From a small northwestern observatory…

Finance and economics generally focused on real estate

Housing…. overheated again?

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“Home price increases appear to be unstoppable,” — a quote from David M. Blitzer, Chairman of the Index Committee at S&P Down Jones Indices, as quoted in a Tuesday article by Christopher Rugaber of the Associated Press, and featured on  Am I the only one who felt cold chills reading that?

C’mon, David, exactly how did that turn out last time?  Prices, by the way, are headed up because money is still relatively cheap, demand is incessant, and supply is constrained.  S&P, which is in business, among other things, of promoting their Case Shiller index, notes that buyers are in bidding wars.  That index, released Tuesday, showed that house prices are up 6.1% from a year ago — well above inflation — and in 45% of the cities tracked, the house price increase has surged from a month earlier.  In short, not only is the car speeding, it’s accelerating.

However, sales volume has fallen 1.5% from a year ago.  That may not sound like much, but in a market that was already not at equilibrium, that’s economically significant.  Plus, the number of homes for sale was down 6.4% from a year ago, to the lowest level since the NAR started tracking these statistics.  Ever.  In history.



Written by johnkilpatrick

November 2, 2017 at 9:02 am


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The massive, annual orgy of shopping is just around the corner, and I’ll admit I’m worried.  Let me share a bit of a story.  I live in a pretty tony suburb of Seattle.  I dare say I’m surrounded by conspicuous consumption.  The Range Rover density in my corner of the world is embarassing.  That said, the glass bowl on the Kilpatrick family’s upright mixer broke (first world problems, right?), so we ordered another one.  Turns out, the quickest  quickest way to get a replacement was to have it delivered directly to a nearby big-box (which shall remain nameless) so I wandered in to pick it up yesterday.

It wasn’t just the dearth of customers that disturbed me, but the dearth of sales staff. the shelves were reasonably well stocked (albeit, nothing holiday-esque yet) but the cashier stands were empty — all checkouts were directed to the customer service desk (I’m not kidding).   I’ve frequented this store regularly, and while I don’t have a grasp of the seasonality of their business, my guess is that the shopping count was about half of what I had seen in there before.

Let me repeat that.  About half.

Most economists have been looking for a pull-back (that’s a kind word for “recession”) sometime next year or the year after.  The current leadership in Washington fails to note that increasing stock prices do not bely the onset of a recession.  Indeed, Mike Patton had a great study of recessions and the stock market (measured by the DJIA) published in Forbes back in 2012 (click here for a copy).  He studied 14 economic pull-backs dating from 1928 thru the most recent one.  Intriguingly, in most cases, the market hit record highs immediately prior to the onset of each recession.  In fact, in a couple of the recessions (particularly the one in 1945), the market continued to rise even during the economic trough.  During the most recent kerfluffle, the market was behaving quite nicely, albeit with a bear trend, until the full onset of the recession.

I think there’s more to be learned about recessions down on Main Street than there is up on Wall Street.  Right now, Main Street in my admittedly prosperous corner of the world is not as healthy as it was a year ago.

Written by johnkilpatrick

October 13, 2017 at 3:52 pm

Posted in Economy, Finance

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

Not a good sign….

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The International Monetary Fund (IMF) tracks gross domestic product (GDP) both globally and by nation.  Their metrics are generally quite good.  They’ve downgraded the 2017 expectation to 2.1% from a prior forecast of 2.3%, in no small part to the abysmal 1.4% the U.S. turned in during the 1st quarter.  They’re currently projecting 2.1% for next year as well. This is a far cry from the 4% annual rate the Prez promised on the campaign trail, and the 3% he promised after taking office.

Admittedly, a president can’t be judged on the economics of his first year.  That said, a principal driver of the lousy 2018 forecast is the amazing lack of understanding this administration (and Congress, for that matter) has about the power of fiscal policy to drive the economy.  This lack of understanding can trace its roots to the early Reagan days and the GOP’s enamor with Milton Friedman.  The Chicago economists (and this is a wild oversimplification) preached monetary theory, holding that the entire economy was driven by the money supply, which could be improved with tax cuts.  This was in contrast to the Keynesians (and again, a wild oversimplification) who held that targeted fiscal policy was the order of the day.  Since the Kennedys were Keynesians (or at least Harvard graduates), then they had to be the enemy of all that was good.

Of course, many of us have been forecasting a recession for 2018 or so.  Why?  From a simple cyclical perspective, we’re long overdue.  My own thinking was that the Congress would enact a tighter budget which would be felt in the short-term, but that tax cuts wouldn’t be felt (if at all) until father out.  As it turns out, I was an optimist.  The budget cuts are draconian, and the tax cuts proposed will do nothing to add to consumption or investment.  (The former is patently obvious.  Give Bill Gates an extra million a year in tax cuts, and he’s not going to eat better or buy nicer clothes.  As for the investment side, money is already essentially free — overnight LIBOR is actually negative — and yet cash lays around on the sidelines looking for a new merger to fund.)

I’m presently not an optimist.  Neither are the economists at the IMF.  For a great synopsis of their report, read Rishi Iyengar’s report on CNN Money.

