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Renaissance at the Aspen Institute
Other than a few of the permanent pages (over on the right of your screen), I’ve let this blog die on the vine this year. It’s actually been a surprisingly busy year, so busy that I’ve not had the time to write much! My lack of intellectual output on this blog is mirrored in my other writings, and all of that needs to change.
Lynnda and I spent this past weekend at the Aspen Institute, which hosted one of the regional Renaissance Weekends. I spoke on a couple of topics, most notably on real estate (of course). I wanted to share with you a bit of what I had to say.
First, let me lay the groundwork. Renaissance Weekend is now in it’s 35th year, and has held about 125 such gatherings. It is a non-partisan, invitation-only gathering of thought leaders from a variety of fields (government, science, business, show business, astronauts, authors, Nobel Laureates, etc.). All discussions are strictly off the record (although a speaker, like myself, is free to share what I personally said). The first one was held at the home of Phil and Linda Lader. At the time, he was the developer of Sea Pines Plantation on Hilton Head and went on to be the U.S. Ambassador to England during the Clinton Administration. They wanted a gathering of families over the New Years weekend to talk about important issues of the day — the sort of informal chats we all used to have in college outside of the pure classroom setting. Over the years, Renaissance has grown, and is now held in Charleston every new years. The Charleston event draws 1,100 or so, and over the years, many of the participants wanted smaller, more intimate gatherings. Hence, Renaissance also meets on major holidays (July 4, Labor Day, President’s Day) in places like Napa Valley, Santa Monica, Jackson Hole, and Banff, British Columbia. The Clintons were regulars at Renaissance back when he was Governor and President, and President and Mrs. Ford were also regulars. All in all, about 20 presidential candidates, countless Senators, Representatives, Governors, and elected officials from every level and both parties have attended over the years.
Labor day was hosted by the Aspen Institute, which is a non-partisan forum for values-based leadership and the exchange of ideas. It has earned a reputation for gathering diverse thought leaders, scholars, and members of the public to address some of the world’s most complex problems. It was founded in 1949 by Walter Paepcke, then the Chairman of Container Corporation of America. His first gathering drew such luminaries as Albert Schweitzer, Jose Ortega y Gasset, Thornton Wilder, and Arthur Rubinstein, along with members of the international press and more than 2,000 other attendees. Through reading and discussing selections from the works of classic and modern writers, leaders better understand the human challenges facing the organizations and communities they serve. “The Executive Seminar was not intended to make a corporate treasurer a more skilled corporate treasurer,” said Paepcke, “but to help a leader gain access to his or her own humanity by becoming more self-aware, more self-correcting, and more self-fulfilling.”
One of my talks was about housing, and specifically addressing an accusatory issue being tossed around in political circles that “homeownership in America is at its lowest level in 50 years.” Like so much in politics, that is technically true, but may not be a bad thing. Home ownership in the U.S. hit record levels during the bubble — slightly over 69%. Today, the homeownership rate is about 64%. If you look back at periods when home ownership in America was stable and healthy, the ownership rate hovered around 64%. Thus, from an ownership rate perspective, we may be at a very good level.
The bigger problem we have is home ownership equity. For many years, the aggregate equity enjoyed by homeowners was about 60% of the aggregate value of the homes in America. That means that on average an American homeowner had about 60% equity and about 40% debt. From an equilibrium perspective, that appeared to be pretty good. At the trough of the recession, roughly early 2008, that level got down to about 35%, which everyone would agree was a terrible number. Today, we stand at about 55%. By the way, this is a LOT of money — the aggregate value of all residences in America today is slightly over $20 TRILLION. That means the aggregate equity in America is close to $11 TRILLION. Getting from where we are to where we used to be means we need to create about another $1 Trillion in equity.
So yes, the housing market is still a bit in disequilibrium, but not from the decline in the home ownership rate, but rather from the decline in home equity. The good news is that we’re headed in the right direction. Recent projections from the National Association of Realtors suggest we may get back to “normal” in the 2018-ish period.
