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Finance and economics generally focused on real estate

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Back again!

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I’ve been gone for over a month, but hopefully not forgotten!  One of the big stories around Greenfield has been the continues soft-launch of our REIT Fund-of-Funds, ACCRE.  We’re rolling this out as a subscription-based newsletter, rather than an actual managed fund.  However, non-subscribers wishing to follow our progress can simply tune into the blog itself, ACCRE.Com, and follow our periodic posts, but without access to the actual fund itself:

www.accre.com/2018/11/fund-status-for-october-2018/

 

Written by johnkilpatrick

November 7, 2018 at 8:09 am

Why things suck, part deux

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The Bureau of Labor Statistics just released the 94th consecutive positive monthly jobs report.  This is nearly a record, and should be great news.  Indeed, the zeitgeist among the workforce should be euphoric.  Should be, anyway….

Of course, the devil’s in the details, and our good friends at Seeking Alpha, normally a bullish lot, took the liberty of dismembering the trends and statistics, and have found some trouble right here in River City (and everywhere else, for that matter).  For sure, there has been nattering from both the learned and les gens ordinaires about things like “underemployment” and “wage growth”.  Indeed, my own earlier column, Why Things Suck, demonstrated that for the last 40+ years, wages in America have not kept up with the cost of living, and the cumulative differential is now huge.  In other words, folks are getting jobs, but those jobs really suck.

The folks at Seeking Alpha did something more interesting, though.  They looked at cycles and trends, and particularly those relative to the onset of recessions.  (Note that I looked at this same trend with respect to the Yield Curve back in late August.)  In an article on Thursday titled “Employment: It’s the Trend That Matters”, Lance Roberts did a great job of dismembering the current news into the key and critical trends.

He starts off with giving the devil his due — the seasonally adjusted trend line in employment is sharply upward.  However, when you take a peek at some of the underlying issues, you come away with some very different information.  Workforce participation stinks, in no small measure due to the fact that over-55 workers are staying in the workforce, to an extent crowding out younger workers.  He notes that for many of these older workers, retirement is simply not an option today.  Many of these folks will simply have to work until they die.

More to the point, though, the actual rate of change in employment is trending downward, both in the long-term and the short-term.  Roberts goes back several decades and finds that the general employment trend in America, as a rate-of-change percentage, is downward.

 

saupload_Employment-Annual-Change-071018
Courtesy Lance Roberts, Real Investment Advice

 

In short, when you take a simple linear trend over the last 3/4 of a century, back as far as we’ve been keeping good data, the suggestion is that our workforce growth is really declining.  This has some broader implications for a maturing economy with a lot of upscale opportunities, a lot of service-oriented jobs, and not much in the middle.

Of more immediate concern, though, the jobs numbers, while positive, are trending in a way that suggests a recession is not far off in the future.  Recall in my article about the Yield Curve I noted that this market looked a lot like some other trends we’d seen before.  Roberts doubles down on that with employment numbers.

 

saupload_Employment-12-month-Average-NSA-091218
Courtesy Lance Roberts, Real Investment Advice

 

In the end, Roberts issues an homage to those of us who watch yields more closely than employment, noting that one or the other — yields or employment — will soon break.  His question is, which first?

Written by johnkilpatrick

September 15, 2018 at 9:06 am

Top of the residential market?

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Ever wonder where the top of the residential market is? A small part of our practice at Greenfield over the years has been consulting on really top-tier, “trophy” real estate.  Valuing these properties is part art, part science, and everyone in that rarified realm is always trying to figure out where the top might be.

It appears that some of the very top of this market is softening, according to an article yesterday on CNBC.com by Robert Frank, their wealth editor.  As it happens, tax law changes and a pull-back by foreign investors (particularly from China) means that the very top tier of properties have seen pricing reductions this summer.  Indeed, the top 500 homes on the market saw total price reductions of $1 Billion of late.