Written by johnkilpatrick

July 24, 2017 at 5:28 pm

WordPress v. Facebook

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Loyal readers will note that I’m frequently on Facebook and less frequently here.  You may have also noted (or not….) the very different tone of my two sets of writings.  My pure FB posts are generally either my (fairly strident) political views or mental meanderings about family, travel, restaurants, and bars.  In other words, normal stuff.  My blog posts lean to business, finance, and the economy, with a bent toward real estate.  By construct, the “voice” on this blog is different than the “voice” on FB.

Here’s where life gets interesting.  I had the honor last week to speak to a small audience at a luncheon at Seattle’s historic Rainier Club about the economy.  It’s quite impossible now-a-days to separate “economy” from “politics”, much as I might like to.  Calvin Coolidge, I believe, said that the “business of America is business”, and the current government in D.C. has adopted that mantra.  Sadly, the current government in D.C. appears to know quite little about mainstream business.  they know a bit about a few things, and almost nothing about most things.  That said, they’ve sold a bill-of-goods to many mainstream business folks.  I saw a truck heading into Seattle today with InfoWars and “Arrest Hillary” bumper stickers.  The driver was a bearded young man who appeared to be a hard working fellow.  He’s been sold on the notion that the government in D.C. is on his side now, and they’re going to make everything a lot better.  I’m waiting to see that.  I haven’t seen anything yet out of D.C. that suggests this government is representing anyone other than Russian bankers and the Koch brothers.

At my Rainier Club talk, a questioner — clearly a Trump supporter — commented that the benefit of the new administration was that they were dismantling onerous regulations which affect small business.  I reminded the questioner that I’m Chair of the Board of a business headquartered in Seattle, and that nearly all of our regulations are imposed by the City of Seattle and the State of Washington.  I further reminded him that these regulations make Seattle the sort of place where creative people wanted to live, and since my bread and butter is hiring creative people, I’m happy to put up with these regulations in order to hire creative folks.  I noted that Amazon, Starbucks, Nordstrom, Weyerhaeuser, Expeditors International, Expedia, Alaska Air, Microsoft, Boeing, Costco, the Russell Group, Symetra, F5 Networks, Paccar (who make Peterbilt and Kenworth trucks) and a host of other global companies were also willing to put up with these Washington State regulations in order to be able to tap into the brain trust that wants to live here.  Intriguingly, the most “regulated” cities and states in the nation tend to be homes to the most forward-thinking and growing businesses.  Indeed, New York and California have over 20% of the Fortune 500 headquarters, and the states which are generally the least regulated have no Fortune 500 or even Fortune 1000 companies (Montana, Maine, South Dakota, Wyoming, West Virginia, New Mexico, and Alaska).  You go figure….

Kroger…. sigh….

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I truly like Kroger.  I do the largest portion of my “commodity” shopping there.  Friends and colleagues know of my constant battle with my weight, and sadly enough, Kroger (or their pacific northwest brand, Fred Meyer) is partly to blame.

That said, I’m very concerned with Kroger (and Fred Meyer) as brands, and by extension as users of big boxes of real estate and anchors of shopping centers.  Kroger’s stock hit a one-year high of $37.86 last July, and is today 40% lower at 22.82.  Admittedly, about 7 points of that loss came on the heels of Amazon’s announced acquisition of Whole Foods.  However, another 7 or 8 points came from slow drift over the last 11 months.  For the record, during the past 12 months, the S&P 500 (not the most aggressive benchmark, for sure) rose from 2000 to 2433 (today, 1pm EDT), for a gain of just under 22%.  Hence, Kroger has underperformed the S&P by 62%.  Ahem…. To put this in more meaningful terms, Kroger has lost about $14 Billion in shareholder wealth in 11 months.

So this morning, I took time out of my nasty, busy schedule to listen to Kroger’s CEO, Rodney McMullen, interviewed on CNBC.  I was underwhelmed, to say the least.  He basically wanted to defend their current modus operandi, and bragged about their cheese department (which, I will admit, is quite good).  Arguably, when one loses $14 Billion in shareholder wealth in 11 months, perhaps one should have a “Plan B” to discuss on CNBC.

From a real estate perspective, Kroger and its other brands (e.g. — Fred Meyer) run 2,778 grocery stores in the U.S.  At about 50,000 square feet each, that’s roughly 140 million square feet of real estate (not counting 786 convenience stores, 37 food processing facilities, 1,360 supermarket fuel centers, and such and so forth).  Further, most of these stores are anchors for community shopping centers.  Lose the grocery anchor, and the entire shopping center becomes a dust bowl pretty quickly.

A long time ago, In Search of Excellence established that businesses “in the middle” of a market are doomed to failure.  You can make money at the top of the market (Whole Foods) or at the bottom (WalMart Super Centers) but not in the middle.  Profit margins in grocery have always been razor thin.  I can think of a dozen business scenarios that make sense for Amazon and Whole Foods, not the least is the fact that Whole Foods, geographically, is well positioned to serve as distribution centers for the sort of “top of the market” customers who would order groceries from Amazon.  I would love to see where Kroger thinks its market lies, but I’m going to guess that everyone in the grocery biz who is not chasing the top of the market will be in a race for the bottom of the market.

Written by johnkilpatrick

June 27, 2017 at 9:27 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.