From a small northwestern observatory…

Finance and economics generally focused on real estate

Philadelphia FED Survey

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One of my frequent economic touchstones is the quarterly survey of economic forecasters conducted by the Philadelphia FED. Obviously, they can’t pick “black swan” events (e.g. — COVID) but once the economy is in a steady state, they are usually very good at seeing intermediate term trends.

The improvement in sentiment from before the election is palpable. Their panel of forecasters project real GDP growth this quarter (that’s nominal growth minus inflation) at 3.2% annualized, with an overall growth at 4.7% in 2021 and 3.7% in 2022. These represent significant improvements over previous forecasts.

Unemployment will continue to nag us, but is on a downward trend. According to their forecasters, we should end this quarter with unemployment at 6.3%, trending down to 5.1% in early 2022. Non-farm job growth is projected at 223,400 per month this year. Inflation is expected to nudge up a bit, although that’s not entirely a bad thing coming out of a recession, as it indicates increased demand. The previous survey anticipated inflation at an annualized rate of 2.0% in early 2021, but now forecasters expect that at 2.5%. That said, the general projections for inflation for the coming decade, barring any flocks of black swans, is in the range of 2.2%. With that, 10-year treasuries are forecasted to average 2.8% over the coming decade, up from an early forecast of 2.7%.

Most interestingly, forecasters were also asked about the probability of another negative-GDP quarter this year (signaling a return to recession). Before the election, the average sentiment was a 20.4% chance of a quarterly GDP contraction this year. After the recession, this has nudged down to 19.1%. While that may not look like much of a change, it is a meaningful shift in forecasters’ sentiments. Survey respondents were also asked about economic output and productivity for the coming decade. A year ago, they projected the ten-year average annual productivity growth at 1.4%, while now they’ve raised the bar to 1.75%, a significant increase in their forecast of U.S. output and productivity.

Finally — and this is probably of most interest to our readers — the forecasters were asked about house prices this year and next. They looked at six different house price indices (see below), and forecasters projected median house price increases ranging from 4.7% to 7.9% this year, slowing somewhat to 3.5% to 5.3% next year.

2021 Median2022 Median
S&P CoreLogic Case-Shiller: US National6.8%4.5%
S&P CoreLogic Case-Shiller: Composite 10 metros4.7%3.9%
S&P CoreLogic Case-Shiller: Composite 20 metros7.5%5.0%
FHFA: Purchase Only (US Total)5.6%3.5%
CoreLoic: National HPI including distressed5.6%5.3%
NAR Median: Total Existing7.9%5.1%
Courtesy Philadelphia FED Survey

As usual, if we can answer any questions about this, or if you have any comments, please don’t hesitate to reach out!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

February 15, 2021 at 10:11 am

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A New Twist on Rails to Trails Takings

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In 2019, the Appraisal Institute, the Appraisal Institute of Canada, and the International Right of Way Association produced Corridor Valuation, an anthology on a complex subject which is surprisingly common in (pipelines, rail lines, power lines, etc.). I had the very real privilege of contributing two chapters, one on telecommunications corridors (fiber optic cable, etc.) and co-authoring the chapter on Rails to Trails corridors with my esteemed colleague, David Matthews.

Each year in America, on average, about 2200 miles of rail lines are abandoned, and often converted to public use, such as hiking/biking trails. However, the legal nuances are a bit more complex than meets the eye. Often, the railroads did not acquire “fee simple title” to the corridor, but rather acquired a perpetual easement with the proviso that if the rail corridor was ever abandoned, the land reverted to the adjacent property owner. “Abandoned” was usually a process over many years, and as these rail lines became effectively abandoned (although perhaps not legally so), the adjacent property owners made use of the land for residential developments. golf courses, and a host of other uses.

Without re-typing our entire book chapter, sufficient to say someone happened upon the idea that converting these “abandoned” rail lines to public use (e.g. — hiking/biking trails) was a good idea. However, there are costs involved. In a case that made its way to the US Supreme Court not too many years ago, it was decided that these adjacent property owners should be compensated not only for the loss of the land (that otherwise would revert to them) but also for “severance damages” which would be the loss of value to their adjacent property for now having a public use in their back yards.

