Archive for the ‘Economy’ Category
A great little September
Following up on Renaissance Weekend at Aspen, Lynnda and I took off with some friends for Europe for a couple of weeks. It was wonderfully relaxing (albeit my office found out I had wifi most days) and a great way to dip into the culture and economies of some countries I’d either never visited (Hungary, Slovenia, Austria) or hadn’t visited in a few years (Germany, The Netherlands).
First, it’s interesting that the river valleys we visited (Rhine, Main, and Danube) appear to enjoy a tremendous economy off of tourism. The proliferation of river cruise ships (we were on Viking) means that a lot of cities and towns can make money selling low-capital, high-profit items (beer, wine, food, and tourist paraphernalia) without investing in high-capital, low-profit infrastructure (parking lots, hotels). They seem to have focused their attention on fixing up cathedrals and castles, all of which are quite lovely.
I was also terrifically impressed with how much commercial vessel traffic uses the Rhine River. I didn’t try a head count, but I’m guessing commercial vessels outnumbered tourists by 10-1. The Main and Danube weren’t quite so busy, but the traffic was still there. Unlike the U.S., where our very few locks are frequently public infrastructure, the vessels we were on paid an average of 1,000 Euros per lock (times 68 locks between Amsterdam and Budapest!). I presume the commercial cargo haulers paid something similar. That said, the cargo haulers generally transported low-value, time-insensitive cargo (grain, aggregate, scrap metal) and each cargo hauler was able to replace quite a few trucks. Thus, the benefit of these 10-knot, fairly efficient cargo vessels, was not only in cost but also in using a natural infrastructure (the river) to replace one that would have to be built (highways and bridges). Add to this the environmental concerns (I’m told that the cargo vessels are significantly more environmentally friendly on a “per ton of cargo” basis) and it all seems to add up quite nicely.
One of the biggest economic problems facing Europe is the aging population. Indigenous populations (e.g. — native Germans) are living long and not breeding very much. To put it in simple terms, if Germany makes money selling Mercedes to other people, then how are they going to build them when all the Germans retire? Many industries — not only in Europe but elsewhere — deal with this problem thru advanced automation. Indeed, the advances in productivity in Europe, North America, Japan, etc., can be tied directly to automation. However, there is a limit to replacing people, particularly in the service industry. Up to this point, “First and Second World” countries (that is, us and them) have partially staved off the problem by importing labor. That, of course, has its own problem, not just the crowding out effect (immigrants allegedly taking jobs from natives) but also results in a shortage of labor in some skill areas in the countries which source the immigrants. For example, nurses are flooding into Europe and the U.S. from India, leaving a shortage of nurses in India. The opposition argument to the crowding out effect is that natives are often unwilling or untrained to take certain jobs. One German engineer pointed out to me that it’s impossible to get a German to collect garbage. Here in the U.S., there is a huge demand for nurses, computer programmers, etc. Sadly, we seem to churn out an excess of poets.
Sigh…. you’d think I could tour the Danube and the Rhine without thinking about such things, but here we are….
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PWC Surveys Investors
PriceWaterhouse Coopers does a great job with they’re quarterly survey of commercial real estate investors. Previously known as the Korpacz Survey, after it’s founder, Peter Korpacz, the lengthy but highly readable review gives investors, brokers, appraisers, and others a snapshot of anticipated market performance both by property type (retail, office, etc.) and market (regional, and in some cases by metro area). The most recent issue just hit my desk, and as usual it’s terrifically informative.
The headline this quarter is, “Investors Scrutinize Cash Flow Assumptions”. As it turns out, the assumptions and resultant aggressiveness (or lack thereof) varies significantly by property type and geographic market. For example, strip shopping centers (nationally), apartments (also nationally), and regional warehouses in the pacific and east-north-central regions are enjoying increased optimism, measured by very significant declines in overall capitalization rates. On the other hand, 20% of investors surveyed expect regional mall cap rates to increase over the next six months, and 40% of investors felt the same about the overall Denver market.
Intriguingly, cap rates in CBDs trend lower than in the suburbs of those same cities, driven mainly by higher barriers to entry and a lack of available land downtown. Additionally, most downtown cores in major markets provide the sort of 24/7 lifestyle and transportation alternatives that appeal to younger workers, and hence the firms that employ them. As such, the downtown locations are viewed as less risky, overall.
Overall, vacancy rate assumptions have remained steady over the past year. Coupled with that, tenant retention rates have also remained steady across markets.
