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Damage to Reputation/Brand

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In my last post, I commented about AON’s Global Risk Management Survey.  I want to continue on that theme today, and continue to compliment the great folks at AON for a super job.

Number one on their list was Damage to Reputation / Brand.  The open the chapter on that with a wonderful story, which I will briefly retell here (with full attribution).  A worker in China purchased an electronic device and while charging it, the device caught fire.  He videotaped the incident and uploaded it to the internet.  The clip was soon viewed millions of times around the world.  Other customers reported similar defects.  Even though less than 0.1% of the devices sold were defected, widespread panic followed.  the company was forced to issue a world-wide global recall costing an estimated $5 Billion.  Ironically, this tech company became a victim of the tech revolution.

AON notes that widespread fake news, the lack of fact checkers on social media, and the political cross-fire following the US 2016 elections all have risk for brand damage.  AON estimates that there is an 80% chance a company could lose at least 20% of its equity value in a month over a 5 year period doe to a reputation crisis.

Eight years earlier (2009), Damage to Brand / Reputation was ranked number 6 among risks by respondents.  Today it is number one.  Reputation / Brand events often arrive with little or no warning, to cite the survey, and organizations are forced to respond quickiily.  As such, it is critical that companies have comprehensive reputation risk control strategies in place.  Such strategies include meticulous preparation and executive training, to help maximize the probability of recovery.

Thanks again to the good folks at AON for providing this information.

Written by johnkilpatrick

April 9, 2018 at 3:29 pm

AON’s Global Risk Management Survey

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The good folks at AON just shared with me their very detailed Global Risk Management survey for year-end 2017.  It’s a terrific document, very thoroughly researched, and I commend them for the effort they put into this.  (Full disclosure – neither I nor Greenfield, nor any of its affiliates, have any interest in AON.).  This is the sort of study that should be on the desk of every CEO who has globally-affected interests, and certainly real estate and private equity fall into that category.

The document is chock-full of good stuff, and I’ll revisit this in future posts.  Two interesting comments, however, hit me right up front.  First, and I’ll simply quote from the survey, “…developed nations, which were traditionally associated with political stability, are becoming new sources of volatility and uncertainty that worry businesses…”. Of course, they’re taking about the U.S. and its misguided trade war, BREXIT, the elections in Northern Europe, and the impeachment of the South Korean president.

Second, what are the top concerns for global businesses and wealthy families?  The list may come as a surprise to those who don’t follow these important sectors, but these certainly make sense in today’s climate:

  1. Damage to reputation/brand
  2. Economic slowdown / slow recovery
  3. Increasing competition
  4. Regulatory / legislative changes
  5. Cyber crime / hacking / viruses / malicious codes
  6. Failure to innovate / meet customer needs
  7. Failure to attract or retain top talent
  8. Business interruption
  9. Political risk / uncertainties
  10. Third party liability

I can tell you Greenfield is deadly serious about these issues.  You should be, too.

Written by johnkilpatrick

April 4, 2018 at 11:51 am

Extraordinary women in aviation

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It’s women’s history month, and as an avid pilot, I’m terrifically impressed with the women I’ve met in the front seats of airplanes of all stripes.  With so many famous male flyers (Yeager, Glenn, Lindbergh, Doolittle, Curtis, the Wright Bros), we lose sight of the fact that women have been there from the beginning.  Here are just a few, off the top of my head:

In 1910, Blanche Stuart Scott was the first woman to fly solo, and later became a test pilot for Martin Aviation.  She was also the second woman (also in 1910) to drive across the U.S., and the first to drive east-to-west (NYC to San Francisco).  She went on to become a Hollywood script writer.  In 1948, Chuck Yeager took her on a ride in a Lockheed TF-80C trainer, making her the first woman to ride a jet.

In 1911, Harriet Quimby became the first woman to earn a pilots license in the U.S., and in 1912 became the first woman to fly the English Channel.  As a side venture (!) she wrote screenplays and seven of her movies were directed by the famed D.W. Griffith.

Katherine Stinson became the 4th woman to earn a U.S. pilots license in 1912, and became the first woman to be licensed to carry the U.S. airmail.  She became one of the first female flight instructors shortly thereafter, and set the aviation speed record in 1917 on a flight from San Diego to San Francisco.

