Archive for the ‘Real Estate’ Category
Merry Christmas to all!
Hope everyone’s having a great holiday season (Christmas here, but with homage to Hanukkah, Kwanza, Winter Solstice, Festivus, and such and so forth….)! Needless to say, 2016 has continued is reign of terror — our condolences go out to the families of Carrie Fisher, George Michael, and a long list of folks who left us w-a-a-a-a-a-y too soon. (We lost three of my favorite space travelers this year — John Glenn, Carrie Fisher, and David Bowie!) This past year suggests the United States may have been founded on an old Native American burial ground….
Ahhh… but enough on that. NAREIT tells me this morning that 2016 was a tough one for REITs in general, but 2017 looks better. (My wife’s Pomeranian could have written THAT press release.) On a somewhat more realistic tone, private equity fund raising is projected to be down among real estate funds in the coming year, which does not portent good things. The Limited appears to be poised for bankruptcy filing, and many (most?) stores that are still open are refusing to accept returns this week. I just wandered into a shopping mall this morning (as I do about twice a year) and noted that The Limited was boarded up. The timing is interesting, since retailers do about 14% of their holiday sales during the week AFTER Christmas.
On another note, S&P CoreLogic’s Case Shiller Index (whew… a mouthful for something started as a student’s MBA project a few years ago…) just announced that house prices from October 2015 to October 2016 rose 5.8%, which isn’t a bad number, and in fact may be a bit high given the present rate of inflation. However, this doesn’t take into account the impact of November’s election, and the likelihood that newly empowered Republicans in Congress will likely tighten capital constraints on major banks. (Ha-Ha-Ha to everyone who thought the GOP was in the pockets of the bankers.) This portends tightening of capital throughout the lending system. Add to this that the dollar is strengthening (the dollar always strengthens in the wake of global uncertainty, irrespective of the source of the uncertainty!) and you get declines both on the supply side and demand side for capital. Couple with this both recent and impending rate hikes at the FED, and one has to wonder what will be a good investment in 2017. (Hint — cash continues to be King.)
Once again, this blog is NOT investment advice, and Greenfield and its senior folks may, from time to time, have investments in things discussed here. It’s just a blog… nothing more….
Well, by for now! May the Force be with you!
Share this:
How many homes do we need?
It is HARD to keep up with a blog when the news seems to move out from under you every day. Now that the election is over, we can get back to normal stuff, like how’s the economy doing and where do we go from here.
Back on the campaign trail, ONE of the presidential candidates (HE will remain nameless) complained about the level of home ownership, which hit the “lowest level” in 50 years or so. Admittedly, that’s true, but also a bit misleading. Since the peak — which led, by the way, to the recent mortgage melt-down, home ownership in America declined from 69.2% (June, 2004) to 62.9%% (June, 2016). That’s not a huge decline, but indicative of just how sensitive our economy is to the level of home ownership. I’ll be the first one to admit (and in my early days, I did more than a bit of research on this) that lots of good things eminate from new home construction and from the home brokerage business. For one, there are a lot of good jobs at stake — from skilled carpentry to mortgage lending and everything in-between. I’ll also note that there have been many studies thru the years focused on the social benefits of home ownership, which add to neighborhood quality, school quality, and even reduced crime levels.
That said, most good things come in “optimum” levels. For example, eating a well balanced diet is superior to either starving or binge eating. Human bodies are optimized for a temperature of 98.6F, and will die if internal temps are sustained even a few degrees on either side. Not enough water and you die, and yet people drown each year from too much. See the connection?
Home ownership would not have hit record levels without lending practices that were neither healthy nor sustainable. We don’t know exactly what the optimum level of home ownership in the U.S. economy might be, since the economy is anything but static. However, right now, the economy seems to be chugging along quite nicely with current home ownership levels. Are we at a sustainable optimum? Perhaps, but only time, and stable economic policies, will give us some empirical data.
Share this:
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.
Share this:
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.
Share this:
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.
Have I written about Thomas Bayes yet?
I had the very real pleasure of speaking at the Appraisal Institute’s annual meeting this past July in Dallas, and indeed I’ve been asked to speak there 3 of the past 4 years — a great group and a very well-done conference. My topic this year was on “Practical Statistics for Practicing Appraisers”, and given the need for continuing education credit, my talk was scheduled for two hours. Unfortunately, two hours is either w-a-a-a-a-a-y too much time, or not nearly enough, depending on what you want to do with it.
About the only thing I could do was touch base on a dozen or so different useful topics, talk about the highs and lows of each, and point the audience in the right direction to get more information. One topic I wish I’d spent more time on was Bayesian Statistics, a little-known and under-appreciated branch of statistical inference which, in fact, has significant every-day impacts on how we analyze (or at least SHOULD analyze) data. For example, let’s say that I want to determine the house price trend in a particular town, and have no idea what that trend looks like. I’ll want to construct some sort of “best linear unbiased estimator” (such as a time-series regression) to help me sort all that out.
However, what if afterwards, in that same town, I’ve already measured the overall property trends, but now I’m told that half of the town is known to be contaminated. Do I still want to use the same estimators, or should my methodology be informed by what is now “prior knowledge” about both the existence of the contamination and the overall price trend in the town?