P.S. — Not everything at Renaissance is as boring as I’ve made it sound! Lynnda and I had several great chats and dinner with Jay Sandrich and his wife Linda. He directed two-thirds of the episodes of the Mary Tyler Moore Show, the first three seasons of the Cosby Show, and many other iconic productions. The behind-the-scenes tales were awesome!
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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.
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Why I’m not that worried about Greece
Pundits (and yes, to a degree, I’m one) have taken every position possible over the Greek debt crisis. I’ll toss in my 2 cents, and hopefully I’ll add a bit to the debate.
First, I’ve never been to Greece, but one of my colleagues from Greenfield just came back and brought me a bottle of Ouzo (than you, U.S. Customs Service). Also, I had a nice lunch at a Greek restaurant a few days ago. As economists go, that must count for something.
Here is Greece’s problem in a nutshell — as a stand-alone economy they suck. Their people are old, the bright young folks go somewhere more productive as soon as they are old enough to read a map, other than feta cheese they don’t export much of anything, and there simply isn’t enough austerity to balance the budget. Hence, they’ve hocked everything worth hocking right down to the scrap value of the Parthenon to pay for social services and little things like food and medicine. Additional austerity (demanded from what passes for the right in Europe) will salve the wounds for a while, and additional high living (essentially a non-starter, but none-the-less demanded from the left) simply isn’t in the cards. The credit cards are maxed out and the repo man is backing up into the driveway.
By the way, Greece has roughly the same population as Ohio. Greece’s most important industry is tourism, which accounts for 20% of Greece’s GDP and employs one out of five people who actually have jobs. In 2014, tourism was an estimated $12 Billion slice of the economy. However, to put that in perspective, Ohio’s tourism is estimated at $40 Billion per year. You see? The most important thing in Greece is about a 4th the size of one of the least important things in Ohio.
We don’t really think about it here in America, but if the 50 states tried to exist as separate nations, some would die on the vine and others would prosper very nicely. (Although, to be fare, the worst unemployment in America, West Virginia at 7.2%, sits right in the middle between the two healthiest economies in Europe, France and Germany.) We don’t think about that because of the crucible of the Civil War, which you may have read about in your history books. Not withstanding some of the news from South Carolina lately, the Civil War was about several things. Slavery was at the top of the list, for sure, but southern “heritage” types (and yes, I was born and reared in the South) would posit that it was all about states rights versus the central authority of Washington. Let’s go with that for a minute, just for the sake of argument. Let’s assume that was the central theme of the war. How did that turn out? Huh? Turns out, the north won. America was one nation, undivided, period, exclamation point. Along the way, we’ve made numerous economic decisions which would not be rational if we were 50 separate nations, but make perfectly good sense in the long shadow of the Civil War. Hence, some states don’t pull their own weight, economically, but we drag them along, sometimes kicking and screaming, as the rest of us march forward into the economic future.
Europe also had a recent crucible. Indeed, one might think of the 20th Century as one long, amazingly painful period. It essentially started with the “War to End All Wars”, and then a massively painful depression, followed by, “War, the Sequel”, and then followed by, “Let’s all count down to nuclear Armageddon” as the superpowers stared each other down across Germany’s Fulda Gap. By the time the Eurozone was created, thinking people in Europe were willing to do whatever it took to unite the continent and make sure that the casus belli of the past no longer existed.
So, that takes us to Greece. One might not think of Greece as being a focal point, but that would be short-sighted in the extreme. Of course, anyone who has studied anything about western civilization thinks of Greece as the fountain of democracy. That said, it is right at the crossroad of Europe and Asia, and has been central to pretty much every argument in that part of the world in the past two or three thousand years. More to the point, the reasonably solid economies of Europe look at the laggards with pity but also with fear, because a splintering of the Eurozone removes the warm blanket of unity that staves off the kinds of wars that Europe is all too familiar with.
