From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for January 2012

S&P Case Shiller Index

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There are two important house price indices in the U.S. — the Federal Housing Finance Authority index (which can be localized down to the SMSA level) and the S&P Case Shiller Index.  The latter actually pre-dates the former, and was the source of data for co-founder Robert Shiller (yes, the Nobel Laureate) making his “housing bubble” cries in the wilderness a half-decade ago.  If for no other reason, we pay homage to this report, which hit our desks this morning.  Additionally, the FHFA index and the C-S index measure house prices somewhat differently, so at a localized level the two indices may say somewhat different things.  Here at Greenfield, we often have to cobble together an index for a market that is smaller than an SMSA.  Using these two indices in tandem, a researcher is able to discern more subtle issues in a local market.  Hence, keeping up with house prices really requires both rather than one or the other.

Bottom line?  For the most recent analysis period (October-November, 2011), both their 10-city and 20-city composites showed price declines of 1.3%, and for the second consecutive month, 19 of the 20 cities tracked showed declines.  Further, the 10-city and 20-city indices showed annual returns of negative 3.6% and negative 3.7% respectively.  Worst city?  Atlanta, with a negative 11.8% annual return.  The only two cities with positive annual returns were Detroit (+3.8%) and Washington, DC (+0.5%).

Our own research here at Greenfield suggests that the current “bottom fishing” on house prices will probably sustain until there is some equilibrium in the home ownership rates.  One might argue that the stagnation in house prices is indelibly linked to over-supply (the “shadow” inventory in the U.S. equals about a year and a half of sales) and the lack of demand (which is tied to the unemployment rate).  Nonetheless, thirty years ago, when interest rates were double what they are today, and the unemployment rate in the U.S. was about the same, home prices were strong and stable.

Why is today different?  Three things — first, the home price bubble was caused by the home ownership rate bubble.  Until home ownership rates get back to a sustainable level, home prices won’t start behaving.  (What is behaving, you might ask?  Historically, before the bubble, home prices track very nicely against household income, which means they’re a great inflation hedge.)  Second, the recent collapse in home prices has taken the bloom off the rose, so to speak, as American households have lost faith in the “home” as a store-house of value.  Finally, the low-down-payment loan was one of the most notable victims of the housing collapse (unfairly, we might add).  As such, “starter” home sales are moribund (just look at new home sales for the clue to this one) and if “starter” homes can’t be sold, then “move up” homes can’t be bought.

I hate to be the bearer of bad tidings on a cold, winter day.  (Irony — the northwestern U.S., where I live, is the ONLY part of the country not facing unseasonably warm weather this winter.)  Unfortunately, housing is just going to limp along for a while.

Written by johnkilpatrick

January 31, 2012 at 9:58 am

Global R.E. Perspective

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The Royal Institution of Chartered Surveyors (RICS, for short), with over 100,000 members throughout the world, is the largest real estate organization of its type.  Their quarterly Global Property Survey gives a great snap-shot into the world-wide investment market.  (Full disclosure — I’m a Fellow of the RICS Faculty of Valuation, and a contributor to this survey.)

The headline really captures the big picture — Weaker economic picture takes its toll on real estate sentiment.  Not every region feels the same pain — Canada, Brazil, Russia, China, and others continue to buck the trend and record positive net balance readings.    Nonetheless, in some of the most economically significant regions, at least from an investment perspective, expectations continue to be weak.  Obvious problem areas are the troubled spots in the Euro zone, but negative expectations are also reported in the U.S., India, Singapore, the U.K., Scandinavia, and Switzerland (among others).  However, despite a weak real estate market, investment demand is expected to grow in the U.S. and even in the Republic of Ireland, which is one of the Euro trouble-spots.  China, despite value-growth expectations, is among the weakest regions of those expecting positive investment growth, behind South Africa in total investment expectations.

One of the more telling studies compares expectations of demand for commercial space and expectations of available space.   Among major markets, only Canada, Poland, Russia, and Hong Kong expect meaningful decreases in supply coupled with increases in demand.  Not unexpectedly, most of the trouble-spots reflect increases in supply significantly outstripping increases in demand,  with the most notable gaps expected in the UAE, the Euro trouble spots (plus, interestingly, the Netherlands, France, Scandinavia, and Switzerland), India, and the U.K.  Expectations for the U.S., China, Brazil, Hungary, Japan, and Thailand all appear healthy, with increases in demand expected to exceed increases in supply.

The survey is available on the RICS website, which you can access by clicking here.

Written by johnkilpatrick

January 30, 2012 at 10:10 am

The death of defined benefit plans

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Actually, this is old news.  It’s fairly well accepted now that, at least here in the U.S. and in the U.K., the only jobs with defined benefit retirement plans (or nearly so) are in the public sector — government employees, military, and the like.  There are a few union-specified plans still out there, but given the dearth of union-members outside government service, these are waning away, as well.

For the uninitiated, employer-funded retirement plans basically fall into two categories (separate and apart from individual retirement plans, or IRAs):  defined benefit and defined contribution.  In the former (DB), the employment agreement includes a provision that after a certain date (say, 30 years of employment), the employee may retire with a lifetime of pay equal to some percentage of, say, the last year’s salary, or the average of the last five years, or something like that.  In a defined contribution (DC) plan, the company agrees to make annual contributions toward a retirement plan via some formula, and upon retirement, the employee will receive whatever is there.  The 401-K is the most popular type of DC plan here in the U.S.

This topic came to my attention due to an article in Institutional Investor a few days ago titled “Shell Is Last FTSE 100 Company to Close DB Plan.”  We have to remind ourselves that Shell isn’t an American company, but rather a decidedly European one, (“Royal Dutch Shell”), headquartered in The Hague but registered in London with 101,000 employees world-wide.  This is confusing sometimes, because Shell-US has a headquarters in Houston and employs 22,000 here in America.