This use of prior knowledge falls into the category of “Bayesian Statistics”, or “Bayesian Inference”, developed by early-18th century theologian and mathematician Sir Thomas Bayes. In short, Bayes noted that our inferences could be improved by the existence of prior knowledge. What’s more, when we’re conducting a Bayesian investigation, our data gathering is anything but random, since we’re seeking data based on our prior knowledge of the situation. In the contamination matter, I may want to look at price trends for homes in the contaminated neighborhood versus price trends for homes in the non-contaminated neighborhood. Naturally, I’ll only focus my attention on properties that have actually transacted, which leads to a common problem in this sort of analysis where properties that have not transacted (which may contain different information) are not part of the data set.
Unfortunately, a lot of practical appraisal — particularly in the residential setting — is heuristic, and over-reliance on “prior knowledge” can lead to a level of sloppiness. That said, a rigorous application of Bayes’ principles, and careful analytical techniques, can allow appraisers to actually develop statistical measures for their valuation work.
21st Century Valuation Problems
Did everyone have a great holiday? It’s been nearly 3 months since I’ve darkened the door of this blog. Between the holiday season, a couple of very interesting conferences (more on those later) and heading for warmer climates for the winter (MUCH more on that later!), I’ve been terrifically distracted since November.
The trigger to get me off my duff and writing again was a complex Federal Court trial in Missouri last week. Yes, I was the testifying expert, and yes, my clients prevailed, but that’s not exactly the point. The point is WHY I was testifying and WHY my clients ultimately prevailed, at least in my humble observation. The case was a class action concerning the value of a fiber optic telecommunications transmission easement. For a variety of reasons, this case only concerned 789 miles of the easement crossing about 3,250 properties, but the very important lessons learned from this case apply broadly to a variety of modern-day corridor easements.
Earlier in the litigation, the class action had been certified and the Court had held that the responsible party did not have the right to enjoy the easement without compensating the property owners. The court had held that the defendants had unjustly enriched themselves, and so this trial was narrowly focused on compensation. That compensation, it was held, would be the fair market value of the easement, and that’s where Greenfield came in.
The defendants proffered a valuation theory called “across the fence”, or “ATF” for short. ATF models were developed many years ago for easements like railroads and power lines when data on such easements were difficult to come by, and when the change in highest-and-best-use of the property resulting from the easement was minimal, at best. The ATF theory basically says that the value of the easement is equal to the value of the land taken (usually farmland or forests) plus an “enhancement factor” to equate the more valuable use of the railroad or power line easement. This enhancement factor would range from 1X for an easement which was no more valuable than the surrounding land to 10X or more for a very valuable easement. Note that the enhancement factor can be a matter of judgment on the part of the appraiser. It is supposed to be determined by looking at sales or leases similar easements and similar surrounding properties, but with a dearth of data, the enhancement factor was often just a matter of conjecture.
In addition, ATF valuation required individualized “before-and-after” appraisals of every affected property. In testimony in Missouri last week, the defendants’ appraiser acknowledged that each “before-and-after” appraisal would cost about $10,000, more or less. Given that there are 3,250 properties affected by this one easement, that translates into $32.5 million in appraisal fees. Ahem…..
In addition, the defendants’ appraiser applied a fractional enhancement factor, which he basically simply made up with no data or analysis to support it. He said that the land devoted to a fiber optic cable telecommunications easement was worth 25% of the value of surrounding pasture and grazing land. Again, ahem….
Greenfield was called in because modern valuation problems call for modern solutions. In 2002, the U.S. Fish and Wildlife Service (“FWS”) was faced with the challenge of determining the fair market value of fiber optic cable easements in National Marine Sanctuaries. Specifically, there were two such easements in the Olympic Marine Sanctuary in Washington State (one each headed to Japan and Alaska) and one in New England. Faced with the likelihood that Federal land would be used for such easements in the future, and the mandate that private users of public property pay fair market value for such uses, the U.S. Government undertook an extensive review of payments for similar easements, and found that prices ranged from $40,000 per mile to $100,000 per mile. (In the Missouri case, the defendants’ appraiser, applying pastureland values, a fractional enhancement factor, and a number of other adjustments, arrived at a value of $3.44 per mile. Ahem, yet again…..)
Shortly after the FWS report, Greenfield undertook our own analysis of telecommunications corridor easement transactions across the U.S. We gathered over 1,000 transactions dating back to the early 1970’s, with a particular focus on easements where both the grantor and grantee were operating on a level playing field (i.e. — telecom companies versus railroads). Our findings were solidly supported. Telecommunications easements are typically valued in America using corridor theory models. The values of the easements are unrelated to the values of the surrounding land (thus relegating ATF models to the history books). Corridor easements should (and indeed must) be valued with simple per-foot or per-mile data in a straightforward, easily understood, 21st century model.
The jury in Missouri deliberated about as long as it took to pick a fore-person to affirm the efficacy of corridor valuation models. The evidence and testimony could not have been more starkly different from the two sides.
The downside? I would love to have had a piece of that $32.5 million project they proposed.
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.
Housing starts, you say?
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.
From a small northwestern observatory... 