In general, office markets remain fundamentally strong, and PWC survey respondents project falling vacancy and rising rental rates over the next few years. Retail market conditions are improving, with no major markets currently in recession and an increasing number in expansion. In the industrial sector, the expansion of the past few years is likely to abate, according to the survey, and a few metros may find themselves in the overbuilt state (Austin, Jacksonville, Las Vegas, Portland, and DC). Apartments will continue in expansion in many markets, but the peak may be near, and an increasing number of markets are reported to be in contraction as 2015 turns into 2016.
As noted, the report is detailed, and this issue also features their less frequent surveys of medical office markets, development land, and student housing. For your own copy (they come at a subscription cost, by the way) visit www.pwc.com/realestatesurvey.
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December’s Livingston Survey
The late columnist Joseph A Livingston started surveying economists about their forecasts back in 1946. It’s the oldest continuing survey of its kind, and is continued twice a year under the auspices of the Philadelphia Federal Reserve Bank. One of the neat things about this semi-annual report is that it compares the current central tendency of projections to the projections which were being made six months ago. In short, we can directly compare how economic forecasts are changing over time.
One of the biggest shifts is in the GDP growth rate for the 2nd half of 2015. Six months ago, economists were projecting that we’d end the year with a modestly healthy 3.1% annual rate of growth. Now, economists are forecasting we’ll end the year at about 2.1% — a fairly significant shift in sentiment. Similar declines in GDP growth are projected for 2016. Check my prior blog post about the 12th District report on the western economy, and particularly the impact a stronger dollar is having on the export market.
The good news — and it’s slight — is an improvement in the projections about unemployment. Six months ago, economists were forecasting we’d end the year with an unemployment rate of 5.1%. This has now been revised downward, ever so slightly, to 4.9%. Also, inflation continues to be dead-on-arrival. From the end of 2014 to the end of 2015, the consumer price index is projected to rise only 0.1%, in line with prior forecasts, and the producer price index is actually projected to fall by 3.2%. Both indices are expected to swell in the coming year, but only slightly. The current CPI forecast for the coming year is 1.8%, and PPI is 0.7%. I’ll leave it up to the reader to pick a reason for this, but can you say “energy costs”?
Six months ago, interest rates were forecasted to rise. Actual increases are somewhat lower than previously forecasted. Six months ago, forecasters predicted we’d end the year with 3-month T-bill rates at 0.59%. In reality, the November 23 auction was at 0.14%, although rates are trending up in December (0.28% as of Monday) in anticipation of Fed rate increases. The current forecast is for 3-month rates to end the year around 0.23%, and for 1-year rates to end around 2.3% (down from the previously forecasted 2.5%). Forecasters currently predict 3-month T-bills will hit 1.12% by the end of 2016, and 10-year notes will end next year around 2.75%.
Finally, forecasters are asked to predict the S&P 500 index for the end of the year as well as the end of next year. Six months ago, the consensus forecast was an S&P level of 2158 for the end of the year, and this has now softened to 2090. (It’s helpful to note that the S&P opened just under 2048 this morning.) Forecasters currently project the S&P will hit about 2185 by the end of next year, which is an anemic growth of 4.5% over the coming 12 months.
If you’d like your own copy, which includes much more detail on these forecasts, you can download it for free here.
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12th Fed District issues 3q report
Greenfield is a global firm (albeit mostly in the U.S.), and even though we’re headquartered in Seattle, we try to focus our attention broadly rather than locally. That said, the 12th Federal Reserve District just released First Glance 12L (3Q15) which takes an early cut at the data from the nine western states. It’s very telling data — the “left coast” as I like to call it tends to suffer worse when times are bad and boom better when times are good. Thus, there are some interesting facts and figures to be gleaned from this well-written report.
Naturally, the report is focused on the health of the member banks in the region, but the macro-econ factors driving that health are of much broader importance. Nationally, unemployment stood at 5.1% at the end of the 3rd quarter. Western states tended to be a bit worse off, with 3 states (Idaho, Utah, and Hawaii) recording lower unemployment rates and the rest showing higher numbers, ranging from Washington’s 5.2% up to Nevada’s 6.7%. California, always the thousand pound gorilla in the room, came in at 5.9%.
However, job growth in the western states is well above the national average — 3% annually for the region versus 2% for the U.S. as a whole. However, the west is digging out of a deeper hole — while job growth nationally hit a trough of -4.9% at the peak of the recession, it bottomed out at -6.7% in the west. Generally, job growth in the west over the past 20 years had held steady at about one percentage point above the national trend during “boom” years.