So… I gave you all of that as a prologue to this. There is a really interesting rails-to-trails case coming out of Oregon right now. Many of the adjacent property owners around the US have argued about the loss of security from having hikers/bikers in their back yards. The project in Yamhill County, Oregon (southwest of Portland) spanned farmland. The argument posed by the farmers was that the new Yamhelas-Westsider recreational trail would inhibit the use of pesticides and endanger food safety (along with the common argument that the trail would invite trespassers). Oregon law requires a 100-150 foot exclusion zone depending on the pesticide being sprayed. If a bicyclist or pedestrian passes within that area, apparently the farmer is supposed to stop spraying.

This is a terrifically interesting argument, and I would have been very interested to see this litigated. However, the county’s board of commissioners voted last week to withdraw the land use application, even after spending in excess of $1 million on the project (and probably obligating to pay the state back another $1 million). The phrase “cut our losses” came out of the final commission meeting to end the project. Notably, Oregon’s Land Use Appeals board had blocked the project at least three times, finding that the county did not sufficiently study the impact on farming.

I doubt we’ve seen the end of this. A lot of money has been spent on both sides, and the proponents of the trail have are well organized. This will be a very interesting case if and as it moves forward.

Written by johnkilpatrick

February 9, 2021 at 2:51 pm

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ACCRE LLC Report, January, 2021

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Well, wasn’t THAT an interesting month! In times of market turmoil, investors often turn to real estate as a safe haven, and we certainly saw that happen in January. The overall S&P was down a bit but the volatility continues to be noteworthy. As such, ACCRE did quite well compared to both the overall market (S&P 500) and the global real estate in general (S&P Global Property Index). We’ve had two very nice months in ACCRE, and hope to see that trend continue in the new year.

Unquestionably, the S&P had a better 2020, but is off to a comparatively lackluster start in 2021. We hope for the best, of course, but it’s important to note that one reason for ACCRE is to provide diversification in an otherwise healthy portfolio. It continues to do that, and continues to provide above-average risk adjusted returns. The overall correlation between ACCRE and the S&P is a bit higher than last month, but continues to be much lower than the historical average.

S&P 500
Average Daily Excess Return0.0405%
Standard Deviation1.3203%
Sharpes Ratio3.0710%
ACCRE Fund
Average Daily Excess Return0.0485%
Standard Deviation1.1922%
Sharpes Ratio4.0651%
Overall Correlation (life of fund)51.9201%
Correlation (monthly)21.4110%
ACCRE Metrics as of January 31, 2021

Again, for the uninitiated, the Average Daily Excess Return is the daily return minus the return that would have been earned in a risk-free asset (here, the coupon-equivalent 13-week T-Bill, measured daily). The Sharpes Ratio is the ratio of those excess daily returns to the standard deviation of those returns (the measure of volatility) and serves as a proxy for risk-adjusted returns. ACCRE usually has higher excess returns and almost always has lower volatility, hence a higher risk-adjusted returns.

Best wishes to you all, and if I can answer any of your questions on REITs or real estate strategies, please drop me a line.

Written by johnkilpatrick

February 2, 2021 at 2:28 pm

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Property taxes and the dark store theory

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This is a continuation of my piece from last week on Property taxes. I suspect that this will be an issue of no small concern to property investors, appraisers, and financial advisors in 2021 and beyond, not just as a result of COVID, but certainly exacerbated by COVID.

I was recently looking at a 10,000 square foot stand-alone commercial building — an “out-parcel” in a shopping center. For a variety of reasons (COVID being only one of them) this shopping center has fallen on hard times, and the tenant (a big national chain) has declared bankruptcy. This store, and nearly all of the properties near it, are vacant, and there is little forecast that this will change in the near future.