For example, the Ziff family estate in Florida was previously on the market for $195 million.  After two price reductions in a year, it is now down to $138 million, a reduction of over a quarter in its offer price, and still with no takers.  Sean Elliott, one of the leading brokers for mansions such as this, notes that there are no comparable transactions to go on.  Indeed, often such properties have to test the market first, and then adjust prices accordingly.

The article makes good reading, even if you’re not presently in the market for a $100 million beach house:  The $1 billion price cut: Luxury real estate gets slashed.

Written by johnkilpatrick

September 1, 2018 at 10:44 am

REITs vs Open Ended Funds

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There is a great article in the current edition of REIT Magazine, by Michele Chandler, celebrating the 25th anniversary of the creation of REITs in Canada.  Ms. Chandler does a great job explaining why Canada has a REIT system in the first place, and why Canada’s REITs came into being in 1993.

In short, Canada’s commercial real estate market collapsed in 1993, and open-ended funds were flooded with investors redeeming shares.  The funds quickly appealed to the government which allowed them to suspend redemption.  This, of course, led to liquidity problems for investors.  The solution was to turn those funds into close-end REITs which would then be listed on the Toronto Stock Exchange.  Investors could sell their shares on the exchange to gain liquidity.  Today, the exchange has 38 Canadian REITs with total capitalization of about C$57.7 Billion as of the end of 2017.

This article illustrates one of the subtle but important benefits of REITs as opposed to a private equity fund or an open-ended fund — liquidity without having to sell off the underlying assets in a down market.

 

Written by johnkilpatrick

August 29, 2018 at 10:23 am

Yield Curve Inverting

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There has been a good bit said lately about the yield curve inverting.  Historically, so they say, an inverted yield curve forecasts a recession.  I decided to explore that concept a bit.  Like all generalizations, this may have a grain of truth in it, but there is more than meets the eye.

By the way, this topic has been explored in greater depth, and with more granular data, by economists who actually focus on this topic.  (Just as a reminder, my area is Real Estate Securities).   If you are reading this with an eye to fleshing out some masters thesis somewhere, I’d suggest you keep looking for authorities.  That said, the FED leadership is meeting in Jackson Hole this weekend, and you can bet this is on the agenda.

Speaking of the FED, I grabbed a bit of data from them — monthly 10 year treasuries and 6 month bills back to December, 1958.  I actually explored some other time periods and even daily data, but this was the best pairing I could get in short order.  Anyway, the “shape” of the yield curve is essentially the gap between these longer term rates and the shorter term ones.  For a normal yield curve, the long bonds (10 year) should be about 2 to 4 percentage points above the short term yields.  That makes some intuitive sense — in “good times”, borrowers are willing to pay more to borrow longer term, and investors are willing to accept less return for shorter term loans.  When borrowers sense that there may be trouble ahead, they are less willing to borrow long-term, and hence the demand for long term money falls relative to short-term stuff.  When things go really topsy-turvy, the short-term money is actually more expensive than the longer term, because borrowers simply don’t want to borrow long-term at all.  The topic is w-a-a-a-a-y more complex than this, but hopefully you get the picture.

Speaking of pictures, I then took the difference between these two yields and graphed it.  Along with that, I graphed the incidence of all of the recessions since 1958.  Here’s what I got:

Yield Curve Inverting

Data courtesy Federal Reserve, graphic (c) Greenfield Advisors, Inc.

Not EVERY inversion was followed immediately by a recession. although almost all were.  The only exception was in 1966.  That one is generally considered a “false positive” because it was triggered not by general economic trends but by a short-term reduction in Federal spending.

More interestingly, though, is the long-term bull market of the 1980’s, which was followed by the recession of 1991.  That long-term market followed the double-dip recessions of 1980 and 81, which are often considered one long recession.  (I know — I was there.)  More to the point, the recession of 1991 was not following a yield curve inversion.  Indeed, the yield curve spread, measured on a monthly basis, never got below 0.38%, in November, 1989.  Also, notably, the behavior of the yield curve over the course of the 1980’s mimics what we’ve been seeing of late.

There is also an argument that rates are behaving more like the 1992-2000 period, and there is some rationale for that.  If that’s the case, then the question is whether the yield curve recovers from here or takes a swan dive below zero. If the former, then we may have 2 years or so of continued positive GDP. If the latter, then we’re headed for a rough patch.

The yield curve spread ended July at 0.78%, and closed yesterday down at 0.59%. Again, this is the data the FED leadership is discussing in Jackson Hole.  We’ll keep you posted.

Written by johnkilpatrick

August 24, 2018 at 1:31 pm

WSJ Property Report

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Three things caught my eye in the Wall Street Journal’s Property Report this morning. The first two were a positive note about Home Depot — which is doing a land-office business — and a related note about the aging of American homes.  Let’s start with the second point first.

The National Association of Homebuilders reports that the median age of a home in America is now 37 years, up from 31 years just a decade ago.  Mathematically, that’s an extraordinary increase.  It basically means that very few new homes have entered the housing stock in the past 10 years, and almost no homes have been torn down or in some way converted to some other use.  That’s the point NAHB is trying to make.  Our aging housing stock is a drag on the economy.  People who might have been employed in higher wage construction jobs are now serving coffee at Starbucks.  This ultimately means that our flat-line inflation in America has, to at least some degree, been achieved on the backs of stagnating wages.

Of course, this means good things for home re-hab shops like Home Depot.  If you’re house is getting older, you have two choices.  You can sell it and buy a new one (making the NAHB happy) or you can buy a can of paint or some new kitchen cabinets at Home Depot.  (Full disclosure — the folks at my local Home Depot know me by name.)

As for the third point, while wage stagnation is decidedly affecting the middle class, there is no such problem in the luxury class.  Belmond Hotels, owners of some of the world’s premier hotels, are considering buy-out offers.  Financially, this suggests they think we may be at the top of a cycle, and it’s hard to imagine that they could wring any more profits out of their properties than they do already.  Ergo, it may be time for them to cash in, and rumor has it some sovereign wealth funds are offering top dollar.  (Full disclosure — Belmond owns the Charleston Place in Charleston, SC, where I spend every New Years.  It is one of my favorite hotels in the world.)

By the way, Belmond is one of those fascinating stories that underscores the globalization of commerce.  Belmond was actually founded with the acquisition of the Hotel Cipriani in Venice, Italy.  It owns the Orient Express, which is run out of its Paris Office.  Corporate offices are in London, and today owns properties in 22 countries, including the historic 21 Club in New York and the Copacabana in Rio.  The legal headquarters, however, are in Hamilton, Bermuda, and the stock trades on the NYSE.  Go figure….

Written by johnkilpatrick

August 15, 2018 at 8:34 am

Phily Fed Survey: More of the Same

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The quarterly survey of forecasters, produced by the Philadelphia FED, is one of my regular touchstones for where the economy is headed.  One caveat — in “steady” times, they tend to be pretty accurate.  They miss black swan events, but so do everyone.

That said, they are look at annualized GDP growth of about 3% in the coming quarter and about 2.6% in the following quarter.  Job growth will decline into 2019, adding about 195,000 jobs per month this year, declining to about 165,000 next year.  However, unemployment will remain pretty much where it is.  Inflation continues to be a non-event.  These numbers pretty much make sense, if you consider there is a pretty strong tail wind.  We’ve been on a positive trend since about 2010, and in the absense of systemic shocks to the system, why worry?

I’ve noted in the past that this group of forecasters tend to be fairly… ahhh, I hate to use the word lazy, but what the heck.  They mostly work for banks and such, and so have a bit of a bias in favor of good times ahead.  That’s one of the reasons they tend to miss negative signals.  I’ve noted here in past posts that the yield curve is approaching a dangerous inverted shape (for the uninitiated, this isn’t just reading tea leaves — it tells us a lot about the expectations of borrowers and lenders).  The trade war only gets worse, and we’re seeing increasing disruptions in agriculture and manufacturing here in the U.S. as a result.  I’m not trying to be Chicken Little, but this is certainly influencing my thinking.

Written by johnkilpatrick

August 12, 2018 at 10:44 am

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