From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for May 2011

Apartment Investing — Cap Rate Divergence

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The fact that apartment “cap rates” are declining in the face of rising fundamentals is old news. (For the newbies — the “cap rate” is the ratio of net operating income, or NOI, to value or purchase price. If NOI is rising, then purchase prices must be rising even faster, indicating increased investor sentiment.) Indeed, as of April, nationwide, mean cap rates on apartments were back to early 2008 levels. (Again, for the newbies — cap rates on all property types rose during the recession, reflecting both declining fundamentals AND declining investor sentiment.)

The more interesting piece of news comes out of our friends at REIS, who just released a report today showing that Class “A” apartment cap rates have declined much faster than Class B/C, indicating that high-end, investment grade properties are much in favor today for their income by institutional investors.

Those same investors are wary of lower-grade apartment investments, although REIS suggests that this wariness should dissipate over time. This suggests some significant opportunities for developers, turn-around specialists, and other non-institutions during the coming months.

Written by johnkilpatrick

May 31, 2011 at 9:02 am

Mueller’s Market Cycle Monitor

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Sorry it’s been so long — I’ve been traveling a good bit lately, and it’s hard to keep up!

One of my favorite real estate pieces hit my desk while I was gone — Dr. Glenn Mueller’ Market Cycle Monitor, published by Dividend Capital. He developed this model about 15 years ago, and it tracks occupancy and absorption of major commercial property types in about 50 geographic markets. As a property type (in a given market) sees increasing occupancy, market participants bring new property on-line. This creates an expansion. At the peak of the expansion curve, “hypersupply” begins, following which the new supply exceeds the market ability to absorb property. Vacancy rates increase, even as new property is still coming on line. This stimulates a recession. During the recession, no new property comes on-line, and occupancies hit a nadir. At that point, natural expansion of the economy stimulates a recovery, during which excess properties are absorbed and the cycle continues. The following, taken from Dr. Mueller’s excellent 1995 paper, captures the entire idea:

Currently, the market can be best described as “flat-lined”. Office occupancies were flat during the first quarter, and rents were actually down slightly (0.3%, on an annual basis). Industrial occupancies improved slightly, but rents actually fell signficantly (3.1% annualized). APartment occupancies improved slightly, and rental growth improved significantly (2.8% annually). Retail occupancy actually improved significantly, but rental growth trended downward (3.1% annually). Finally, hotel occupancies improved a bit (0.8%), and hotel income (measured as RevPAR, or Revenue per available room) increased 8.9% on an annualized basis.

For a complete copy of Dr. Mueller’s report, click here or write us at

Written by johnkilpatrick

May 27, 2011 at 10:04 am

Phily Fed — Econ Forecast

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One of my favorite economic touchstones is the quarterly survey of professional economists by the Philadelphia Federal Reserve Bank. Forty-four economists are surveyed, including such notables as Mark Zandi from Moodys, John Silvia from Wells Fargo, and Neal Soss from Credit Suisse. The focus is on “practicing” economists rather than “academics”, and as such gives a great snapshot of what decision makers at major corporations are thinking.

The Phily Fed then takes a synopsis — both a mean and a distribution — of their collective thinking in several key areas, such as Real GDP growth, unemployment, monthly payroll growth, and inflation. The interesting factors include both the current thinking, the CHANGE in current thinking (from the previous projections) and the probability distribution.

Current thinking about GDP growth is a bit less optimistic than it was before. As noted in the graph below (reproduced from the Phily Fed’s report), prior consensus thinking put GDP growth in the 3.0% to 3.9% range, while the current consensus mid-point is between 2.0% and 2.9%. Good news — hardly anyone projects negative GDP growth for this year. As we get into out-years (the graphics are on the Phily Fed’s report), which you can download by clicking here ), the consensus is a bit blurry, but in general most economists still see GDP growth postiive and between 2% and 4%. Unfortuantely, this isn’t the best of news — for the U.S. economy to really get back on track, much stronger GDP growth is needed (solidly high 3% range and even above 4%).