So, the total taxable value of the property back when everything was hunky-dory was about $2.2 million. Today, the total taxable value is… you guessed it, $2.2 million. The question which perplexes property owners, appraisers, and tax assessors is the valuation of these “dark stores”. Do they get valued at their highest-and-best use (even though they are vacant) or as some value-in-use, recognizing the current economic condition. More to the point, even when these properties are up-and-running, should the value be reflective of the current contract rent or some other theory of valuation?

As an aside, about 30 years ago, I published a paper on the impact of the failure of anchor tenants in strip shopping centers. The original tenants are typically very stable, boring grocery stores. The other tenants, who on a per-square-foot basis are usually much more profitable to the landlord, draw business as a result of proximity to the grocery anchor. After one fails or moves out, all too often, the landlords scramble around for a substitute, picking up an anchor tenant that may be very risky and/or fails to provide traffic to the other tenants. The result is often a financial failure of the whole shopping center.

Back in February, 2017, the Texas Comptroller published a piece on the Dark Story Theory and how it impacts property tax assessments. There is a lot more written on the subject, and a full literature review would be beyond the scope of what I hope to accomplish today. This theory first gained purchase with the big-box landlords, but it is now the theory du jour with many tax advisors in the commercial sector. In short, the Dark Story Theory holds that a big-box retailer really only has value due to the unique tenant. As such, these properties should always be valued as if they are vacant (or “dark”), because these locations would be difficult to sell to subsequent buyers without the big-box tenant. The Texas Comptroller article notes that the most vigorous proponent of this theory in that state, at least in 2017, was Lowes Home Improvements Stores, with 141 operating locations in that state. In Texas, Bexar County alone estimates it would cost the schools $850 million per year in property tax revenues if this theory was to succeed. As of 2017, Bexar County had spent $300,000 on Lowe’s tax appeals.

Note that the definition of market value for commercial properties, for tax purposes, may be somewhat different than the definition used for a simple home mortgage. Texas law, for example, taxes property at its current use, including any rents it generates. Note that many dark stores are still generating rent for the landlords due to the complex build-and-lease-back provisions in the original development.

This is not an issue limited to Texas. A study out of the U. North Carolina in 2018 showed that this theory has caught on with commercial property owners throughout the U.S., and that the reductions sought often amount to 50% or more of the otherwise assessed value. With millions of dollars in annual tax expense at stake per building, the landlords can afford to hire the best talent and litigate these appeals. Courts are increasingly finding merit with the landlords’ arguments. In 2008, the Wisconsin Supreme Court held in  Walgreen Co. v. City of Madison, 311 Wis. 2d 158 (2008), that the market value for tax purposes must be based on market rents rather than contract rents, because the latter, “artificially increased sales prices cause by unusual financing arrangements[.]” The Walgreens decision has resulted in over 140 property tax appeals in that state alone. A bill to effectively reverse this decision failed in the Wisconsin legislature in 2018.

In Indiana, the state tax court was persuaded by appraisers and attorneys for Kohl’s to rely on sales data from nine “dark box” retail stores. This was effectively upheld by the State’s Supreme Court. (See Howard Cty. Assessor v. Kohl’s Indiana LP, 57 N.E.3d 913, Ind. T.C. 2016, review denied, 86 N.E.3d 171). In North Carolina, the Lowes Store in Kernersville (Forsythe County) was valued at $16 million. Using the dark story theory, Lowes appealed with a $6 million valuation, which was upheld by the Property Tax commission. (Matter of Lowe’s Home Centers, LLC, COA17-220, 2018 WL 708657, N.C. Ct. App. Feb. 6, 2018)

With the implosion of certain sectors of commercial real estate becoming more of a reality in the COVID recession, we can surmise that these theories will be more vigorously litigated in the coming months. There is very real money at stake on both sides of this issue.

Written by johnkilpatrick

January 11, 2021 at 9:26 am

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Property taxes on the rise

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Fair and Equitable is the monthly journal of the International Association of Assessing Officers, the primary professional group for tax assessors around the U.S. In the current edition, there is a striking article about rising property taxes due to COVID. In summary, it’s not very good news.