So, like it or not, Europe will hold their noses and cut a check to help pay for Grandma Greece’s hospice bills. They will probably make her move to from a private room to a semi-private one, and she’ll have to settle for generic medicines from now on, and eat in the cafeteria like all the other folks, but she won’t be allowed to starve, and she’ll get a card every Christmas, as long as anyone remembers the 20th century.
American Real Estate Society Annual Meetings
For many years, Greenfield had been privileged to participate in the annual American Real Estate Society meetings, held in late April and typically in a warm, waterfront location. This year’s meeting was at the Sanibel Harbor Marriott Resort, on the bay near Sanibel Island, Florida.
Of the major academic real estate organizations, ARES has the unique mission of bridging academia and practitioners, and as such draws a large contingent of Ph.D.-types (and others) from organizations like Greenfield. Somewhat surprisingly for an organization which bridges academia and practice, ARES publishes the largest number of scholarly real estate publications, and has the top-ranked academic journal in the real estate, insurance, and banking fields (the Journal of Real Estate Research, edited by my good friend, Dr. Ko Wang of Johns Hopkins University).
Various researchers at Greenfield authored several papers accepted for presentation at the ARES meetings, including:
- The Impact of Fracking Sites on Brownfield Funding (Dr. Clifford Lipscomb)
- Can We Forecast the Next Bubble? (Kilpatrick and Lipscomb)
- A Primer on Cleaning Residential Real Estate Data (Lipscomb and Dr. Andy Krause of U. Melbourne)
- Using a Random Forest Process in an Automated Valuation Model (Lipscomb, Kilpatrick, Jessica Kenyon of Greenfield and Dan Tetrick of Greenfield)
- The Impact of the NAREIT Light Awards on REIT Performance (Kilpatrick and Lipscomb)
Additionally, I had the pleasure of serving as co-chair (with the esteemed Dr. Stephen Roulac of U. Ulster and Roulac Global Research) for one of the sessions where doctoral students presented their research. Dr. Roulac and I heard presentations from students from Yale, from Royal Agricultural University and U. Aberdeen in the U.K, and U. Regensburg in Germany.
I’ll conclude with a big “shout-out” to Dr. Arthur Schwartz, who despite having been retired for quite a few years, serves as the volunteer Meeting Planner for ARES (at no small personal expense) and manages to secure world-class warm-water resorts for these spectacular meetings. Sadly, he is taking a sabbatical for 2016, and the meeting will be in chilly Denver. However, I’m pleased that the meeting will return to San Diego in April, 2017, and to Estero, Fl (near Ft. Myers) in 2018.
REITWorld 2014
REITWorld is the principal annual meeting of the National Association of Real Estate Investment Trusts (NAREIT), held this past week in Atlanta. I had the privilege of representing Greenfield, meeting with many of the top leaders in the securitized real estate field. The tone was generally upbeat, not surprising given the great run that REITs have enjoyed the past few years.
The gathering was a mix of very specific information on individual REITs, provided in small group briefings by the leaders of those REITs, along with several large group meetings with briefings on the industry as a whole. As expected, many of the service providers to the REIT industry were there, such as the research firm SNL Financial, with whom I had several great meetings.
The biggest concern in the meeting was matching past performance. REIT investors have enjoyed unprecedented gains since the trough of the recession, and even though most sectors of the market look stable and solid going forward, no one believes that returns for the next few years will equal those of the past few years.
Leading economists presented two of the five featured programs — Jeffrey Rosensweig, Director of the Global Perspectives Program at Emory U., and Robert Zoellick, currently a Senior Fellow at Harvard’s Kennedy School and former President of the World Bank. In addition, the Board of Governors dinner speaker was former Secretary of State Madeleine Albright. The focus and attention of REIT leaders is clearly on the global scene.
