Archive for the ‘Real Estate’ Category
It’s been a busy month!
Sorry about the lack of posts. Things have been terrifically busy around Greenfield, and I’ve been traveling almost constantly.
Two quick pieces of news, then on to my regularly scheduled prattle. First, the May issue of The Greenfield Advisor just went to press. If you’re not on the e-mailing list, please let me know. We just send out an e-mail once per month with a link to the .pdf file, which you can read on-line or download and print. The newsletter format allows us a little more lattitude than a blog for including graphics, etc.
Second, I’ll be speaking at the Chinese Drywall litigation conference in New Orleans on June 18th. If you’d like more information, either e-mail us here at Greenfield or check out the Litigation Conferences website.
You’ve probably heard today’s jobs report by now — unemployment is up to 9.4% but the rate of job decline is slowing. The stock market is reading this as relatively good news (the 9.4% was already discounted in the market, and the slow-down of decline is good news). In our most recent Greenfield Advisor, we present a more detailed analysis from the Philadelphia FED, along with the implications for real estate. The current consensus thinking is that umemployment will get worse (up to 9.8%), but it will get from here to there slowly, probably peaking in early 2010.
In general, the residential real estate market has probably already bottomed, but we’ll need the credit markets to straighten out before we see strong price growth again. A LOT of personal wealth was wiped out with the market declines, and until this is restored — which could be a few years — we won’t see sales volumes like we saw at the recent peak.
The commercial market is a mixed bag. Some parts have already bottomed, and will slowly recover as the market comes around. Some parts — notably retail (except existing community shopping centers) — will be dark for quite some time.
Anyway, that’s it for today. If you have any questions, don’t hesitate to contact me.
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4/21/09 — From a Seattle Perspective
Ironically, I’m writing this sitting in a hotel room in Baltimore.
As many of you know, the Seattle Post-Intelligencer newspaper is one of this year’s recession casualties. However, many of their staff, with much help from their loyal followers, have created a very good on-line news source for Seattle-ites. We wish it well, along with many more like it around the world.
My good friend, Chuck Wolfe, contributed an editorial today. Whether you’re from Seattle or not, I encourage you to read it here. His comments can be generalized to any community facing a changing development dynamic.
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4/17/09 — GGP Files for Bankruptcy
Argus, on their blog, have a well-written report on the General Growth Properties Chapter 11 filing. I have more than a passing bit of interest in GGP — my Ph.D. dissertation was on REITs, and GGP was one of the companies I analyzed. More importantly, what implications does GGP’s filing have for retail real estate in general?
Is this a passing phenomenon, emblematic of the trough of a recession, or are we facing a structural shift in the American economy away from retail consumption? The former has some implications for GGP’s management (why did you leverage-up so much when you know that consumer recessions are cyclical realities?) as well as for their lenders and bondholders (why did you loan them so much?). The latter potentiality has much deeper, longer-term implications for both GGP as well as their competitors.
Only time will tell, but there is a lot of sentiment among both economists and other public policy types that a return to pre-2008 consumption patterns isn’t necessarily the best thing for America. Naturally, our global trading partners are apoplectic over such an idea — for example, if we quit “consuming” all of China’s stuff, many of their workers are either going to have to go back to farming or their economy is going to have to be more internally self sufficient. In either of those scenarios, China starts looking a lot like the next Japan, only much bigger.
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4/16/09 –This USED to be weekly
A surprisingly large number of entrepreneurs are sitting on the sidelines waiting to see what the Fed’s toxic asset solution will look like. In the spirit of “deja vu all over again”, this look a heck of a lot like 1989/91, when the RTC was coming into existence and a significant number of private firms helped with the workout of bad assets from the Savings and Loan crisis. It was terrifically clear back then — and it’s clear to me now — that this was/is not the sort of thing that can be done internally at a Federal agency (then, the FDIC, now the Treasury). An agency simply doesn’t have the people-power or the entrepreneural expertise to put these assets back to work.
Fortunately, it appears that Geitner “gets it” and the early indications are that they will want to bring some serious players (the Blackstones, Blackrocks, and Goldman Sachs of the world) to the table. From there, it’s anyone’s guess, but my bet is a thousand small private equity firms will get involved to buy, repackage, and redeploy the bad assets.
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4/6/09 — Back in the Office
Was in New Orleans and Baton Rouge last week. The Louisiana economy, which has never been wonderful, none-the-less seems to be handling the current recession better than most. Of course, the whole of the Gulf Coast is still recovering from the disasterous 2005 hurricane season that saw Katrina and Rita — both Category 3 storms at the time of landfall — hit the Louisiana coast within a month of each other. For a synopsis of the real estate research implications of these storms, see my 2007 Journal of Real Estate Literature article with Dr. Sofia Dermisi. You can also get a great synopsis of the economic impacts of these two storms from Louisiana State University’s Geographic Information Center.
