From a small northwestern observatory…

Finance and economics generally focused on real estate

Sad news from Seattle

leave a comment »

It’s been a busy April, and sadly, this blog gets shoved to the back burner w-a-a-a-ay too easily.  But, two very sad issues from Seattle have attracted my attention of late, and I wanted to comment on them.

First, we are all saddened by the loss of life from a high-rise crane that collapsed on Saturday.  The crane was working on the new Google campus, located in the hot South Lake Union area, just about a mile north of downtown.  Our hearts go out to the four people killed and the others injured in this terrific incident.  Given the proliferation of cranes in Seattle, we hope the authorities immediately get to the bottom of the cause of this tragedy and learn from it.

That leads, inexorably, to the second sad thing.  A TV station in Seattle, owned by a an out-of-town consortium with no ties to Seattle, produced an editorial (labeled as a documentary) titled “Seattle is Dying”.  This editorial has garnered some attention among the chattering class who believe Seattle is badly governed.  Now, everyone is entitled to their opinion, and I am a firm supporter of the First Amendment.  That said, labeling an “opinion” as a “documentary” is a bit disingenuous, but that’s what the fringe media does now-a-days.  I am also not really the biggest supporter of Seattle’s governance, but that’s another story entirely.

What I really wanted to point out is that Seattle has the highest number of these high-rise cranes of any city in the United States.  Read that sentence again, folks.  We’re the 20th largest city, but #1 in high-rise cranes supporting our exploding skyline. From a real estate development perspective, Seattle is the hottest market in the country right now, if not the world.  If you believe in Richard Florida’s concept of the “creative class” (and I certainly ascribe to that), then Seattle is the center of the universe.   The arts, sciences, education, economy, and business opportunities in Seattle are all world-class.

Now, admittedly Seattle has it’s problems, as does every city on the globe.  We have a really serious homeless problem, our transportation infrastructure needs attention, and to quote one famous NYC politico, “The rent’s too d*&^ high!”  But dying?  Me thinks the TV folks protest too much…


Written by johnkilpatrick

April 29, 2019 at 10:01 am

Posted in Uncategorized

Yield curves and real estate

leave a comment »

Every economist and his kid brother are out there touting the negative slope on the yield curve as a harbinger of the Apocalypse. I have to confess I raised the issue in a blog post back in August. ( Dr. Ed Yardini of Yardini Research released some charts yesterday which suggest that all this wailing and rending of clothes may be a bit premature ( Nonetheless, none of this says anything about the yield curve and real estate.

To reflect, here is the core chart I used back in August, although I’ve updated it to reflect end-of-February numbers. Note that as of the end of February, the yield curve was still positive. It didn’t turn negative until last week.

Yield Curve Inverting

The orange line notes the incidence and length of recessions. (I happen to use 6-month t-bills in my data, while other analysts use 3-month. The difference is negligible.)

Last week, I took a look at the NAREIT index back to 1972 (the earliest data I have available). Admittedly, the NCREIF index might be a bit more telling, but NAREIT also includes income along with capital gains, and as a matter of simplicity, I don’t have NCREIF data handy right now. Anyway, I did two things. First, I replicated the chart above but rather than looking at the incidence of recessions, I looked at the incidence of down-turns in the NAREIT index. To smooth thing out, I used a 12-month moving average. The results are visually interesting, and in fact very conclusive.

4 1 19

As you can see, real estate returns, when viewed on a 12-month scale, have been fairly positive almost continuously since 1972, with the exception of course of the “great recession” of 2007-2009. Indeed, visually there appears to be no relationship at all between the yield curve and real estate returns.

To analyze this a bit further, I looked at the relationship with a simple regression. There is simply no relationship at all (p-value = 0.50) between the yield curve and real estate returns.  Indeed, notably, the real estate downturn in 07-09 followed a yield curve inversion, but by over two years.  I think few economists would disagree that the 07-09 downturn was related to a host of structural issues, and had very little to do with a yield curve inversion.  Indeed, one might posit that the yield curve inversion was driven by real estate returns, and not the other way around!

In short, while the stock market may be shuddering from yield curve flu, the real estate markets are another thing entirely.  That’s one of the reasons why properly and expertly curated real estate is usually viewed as an excellent diversifier in a portfolio.

