Archive for the ‘Uncategorized’ Category
Welcome to April
…and welcome to Florida. I’ve been in the southeast corner of the U.S. for the past two weeks in a hearing. I happen to love Florida, and if I ever get around to retiring, I’ll probably end up here. Thanks to personal choice, some business, and just a little bit of kismet, I get to travel here at least 3 or 4 times a year. Indeed, by the end of April, I will have made 3 trips here in 2012, with at LEAST two more planned.
In many ways, Florida is the poster child for the current economic problems plaguing the U.S. It has all of the hotbutton issues in one place — overbuilt housing, lending practices to match, and huge demographic shifts. The latter is almost humorous — Florida is jokingly referred to as “God’s waiting room”, not withstanding the fact that suburban Las Vegas, Orange County, California, and Scottsdale, Arizona, are all fighting for that moniker. Indeed, about 15 years ago, I was relegated to represent my university at the annual meeting of the American Association of Retirement Communities. I learned (among other things) that the two Carolinas, when taken together, actually get as many retirees every year as does Florida. However — and here’s the funny part — the “source” of Florida’s retirees is primarily the New England and Mid-Atlantic region. The “source” of the Carolinas’ retirees is Florida — they’re called “half-backs” because they move to Florida, find the weather to be abysmal, and move half-way-back home.
Being that as it may, Florida is still the destination for seemingly millions of retirees, a large proportion of whom seem to be “snow-birds”. They live in Florida 6.01 months of the year (just enough to qualify for Florida citizenship, and thus preferential Florida taxes) and then head back up north on March 31 every year. (I was in Florida on March 31, and the out-migration seemed to clog the interstates).
Before the melt-down, the whole housing industry in Florida existed to provide half-year housing for these snow-birds. Pick what you want — condos, townhouses, detached homes, we’ve got it at every price-point, size, color, and configuration. It would be hard to imagine a housing solution that wasn’t available in Florida. Financing? No money down? No problem. Move right in. While a surprisingly large number of homes were paid for with cash, there was certainly lots of available financing for the retiree who didn’t want to tap his funds for a down payment. And why tap your funds? When the stock market is growing at 10% per year, and real estate is going up by 15% per year, who would avoid a 4% mortgage? And what bank wouldn’t make that mortgage? After all, Grandpa and Grandma are great credit risks, and if they die before the loan is paid off, certainly the property can be re-sold for a profit. It’s a win-win, right?
Yeah, we don’t need to re-visit the meltdown, but the aftermath is a fascinating war zone. First, a lot of cond0-dwellers simply walked away. A lot of single-family dwellers tried to hang on, but often to no avail. Nothing would re-sell, so the market just froze. But, remember that a LOT of the buyers paid cash or had very low LTV loans. Those folks are particularly harmed — they are sitting on nearly unsellable property, with no end of the pain in sight.
If you visit Sarasota or Naples or any of the dozens of “retirement” communities on the Florida coast, you’ll get two distinct pictures. The beaches are filled, the hotels are filling back up, and the neighborhoods look healthy. Visit the county government complex, though, and you get a distinctly different picture. Floridians are a distinctly tax-averse lot, and so many county and city governments thrived on fees paid by developers. With that market frozen, the local government finances are a mess. Couple with it an actual and meaningful decline in property tax collections, and you get a local finance problem that won’t get fixed anytime soon.
With that in mind, millions of Americans (and an increasing number of South Americans and Europeans) see Florida as the best of all retirement solutions. The weather is great most of the year, there is excellent infrastructure and health care, and plenty of recreational opportunities. The cost of living is among the lowest in the U.S., providing ample opportunity for “worker bees” who move here to care for the retirement cadre. However, the housing market continues in the doldrums. A good friend of mine, with excellent credit and not unsubstantial resources, recently bought a Florida condo. The BEST loan he could get was 40% LTV, and even that was a paperwork nightmare. There is plenty of demand for Florida housing, but the financing side of the equation continues to be an issue. Unless and until the financing problem gets fixed, the housing problem will still be with us.
Share this:
Marcus & Millichap’s Apartment Report
Of the major commercial real estate brokerage firms, Marcus and Millichap seem to consistently do the best job of thoughtful and insightful research. We track their work regularly here at Greenfield. Their 2012 Apartment Report just hit our desks, and it follows our expectations of excellent work on their part.
courtesy Marcus & Millichap
The apartment sector is rebounding nicely, but because of the intersection of favorable demographics and unfavorable economics. It’s driven by pent-up demand among “prime renters” (young adults who want to “unbundle” from parents and roommates) who would potentially have become homeowners a few years ago. Development had been stagnant for a few years, leaving the market with a potential shortage in supply. Developers, lenders, and investors had a brief pause late last year, but M&M expects to see steady additions to supply over the next three years.
courtesy Marcus & Millichap
As a result of all of this, vacancy rates are trending downward, and are expected to hit 5% this year (down from a peak of about 8% in 2009). This has the effect of driving up rents to historically high levels, even after a net decline from 2008 to 2009. With all this, apartment transactions are back up to pre-2009 levels, while the average price per unit is now topping $90,000 (up nearly to the peak of 2006) and cap rates are down in the 6.5% range (still off the trough of about 5.5% seen in the 2006-2006 period).