According to LSU, about $25 Billion in Federal redevelopment funds have come into that state in the past 3 years, with the bulk of that flowing into the New Orleans area as a result of Katrina. Of course that doesn’t include substantial private settlements, such as the $330 milllion Murphy Oil settlement which Greenfield assisted in negotiating. The accounting for all of these pivate dollar flows will probably never be totalled.
Does that mean Louisiana has recovered from these disasters? Far from it. The state is still in economic turmoil, and current state budget cuts have the potential to eviscerate higher education, further increasing the “brain drain” that Governor Jindal pledged to stop in his campaign.
But, given where Louisiana was, economically, as of about a year ago, one would have expected that the recession would have simply shut down the economy there. Instead, there’s still a wonderful vibrancy in the state. Crops got planted this year, refineries are still in operation, and tourists still flock to the state. Anecdotal reports indicate that building construction has slowed, but not as badly as in some other parts of the country. Louisiana still has economic problems, and like the rest of the country, many of these problems are beyond their direct control. However, they seem to be slowly pulling themselves together.
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3/29/09 — Rolling Bottoms
I got some strange looks last week when I was speaking at a real estate investment group. The “theme” of my talk was on the structural shifts in the economy, which I’ve talked about here as well as in our monthly newsletter. However, when asked about the “bottom” of the recession, I told everyone I thought we were looking at a rolling bottom. The equities market would bottom out first (and we’re probably there right now). The real estate market would bottom second, sometime later this year. The employment/GDP picture would bottom third.
Now, I think I’m on pretty safe ground with the first and the third. The dire predictions of a 5000 DJIA seem to be behind us, and some recent analyses of options market pricing suggests that the market puts less than a 10% probability on a “depression era” type crash. As for the third prediction, I’m relying primarily on the Livingston Forecast, produced by the Philadelphia FED. This semi-annual survey of leading economists gives us both the central tendency of their opinions as well as the degree of consensus around those opinions (more or less a measure of dispersion). Generally, they’re looking at GDP growth and employment bottoming this year, with GDP growth turning positive again by the last quarter and employment turning positive in the first quarter of 2010. (Note: I’m a huge fan of this survey — while they don’t always get it “right” , they get it “less wrong” than other forecasts.)
The audience of real estate professionals and investors was a bit skeptical of the middle component of my forecast. Some skeptics even suggested that real estate should lag the rest of the economy, and won’t rebound until after employment and the GDP bottom out.
Economy.Com, in their recent report Housing in Crisis projection that the Case-Shiller index will continue to decline into the 4th quarter of 2009, bottoming out some 36% lower than the recent peak. While even that would suggest that real estate prices (at least housing) will bottom out before the employment sector, it still seems somewhat on the pessimistic side.
Current evidence suggests the bottom may be nearer than these projections imply. For one, a report this week from CNBC provides three important clues to the near-term. First, the National Association of Realtors reports that 45% of all residential transactions in 2008 were distress sales. That’s a pretty large number of sales, and wringing the distressed market dry is a necessary precursor to a recovery. Anecdotally, this would suggest that the bottom feeders have pretty much found their bottom. Second, much of the U.S. has not been hit as hard as reports indicate — particularly “middle America” which were never truly overbuilt or badly overpriced, and where price-declines have been moderate. Finally, some of the hardest-hit areas — Florida and the Phoenix/Scottsdale area — are receiving significant interest, even in the hard-hit second home market.
This all portends good things for the residential market, but what about commercial? Construction lending is nearly dead today, and permanent financing for all but “sure bets” (or low income housing) is a tough sell. Nonetheless, pricing seems to be accomodating both the increased cap/discount rates as well as forward-looking fundamentals. Some markets will continue to suffer (residential development, big-box retail) while others are already getting some upward pricing pressure (apartments). However, the market seems to have a pretty good consensus pricing on this, we’re not seeing nearly the “distress sale” pricing in commercial assets that seem to have plagued residential, and in general the damage may pretty much have already been realized.
Does this imply buying opportunities? Probably, but only for the most patient investors. If we are seeing a bottom, that doesn’t imply a return to a steep upward slope on prices just yet. Both investment demand and occupancy demand are going to stay low for a while, the former as funds and investors lick their wounds and the latter as corporate America comes to terms with what the post-recession economy will look like.
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3/22/09 — Newsletter this week
The past two weeks have been busier than usual due to a pair of expert-witness trial testimonies in Kansas City. (Congrats to our clients, by the way, who prevailed with flying colors!). This coming week is slightly relaxed, then I’m off to the races again for a couple of weeks, including a trip to Louisiana and some other projects here in Seattle.