Philadelphia FED GDP Projectsions 2Q 2011

Unemployment projections for 2011 are somewhat rosier. In the prior survey, the mean projection was in the range of 9.0% to 9.4%, with a significant number of economists projecting from 9.5% to 9.9%. Currently, the mean is 8.5% to 8.9%, and a signficant number project in the 8.0% to 8.4% range — a very real shift in the outlook for the nation’s economy as we head into the second half of the year. On the downside — projections for out-years (2012, 2013, and 2014) show a very slow restoration of “normality”, with mean unemployment projections above 7% in all years.

Philadelphia FED Unemployment Projections 2Q 2011

One piece of good news — and this may be the FED patting itself on the back a bit — is that its inflation projections have been quite accurate over the years, and they continue to forecast exceptionally low CPI changes over the next ten years. While the median forecast is up slightly from last quarter (2.4% up from 2.3%), this continues to be great news for consumers and bond-holders. Notably, as you can see from the graphic, there is a fair degree of agreement among economists surveyed — the interquartile range is less than a percentage-point.

Philadelphia FED Ten-Year Inflation Projections as of 2Q 2011

Written by johnkilpatrick

May 13, 2011 at 9:55 am

Global and Local Data

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Two important economic research pieces hit our desks this week — the RICS Global Commercial Property Survey, and the Dr. Bill Conerly’s Businomics Newsletter. The former, as its name implies, has a very global reach (the U.S. included), and gives a great basis for comparison of how the U.S. commercial real estate economy is doing relative to other economies. Naturally, this begs the question, “Are there OTHER economies?” From an investment perspective, all “economies” are integrated, and while each occupies a different place on the risk/reward graph, they are all viewed through the same lens by the equity and debt markets. Dr. Conerly’s work focuses narrowly on the Pacific Northwest, and gives us a great snapshot on how our local economy is doing. It’s a “must-do” resource piece for any work we do in our backyard.

RICS, of course, stands for Royal Institution of Chartered Surveyors. First charted by Queen Victoria in 1881, it is now the world’s oldest and largest property-focused organization, with 100,000 professional members and 50,000 students in 140 countries. Greenfield has been pleased to be affiliated with RICS here in the U.S. for quite a few years.

The headlines speak for themselves:

  • The strongest real estate markets are in Asia (except Japan) and Latin America
  • Emerging European Markets are seeing further improvements
  • Rental outlook turned positive in the U.S., deteriorated in the U.K, peripheral Europe, Japan, and the UAE
  • Capital market expectations are rising in China, Hong Kong, Poland, and India
  • from RICS Global Commericial Real Estate Survey 1Q2011

    For your own copy of the report, or one of the regional reports, visit the RICS web site by clicking <here>

    Dr. Bill Conerly, based out of the Portland, Oregon, area, is a great friend of ours here at Greenfield and one of the region’s top consulting economists. His newsletter presents key national economic trends (along with his pithy comments) and then focuses on how these play out in the Pacific Northwest. He calls national GDP growth since the start of the recovery “disappointing”, and notes that while consumers seem to be rebounding and business equipment capital spending is growing moderately, construction spending is still “weak”. Housing starts are still troubling (for more on this, see some of my prior blogs on the housing market) and despite gas prices, inflation still seems to be under control (actually near the lowest levels in the past 5 years.) The spread of junk-bond yields over treasuries hit a peak of nearly 2000 basis points in 1009, and is back down to between 500 and 1000, but still above the roughly 300 basis point level of 2007. Dr. Conerly suggests there is still some worry about risk, although I would posit that 700 or so basis points is probably a healthy level. Finally, on a national view, Dr. Conerly is looking for “decent but not dramatic gains” in the stock market.

    On the local front, Dr. Conerly notes that both Oregon and Washington bankruptcy filings have turned downward from their peak levels last year, although both are still well above levels pre-2009. Through the recession, both states have seen substantial net in-migration (Oregon at about half of Washington’s level), although Oregon’s in-migration had trended slightly downward and Washington’s slightly upward.

    For more information on Dr. Bill Conerly or copies of his charts, visit him here.