In most towns, cities, and counties, one of the primary sources of operating budgets is property taxes. However, many, and perhaps most cities also rely on sales taxes, tourism taxes, and sometimes even local option income taxes. All of these latter sources of revenues have gone in the tank since the onset of the COVID recession. A study out of the U. of Wisconsin indicates that the shortfall for 2020 is $165 Billion across all cities. Many cities which are highly dependent on tourism — Nashville, New Orleans, and Las Vegas immediately come to mind — are particularly hard-hit.

Many states have hard caps in property tax increases, although some do provide exceptions for emergencies. Houston, for example, has an annual tax increase limit of 3.5%, but may exceed this in the case of declared emergencies.

For the uninitiated, the property tax bill you receive every year is the product of two things — the property ‘assessment’ (determined by the local property assessor or appraiser) and the ‘tax rate’ (sometimes somewhat archaically called ‘millage’), set by the taxing authority, such as the city, county, or school district. This gets particularly cumbersome during recessions because, arguably, the assessed values of some properties, particularly in this case commercial properties (such as restaurants, bars, or such) may decrease even as the local taxing authority needs to raise more money. Hence, to get a 5% increase in tax revenues when some properties are declining in value, the local county council may need to actually raise the tax rates by 10% or 20%. Nashville, for example, just raised tax rates by 34%. Notably, Tennessee has been historically less dependent on property taxes as a source of revenue, with the average tax bill in that state about 40% below the national average. As a result, Tennessee tax payers may feel some very real sticker shock in 2021.

What’s more, if some properties go down in value more than others (as is happening now), the burden of higher taxes falls disproportionally on property owners who are still solvent.

Property owners are advised to take a very serious look at tax assessments in light of the potential declines in property values. Some assessors are trying to get ahead of the game. For example, New Orlean’s assessor Erroll Williams has made pro-active, across the board cuts in the values of hotels and restaurants by as much as 57%. Cook County, Illinois, Assessor Fritz Kaegi is in the midst of a re-evaluation of every commercial property in his jurisdiction.

All in all, a phone call to your friendly, neighborhood real estate appraiser is probably warranted. If and as we can be of any assistance, please let me know.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

January 8, 2021 at 1:26 pm

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ACCRE LLC Report, December, 2020

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Let’s all start by admitting that the S&P 500 has been on a tear this year. If you had put a dollar in an S&P Index Fund on March 31, it would have been worth $$1.38 when you sang Aude Lang Sine last week. Personally, I hope it keeps going! ACCRE is designed in no small part to hold value during market swings, to outperform REITs in general, and to attenuate a well-diversified portfolio. It did all of those this year, and particularly in December. Let’s get down to the basics.

I use January 31 as a benchmark date — that was nominally the beginning of the COVID bear market. As you can see (below) ACCRE did very well compared both to the broad market and to the S&P Property Index. Indeed, but for some market reversals in the fall, we’d be well ahead today. December was a great month for us, and we’re back in the lead against both benchmarks. A dollar invested in ACCRE at the inception would be worth $1.65 today, compared to $1.59 for that same dollar in the S&P 500 and $1.19 in the Property Index.

We feel like we’re well positioned for the coming year, and in fact we were up on the first day of trading, today, while the main market indices all tanked.

One important measure is our Sharpes Index, which looks at excess returns (returns in excess of what we would have earned in treasury bills) adjusted for risk (volatility — measured by the standard deviation of those returns). An additional measure is the correlation with the S&P 500. We generally measure this over the life of the fund, and it hovers around +50%, which is where we want it to be. However, in December, this hit about +15%, suggesting that the market may be looking at real estate very differently from other securities.

S&P 500
Average Daily Excess Return0.0424%
Standard Deviation1.3215%
Sharpes Ratio3.2034%
ACCRE Fund
Average Daily Excess Return0.0448%
Standard Deviation1.1975%
Sharpes Ratio3.7398%
Correlation (overall)52.3091%
Correlation (December)14.6899%
ACCRE Metrics as of December 31, 2020

Well-curated real estate continues to be viewed as a safe haven, with very real value opportunities when and as this recession is over. As always, this in no way constitutes investment advice, and your own financial investments should be made in consultation with appropriate advisors.