Housing starts in the west are well below the pre-recession peaks. As of September, 2015, the seasonally adjusted annual rate (SAAR) of housing starts stood at 161,000, with 107,000 of that in 2+ family units. This compares with a peak of 449,000 SAAR in the 2005-2006 period, at a time when 2+ unit housing only made up 85,000 of the starts. Arguably, the market in the west is still absorbing the huge shadow inventory built up during the boom days.
Commercial vacancy rates in the west have been drifting down for the past few years in the office, industrial, and retail sectors. Apartments, however, seem to have plateaued around 4.3% at the end of the 3rd quarter, and are forecast to rise a bit to 4.7% a year from now. I might posit that historically, profit-maximizing apartment vacancy rates have been found to be somewhat higher than these numbers, so apartment managers and owners may have some lee-way to continue building.
The 5 western maritime states are very export-driven, and the strength of the U.S. dollar (up about 18% against major currencies since 2014) has been rough news for those markets. While western state exports rebounded nicely from the trough of the recession (up about 17% from 2009 to 2010), export growth has flat-lined since 2012. Regionally, exports declined about 2.5% since last year, with positive growth reported in only four states (Arizona, Hawaii, Nevada, and Utah). Bellweather California saw exports decline 3.6%. Note that in Washington, my semi-home state, exports make up 21.2% of the gross state product. (We export things like big trucks, big airplanes, software, and agricultural products.) Hence, this is critically important stuff.
The remainder of the report focuses on the health of the regions banks. I’ll leave that up to the reader if you care to download your own copy. Short answer, though, is that the region has seen loan growth accelerate even while the nation as a whole has flattened. Further, the regions banks tend to be a bit more efficient in terms of expenses and staff, both compared to the nation as a whole and compared to the “boom days” pre-recession. Both small and large commercial borrowers generally reported tightening credit standards at the end of the 3rd quarter, which is a change from previous reports. However, consumer borrowers (residential mortgage, credit cards, and auto loans) generally reported easier standards. The bulk of loan growth for small banks (under $10B) came from non-farm non-residential, while for large banks the biggest growth sector was in consumer lending. The percentage non-performing assets (the “Texas Ratio”) in the region, which peaked at 38.9% in 2009, is now down to 5.4%, although still higher than in the 2004-2007 period. By comparison, the national peak hit in 2010 at 19%, and is now standing at 7%, also higher than pre-recession levels.
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PWC’s Emerging Trends in Real Estate for 2016
Ever since PWC acquired Peter Korpacz’s excellent quarterly commercial real estate survey, they have really leveraged that theme into a great regular read. Along with my subscription, their annual Emerging Trends just landed in my in-box, and it’s a really excellent read. (To access a copy, just click on the link above.) The report is a must-read for anyone in real estate, particularly in the investment or finance side. I’ll skip to two of the summaries — one they call “expected best bets” as well as the capital market summary, to give you a flavor of their report.
Expected Best Bets — PWC recommends, “Go to the secondary markets”. They note that gateway markets have pricing problems, while the “18-hour cities” are “…emerging as great relative value propositions.” They particularly cite Austin, Portland, Nashville, and Charlotte.
PWC also discusses “middle-income multifamily housing,” and notes the solid business opportunities providing creative answers for what they call the “excluded middle” households. PWC also encourages planners to re-think parking needs, in light of the changing demands of “live/work/play downtowns.”
On the securities side, PWC notes that many REITs are priced well below net asset value, providing an interesting arbitrage opportunity in 2016.
Capital Markets — PWC opens by noting, “In many ways, it appears that worldwide capital accumulation has rebounded fully from the global financial crisis. The recovery of capital around the globe has been extremely uneven. And the sorting-out process has favored the United States and the real estate industry, affecting prices, yields, and risk management for all participants in the market.”
Whew…. I’m usually loathe to quote so much from another’s work, but I simply could not have said that any better. PWC quotes one of their survey respondents, a Wall Street investment advisor, who says, “There is going to be a long wayve of continued capital allocation toward our business….”
Survey respondents largely were split on short-term inflation, with about 40% predicting modest increases and 60% looking for stability at current rates. However, when they look down the road 5 years, 80% of respondents look for modest increases in inflation. Coupled with that, over 60% of respondents think both short term interest rates and mortgage rates in specific will rise next year, and nearly 80% think such rises will occur over the next 5 years. Intriguingly, a small but significant minority — about 20%, believe rates will rise substantially over the next 5 years. Almost no one believes rates will fall, either in the short-term or the long-term.
To sum up the capital markets view, PWC says the general spirit of the industry is positive, albeit with an eye toward risk. Many are calling for a “long top” to this recovery, but many are also taking defensive postures by shortening investment horizons, paying more attention to the income component of total return rather than the capital appreciation component, and moving down the leverage scale.