Written by johnkilpatrick

April 1, 2019 at 10:46 am

Posted in Uncategorized

Worrysome econ indicators?

leave a comment »

The stock market had a troublesome day yesterday — the Dow down about 1.8% and the NASDAQ down 2.5%.  We’re pleased that our in-house REIT fund, ACCRE, only fell about 1.06% yesterday, and is still up about 2.4% on the month, so we’re happy about that.  But enough bragging, let’s look at just what was troubling the otherwise still waters of Wall Street on Friday.

The biggest issue was an inversion of the yield curve.  This happens when the treasury bill auction (every Thursday) comes in at a yield higher than the 10-year Treasury note.  It is a harbinger of negative economic outlooks on the part of investors.  I wrote about this a few months ago, and at the time noted that while the inversion had not yet occurred, we were headed that way.  However, had previous trends continued, we wouldn’t see a sustained inversion for “some time”.

Is “some time” upon us?  Hard to say, but the FED turned remarkably dovish at its most recent meeting, indicating no further interest rate hikes this year.  This is apparently on the heels of a decreased forecast for 2019 GDP growth.  Coupled with some negative news from abroad, mainly Germany and France, and the signs are not very good.  Liz Ann Saunders of Charles Schwab echoed the previous sentiments of so many forecasters, myself included, that a recession was further down the road — perhaps 2021 or so.  Now, she says, it appears we could be using the dreaded “R” word later this year.

Stay tuned, folks…..


Written by johnkilpatrick

March 23, 2019 at 8:34 am

Posted in Uncategorized

Back in the USA….

leave a comment »

I’ve been gone for a while — took a wonderful trip to Egypt in late January and early February and I’m just getting back in the swing of things.  One of the big items on my agenda right now is the creation of Opportunity Zone Funds.  This portends to be very real shot in the arm for disadvantaged neighborhoods across the U.S.

In short, certain census tracts have been designated as Opportunity Zones under the new tax laws passed in 2017.  Opportunity Zone Funds can be created to invest in those zones.  Investors in those funds may defer gains on the sale of businesses and stocks by reinvesting the proceeds in a qualified Fund.  In a way, this is similar to 1031 exchanges which have been available for real estate sales for many years.  However, unlike the 1031, any business gain can be invested.  Further the creation of a Fund alleviates the burden on the taxpayer from identifying specific new investments — that will be the responsibility of the fund.  Further, 1031 exchanges carry a 180 day time clock for identifying and closing new investments, but these new Funds have much more liberal — and reasonable — time frames.

At Greenfield, we’ve identified over 100 potential new funds which are being organized around the country.  As with any new investment, the likelihood is that most of these will never get off the ground.  However, Greenfield has identified several already which are both well-organized and backed with serious money. We will continue to keep you apprised of these projects as they move forward.

Written by johnkilpatrick

February 20, 2019 at 3:55 pm

Posted in Uncategorized

The shutdown at a micro-econ level

leave a comment »

As the madness of this Federal shutdown continues, the lead news story every day features obvious pain and suffering faced by hundreds of thousands of government employees, an unknown (but probably much larger) group of federal contract workers, and the general citizenry who depend on those government workers.  Compared to the very real problems this is causing so many hard-working Americans, whining about the real estate industry, and business in general, may seem to be superfluous.  That said, the economy as a whole — and by that I mean working people, their jobs, their savings, and their lives, will be impacted for quite some time by this stupidity at the highest levels of our government.

A few random points, just to illustrate:

  1.  Local schools depend heavily on Federal support for school lunches.  Even schools with few students receiving free lunches will receive significant dollars each month to subsidize the school lunch program.  This money immediately trickles into the local economy to pay for food and cafeteria salaries.  Interrupting this for even a short period of time can really impact school districts that already have problems paying teachers and providing school supplies.
  2. Many Federally-produced business reports, which are necessary for business intelligence and decision making, have been delayed.  For example, the international trade report was not released last week, as was the January 11 agricultural supply/demand report.
  3. JP Morgan lowered its GDP growth estimate by a quarter of a percentage point.  That may not sound like much, but it represents a materially large impact on our economy and its ability to provide private-sector employment.
  4. Mass transit systems throughout the US — on which many workers depend for their daily commute — have temporarily lost financial aid that supports maintenance and repair costs.
  5. Federal courts are increasingly having to delay or defer litigation, including almost all civil cases.
  6. Cyber security at many Federal agencies is handled by outside contractors, who are not being paid and thus legally cannot provide those services.
  7. College students applying for student loans cannot verify parent income through Federal sources.
  8. Department of Agriculture loans to farmers and rural dwellers are on hold.
  9. Wildfire prep work and firefighter training, a needed preparation for the 2019 fire season, are on hold.
  10. The FCC, which licenses and regulates TV and radio, plus private radio licenses (such as the radio in an airplane or a boat) has shut down.
  11. The Federal government missed paying its $5 million monthly water bill to the District of Columbia.
  12. IRS staffers cannot answer consumer questions about the new tax law.
  13. Employers cannot use the Federal E-Verify system to check if workers are in the US legally.
  14. The National Hurricane Center is now off schedule for badly needed upgrades to the main American weather model.
  15. Some states are delaying contracts for road and bridge maintenance.
  16. Mergers and IPOs are being delayed because the SEC cannot issue approvals.
  17. The FDA has stopped many food inspections.