In the meantime, our monthly newsletter, The Greenfield Advisor, is slated to come out this month. We had planned to unveil our new trophy property index this month, but now I believe we’ll defer that for a couple of months. This month, our newsletter will summarize our economic forecast for the 1st quarter, with emphasis (of course) on the implications for real estate. I’ll unveil this forecast at a luncheon presentation to Seattle’s “Belden Club” at the Seattle Yacht Club on Tuesday.
The crux of the forecast depends on which of two economic theories you buy into — is this recession “normal” (albeit far deeper and longer than usual) or are we looking at a real structural shift in the economy?
It’s hard to point to specific phenomenon and say, “Aha! We have a structural shift on our hands!” because these events are so rare and ideosyncratic. Recessions are easy to spot, at least in the rear-view mirror. String together a couple of quarters of negative GDP growth, and you have, definitionally, a recession. However, once a recession is over, people go back to their jobs, asset markets make-up for lost time, and generally all of the trend lines are back where they were before the recession began.
There’s a lot to suggest that this time will be different. The obvious one is the housing price bubble — Moody’s Economy.com in a report released last month predicts that the Case-Shiller Index will retreat a total of 36% before it bottoms-out in the 4th quarter of 2009. That’s not only unprecidented, it also implies a massive loss in household wealth which will take many years to re-coup. Unfortunately for many families, time is not on their side, since the crest of the baby-boom — currently in their 50’s — were looking at this accumulated equity as a major source of retirement cushion. Coupled this with the declines in the stock market — household wealth buried in the equity market (either directly or indirectly) was another significant source of retirement cushion.
Some economists think the real clincher is the pay-down in household debt, which began last year and will probably accelerate this year. There’s a double-whammy there — much (most?) of the pay-down is being done by the most credit-worth households, leaving credit card companies seeing a real shift in the aggregate credit-worthiness of their borrowers. This is happeneing at the very time when the credit card companies themselves are seeing significant retrenchment in their lines of credit. Credit card companies are left with no choice but to curtail credit limits, thus forcing less credit-worth households to either pay-down or default. Since many households were already running permanent balances, and using the monthly pay-down as their revolving purchase line, the impact on household consumption is obviously severely negative.
If we ARE in a structural shift, then the impacts will be felt differently in the U.S. and abroad. Domestically, we’ll look a lot more like the 1970’s but without the inflation. The stock market will trade in a narrow band, and without inflation, bonds will look better than equities. Younger workers coming into the job market will see stagnating expectations, with older workers deferring retirement and an economy that won’t sustain significant job growth.
Abroad — Asia and Europe will be basket cases. The more conservative oil countries (Saudi Arabia comes to mind) will fare well enough, but the economies that bet the whole farm on $100 oil (Venezuela comes to mind) will quickly go into downward spirals. Don’t even start talking about sub-Sahara Africa. Japan — already suffering — from an aging population and a stagnant economy, will face political turmoil. China may be the worst hit — they’re more than happy today to loan us whatever money it takes to get the U.S. economy rolling again, since we are the engine that pulls their 8+% GDP growth. The U.S. could face two choices — either fund our domestic recovery with severe devaluation of the dollar (a distinct possibility) or hunker-down with protectionist legislation (anyone read what a good idea this was in the 1930’s?). Either case leaves China headed back to subsistence rice farming. A significant structural shift in the U.S. away from a consumption-driven economy basically puts us and China in the same position anyway, albeit indirectly rather than directly.
I’m personally leaning 60-40 in favor of a believing in a structural shift. The Obama Administration, at its core, believes in stronger domestic-spending by the U.S. government on things like education, health care, and domestic infrastructure. All of this shifts money away from consumption and toward government expenditures. GDP grows, but the mix of components that gets us there is lower consumption (or at least lower growth in consumption), higher growth in government spending, and a dampening of the import/export red ink.
What are the implications for real estate? More on that in my next post.
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3/13/09 — “All the lights are on….”
I’ve been traveling this week, and actually surprised to be in the office today — I was supposed to be in court today testifying in a case. Fortunately, the case went quicker than we’d planned, and I get an “extra” day in my schedule. It’s sunny outside, with mild temperatures. Naturally, that means I’m sitting at my desk. Oh well….
But anyway, I have to share this semi-boring story with you from my travels this week. It’s 100% true, only with the name of the city and the “offending” corporation blotted out. I found it fairly humorous. You may find it terribly boring, but I thought it was emblematic of the current investment malaise.
I was in a major central-time-zone city, far away from Wall Street. I flew in late Sunday night, and checked into a hotel which I’ve frequented in the past. I’d never paid attention to it in the past, but next door to the hotel is an art museum, and next door to IT is a fairly blank, open field of perhaps 4 – 6 acres or so. As I drove past the field late at night, I couldn’t help but notice that there were some odd looking light fixtures out in the field all turned on. The fixtures themselves were fairly decorative, but they were positioned as if they were supposed to illuminate something else — but there was nothing else in the field besides the lights.