Bessie Coleman was the first African American aviator in 1922. The daughter of sharecroppers, she fell in love with aviation, but no American flight school would give her the time of day, both because of her gender and her race. She taught herself French, and went to France to enroll in a flying school there. Returning to the U.S., she became famous in the barnstorming circuit, but tragically died a the age of 33, in 1926, rehersing for a show.

Beryl Markham was one of the first African bush pilots in the 1920’s and 30’s, and in 1936 became the first person — male or female — to fly the Atlantic from east to west. (Lindbergh flew from west to east. Markham’s passage was the more difficult due to prevailing eastbound winds.)

Jackie Cochran was the first woman to break the sound barrier in 1953.  She’d founded the WASPs in World War II, and still holds more aviation records than any other pilot, male or female.  She was the first woman to pilot a bomber across the Atlantic (in WW-2) and after the war, was commissioned a Colonel in the newly formed U.S. Air Force reserves, making her the first woman pilot in the USAF.

Jackie Cochran’s co-founder was the somewhat lesser known Nancy Harkness Love, who founded the Women’s Auxillary Ferrying Squadron (actually, several squadrons) that was eventually merged with Cochran’s group to form the WASPs.  Love was certified on 19 different military aircraft, including the P-51 Mustang.  She was eventually commissioned a Lieutenant Colonel in the Air Force Reserves.

So, there’s our history lesson for today, folks.

 

 

 

Written by johnkilpatrick

March 13, 2018 at 11:04 am

So, folks, where are we going to live?

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Much has been said recently about housing starts being back up to where they were before the recession.  If this is the case, then why does Seattle, for example, have a 0.9 month supply of homes for sale?  As usual, the details are much more complicated than the headlines.

Prior to the “meltdown” (let’s say, 2004 – 2007), housing starts in the U.S. averaged about 1.865 million units per year.  Now, few analysts disagree that this was too many, but figuring out the right number is harder than one might think.  In 2008, the number dipped down to about 905,000, and hit a low of 583,000 in 2009.  Since then, the annual starts have trended up.  However, in 2016, we still were only at 1.207 million.  Of that, only 751,000 were single family units, compared to an average of 1.4 million single family homes per year in the 2004-2007 period.  Hence, nationally, we’re building about half as many homes as we were 10 years ago.

From 2004-2007, we started 7.462 million dwelling units in America, but in the past four years we’ve only started a total of about 4.432 million (all varieties).  That’s a shrinkage of about 3 million new homes, and most of that shrinkage is in the single family category.

One might posit that the decline in home ownership rates should have freed up some demand, and some of that’s true.  The home ownership rate in America peaked at 69% during the run-up to the recession, and dropped steadily after the melt-down, to a low of 62.9% in the 2nd quarter 2016.  As of the end of the 3rd quarter this year, it sits at 63.9%, or about 5 points below the peak of a decade ago.

There are about 76.146 million owner-occupied housing units in the U.S. today.  A five-percent swing in this number is a little over 3.5 million houses.  In short, we’ve now “absorbed” the decline in starts, and structurally we’re more-or-less “over” the recession, and we’re simply not building enough new homes to meet the demand.

Several consequences came out of the melt-down.  First, developing land takes quite a few years — five or more in the “hot” areas like Seattle, where land has to go thru a permitting and entitlement phase long before a house can be built.  All of this requires land planners, both in the private sector and downtown at the county or city hall. Many of these folks lost their jobs during the 2008-09 period, and indeed some county and city planning offices were eviscerated.  New home development frequently requires a significant outlay in public infrastructure, including schools, roads, and utilities.  Worse than that, many construction trades were gutted, with no replacements available.   Financing for acquisition, development, and construction is now problematic (although, arguably, it was too liberal pre-recession).

As such, it’s a sellers market for homes, and in hot markets, buyers compete by bidding up prices beyond reasonable levels.  Some pundits are nervous, and with good reason.

(Thanks to the U.S. Census Bureau for the October 31 data.)

Written by johnkilpatrick

December 11, 2017 at 11:29 am

Large, circular storms

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The first time I sailed in the Caribbean (on a 42′ Morgan Sloop), I asked the Captain about “hurricanes”.  He said that was a verboten word in that part of the world, and I should simply refer to “large circular storms”.  So, as many of you know, Key West and the waters of the Carib and the Gulf are my adopted second home (although, truth be known, my father was born in Florida and commanded a ship out of Key West back in the 1940’s… but I digress…).  Like everyone, my eyes have been glued to the Weather Channel of late, and our thoughts and prayers go out to everyone harmed by the storms that have ravaged the southeast and our neighbors with whom we share those magical waters.  I also want to thank everyone who has expressed concern over our potential property damages, but let me say that it’s only property, and it’s well insured… but more about this later.

By the way, we’ve been in touch with several folks who weathered the storm in KW.  According to one report, at least one bar on Duval Street was re-opened and packed with locals by Monday morning.  Of course, economically, the locals need to restore the never-ending flood of tourist dollars, otherwise they’re just swapping dollars among themselves.

A few factoids about the Keys to help color in the lines.  The Florida Keys are an archipelago of about 1700 (!) islands starting about 15 miles south of Miami and running generally southwestward.  Key West (which is actually an aberration of the Spanish “Caya Hueso”, which means Island of Bones) is the westernmost point which is accessible by car, thanks to Henry Flagler and his railroad/tourist empire.  In actuality, the Keys officially include the Dry Tortugas, about 60 miles to the west of KW.  KW is just barely in the Eastern time zone, and the Dry Tortugas observe Central time.  KW is closer to Havana than it is to Miami.

By the way, the since KW is in the Western edge of the Eastern time zone, it means that the sunsets are slightly later there than back in Miami.  This provides for an extended happy hour out on Mallory Square, on the west side of the island, every day at sunset.  It also means that sunrise is slightly delayed, allowing for a few extra minutes of sleep before the obligatory morning dog-walk down to the pier to watch the sunrise in the east.

Oh, and about those 1500 islands — only about 30 are actually inhabited.  The remainder are wonderful nature preserves.  Geologically, the Keys are actually three different expanses.  The upper keys (Elliott Key, Key Largo) are remnants of ancient coral reefs.  The middle keys (down to Big Pine Key) are parts of the ancient Florida Plateau that stretched from Miami to the Dry Tortugas some 130,000 years ago.  At that time, the water levels rose about 25 feet, submerging all of this plateau except for the islands which remain.  Finally, the lower keys (Key West, for example) are sandy-type accumulations of limestone grains produced by plants and native marine organisms.

The climate is sub-tropical, and the foliage is more Caribbean than the rest of Florida.  Monroe County is the only frost-free zone in America.  There are three ways to get to Key West — by plane (short hops from Atlanta, Miami, and other nearby airports), by boat, or by car.  US Highway 1 stretches from Florida City (just south of Miami) to KW.  With the exception of a slight detour available between Florida City and Key Largo (Card Sound Road), every bit of vehicular traffic has to pass down this corridor.  Additionally, all the water for the keys comes from the mainland via the Aqueduct Authority, which has built on an original infrastructure installed by the Navy back in the 1930’s.  To put this in perspective, Mile Marker 0 on US-1 is at the corner of Truman and Simonton in downtown KW.  Key Largo is at mile marker 102, and Florida City is at MM-122.  Hence, everything that comes and goes thru the keys travels down this narrow path.  While much of the original KW was built via shipping and rail, neither of these options currently exists.   You truck it in, or it doesn’t come.

I had the opportunity to view aerial photos of KW taken by NOAA yesterday afternoon.  There appears to be little structural damage to our house or, for that matter, most of the island.  Indeed, even one nearby trailer park I viewed looked mostly intact.  Apparently, the eye of the storm passed thru the gap south of Marathon where the famous 7-Mile Bridge is located (featured in countless films, such as the Bond film License to Kill and Arnold Schwarzenegger’s True Lies).  According to reports, the 7-Mile Bridge and all of the bridges to the west are intact.  Since the worst of the wind is on the east-north-east of the eye of the storm, it comes as no surprise that the worst damage occurred to the east of the bridge, including the cities of Marathon, Islamorado, and Key Largo.  As you can guess, the damage to the east will have to be repaired before the western islands can be reached, or before tourism can return.

More as we hear it….

 

Written by johnkilpatrick

September 12, 2017 at 9:00 am

PWC’s Quarterly CRE Review

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PwC’s quarterly commercial real estate review just hit my desk.  I have a particular affinity for this survey-based review — it was founded about 30 years ago by Peter Korpacz, MAI, an alumni of the Real Estate Counseling Group of America and an acquaintance of mine.  PwC took it over a few years ago, and have done wonderfully with it.

The entire report, at 106 pages, is far too robust for a simple summary.  However, a key metric is the review of capitalization rate changes by property type (e.g. — warehouse, apartments) and offices by region (e.g. — Manhattan, DC, San Francisco).  A cap rate, of course, is the ratio of a property’s net operating income to its sales price.  Declining cap rates on a broad front can indicate the onset of a recession, but differential cap rate changes (rising in one market, declining in another) may suggest differing sector views by real estate investors.  By property type, this is what we appear to have today.

For example, warehouse cap rates currently average 5.27% nationally, but this represents a decline by 10 basis points just in the 2nd quarter.  Generally, this points to a favorable view of warehouses by investors — they’re willing to pay a bit more for each dollar of prospective income.  Conversely, offices in the central business district saw increases of 13 basis points, suggesting a softening of CBD office prospects.

Across various regions of the country, offices in general (both CBD and others) showed either no change or declines in cap rates, with the biggest cap rate declines occurring in Phoenix and Philadelphia.  Only Denver and Atlanta showed increases in office cap rates.

Overall, investors expect cap rates to hold steady or increase over the coming six months.  Indeed, only among CBD offices and power centers was there any sentiment for cap rate decreases.  100% of investors expect net lease properties to show cap rate increases in the coming 6 months, which portends value softening in that property sector.

We’ve used the nasty “R” word (ahem… “recession”) on occasion here at Greenfield, and PwC seems to agree with us.  They expect that the office sector will peak by the end of this year, and a large number of metro areas are expected to move into contraction during 2018 and 2019.  They expect 61% of cities in their survey to show retail property recession by the end of this year, but with some limited exceptions (Austin and Charleston).

Industrial properties, on the other hand, should fare well, with only Houston headed for recession during 2017.  They also expect 15 other markets, including Los Angeles and Atlanta, to face industrial recession by the end of this year.  Further, a large supply of industrial property is expected to come to market during the near term, suggesting an industrial over-supply for the next four years.

One bright spot is multi-family, which continues to “benefit from the unaffordability of single family homes”.  Two markets need to play catch-up (Charlotte and Denver) but other markets should fare well, with 40% of markets headed for expansion.

Demand & Supply

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I just read a nice piece by Deloitte’s Robert T. O’Brien, their Global and U.S. Real Estate and Construction Leader, titled Commercial Real Estate Outlook 2017.  It’s far too interesting and too packed with info to summarize here, so have a glance for yourself.  However, I’ll point out a couple of things I believe stand out in his analysis.

First, homebuilders are under pressure due to what he calls the “demand-supply dichotomy.”  I’ve been concerned about this for a while.  During the recession — which admittedly was several years ago — big chunks of the housing infrastructure collapsed, including acquisition-development-construction (ADC) finance, skilled labor, permanent finance securitization, and local government permitting capabilities.  As such, we now actually have a bit of a housing shortage in hot areas (think “Seattle”).  Mr. O’Brien worries that homebuilders’ financial projections may be dampened.  I’m a bit more concerned with the upward price pressure on houses, which could put us back in a bubble situation.  Deloitte believes interest rates hikes by the FED may temper some of the demand side.

He believes private equity fundraising will decline this year, “…as managers focus on deploying existing funds.”  He believes managers will face increasing competition looking for good investments.  I would add that new managers or managers with a new story to tell will find 2017 a bit easier for fundraising than 2016.

O’Brien also sees slowing in the commercial construction arena, and so slugging financial performance for engineering and construction firms.  REITs should do well, though, albeit with continued portfolio repositioning.

Deloitte sees GDP growing about 2.5% this year and unemployment below 5%, which is in line with metrics we see here at Greenfield.  They also see several things disrupting the economy both this year and in out years.  The “collaborative economy” will certainly have implications for the way new start-ups use and lease commercial real estate.  The internet is rapidly disintermediating brokerage and leasing services, with implications for traditional brokers.  A shortage of talent in the STEM area and other shifts in the way millennials view the workplace have implications for location strategies.  Speed and mode of retail delivery — the “last mile” disruptions of Amazon — are still being sorted out.