If we can answer any other questions, or be of any assistance, please let us know.

John A. Kilpatrick, Ph.D. — john@greenfieldadvisors.com

Written by johnkilpatrick

January 4, 2021 at 3:24 pm

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Back rent problem — take 2

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In my previous post, I talked about the accumulated “back rent” problem stemming from the COVID recession. It’s a growing problem, and one which the newly signed COVID relief bill only partially addresses. Here’s what we know today about rental assistance forthcoming.

I would stress at the onset that state and local agencies will be the conduits for this relief, as was done in the previous CARES Act. Notably, it took weeks or months for many of these agencies to spin-up the actual relief payments. Hopefully they have some lessons learned from earlier this year, but don’t expect relief to come in the next few days.

Relief payments must be used to fund the following:

  • Rent and rental arrears
  • Utilities and other home energy expenses, but current and in arrears
  • Other pandemic-related housing expenses

Assistance may continue for up to 12 months, and in some circumstances for up to 15 months if situations warrant. Eligible tenant households must meet all of the following three criteria:

  1. An individual in the household has qualified for unemployment benefits or the household has experienced an income reduction, experienced significant pandemic-related costs, or can document other pandemic-related financial hardships. (Note: applicants must attest to this in writing.)
  2. One or more individuals in the household must demonstrate a risk of experiencing homelessness or other housing instability, such as a past-due utility or eviction notice or unsafe or unhealthy living conditions.
  3. The household income is less than or equal to 80% of the area median income, based either on total income for the year 2020 or confirmed monthly income at the time of the application.

Priorities will be given to households with income less than 50% of the area median and households where one or more persons have been unemployed for 90 days or more. Landlords may provide application assistance but will need to obtain the signature of the tenant, provide documentation of the application to the tenant for their records, and use any payments for current or past-due rent.

As noted, the conduit for all of this will be state and local government agencies and tribal units. Those agencies will be responsible for collecting and reporting certain documentation to the U.S. Treasury Department, including the number of eligible households receiving payments and average payments per household, the types of assistance provided, the acceptance rates, the average number of payments covered by the assistance, and the household income levels by median income category (e.g. — less than 30%, 30% to 50%, and 50% to 80%).

We’re all waiting to see how this pans out, and quite obviously this will not cure the problem. However, it is clearly a step in the right direction. Please stay in touch — we look forward to hearing from you all.

John A. Kilpatrick, Ph.D. — john@greenfieldadvisors.com

Written by johnkilpatrick

December 29, 2020 at 8:43 am

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How bad is the back rent problem?

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It is axiomatic that landlords do NOT want vacant space, and coupled with eviction moratoriums there is a growing backlog of unpaid rent, particularly by small businesses and residential tenants. Anecdotally, the problem is widespread and growing, but just how big is it? Experts differ, but generally agree it is huge and portends a huge humanitarian problem in 2021.

One of the most quoted experts on the topic is Mark Zandi, chief economist at Moody’s. He estimates that 11.4 million renters owe an average of $6,000 in back rent. Add to that late fees on utilities and such, and we’re probably looking at a $70 Billion problem, more or less. Most of this has accrued since the CARES Act expired last summer.

Even back in September, the overdue rent bill had already reached an estimated $34 Billion, according to a study commissioned by the National Council of State Housing Agencies. Note that this problem is not just limited to renters — Since August, the FHA mortgage delinquencies have been setting new records, at 15.6% on September 30th, the highest rate since 1979. Note that the peak during the Great Recession was between 14% and 15%. The Mortgage Bankers Association is tracking forbearances among lenders, and estimated that 5.5% of mortgages, or 2.7 million, were in some sort of forbearance in November. The delinquency rate in September was 7.6%, and while this is down from 8% in April, it is dangerously close to the 10% peak seen in 2009/10. The Credit Union Trends report released in late November forecasted delinquencies to “broadly rise in the fourth quarter and charge-offs to rise in the first quarter” of 2021.