In other news, the death notices for traditional retail may be premature. As noted by Sandeep Mathrani, CEO of General Growth Properties, malls today can really be divided between “A” and “B” properties. The “A” properties are in high demand by in-line tenants, who have much stronger balance sheets than in the past. Right now, occupancies in the high-90% range with strong rent growth is the norm for “A” retail properties. As such, this sector is looking for continued strong growth in the near term.
Europe is projected to be an interesting market in the intermediate term for REITs looking for global expansion and choice properties. About 80% of the commercial real estate debt in Europe is scheduled to mature in the next 5 years, and many if not most of the debt holders are in no position to renew or “roll” that debt. As such, cash-rich investors may have some cherry picking opportunities soon.
Finally, the closing session speaker was Mark Halperin, Managing Editor of Bloomberg Politics. He shared intimate insights on the Washington political scene for the next few years, with a particular emphasis on the presidential campaign (which, if you didn’t notice, started last Wednesday morning).
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.
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.
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What’s happening to REITs?
Don’t get me wrong, I’m a great fan of REITs in general (my dissertation was on REIT IPOs). Nonetheless, the great returns of 2009-2012 (which followed the NASTY collapse of 2008) seem to be a thing of the past.
For the half-year ending June 30, REITs are only doing “pretty well”, with a few surprises on a sector-by-sector basis, particularly compared with the 12.6% return in the S&P500 over the same period:
Retail (4.5%)
Residential (4.6%)
Diversified (5.8%)
Health Care (9.4%)
Lodging/Resorts (10.5%)
Self Storage (9.0%)
Timber (5.6%)
Infrastructure (-4.6%)
Note that these returns include dividend yield, which is typically in the 3% – 4% range. This means, for example, that residential and retail returns are almost entirely from dividend income.
So, what’s going on? Part of the problem is what we’ll call “fulfilled expectations”. In the run-up to 2013, some areas were pretty exciting. Residential, for example, has returned an amazing 284% since the trough of the market about 4 years ago. Retail has returned about 300% over that same period. (Of course, all of these sectors suffered a blood-bath in 2008, so as usual, timing is everything.)
Over the past couple of years, apartments have been springing up like mushrooms on a warm spring morning. Investors have been very excited for a while, but excitement is beginning to wane. How many new apartments do we need? Retail is sluggish for different reasons — recent reports show double-digit increases in on-line retail, but flat-lines in department store sales. Even Wal-Mart is wondering where their customers are going to come from.
Lodging/Resorts have some excitement, with new records being set in both volume and prices. However, as I’ve noted elsewhere recently, this may come back to haunt buyers. Health Care, of course, is a play on Obama-care.
Finally, over the past two months, the entire sector has been shaken by fears of increased interest rates, which impact REITs in two ways. First, the fundamental cost of doing highly-leveraged business goes up. Second, with higher short-term rates, REITs begin to pale as income-producing vehicles.
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Mid-year observations
I just returned from a fantastic weekend and series of meetings in Jackson Hole. I had the pleasure of moderating a panel on real estate and sitting on a panel on alternative investments. I’ll share some of my thoughts over the next couple of posts.
First, the “big picture” on real estate mid-year. While many metrics look favorable, the patient isn’t fully ready to go home from the hospital yet. Structural issues still abound, including permitting problems in many major cities and counties (a result of budget cuts and short staffs), mortgage-backed securities pipelines still getting re-routed, and a lack of development infrastructure (permitted and enabled building sites, skilled labor, and such).
Apartment vacancies are projected to rise slightly this year, but there is a lot of new product in the pipeline. I fear that the increased vacancy will all fall on the shoulders of the new apartments. Stay tuned.
High-end hotel funds are paying silly-money for properties right now. Thus-far in 2013, we’ve already seen transaction volume equal to all of 2012 (about $8 Billion in the U.S.) with substantial private money coming in from abroad. Hot cities include Atlanta, Houston, and New Orleans. Resorts account for about 25% of the total, and slightly over half are single-asset purchases.
More later, including some observations about the housing market and the retail sector.
From a small northwestern observatory... 