The next day, I had a few minutes to kill and went for a walk. Across the street is the very massive, multi-building headquarters for a very major mutual fund company. Full disclosure here — until mid-2008, this mutual fund company had a tidy sum of Ms. K’s money invested. They still have her money, it’s just about 1/3 less than it was a year ago. Anyway, the field, as it turns out, is the “Mutual Fund Company Sculpture Garden”, a part of the art museum paid for by the folks across the street as a gesture of good citizenship.
But… ahem…. where’s the sculpture? The lights are all there, but the supposed sculpture pieces which are to be illuminated by said lights are all gone. What’s even more galling (where’s Al Gore when you need him…), the lights were on at night even though there was nothing there to illuminate.
Seriously. A mutual fund sculpture garden, fully illuminated, with no sculptures. If that’s not emblematic of the current investment world, I don’t know what is.
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3/7/09 — Time Flies When You’re Having Fun
Sorry it’s been so long since I’ve posted. It’s been a terrifically busy few weeks. I will say this, I haven’t been totally incommunicado — I wrote the March issue of The Greenfield Advisor, which you can read for free by visiting here and clicking on “newsletters”. We use the monthly G/A to summarize our thinking on the real estate economy and to look more in-depth at what’s going on around us.
One of my frequent reads is Dr. Glenn Mueller’s Market Cycle Monitor, published quarterly by the folks at Dividend Capital. It’s based off of a journal article he wrote back in the 1990’s in which he observed that the timing of the investment characteristics of commercial real estate could be analyzed in terms of a cycle through four occupancy/supply quadrants: recession, recovery, expansion, and hypersupply. (After hypersupply, a market declines back into recession as supply outstrips demand.)
From that core thought, Dr. Mueller is able to analyze real estate not only nationally, but also by subsector (apartments, suburban office, limited service hotel, etc.) and by geographic region (about two dozen or so major markets).
In markets at equilibrium, this model works very well. Naturally neither it nor any other model is very good at picking up “shocks” to the system. As a result, his model shifted dramatically from third quarter, 2008, to fourth quarter, 2009, the latter of which was just published in February. Today, of course, the model pretty much lumps everything in “recession.
The important point is, that doesn’t at all invalidate Dr. Mueller’s work. Indeed, his model provides an excellent launch point for investors, as we peel back the layers of the empirical onion to determine which sub-sectors and geographic markets will rebound first, and which will be laggerds as a result of oversupply and under-demand.
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2/2/09 — More on the Domino Theory
California is in deep hock. Not only are essential state services (police, for example) going wanting, but they’re now apparantly going to furlough every state employee two days per month. Student aid checks for colleges won’t get mailed out. I can’t imagine this not getting worse before it gets better.
From a real estate development perspective, this has some very long range implications. Except for in-fill and redevelopment, most development requires some public infrastructure — even in cases where the developer is required to pay infrastructure fees or mitigation. A little personal example — about 10 years ago, I was working with a small town in the southeast to get a low-income tax credit housing development put together. EVERYONE was in favor of this. It was a total no-brainer — demand was far in excess of our intended project, the numbers all worked out, etc., etc., etc.
Then we hit the ONE stumbling block. The proposed project, to qualify for various Federal subsidies (necessary to make everything pencil out) would have to tie into the public municipal water system, and proof of this availability would have to go into the application packet. No sweat, I figured, we’ll simply go to the right authorities and get a letter. As it happens, the local municipal water supply system suffered from years of neglect, with leaks and pressure problems. We were sympathetically informed (by a public official who really wanted this project to succeed) that hooking 200 more apartments — or even 100 — to the existing system would cause a catastrophic collapse of the entire system. What would be needed to fix this, we asked? Money, which they didn’t have. (Epilogue — we explored getting some Community Development Block Grant money for the town to get this fixed, and it became quickly clear that we were looking at a very long range problem, well beyond the scope of our abilities to fix.)
That’s what we may have in the very near future in California. Sadly, public infrastructure projects are always the first to go and always the last to return. Admittedly, the White House stimulus bill is infrastructure-oriented, but it’s looking for “shovel-ready” projects. Infrastructure in support of future real estate development rarely meets this criteria.
California’s not alone — it’s just the biggest state, and yes… the only state with a governor who is also a movie star (and married to a Kennedy, to boot). We’re going to see widespread infrastructure issues in coming months.
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And while we’re at it — Builder magazine reports a growing list of major homebuilders who are biting the dust. They estimate that about half of the top firms from the 2005 boom will not make it thru this recession.
From a small northwestern observatory... 