The economy is definitely bifurcated right now. The upper tier has seen the value of their stock portfolios grow by well over $1 Trillion this year, but as Zandi notes, the renter population is at the bottom tier of the economy. They’ve already borrowed as much as they can. Over the weekend, the President signed the COVID relief package, but while the eviction moratorium continues, back rents continue to accrue. One recent study suggested that at present, as many as 14 million rental households are in arrears, and this number will clearly get worse over the winter. Another, issued by the National Low Income Housing Coalition, put this number at 6.7 million. The Census Bureau’s latest Housing Pulse Survey (from November) indicated that 11.6 million people would not be able to pay their rent or mortgage payment in December. Whatever the final number, at some point, the piper will need to be paid.

Notably, the bill signed yesterday includes $25 Billion in emergency rental assistance. Exactly how this will be distributed, and how much of the rental backlog this will actually assuage, will be seen in the coming days. Notably, when the CARES Act included such assistance, it took some state housing finance agencies months to actually enable rental aid programs.

Again, anecdotally, landlords have shown very real forbearance in this area. I would note that the rental market, ranging from single family housing to large apartments, are generally ultimately owned by individual investors. At the lower end of the spectrum (rental houses, for example), individual investors usually directly own and manage these properties. At the upper end, REITs or Trusts may own the properties, but the rental income flows to investors or their retirement accounts. Further, rental income employs property managers, maintenance people, and a host of other service providers. In short, this is a problem that reverberates across many sectors of the economy.

Written by johnkilpatrick

December 28, 2020 at 10:04 am

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So what do we know about COVID relief?

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I spoke with some folks “in the know” this morning, and the details are still unfolding. The real estate sector should pay very close attention to this, as so many aspects of the relief bill affect it.

First, what do we think we know? There are apparently 6 categories of aid in this package:

Supplemental Employment InsuranceWeekly payments of $300 (half of what was provided in the original CARES Act) for up to 11 weeks
Direct PaymentsOne time payment of $600 for individuals making under $75,000 and for each dependent child (again, half of the CARES Act)
Small Business ReliefPPP loans of $284B (about $100B less than CARES) plus $15B specially allocated to theaters and live entertainment venues
Rental Assistance$25 Billion, and the national moratorium on evictions extended until Jan 31
Vaccine Assistance$48 Billion for healthcare, and $20 Billion for vaccine distribution
Education$82 Billion for local schools, colleges, & child care plus $13 Billion for supplemental nutrition programs
Thanks to my friends at Marcus and Millichap for much of this information.

It is axiomatic that the lowest wage earners, who have generally been hit the worst by this recession, are most likely to be renters. Further, a large portion of rental properties are owned by small real estate investors. Hence, there is a bit of a two-edged sword here, in that some parts of this may flow directly to those landlords who are often retirees or others dependent on rent collection. From a practical perspective, the eviction moratorium isn’t nearly as powerful as it seems, because so many landlords would rather keep a non-paying tenant in place than to go thru the cost of eviction only to have an empty property.

It’s far too early to even conjecture as to how much (or little) impact this will have. Many businesses kept their doors open only due to the CARES Act PPP loans, but all too many of those have now shuttered permanently. For example, CNN Business reported last week that 10,000 restaurants have closed for good in the past 3 months. Every one of those restaurants had a landlord who is now not getting paid. Back in September, YELP reported that 163,735 small businesses that they track had shut their doors, and that almost 98,000 of those were projected to be permanent closings. Of course, large chain bankruptcies and closures are well publicized.

One intriguing study from iPropertyManagement.com suggests that apartment and rental housing vacancies vary widely according to location — inner city versus suburbs. Apparently, major cities are seeing an uptick in apartment vacancies (Manhattan’s has tripled), but suburban vacancy rates are actually down, suggesting renters are fleeing congested cities. Indeed, non-metro area vacancy rates are also down.

By the way, this is usually the week I re-visit our REIT Fund-of-Funds, ACCRE LLC, and report on the S&P correlations and other diversification benchmarks. Going forward, I’m going to consolidate the two ACCRE reports into one at the beginning of each month. This mid-month blog post will now be just about economic and real estate issues.