As always, I would stress that I am citing a 3rd party source here, and nothing in this review should be construed as investment advise. That said, PWC’s Emerging Trends is an excellent read, and I highly recommend it.
Scotland Independence and U.S. Real Estate
If you haven’t been keeping up, about 4 million voters in Scotland will go to the polls tomorrow (Thursday, Sept 18) to decide one simple question, “Should Scotland be an independent country?” If a majority vote no (the “unionist” position), then the question of Scotland’s independence should be put to rest for a long time to come. If a simple majority votes “yes”, then Scotland and the United Kingdom will sever most of the ties that bind. Scotland will apparently remain part of the British Commonwealth, but with the same relationship to London and the Crown that Australia, New Zealand, and Pakistan have. (Yes, folks, Elizabeth is the Queen of Pakistan. Betcha didn’t know that.) As of this writing (Wednesday afternoon here in the states), it is reported by the Washington Post that the independence movement is slightly ahead.
So what are the implications, other than for scotch and haggis? As with any such major event, the unknowns outnumber the knowns, and the negatives may be overblown. However, from the perspective of global finance and European stability, no one can discern a plus and the minuses seem to be having a field day.
One thing is obvious — Scotland is the heartland of liberalism in the U.K. Independence means the remaining components of the U.K. (England, Northern Ireland, and Wales) will be governed by the conservatives for the foreseeable future. More to the point, Scotland’s indigenous political parties range from left of center to further left of center. Proponents of independence hope for a Scandinavian-style socialist state free of meddling from the Tories in the south. Of course, exactly how Scotland plans to pay for this isn’t quite clear just yet.
Oh, did we mention oil? Britain’s oil comes mainly from the North Sea. However, those reserves are being pumped by firms with names like BRITISH Petroleum, not SCOTTISH Petroleum. However, actual ownership of the oil revenues is a matter which has yet to be discussed, much less decided. Indeed, the Institute for Fiscal Studies indicates that Scotland will actually have to cut social spending by about $9.9 Billion per year.
Then there’s the issue of currency. Scotland benefits by using the pound, which is a globally accepted reserve currency. London is adamant that the pound will not be shared with Scotland, any more than it is shared with any other commonwealth state. (Note that Australia, Canada, Lesotho, and the like may have the Queen on their currency, but have to print their own money. As a result, many Scotland based businesses have threatened to de-camp to the south. Will Royal Bank of Scotland become Royal Bank of…… East Northumberland? (In fairness, Scotland could unofficially use the pound the same way Equator uses the U.S. dollar.)
How about nuclear weapons? Currently, Scotland is where the U.K. keeps theirs. Scotland has declared that they will be a nuclear-free zone. Further, Scotland’s chances of joining NATO or the European Union appear slim.
All of this has some very real implications for one of the world’s anchor currencies and 6th largest economy ($2.8 T estimated 2014 GDP, according to CNN.com). To suggest that this wouldn’t have implications for global real estate investment would be short sighted in the extreme.
Retail Real Estate
The current common wisdom (such that it is) about retail real estate is that the Amazons of the world will crush retail real estate. Add to that the pressures of retrenchment among traditional shopping mall anchors such as Sears and JC Penney (neither of whom have figured out how to make “on-line” work), as well as the changing shopping habits of the millennial generation and the “halt” of suburban sprawl, and it comes as no surprise that only three traditional enclosed malls have been completed in the last decade, compared with 19 in the 1990’s (according to the International Council of Shopping Centers).
A neat article in the current edition of Real Estate Investment Today (REIT) published by the National Association of Real Estate Investment Trusts, illustrated both the challenges and the potential solutions for real estate investors. The principle focus of the article was on Macerich, one of the nation’s premier retail trusts. While the article does a great job of illustrating how this one firm is addressing today’s challenging retail landscape, the underpinnings of the article were even more interesting for projecting the future of this important property sector.
Among other ways to address the issues, Macerich is targeting its top performing malls for significant redevelopment. For example, the Tysons Corner Center in Fairfax, VA, is slated for a $525 million expansion. In addition, many top-tier malls are being multi-purposed, with hotels and office space added for synergy and operational leverage. Much of the redevelopment has been aimed at making properties in densely populated markets more up-scale or even “luxury” branding. Macerich also has a technology program, including social media, aimed at the millennial shopper. Finally, the outlet mall product continues to be strong, and Macerich intends to build a few of those in the near term.