Written by johnkilpatrick

January 21, 2019 at 9:39 am

Posted in Uncategorized

Sears, I’m gonna miss you…

leave a comment »

Yeah, I grew up in one of those households.  Mom would pack me in the car and drive 40 miles to the nearest Sears to be at the door when they opened at 9am.  Christmas shopping always involved The Catalog (THE Catalog).  Except for a car, a house, and a dog, if Sears didn’t sell it, we probably didn’t own it.

As of this writing, it appears that they may — or may not — emerge as a shell of their former self.  Many (most?  all?) of the stores will close.  Every retail pundit in the universe is trying to explain why the business went into bankruptcy.  I have my own ideas, but that’s not the issue here.

One of the more interesting stories, though, is how badly Sears has apparently managed its real estate holdings in the last few years of its life.  There are a lot of claims on the assets out there (one argument is that Sears’ expensive defined benefit retirement program is taking it under).  Intriguingly, however, Sears owns a very valuable asset which, in bankruptcy, it will simply throw away.  That asset is a nationwide network of below-market leases on very valuable real estate.  The current Board Chair, Eddie Lampert, is making a $1.8 Billion bid for this real estate, although there is some question as to whether the court will accept his bid.  In fact, many of the landlords are clamoring to evict Sears and turn the assets over to more profitable tenants.

Imagine you own a shopping mall, and you can rent 140,000 square feet of Sears space (the average size of a Sears store) for $15 per square foot.  Instead, however, Sears currently rents that space for $5 per foot, due to a favorable lease they negotiated when the mall was first built.  Imagine that Sears still has 20 years remaining on said lease.  At a 7% rate of return, the difference is almost $15 million in present value.  In real estate terms, that’s called a Leasehold Estate.  Multiply that by hundreds of stores, and… well… you get the picture.

Leasehold Estates may or may not be transferrable, but often can be subleased.  Indeed, Sears in its hey-day made quite a bit of money sub-leasing portions of the store to third-party merchants (many big retailers still operate this way).  When Woolworth’s realized that they were not long for this world, rather than head down the bankruptcy path, they carefully managed their long-term leasehold assets.  Indeed, some analysts argued that Woolworths was worth more as a real estate holding company than as a retailer.  In Sears case, that may have been a possibility at one time, but sadly that ship has sailed.

I’m currently writing a book chapter on the importance of differentiating between the business value and the real estate value in the analysis of a closely held enterprise.  The melt-down of Sears is a shining example of the failure to do just that.

Written by johnkilpatrick

January 7, 2019 at 10:18 am

Posted in Uncategorized

Apartments — better than predicted

leave a comment »

Home ownership rates have plummeted from pre-recession “bubble” peaks, and have recently begun stabilizing around the pre-bubble levels.  Before, during, and particularly after the recession, apartment construction and absorption soared.  Many (most?) analysts feared an overbuilding in apartments, necessitating a retraction in construction until excess units could be absorbed.

The one very small black swan we all missed in that prediction was the shortage of homebuyer credit and the difficulty for buyers — particularly first-time homeowners — to accumulated down payments.  Admittedly, the zero-down world of the housing bubble was unhealthy for the stability of the market, but the job-market of the past few years has made it difficult for younger buyers to enter the homeownership market.

Diana Olick Olick wrote a great piece for CNBC over the holidays about the unexpected strength of the apartment market.  She details both the current state of the apartment market as well as the causes and trends in that arena.  You can view the original article here.

Written by johnkilpatrick

January 2, 2019 at 5:49 am

Posted in Uncategorized

%d bloggers like this: