Archive for the ‘Real Estate’ Category
Office Markets Report
Marcus and Millichap just released their Office Markets Report and their Hospitality Report this week. I’ll comment on the former today, and the latter later.
To quote, they believe the recovery will be “…muted and choppy…”, which is a departure from prior recession recoveries. They note that in the second half of this year, the business sector will need to step up to the plate and replace the government as the primary driver of economic recovery. Is the business sector up to the challenge?
Specific to the office sector, the rise in unemployment really masked the overbuilding in the office sector. As a result, while the overall vacancy rate has not yet peaked, the rate of increase in vacancies has slowed and should turn around later this year, with gradual recovery in 2011. Above-average job growth in 2012 and 2013 should fuel the slow recovery in the office sector.
Office investment hit a near-standstill in 2009, but they now see it picking up somewhat. (At Greenfield, we’ve noted that there is a fair argument for bargain hunting, particularly among choice properties which are on the market.) However, credit markets are still tight, keeping a lid on investment activity.
For the full report — which runs 66 pages — you’ll need to visit the Marcus and Millichap website and “join” as a client.
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Small vs. Large?
Over at Jones Lang Lasalle’s blog, Ben Breslau (head of America’s Research) discusses the topic of whether small or large real estate firms will dominate the landscape. His thoughts are good, and I won’t repeat or attempt to refute them. Go read for yourself.
My own thinking is that small firms and large firms are most efficient when they occupy different but “interactive” niches. Larger firms (and yes, we’re talking about JLL here — but also REITs and such) do a great job of aggregating, brokering, and managing real estate when it’s fully developed. Smaller firms, on the other hand, are more nimble and agile at the development, redevelopment, and repositioning. These latter functions have a very “local” component, and smaller entrepreneural firms are typically better at that.
The fly in the ointment is money. The big firms have it, and the small firms generally don’t. Prior to the melt-down, smaller firms could dance around this topic pretty well, since there was risk-capital out there, as well as overly-compliant bankers. In today’s world, where cash is king, the larger firms are the only ones that can afford a seat at the table. Couple this with the fact that, for most sectors, “development” is on the back burner, and we get a scenario where the larger firms will dominate for the time being.
Larger firms would be well advised to ignore the devil on their shoulders telling them that they can be everything to everyone. They are great at raising and managing money and managing stabilized properties. They need to aggresively partner with smaller, agile firms at the front end and back end of the property life-cycle for optimal results.
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Chinese drywall… redux
Judge Eldon Fallon just issued a ruling in the first Bellweather CDW cases (click here for the news article). It completely follows the recent Consumer Products Safety Commission guidelines that the homes need to be stripped back to the studs, and also leaves open the reality that there are other losses such as loss of use and enjoyment. We’ll be examining the potential stigma losses (post-remediation) in the coming weeks.
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all I can say is…. whew…
Twenty years ago, when the Savings and Loan Crisis was all the rage, a significant number of professionals — appraisers, brokers, mortgage lenders — went to jail over mortgage fraud. I’ve been thinking in the back of my mind that the dam would eventually burst on this housing crisis with similar ends. (Indeed, I consulted on one of those prosecutions recently, which resulted quite a few folks going to Federal prison.)
Rachel Dollar, an attorney in Santa Rosa, California, has compiled a great blog which keeps track of this — www.mortgagefraudblog.com. I’ve added a link to this over on the right. The volume of prosecutions listed on her site is utterly amazing. Check it out.
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Chinese drywall
The consumer products safety commission finally issued an interim set of guidelines regarding Chinese Drywall remediation. You can view the entire document as a .pdf at: http://www.cpsc.gov/info/drywall/execsum0410.pdf (Naturally, you’ll need adobe reader to view it, if you don’t have it already — it’s free — visit www.adobe.com.)
The guidance is “interim” for several reasons. Most importantly, issued regarding off-gassing of the drywall itself were studied at Lawrence Berkeley National Lab, while secondary impacts (e.g. — electronics, appliances) are being studied at Sandia National Lab. The latter’s preliminary results won’t be available until this summer.
Nonetheless, even these preliminary guidelines are significant. They call for a complete “stripping” of the drywall and electrical wiring (including breaker systems) back to the studs and then refinishing the home. Coupled with the probable need to replace electronic appliances (e.g. — alarm systems, computers, microwaves) and the expense per home will be huge.
This does not yet even address the question of property values post-remediation. Our experience with other construction defects situations, such as synthetic stucco and moisture intrusion cases, suggests that even after remediation, these homes will be problematic to market.
I’ve inspected several Chinese drywall homes recently, including situations where the homes have been remediated (albeit without authoritative guidance) and situations in which the homes are still affected. Included among the homes I inspected was the home of Sean and Beth Payton — Sean, of course, is the coach of the current Superbowl Champions, the New Orleans Saints.
Cases are currently headed for court in Louisiana and Florida. I’ll keep you posted.
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…and yet another Seattle-centric post
I had the real pleasure of serving as Editor of the Central Puget Sound Real Estate Report for a number of years, a job which I gladly passed off to Matthew Gardner a couple of years ago. This is the 60th year of publication for this fine report. As local real estate markets continue to roil, it serves as a great touchstone for researchers, investors, and others with an interest in this market.
For more information or to subscribe, contact Glenn Crellin at the Washington Center for Real Estate Research, Washington State University, wcrer@wsu.edu, or visit their web site, www.realestatereport.org.
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Dallas Fed Econ Letter
The February issue of the Dallas Fed’s Economic Letter hit my desk this week. The economic research staffs at various Federal Reserve Banks don’t directly compete with one another, but instead take very different slices of the same issues. As such, I try to glance at most of them from time to time. Dallas does a great job at the nuts-and-bolts of what makes up the economy.
The focus this month is on the way the world-wide recession has hit global trade, particularly durable goods. I won’t bore you with the whole thing — look it up yourself at http://www.dallasfed.org. However, they DO tend to assume that the reader is fully versed on how things work, and as such leave out a few details we would normally need to explain to Econ 101.
From an average persons perspective, world trade begins — and ends — with consumption. People want to buy stuff, and so other people somewhere else make it and ship it to them. If demand falls off, so does supply. Since one person’s consumption is another person’s income, a fall-off in demand creates a downward spiral that needs to be kick-started. It’s one reason why the Chinese are so apoplectic right now — they tend to be in the “supply” biz and Americans and Europeans are in the “consumption” biz. Ergo, if things get really bad, Chinese workers have too much spare time on their hands. Very few things frighten the Chinese leadership more than that.
And yes, trade REALLY got hit hard by this recession. On an annualized basis, U.S. imports fell about 15% in 4Q08 and another 35% in 1Q09 (U.S. exports fell by comparable percentages). Those are huge, but mild compare this to Japan’s experience. Remember — Japan is very much a trading hub. They import a huge share of their food and consumption and make a big chunk of their income by exporting stuff. Japan’s exports fell at an annual rate of about 45% in 4Q08 and a whopping 60% in 1Q09. Their imports fell as well, but not as badly because, let’s face it, if they don’t import stuff, they starve. (If the U.S. doesn’t import food, we end up having to eat domestic lettuce rather than Chilean arugula. It’s just not the same.)
Two things are missing from this equation, though, and need to be understood for a fuller appreciation of the trade problems. First, even if demand picks up (or for that matter, never fell off in the first place), world trade was going to get hit badly due to the almost total collapse of trade capital. Banks in free-fall were cutting lines of credit, and since import/export activities are among the riskiest (and require hedging, which was also in a tailspin), those lines got cut badly. If you were a major player, like Boeing or GE, you could finance yourself. However, if you were Joe’s Apple Orchard, you were out of business.
Second, this is interesting to the real estate community because the huge array of trade means a huge array of logistics — transportation, storage, port facilities, and associated properties dedicated to moving and storing stuff. If arugula needs to be imported from Chile, then consider all of the real estate devoted to getting a serving of it from the farm to a salad plate in middle-America.
Until credit is restored, the import-export game will continue to suffer, and the real estate devoted to serving that game will be “on hold”.
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Seattle Mortgage Bankers
I don’t get to visit with these folks as often as I’d like (maybe…. twice in… forever?), but they had a great luncheon meeting yesterday on HUD multi-family and health care finance. As dull as that topic sounds, HUD lenders are almost the only game in town for these sectors, and as such the “deal” volume at HUD has exploded.
Also, unfortunately, the “bad deal” flow has dramatically increased. HUD is seeing a rapid increase bad loans — not the same sort of levels we see in the sub-prime housing market or even in the conventional commercial market, but given the high degree of underwriting on these projects, HUD usually expects a loan-loss problem in the fraction-of-a-percent range. Thus, when loan losses start approaching 2%, it’s time for a lot of serious soul searching.
We had heard some vicious rumors out of the east coast that HUD was “shutting down assisted living lending”. Well, that’s apparently not true. However, there are a few obvious problems in the “New Normal” (I’m increasing stealing that phrase to describe the post-recession financial reality). Based on what I heard yesterday, I think HUD multi-family borrowers are going to see three significant issues:
1. The pipeline is a LOT longer. They haven’t done this on purpose, but the volume of deals coming thru the door at HUD is disproportionately large compared to the number of underwriters. (I saw this in the residential FHA/VA market back in the early 1980’s, when FHA money was the only game in town for start-up homebuyers, and it took longer to process a loan than it did to build the house!)
2. Underwriting criteria will be more subjective, and borrowers with little track record will face significant scrutiny.
3. Terms will be more severe. In the case of assisted living, the LTV went from 90% to 75% (although the Loan-to-Cost is still 90%) and DSCR is now 1.45, up from 1.1. This is mainly reflective of the significant problems in the assisted living market.
On the positive side, some programs are being slightly liberalized (232 program, for example). All in all, though, HUD multi-family borrowers will have a somewhat tougher time in the future than they had in the immediate past. Will this change down the road? Probably. I would expect that eventually we’ll see a return to somewhat easier money, but not until HUD works through the loan-loss problems and the conventional market becomes competitive again.
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Where does everyone live?
It’s an interesting question for a couple of reasons. First, I’m in the real estate analysis biz, and since housing is a b-i-g chunk of real estate, it’s interesting from a purely academic perspective.
Second, though, there is a fair argument that at the apex of the recent housing bubble, we got the mix wrong. Congress, in their infinite (cough… cough….) wisdom, encouraged home ownership for all. It sounds like a noble idea, but one without too much economic sense. Simply put, even though the United States is LARGELY a nation of homeowners, we are not ALL homeowners. There are a lot of important economic reasons for this, w-a-a-a-a-y behond the scope of this blog. That having been said, over a reasonably long period of time, (say, a few years), the supply side of the equation can more-or-less match demand, and an equilibrium of sorts can emerge.
The problem arises when non-economic forces enter into the equation (such as artificial government stimuli) and home ownership is foisted off on market participants who really should be renters. There are plenty of ways to do this — mostly through artificially high levels of liquidity.
It’s hard to say exactly WHEN the recent housing bubble crested, but a quick glance at the Census Bureau’s American Housing Survey as of the end of 2007 is probably pretty close. (Anything closer than that would be pure conjecture anyway). We had 124.4 million housing units in the U.S., both rental and owner-occupied, of which 110.7 million were occupied. The different — a vacancy rate of about 11% — is pretty normal. This number includes new construction and actual vacancies, and there is a fairl amount of economic literature showing that a very low vacancy rate is not efficient in a healthy market, particularly among rental units.
Here’s where life gets interesting. Of the total number of occupied units, 75.6 million were owner-occupied, or about 68%. Many economists now agree that this proportion was too high — that the ownership rate in America was artificially propped-up by Congressional direction toward “easy” mortgage money. Since it was those “easy” borrowers who got in trouble first, one of the important questions being asked now is, “What is the best level of owner-occupancy for the market?” In a free market economy, “best” is what emerges at equilibrium without any external artificial interference.
We don’t really know where the market will level out, but discussions suggest the owner occupancy level should be closer to 60% than 68%. If this is the case, then in a static no-growth model, we would have about 66.4 million occupied dwellings. That’s a shift of about 9.2 million homes. Naturaly, many of these will be absorbed in the rental side of the equation, and that’s what we’ve seen lately — it’s why the fundamentals on new apartments has looked rugged for a while. That ruggedness won’t last long — much if not most new construction built for owner-occupancy is not suitable for rental, at least in the long-term. Luxury homes, luxury condos, and vacation “second” homes are either the wrong housing product or in the wrong place for such an easy shift to be accomodated. As such, we should see the apartment fundamentals get back to normal before the owner-occupied side of the market does.
Our natural “equilibrium” absorbtion of new housing in America is about 1.9 million units per year (about 1/3 rental and about 2/3 owner-occupied), so a big chunk of any excess will be eaten up by new demand as we come out of the recession. Nonetheless, it will take a while for the excess supply to be absorbed and for things to get back to normal in the new housing sector.
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Now where was I?
I’ve been gone an embarrassingly long SIX MONTHS (or about that)… let’s see, what have I been up to?
First, Greenfield is still around and busy. Like so many other firms, we had to do some belt-tightening in early 2009, and that left a lot more stuff on my desk. Ergo, this blog (and a lot of other “important but not urgent” stuff) got left on the back burner.
Second, it’s increasingly hard to write ABOUT the economic turmoil when you’re PART of the economic turmoil — or at least ADVISING clients who are deep in the depths of the front-page issues of the day.
So, I’m back — at least I’m going to TRY to be back, on a regular basis this time. Recent event number one — I’ve now spoken at two different conferences on the Chinese Drywall matter — both legal CLE conferences and both, coincidentally, in New Orleans. For the uninitiated, Chinese Drywall (“CDW”) was imported a few years ago, at the height of the housing boom, when U.S. supplies of drywall simply couldn’t keep up with demand. The shortage was exacerbated by the numerous hurricanes (Katrina, Wilma, etc.) that hit the southeastern U.S.
Now, apparently, CDW contains impurities which are allegedly linked to other problems, both structural (degradation of copper elements) and health/safety. Hundreds of lawsuits have been filed, and the Federal District Court in Louisiana has been assigned oversight under what is known as a “multi-district litigation” or MDL. They hope to conduct bellweather trials in early 2010, although the venue isn’t yet known (probably state court in Florida). Naturally, Greenfield has been involved since the onset with position papers on the economic and valuation implications. For a pdf copy of our most recent white paper on the topic, please click here.
From a small northwestern observatory... 