On the flip side, Macerich sold about $1 Billion in assets over the past 14 months, and has another $250 million slated for disposal during the rest of 2014. Lower quality assets and properties in secondary markets are largely on the chopping block.
What does this mean for the industry? In some ways, the news isn’t all that bad. The lack of new construction favors existing properties, particularly those with good fundamentals and solid (and growing) customer bases. On the down-side, mid-grade properties are going to become “malls people USED to shop at”, and retail is extraordinarily hard to reposition. Thus, while there are bright spots in retail sector, there are certainly players who won’t survive the next cycle.
whew…..
The gap in postings is a good indication of just how busy I’ve been the past several months. Whew….
Anyway, the latest semi-annual Livingston Survey just hit my desk from the Phily FED. Just to remind you, the Phily FED surveys a cross-section of top economic forecasters on four key issues — GDP growth, interest rates, unemployment, and inflation. Ironically, the survey came out before this week’s BEA announcement that GDP grew at an annual rate of 4.1% in the 3rd quarter (following a 2.5% growth in the 2nd quarter).
Nonetheless, the Livingston Survey gives a good snapshot of where professional forecasters think the economy will be over the next couple of years. Forecasters generally see GDP growth ending this year around 2.4%, increasing to an annualized rate of 2.5% early next year, and 2.8% in late 2014.
Interest rate forecasts were also surveyed before the recent FED pronouncements about tapering, although the general sense is that markets have been capturing the “taper” news for a while. Forecasters project t-bill rates to continue below 0.1% into 2014, rising to 0.15% by the end of next year, and 0.75% by the end of 2015. Ten-year bond yields should follow suit, with rates rising above 3% in mid-2014, up to 3.25% by the end of next year. Of course, time will tell on these projections.
Finally, unemployment is projected to dip below 7% after mid-2014, and finish the year around 6.7%. Inflation should hold below 2%, although it is projected to creep up somewhat from the current rates.
The Phily FED produces a series of economic surveys throughout the year. For more information, visit their research department.
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A quick note about maps
My expertise (such that it is) lives in the universe of Finance and Economics, but I tend to specialize in the real estate arena. That means, I spend a lot of time looking at maps. (Somewhat ironically, my main hobbies — flying and boating — also require a lot of map work. Go figure….)
With that in mind, someone sent me a link to a great piece in the Washington Post called 40 Maps That Explain the World. Click on it yourself. The maps are somewhat interactive (you can expand them for detail, and there are cross-post to other articles and explanations). The maps are extremely thought-provoking, and some take a bit of time to fully comprehend.
If THAT wasn’t enough, apparently other writers are starting to compile their own “40 Maps” lists. One of the better ones, albeit somewhat more U.S. centric, comes from the website twistedsifter.com, and is called 40 Maps That Will Help You Make Sense of the World. Whether they do or not is still up in the air, but they do make for fun reading.
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Quarterly Econ Survey from Phily FED
One of my favorite regular “reads” is the Survey of Professional Forecasters” from the Philadelphia Federal Reserve Bank. The main survey comes out quarterly, with occasional special editions thrown in along the way. The brilliance of the survey is its simplicity — ask a large panel of economic forecasters where they think the economy is going in terms of a handful of key indicators — GDP, unemployment, inflation. Then calculate the median and the range of responses.
The medians are fairly predictable and “sticky” (that is, this quarter’s results look a lot like last quarter’s). However, the interesting stuff is buried in the way the distribution of results change. For example, both the last survey and the current survey find that the largest number of economists think unemployment will average between 7.0% and 7.4% next year (with a median of 7.1%), down somewhat from this year. That’s pretty predictable stuff. However, this year’s distribution is skewed to the low side (a very large number of economists think unemployment will dip this year and end up as low as 7% on average) but next year, the distribution is fairly even, with the bulk of economists forecasting anywhere from 6% to 8%. In short, 2014 is pretty cloudy right now, and that means that hedging your economic bets isn’t a bad idea.
GDP projections are somewhat less rosy. In the previous survey (2nd quarter, 2013), the largest number of economists projected 2013 GDP in the 2% to 3% range, with the median at 2%. Today, that has dropped a full half-percentage point, down to 1.5%. Previously, 2014 was projected at 2.8%, and that has now been downgraded to 2.6%, although as we’ve already established, 2014 is pretty much a guessing game.
Inflation continues to be pretty-much a flat line, with a lot of “1.8%” and “2.0%” on the chart. In short, hardly anyone sees inflation above 2.3% or so in the foreseeable future.
To download the full report, go to http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2013/survq313.cfm
From a small northwestern observatory... 