This is also my last post (I think!) before the Christmas holiday. All of us at Greenfield hope you and yours are enjoying a safe holiday season. I know we’ve lost all too many friends and colleagues this year, and we look forward to getting COVID under control in the very near future. Best wishes,

John A. Kilpatrick, Ph.D. — john@greenfieldadvisors.com

Written by johnkilpatrick

December 22, 2020 at 3:51 pm

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Trophy Property and the Pandemic

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I spend a significant amount of my time at two somewhat opposite ends of the real estate spectrum – “damaged” property (particularly environmentally damaged, such as brownfields) and “trophy” property. Neither of these sectors behave like “normal” real estate even in “normal” times. Damaged property may eventually be remediated, converted, or in some way improved into the normal market. Ironically, demand for some kinds of damaged property, such as foreclosures, may actually improve during recessions or other “normal” market disruptions.

Trophy property is typically any property in the top 2.5% of its subclass. The market for such properties transcends normal markets for that subclass. Consider all of the office buildings in a given city — even New York or London. Investments in Class C and B offices may appeal to local buyers, while Class A properties will typically be marketed to trusts, REITs, pension plans, or the like. However, at the very top — the “named” properties which really anchor the city as a whole — the investment market may be entities or individuals for whom the trophy investment will provide halo effects or collectable effects for the rest of the portfolio. Normal metrics — income or cash/on/cash rates of return and such — may not apply to trophy investments. Much like a fine painting or other object d’art, an investor may want to own a trophy property simply for the sake of owning it. Of course, it doesn’t hurt that over long periods of time, trophy real estate has a great history of maintaining and improving value. It doesn’t hurt that trophy property investors often have very long time horizons, perhaps even multi-generational.

So, how is trophy property faring during this pandemic-induced recession? As with any good analysis, it may be too early to tell, but some anecdotal info coming our way suggests that trophy investors look at this recession as a real opportunity to pick some low-hanging fruit. One case in point was the acquisition of the Viceroy L’Ermitage Beverly Hills Hotel in October by EOS Investors. Admittedly, this property had a “damaged” component — the property had been taken over by the U.S. Government as a result of prosecution of an international money laundering case. Further, hotels in general remain strained, with many transactions falling into the “damage” category. However, EOS ended up paying $100 million for the 116-room trophy property, nearly $1 million per room, a figure that bears almost no connection to the realities of the hospitality market today.

At the other corner of the country, Manhattan trophy residences recorded one of their best weeks of the year in late October, albeit with a fairly large inventory of top-tier properties coming on the market. As an example, a 30,000 square foot, 5-story home on West 11th Street in Greenwich Village sold this month for $45 million. Originally listed for $49.5 million in January, 2019, this was the second highest price residential sale in New York City this year, and the highest since the pandemic began. Another New York City trophy residence sale in late October was a Perry Street (Tribeca) 5-bedroom duplex, with a private pool, for $20 million. According to one source, the average sale-price-to-list-price discount for Manhattan trophy residences stands at 11%, and the average time on the market in this sector is about 2 years. The last week of October showed 5 New York City contracts at $10 million or more.

Finally, in the middle of the continent, trophy ranches continue to sell to investors looking for recreation, retirement, or just pure collection purposes. Recent top-tier sales include the Pole Mountain Ranch in Wyoming (2,300 acres, 8,000 square foot main home, $8 million), a vacant pond-side lot at the Elk Creek Ranch in Colorado ($1.1 million for 2,850 vacant acres), and the Winding River Ranch in Wyoming (376 acres, 1.5 miles of Platt River frontage, custom built 5-bedroom lodge, for $2.2 million).

In short, there is some disruption right now in the trophy property market, as many properties seem to be coming on the market and inventories are strong. However, buyers with cash and/or resources are definitely in the market, and are looking to cherry-pick trophies that come available.

Written by johnkilpatrick

December 11, 2020 at 10:01 am

Posted in Uncategorized

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