But, back to the subject at hand.  Shell just announced that it will accept no further new members into its DB plan, becoming the last FTSE company to do so.  Thus, in the U.K. at least, the DB plans are no more.

The economic implications of this are fascinating, and can only be viewed in longer-term perspectives.  Post WW-II saw the emergence of a wide-spread middle-class in the developed world, and much of this was linked to job-loyalty.  Much of that job-loyalty stemmed from the idea that if a person worked for a particular firm for an entire career, that person would be “set for life”.  Of course, stock market hems-and-haws coupled with rapidly changing demographics and mergers/dissolutions of old, well-established names cast significant doubt on the ability of most of these 30-year horizons to actually come to fruition.  Nonetheless, that was part of the American (and elsewhere) post WW-II middle-class dream.

With the dissolution of DB plans, everyone is more-or-less on his or her own.  A well-managed and well-funded 401-K, coupled with a near-religious funding of an IRA can do pretty much the same thing as a DB plan, although it requires a substantial degree of discipline, financial acumen, and planning on the individual’s part.  Sadly, we have to remember that exactly half the people in any society are below average.  Hence, cradle-to-grave self discipline, while it sounds like fun in a Ron Paul speech, none-the-less has serious societal implications when put to the test.

I’m on the Board of one of those “dissolved” DB plans that isn’t taking any more new members.  Actuarily, it’s a royal pain in the neck.  No “new” money is coming in for new employees, but the old employee’s aren’t fully funded yet and the stock market sufferings, coupled with demographic shifts, has turned all of us on the board into actuaries cum soothsayers.  Fortunately, the sponsor organization has the resources to fix any unfunded problems, but I’m sure there are plenty of other DB plans out there with funding issues.  Indeed, plenty has been written in recent months about very real shortfalls in public (state and municipal) DB plans.

As our population gets older, this shift from DB to DC plans will get more interesting.   Recall that the Chinese have a curse, “May you live in interesting times.”


Written by johnkilpatrick

January 27, 2012 at 11:42 am

Korpacz Survey

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The quarterly PriceWaterhouse Cooper’s real estate survey is now known as the PWC Real Estate Investor Survey.  However, those of us who have used and trusted it for so many years will always think of it as the Korpacz Survey, named after its founder Peter Korpacz, MAI, and former active member of the Real Estate Counseling Group of America.  The latest issue (4th Quarter, 2012) just hit my desk, and as always, it’s a great snap-shot into the current thinking of real estate investors in the U.S.

The headline pretty much says it all, “Buying beyond core remains tricky.”  The principle problem is the protracted recovery.  Investors are still attracted to core assets for the yield, but are skittish on anything not bought for income.  Particularly favored are community shopping centers with grocery anchors, apartments, offices in tech centers, and port-oriented industrial.

However, a growing number of investors are looking at secondary markets, but expecting returns that are a “multiple of core deals.”  Part of the challenge here is bank underwriting standards, which can really hinge on the finer points of a deal.

Among investment sub-sectors, cap rates have declined across the board this past quarter, with the exception of warehouse (+4) and flex/R&D (+3).  The most notable decline was in the net lease sub-sector (-54 points).  Apartments continue to “lead” with the lowest overall cap rate of 5.8% (down another 18 basis points from the previous survey).

Not withstanding my comments about the the survey’s founder, Susan Smith, the Director of Real Estate Business Advisory Services at PwC, does a great job putting this survey together every quarter.  The quality and quantity of information continues to grow, and its usefulness to real estate decision makers cannot be over-stressed.  For more information, or to subscribe to the survey, visit

Written by johnkilpatrick

January 23, 2012 at 3:43 pm

My newest friend

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In my work, I’m fortunate to meet some terrific people.  If I attempted to write about each one, I’d never have time to actually accomplish anything myself!  However, my “newest friend” really rates a few minutes of my time.  Let’s also recall that the theme of this blog is the economy, with a focus on real estate.  Her work really has serious implications for people who do what I do.

Two months ago, I read a great article in Fortune about Frances Hesselbein, the former CEO of Girl Scouts of America who now actively heads up the Leader to Leader institute (formerly the Peter Drucker Foundation) in Manhattan.  Her institute is slated to be re-named in her honor, the Frances Hesselbein Institute, this coming year.  I want to stress that she is actively engaged as the leader of this institute, because Ms. Hesselbein is a very spry, very active 96.  (For a copy of the Fortune article, click here.)

Given my own interest in both the Scouts and in the work of Peter Drucker, the Fortune article was one of my favorite “reads” in November.  Thus, last week, when I met Ms. Hesselbein in Charleston, I instantly knew who she was, what she’d done, and what she was currently doing.  I won’t go to the effort of copying the article here — I highly encourage you to read it yourself.  However, it’s helpful to review Peter Drucker’s famous five questions, because they really do influence how we should run excellent organizations:

1.  What is our mission?

2.  Who is our customer?

3.  What does the customer value?

4.  What are our results?

5.  What is our plan?

Those are real attention-getting questions.  One of our resolutions for 2012 is to go through a mantra similar to that with every project we undertake here at Greenfield.  I would add to it the six points raised by Ms. Hesselbein in the Fortune article as key tactical take-aways from the Drucker outline, particularly as they apply to organizational doctrine:

1.  If a door opens, walk through it

2.  Have a clear mission

3.  Be inclusive

4.  Be on time

5.  See yourself “life-size”

6.  Look to the future

For more about Frances Hesselbein and the work she and her team are doing, visit the Leader to Leader Institute’s web site by clicking here.



Written by johnkilpatrick

January 3, 2012 at 12:54 pm

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