- courtesy Marcus & Millichap
The surprising upshot of all of this is that apartment cap rates are still at record high spreads over the 10-year Treasury long-term average. Market participants got nervous back in the 2006 period, when the spread had shrunk to 90 basis points (from a more “normal” rage of 380 to 430 basis points experienced since the S&L crisis 15 years earlier). Today, the spread is at 460 basis points, reflecting a bit of continued risk-aversion on the part of market participants, along with historic low rates on treasuries.
Share this:
Yet another comment about today’s economic news
It’s hard NOT to be pleased at today’s economic news. The unemployment rate is down, total employment is up (the two numbers don’t ALWAYS move in sync, due to the growth in the potential workforce), the stock market is up, the dollar is up versus the Euro, Yen, and Pound (not always a good thing), and bond yields are up (reflecting a potential demand for borrowing — a very “old school” view of stocks versus bonds). Intriguingly, oil is up but only by $0.59 a barrel as of this writing (12:35am EST on Friday the 3rd) — one would normally expect that great economic news would spur a run on oil.
Which may, in fact, reflect the continued anxiety in the marketplace. Recessions rarely happen in a straight line (see my post a few weeks ago on the relationship between the yield curve and the onset of a recession — click here for a shortcut). Real estate continues to be in disarray, and the banking sector is still in rehab, with the continued concern of a relapse if the Euro crisis doesn’t solve itself.
Ben Bernake’s testimony before the House Budget Committee this week was painful to watch — members of Congress would prefer to listen to themselves rather than the Chair of the Fed, and it was clear that members of that august committee had only a cursory understanding of what the FED actually DOES. Nonetheless, a piece of Bernake’s testimony had the tone of Armageddon. He noted that we’re on our way to addressing the CURRENT problems — the huge deficit overhang, the Euro crisis, etc. Congress still has ample work to do in those areas, but we are at least confronting the issues. The larger problem, in his mind, is what start happening in about 10 years or so when the demographic overhang starts hitting. The rapid shrinkage in the number of people PAYING into social security and medicare versus the number of people COLLECTING these transfer payments will be substantial, and this doesn’t even begin to address the productivity problems associated with a society in which a substantial number of people are retired and not contributing to the nation’s output.
Sigh…. at least it looks great today, right?
Share this:
Economy set to improve?
Neat article in CNN Money this morning titled “Economists a Bit More Optimistic”. To read in its entirety, click here.
In short, economists are a bit surprised — pleasantly so, I might add — at economic results thus-far in the 4th quarter. CNN’s survey of 20 economic forecasters finds a consensus sentiment of GDP growth at 3.3% this quarter, substantially higher than where it’s been thus-far in the past several quarters, and with perhaps some momentum to carry forward into 2012.
Now, 3.3% isn’t quite as good as we’d like to see — 4% would be even better. However, as I’ve been noting for some months, GDP growth in the 2% – 3% range would barely be enough to keep us at status-quo, much less get job growth to the levels needed to cure unemployment problems. Hence, if this survey and forecast are correct, it is indeed very good news for the holidays.
Share this:
FDIC — Supervisory Insights
The latest issue of the FDIC’s Supervisory Insights (Winter, 2011) just hit my desk. (If you really have plenty of time to kill, you’re welcomed to download your own copy, for free, from here.)
The focus of this issue is on appraisal problems, particularly re-inventing the review appraisal supervision role. This issue — which is ongoing — is a matter of considerable discussion and debate within the appraisal community. I’ll leave that matter to other pundits, but with the caveat no solution on the drawing board today will make everyone happy.
It may be a bit more interesting to examine the underlying arguments within the FDIC, to gain some insight in to where that agency is “coming from”. First, Table Four from the publication really sets the stage with the overarching problems facing the FDIC.
graphic courtesy FDIC
Notably, while the non-current loan ratio is slightly down from two years ago (although, terrifically higher than before the current crisis began), the dollar figure of “other real estate” (FDIC code for “real estate owned” or REO) hovers about 10 times as high as in 2006, with no end in sight.
So, the FDIC is challenged not only with fixing the CURRENT problem, but laying blame — so as to presumably prevent the NEXT crisis. Peeling back the layers of the onion, Table Three from that same report give significant insight into their perspective on the problem.
Courtesy FDIC
This data comes from LexisNexis, and the percentages do not total to 100% because many cases have multiple sources of problems. Nonetheless, since 2006, the trends for all categories have been flat or trending positively except for appraisal problems, which are now significantly higher than at the beginning of the crisis. One might argue that the increasing percentage of cases with appraisal problems is a manifestation of increased investigation in that realm, but that would be damning with faint praise, since it implies that oversight was lacking in the past.
Share this:
Now for a little good news….
Globe Street has a great piece about the self storage market, which is doing very nicely lately. Top firms in the fiele had revenue growth of 4% to 5.8% in the 3rd quarter, with net operating income growing 7.3% to 8.6%. ranged as high as 91.7% at Public Storage. The article properly notes that this sector is now joining apartments in strong, positive territory. Overall REIT share performance, as noted in the chart below, certainly underscores this (YTD as of October 2011, data courtesy NAREIT).
While the article correctly notes the strength in this market segment, it doesn’t connect the dots vis-a-vis why. Some of this is obvious, but it bears noting due to the very signficant long-range implications. The more-or-less simultaneous strength of the apartment sector and the self storage sector isn’t coincidental — the popularity of apartments for households which WOULD HAVE been in the owner-occupied housing market is driving the need for self storage. Anecdotal evidence of late suggests that the trend is toward smaller apartments — studios, efficiencies, and one-bedrooms seem to be in higher demand lately, although I haven’t seen this formally quantified as of yet. Given that, not only is there a need for self-storage, there will also be an increased need for SMALLER self-storage units as opposed to larger ones, urban infill units (or at least units near apartment communities) and even self-storage as an adjunct to apartment communities themselves.
Long term? This market risks getting over-build whenever the housing market stabilizes. However, that seems to be several years out. In the intermediate term, one would suspect a strong demand for more units paralleling the demand for apartments.
Share this:
CNBC reports on housing doldrums
Diana Olick is the real estate blogger/reporter for CNBC, and has a great column this week commenting on the recent “semi-good-news” from CoreLogic. For her full column, and links to the CoreLogic report, click here.
The synopsis — CoreLogic reports that foreclosure sales as a percentage of total sales are down. Great news, if it wasn’t for the sad fact that distress sales in May were still at 31% of the total market, albeit down from 37% in April.
Ms. Olick correctly notes that the “shadow” market hanging out there is huge. A few snippits:
Loans in the foreclosure process (either REOs or in-process) total 1.7 million homes, down from 1.9 million a year ago. Given that total home sales in America seem to be hovering around 5 million per year, this is a huge portion of the inventory.
Share this:
Mueller’s Market Cycle Monitor
Sorry it’s been so long — I’ve been traveling a good bit lately, and it’s hard to keep up!
One of my favorite real estate pieces hit my desk while I was gone — Dr. Glenn Mueller’ Market Cycle Monitor, published by Dividend Capital. He developed this model about 15 years ago, and it tracks occupancy and absorption of major commercial property types in about 50 geographic markets. As a property type (in a given market) sees increasing occupancy, market participants bring new property on-line. This creates an expansion. At the peak of the expansion curve, “hypersupply” begins, following which the new supply exceeds the market ability to absorb property. Vacancy rates increase, even as new property is still coming on line. This stimulates a recession. During the recession, no new property comes on-line, and occupancies hit a nadir. At that point, natural expansion of the economy stimulates a recovery, during which excess properties are absorbed and the cycle continues. The following, taken from Dr. Mueller’s excellent 1995 paper, captures the entire idea:
Currently, the market can be best described as “flat-lined”. Office occupancies were flat during the first quarter, and rents were actually down slightly (0.3%, on an annual basis). Industrial occupancies improved slightly, but rents actually fell signficantly (3.1% annualized). APartment occupancies improved slightly, and rental growth improved significantly (2.8% annually). Retail occupancy actually improved significantly, but rental growth trended downward (3.1% annually). Finally, hotel occupancies improved a bit (0.8%), and hotel income (measured as RevPAR, or Revenue per available room) increased 8.9% on an annualized basis.
For a complete copy of Dr. Mueller’s report, click here or write us at info@greenfieldadvisors.com.
Share this:
Phily Fed — Econ Forecast
One of my favorite economic touchstones is the quarterly survey of professional economists by the Philadelphia Federal Reserve Bank. Forty-four economists are surveyed, including such notables as Mark Zandi from Moodys, John Silvia from Wells Fargo, and Neal Soss from Credit Suisse. The focus is on “practicing” economists rather than “academics”, and as such gives a great snapshot of what decision makers at major corporations are thinking.