    Written by johnkilpatrick

    May 12, 2011 at 9:16 am

    REIS reports on apartment & office markets

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    Our friends at REIS just sent out their May ReisReports titled, “The Multifamily Gravy Train Keeps Rolling”. They report that 77 out of 82 major apartment markets that they track showed occupancy increases, up from 63 in the same quarter last year. Effective rents increased in 79 of these markets.

    This contrasts with office performance — occupancies either improved or were flat in 42 of 82 markets, and effective rents only increased in 37, which is a slight improvement over 2010.

    Click “here” for your own version of their reports, which we find very helpful here at Greenfield.

    Written by johnkilpatrick

    May 10, 2011 at 8:23 am

    Home Prices Decline — Why?

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    Our neighbors down the street,, just released a report showing that home prices nationally fell by 3% in the first quarter, or a total of 8.2% from March, 2010. The cumulative national average decline from the market peak (June, 2006) is 29.5%, and this quarter’s decline was the worst since 2008.

    By the way — and this may seem totally obvious — but one of the biggest reasons people buy homes is because they are expected to go up in value, not down. Hence, a home is expected to be a storer of value and a hedge against inflation, not a dissipating asset. A buyer in June, 2006, would have reasonably expected his or her home to increase in value by 5% or so per year. For example, as Zillow’s chart shows, even back in the 1990’s, a home bought in 1996 (where their chart begins) went up by a total of about 20% by 1999 — slightly over 5% per year compounded. In five years, 5% compounded annually totals about 28%. Hence, not only are homes going down, they are totally contra to expectations by a total (28% plus 29%) of nearly 60%.

    It sounds trivially obvious, but bankers also expected that. It’s one of the reasons why they fearlessly (and yes, foolishly) made loans to anyone who could sign their name (or make a “X”) back in the bygone days, because if the loan went sour (and they KNEW some of them would), they could always dump the collateral for more than they had in it. “Heads, we win. Tails, we don’t lose.”

    CNBC had a nice piece on this topic this morning, featuring (among others), Dr. Susan Wachter, of U. Penn, who we’ve had the pleasure of knowing for many years. All of the talking heads agreed that banks won’t loan money today unless they’re absolutely sure of creditworthiness of the borrower. Hence, fewer people can borrow today, so fewer homes can get sold. Values decline due to lack of demand (pretty simple ECON 101 stuff happening here) and, as Prof. Wachter put it, the spiral will continue downward until an equilibrium is reached.

    I’ve opined about that equilibrium in this column for quite some time. There is some significant albeit anecdotal evidence to suggest that the equilibrium home ownership rate will constitute the floor in all of this — probably somewhere around 64%, which is where we were back in “normal” times of the late 1980’s to mid-1990’s. I wish we had more data, but systemically declining housing markets don’t happen very often.

    Written by johnkilpatrick

    May 9, 2011 at 9:20 am

    Job Search — from the CEO’s perspective

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    Ahhhh…. it’s Spring again. The flowers blooming, bees buzzing, birds chirping, and a zillion freshly minted graduates out looking for about 0.1 zillion available jobs. We’ve been hiring at Greenfield — just added a few new entry-level-ers to the team, and plan to add a couple of more mid-level folks in the near future. This morning, I happened to read one of those little articles aimed at interviewees on how to improve their chances in the job market. It dawned on me that few of these articles are ever written from the perspective of the CEO who is actually hiring folks. In other words, why did we hire Jane as opposed to John? I don’t pretend to have ALL the answers to this question, or even a universally valid set of “almost” answers. However, maybe I can add my two cents worth, and it will help someone, somewhere. And, as always, if you have specific questions, don’t hesitate to e-mail me.

    First, let’s divide the universe into two different categories — because we really do look at potential hirees this way: newbies and grey hairs. The most recent newbie we hired actually had a year and a half experience, and the most recent grey hair we hired is actually blond. However, this categorization seems to be pretty obvious.


