From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for July 2013

Housing starts, you say?

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Housing starts reportedly dipped 9.9% in June, with the bulk of that in multifamily starts. A few quick points about that. First, rebounds from a recession are anything but smooth. Come back in December and we’ll see what the trend line looks like. Second, note what happened to apartments. While apartment vacancies are still very healthy (5% range, nationwide), there are signs we’re getting a bit overbuilt in that sector. There was a huge rush, and I wouldn’t be surprised if many (most?) of the equity investors and lenders are looking for a chance to catch their breath.

Finally, I’ve opined in a number of places about the loss of construction talent and infrastructure. The long, deep recession really cost us in skilled labor (apprentice programs all the way to master crafts people) and in entitled land. A lot of building sites which were carrying entitlements (zoning, permitting, concurrence requirements, etc.) saw these vital legalities pass into the sunset (most of these had “build-by” dates). Even worse, many local planning and permitting offices are short-staffed, as cities and counties had to decide between laying off under-utilized permitting staff or over-utilized cops, firefighters, and EMTs. Guess what decisions councils and mayors made? On top of that, these understaffed departments will be the last to staff back up to normal.

Sigh….. normal housing starts in America post-WWII are about 1 million per year. When the total got down to, say, 800,000, the Fed would goose the monetary base, banks would make loans, and builders would fire up the pick-up trucks. When starts got above 1.5 million, the Fed would dim the lights a bit, and builders would go fishing. Overall, starts came in at 836,000 in June, down from May but amazingly up 10% from last year. Prior to 2008, a sustained level of starts in this range would be emblematic of a recession. Today, it’s good news. Go figure.

Oh, and one other quick thing — one pundit (I want to say on CNBC) recently suggested Ford, Chevy, and Chrysler as plays on housing starts. When starts go up, Ford sells more F-series pickups. Reportedly, Ford profits to the tune of $10,000 for each of these main-stays of the building site, and currently sells 72,000 of them a month. Do the math.

Written by johnkilpatrick

July 23, 2013 at 3:05 pm

What’s happening to REITs?

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Don’t get me wrong, I’m a great fan of REITs in general (my dissertation was on REIT IPOs). Nonetheless, the great returns of 2009-2012 (which followed the NASTY collapse of 2008) seem to be a thing of the past.

For the half-year ending June 30, REITs are only doing “pretty well”, with a few surprises on a sector-by-sector basis, particularly compared with the 12.6% return in the S&P500 over the same period:

  • Office (7.0%)
    Retail (4.5%)
    Residential (4.6%)
    Diversified (5.8%)
    Health Care (9.4%)
    Lodging/Resorts (10.5%)
    Self Storage (9.0%)
    Timber (5.6%)
    Infrastructure (-4.6%)
  • Note that these returns include dividend yield, which is typically in the 3% – 4% range. This means, for example, that residential and retail returns are almost entirely from dividend income.

    So, what’s going on? Part of the problem is what we’ll call “fulfilled expectations”. In the run-up to 2013, some areas were pretty exciting. Residential, for example, has returned an amazing 284% since the trough of the market about 4 years ago. Retail has returned about 300% over that same period. (Of course, all of these sectors suffered a blood-bath in 2008, so as usual, timing is everything.)

    Over the past couple of years, apartments have been springing up like mushrooms on a warm spring morning. Investors have been very excited for a while, but excitement is beginning to wane. How many new apartments do we need? Retail is sluggish for different reasons — recent reports show double-digit increases in on-line retail, but flat-lines in department store sales. Even Wal-Mart is wondering where their customers are going to come from.

    Lodging/Resorts have some excitement, with new records being set in both volume and prices. However, as I’ve noted elsewhere recently, this may come back to haunt buyers. Health Care, of course, is a play on Obama-care.

    Finally, over the past two months, the entire sector has been shaken by fears of increased interest rates, which impact REITs in two ways. First, the fundamental cost of doing highly-leveraged business goes up. Second, with higher short-term rates, REITs begin to pale as income-producing vehicles.

    Written by johnkilpatrick

    July 15, 2013 at 4:35 pm

    Posted in Uncategorized

    Mid-year observations

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    I just returned from a fantastic weekend and series of meetings in Jackson Hole. I had the pleasure of moderating a panel on real estate and sitting on a panel on alternative investments. I’ll share some of my thoughts over the next couple of posts.

    First, the “big picture” on real estate mid-year. While many metrics look favorable, the patient isn’t fully ready to go home from the hospital yet. Structural issues still abound, including permitting problems in many major cities and counties (a result of budget cuts and short staffs), mortgage-backed securities pipelines still getting re-routed, and a lack of development infrastructure (permitted and enabled building sites, skilled labor, and such).

    Apartment vacancies are projected to rise slightly this year, but there is a lot of new product in the pipeline. I fear that the increased vacancy will all fall on the shoulders of the new apartments. Stay tuned.

    High-end hotel funds are paying silly-money for properties right now. Thus-far in 2013, we’ve already seen transaction volume equal to all of 2012 (about $8 Billion in the U.S.) with substantial private money coming in from abroad. Hot cities include Atlanta, Houston, and New Orleans. Resorts account for about 25% of the total, and slightly over half are single-asset purchases.

    More later, including some observations about the housing market and the retail sector.

    Written by johnkilpatrick

    July 11, 2013 at 1:40 pm

    Posted in Uncategorized

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