The Phily Fed then takes a synopsis — both a mean and a distribution — of their collective thinking in several key areas, such as Real GDP growth, unemployment, monthly payroll growth, and inflation. The interesting factors include both the current thinking, the CHANGE in current thinking (from the previous projections) and the probability distribution.
Current thinking about GDP growth is a bit less optimistic than it was before. As noted in the graph below (reproduced from the Phily Fed’s report), prior consensus thinking put GDP growth in the 3.0% to 3.9% range, while the current consensus mid-point is between 2.0% and 2.9%. Good news — hardly anyone projects negative GDP growth for this year. As we get into out-years (the graphics are on the Phily Fed’s report), which you can download by clicking here ), the consensus is a bit blurry, but in general most economists still see GDP growth postiive and between 2% and 4%. Unfortuantely, this isn’t the best of news — for the U.S. economy to really get back on track, much stronger GDP growth is needed (solidly high 3% range and even above 4%).
Philadelphia FED GDP Projectsions 2Q 2011
Unemployment projections for 2011 are somewhat rosier. In the prior survey, the mean projection was in the range of 9.0% to 9.4%, with a significant number of economists projecting from 9.5% to 9.9%. Currently, the mean is 8.5% to 8.9%, and a signficant number project in the 8.0% to 8.4% range — a very real shift in the outlook for the nation’s economy as we head into the second half of the year. On the downside — projections for out-years (2012, 2013, and 2014) show a very slow restoration of “normality”, with mean unemployment projections above 7% in all years.
Philadelphia FED Unemployment Projections 2Q 2011
One piece of good news — and this may be the FED patting itself on the back a bit — is that its inflation projections have been quite accurate over the years, and they continue to forecast exceptionally low CPI changes over the next ten years. While the median forecast is up slightly from last quarter (2.4% up from 2.3%), this continues to be great news for consumers and bond-holders. Notably, as you can see from the graphic, there is a fair degree of agreement among economists surveyed — the interquartile range is less than a percentage-point.
Philadelphia FED Ten-Year Inflation Projections as of 2Q 2011
Share this:
Global and Local Data
Two important economic research pieces hit our desks this week — the RICS Global Commercial Property Survey, and the Dr. Bill Conerly’s Businomics Newsletter. The former, as its name implies, has a very global reach (the U.S. included), and gives a great basis for comparison of how the U.S. commercial real estate economy is doing relative to other economies. Naturally, this begs the question, “Are there OTHER economies?” From an investment perspective, all “economies” are integrated, and while each occupies a different place on the risk/reward graph, they are all viewed through the same lens by the equity and debt markets. Dr. Conerly’s work focuses narrowly on the Pacific Northwest, and gives us a great snapshot on how our local economy is doing. It’s a “must-do” resource piece for any work we do in our backyard.
RICS, of course, stands for Royal Institution of Chartered Surveyors. First charted by Queen Victoria in 1881, it is now the world’s oldest and largest property-focused organization, with 100,000 professional members and 50,000 students in 140 countries. Greenfield has been pleased to be affiliated with RICS here in the U.S. for quite a few years.
The headlines speak for themselves:
from RICS Global Commericial Real Estate Survey 1Q2011
For your own copy of the report, or one of the regional reports, visit the RICS web site by clicking <here>
Dr. Bill Conerly, based out of the Portland, Oregon, area, is a great friend of ours here at Greenfield and one of the region’s top consulting economists. His newsletter presents key national economic trends (along with his pithy comments) and then focuses on how these play out in the Pacific Northwest. He calls national GDP growth since the start of the recovery “disappointing”, and notes that while consumers seem to be rebounding and business equipment capital spending is growing moderately, construction spending is still “weak”. Housing starts are still troubling (for more on this, see some of my prior blogs on the housing market) and despite gas prices, inflation still seems to be under control (actually near the lowest levels in the past 5 years.) The spread of junk-bond yields over treasuries hit a peak of nearly 2000 basis points in 1009, and is back down to between 500 and 1000, but still above the roughly 300 basis point level of 2007. Dr. Conerly suggests there is still some worry about risk, although I would posit that 700 or so basis points is probably a healthy level. Finally, on a national view, Dr. Conerly is looking for “decent but not dramatic gains” in the stock market.
On the local front, Dr. Conerly notes that both Oregon and Washington bankruptcy filings have turned downward from their peak levels last year, although both are still well above levels pre-2009. Through the recession, both states have seen substantial net in-migration (Oregon at about half of Washington’s level), although Oregon’s in-migration had trended slightly downward and Washington’s slightly upward.
For more information on Dr. Bill Conerly or copies of his charts, visit him here.
From a small northwestern observatory... 