    There’s a lot of silliness out there that we don’t pay attention to your cover letter. Actually we do, but only the first couple of sentences. If you don’t grab us in the first paragraph, then the rest is useless. Indeed, there’s a lot of significance in that — in our business (and in most businesses that have desks, computers, and carpet on the floor) we’re expecting a certain level of communications skill coming in the door. If your cover letter reads like a 3rd graders, or if you don’t “get me” in the first sentence or two, you probably don’t evidence the sort of communications skill-set we need.

    When I interview people (and note that by the time someone gets to ME, they’ve already been thru several rounds of interviews, tests, background checks, etc.), the first “formal” question out of my mouth is, “So, tell me about Greenfield.” Not, “tell me why you want to work here” or “tell me about how you were president of your sorority” but “tell me about ME AND MY COMPANY.” Please tell me that you’ve spent a LOT of time researching us and reading the stuff we write and finding SOMETHING that we do that intersects with the stuff you’re passionate about. PLEASE tell me you’re not wasting my time telling me how you’re a generic people-person and that you could work nicely for us or any other firm that has free soft drinks in the fridge and a great dental plan.

    Which brings us back to the cover letter — it should ALWAYS start with a sentence like, “Greenfield does this thing and I have some very specific ideas about that…” or “In 2007, Greenfield published this article and I used it as a basis for my senior thesis on…” or “Greenfield’s work in this particular project caused me to focus my entire academic career on being hired by a firm like yours.” Seriously. It’s gotta be THAT dramatic. Think about the opening 5 minutes of any James Bond movie. The opening sentence of your cover letter has to be THAT.

    A few other random thoughts, then I’ll move on:

  • Make eye contact in the interview. Maintain eye contact. Don’t look off in the distance.
  • This is not about you. It’s all about the interviewer.
  • Whatever question you’re asked, turn the answer into an example of something the company did and how you could fit into that.
  • It’s SURPRISING how few people actually try to WORK their network of friends to get introductions, yet a very large plurality of jobs go to people who have networked There is a valid reason for this — successful networkers tend to be good at team building, sales and promotion, and client communications, and as such are very desirable employees. Older, successful friends will WANT to help you out even more than your peers.

  • Grey Hairs

    I think the “hire” process probably begins a few years before the job opening actually occurs. Mid-level and senior-career people who think that a job change may be in their future are well advised to begin the networking process many years before the actual job change occurs. Conversations at professional meetings or even over cocktails may include a sentence, “you know, we have this gap in our org chart” or “hey, how would YOU tackle this problem we’ve got?” Those really begin an interview process that can go on for months or even years.

    Really excellent firms are constantly looking for mid-to-upper level talent, and tend to hire “targets of opportunity” rather than hire for actual slots. A great case in point is how Google hired Dr. Kai-Fu Lee from Microsoft who ended up heading up Google’s China initiative (discussed in a recent issue of Fortune). Google was publicly thinking about a China initiative, and the Dr. Lee — who was well known to them but NOT on their radar screen as a potential hire — simply dropped them a letter about that initiative. A week later, he was hired with a bonus big enough to buy a big chunk of China.

    But, how does this help the newly-out-of-work mid-grade grey hair? Searching for actual jobs is the NORMAL route, but if you really bring something to the table, then you PROBABLY know who else is in the same “space” as your skill-set. Who else does the sort of stuff you’ve been doing for the past 10 – 20 years? How would you do what they do better? Find a key person at that firm, and make an appointment. Don’t tell them you’re looking for a job. Simply approach them with, “I’ve been watching how you guys do this thing for the past 5 years, and now that I’m not bound to my old firm I’d really like to share a couple of ideas with you. Then, in a few succinct bullet points, let them know you have a strategy for doing that thing better, either increasing market share or doing it more efficiently or improving quality or such and so forth. Also, let them know that you’re looking for a new place to settle down and put some of these ideas in place. “So, why didn’t you do that over at your old firm?” Answer — “I think if they’d been open to doing this, they’d still be in business.”

    Anyway, these ideas won’t work for everyone, or in every situation. But, in firms both large and small, there seems to be a consistency across the hiring process. Best of luck.

    Written by johnkilpatrick

    May 4, 2011 at 7:47 am