growth to be unacceptable. I get the opportunity to interface with students and young folks on a daily basis, and they constantly refresh my positive outlook for the future.

Written by johnkilpatrick

November 27, 2010 at 11:33 am

Valuation Colloquium

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I’m writing this from the audience at an invitation-only colloquium on real estate valuation, held at Clemson University and sponsored by a number of high profile groups, including Argus Software, the Appraisal Institute, the Homer Hoyt Institute, the Maury Seldin Advanced Studies Institute, and of course Greenfield Advisors.

This is the third in a series of such advanced meetings, begun in 1964 and held roughly every 20 years. The first was at the U. Wisconsin, and the second at U. Connecticut. The purpose of these gatherings is to bring together both top academic scholars as well as the top practitioners to discuss the future of the profession, both organizationally and methodologically. The past meetings were decidedly U.S. in focus, while this year’s meeting is co-hosted by Nick French (U.K.) and Elaine Worzala (U.S.) and has substantial European, Latin American, and Pacific Rim participation. Consistent with the rapid changes in the field, future colloquia will be held more frequently, and the next one is tentatively slated for Oxford, England.

Papers and proceedings of the meeting will be published in the Journal of Investment and Finance in the near future.

Written by johnkilpatrick

November 13, 2010 at 8:11 am

It’s been a busy couple of weeks

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Two quickies, and then I’m off to give a talk at Clemson University in South Carolina.

First, I had the pleasure of speaking at yet another Gulf Coast Oil Spill Litigation conference, this one last week at the Fountainbleu Hotel in Miami Beach. First, a brief shout-out for the venue — a great hotel, now elevated to one of my favorites in the world. Seriously. I can’t speak to highly of it. Imagine the Bellagio, but without the casino, and a perfect view of the ocean.

But, back to the subject at hand. I’ve also given a couple of private talks to groups of attorneys in recent weeks, but this was my first “public” forum since back in the summer. A lot has changed, not the least of which is the apparent decision by the Gulf Coast Claims Facility that they will not pay property diminution claims (despite what their documents say). This will unfortunately leave claimants with no choice but to pursue in the courts. Many of the smaller (i.e. — single residential and condos) will need to band together in class actions and mass torts under the MDL. Larger claimants (and we’ve been talking to nearly all of those) will have other options.

On a different topic, the news about the mortgage foreclosure mess just gets worse and worse (see my October 18 link to John Stewart for a funny but spot-on analysis of this). The most recent turn of events is comes from the 50 state Attorneys General, all of whom are elected officials, and many of whom have names like Andrew Cuomo and Jerry Brown. Yeah. These are not wallflowers, and many (most?) AG’s find that the post can be a great stepping stone to higher office (like… Jerry Brown and Andrew Cuomo). By the way, it’s a great year to be a populist, and no one ever lost votes by beating up on Bank of America and Wells Fargo, so out come the long knives.

Seems that the banks forgot that foreclosure is essential a state action, not a Federal one, and so falsifying evidence in state court can get you in a whole heap of trouble. The Wall Street Journal has had several great articles about this in recent weeks, perhaps the best being a piece by Robbie Whelen on page B-1 in the Sat/Sun, Oct. 30-31 edition.

This is going to get worse before it gets better. Best case scenario is that the cost of servicing (ultimately borne as a cost to borrowers) will increase dramatically, as the linkage between the “mortgage” and the “note” will need to be better maintained in the future. Worse and Worst Case Scenarios are hard to plumb, and could include severe state court sanctions against major banks, gumming up the mortgage process for months and years to come.

Foreclosure isn’t anyone’s dream. Banks lose, buyers lose, and in today’s market, even post-foreclosure investors are taking risky positions. However, just like getting an absessed tooth pulled (or root-canalled), the foreclosure process is necessary to get bad loans off bank books and get assets back into productivity. With foreclosure rates running 500% of just a couple of years ago, and with something like 25% of home mortgages “under water”, banks can ill afford to keep huge chunks of assets out of play while this gets adjudicated. Worse still, the cost of this mess, currently, is being borne by the servicing agents, who are seeing no new paper come IN the door, but they’re having to expend huge resources dealing with old, dead paper. The legal fees alone are enough to drown these thin-margin firms. Everyone who’s consulting on this mess is going to want to get paid, and yet there’s no new money coming in the door to pay those bills.

Yep, it’s a mess. It may actually be, in the end, the worst spill-over of the mortgage crisis.

Written by johnkilpatrick

November 10, 2010 at 5:48 pm