From a small northwestern observatory…

Finance and economics generally focused on real estate

Collapsing Price of Alternative Energy

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Most — nearly all — of our work is in real estate, but energy has a huge real estate component, so major shifts in the energy market have significant implications for real estate investment.

A recent report out of Lazard reflects just such a major shift.  Specifically, among five major sources of energy, wind and solar are now the low-cost alternatives.  Indeed, since 2009. the cost of solar energy (at a utility scale — not just what’s on the roof of your house) has declined by 86% to about $50 per megawatt hour.  Coal, for example, has declined in price only 8% during that period, and is now $102/MWh, or double the cost of solar.  Wind is even cheaper, at $45/MWh.

Thanks to Lazard for the accompanying graphic.

Lazard estimates

The implications for real estate are obvious. If and as utilities shift supply sources, and focus on alternative energy to meet increasing demands, there will be an accompanying demand for solar farms, wind farms, and new transmission lines.  Accompanying this, we’ll probably see a decreased utilization of coal mines, and certainly a reduced demand for new coal mines.

Written by johnkilpatrick

May 9, 2018 at 8:39 am

Commercial Real Estate — Prices vs Values

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Anyone involved in real estate knows that commercial prices and values have been on a constant uptick since the trough following the recession.  The very length and breadth of the recovery has caused nervousness among investors, appraisers, and lenders.  Today, I’m looking at two somewhat disparate views on the subject.

First, Calvin Schnure, writing for NAREIT, looks at four measures of valuation:

  • Cap rates and cap rate spreads to Treasury yields
  • Price gains, either from increasing NOI or decreasing cap rates
  • Economic fundamentals, such as occupancy and demand growth
  • Leverage and debt growth

At present, none of these is giving off warning signals, according to Schnure.  Cap rates continue to be low compared to other cycles, but so are yields across the board.  There continues to be room for cap rate compression, in Schnure’s assessment.  As for price changes, every sector is showing growing or at least stable NOI, with the proportion of price changes coming from NOI now equal or exceeding price increases coming from cap rate declines.  Across the board, REIT occupancy rates are high and on the rise, with industrial and (surprisingly) retail at or near 95%.  All equity REITs are in the low 90% range, compared to the high 80’s at the trough of the recession.  Finally, debt levels are rising, but at a lower rate than valuations.  Ergo, this is not, in his opinion, a debt-fueled cycle.  Right now, debt/book ratios are significantly lower than in the previous FOMC tightening cycle (2004-2006).  For a full copy of Schnure’s article, click here.

Second, I was at the American Real Estate Society’s annual meeting in Ft. Myers, FL, last week, and had the great pleasure to sit in on a presentation by my good friend Dr. Glenn Mueller of Denver University, the author of the widely acclaimed Market Cycle Monitor.  He tracks property types and geographic markets by occupancy, absorption, and new supply statistics, and for years has proffered a very accurate measure of commercial real estate, both nationally and locally, across four potential phases:

  • Recovery (rising, although unprofitable rents and occupancy)
  • Expansion (rising and profitable rents and occupancy, stimulating new construction)
  • Hypersupply (oversupply of new construction and declining rents and occupancy)
  • Recession (unprofitable and declining rents and occupancy)

Most markets cycle through these phases in a fairly predictable fashion.   Right now, most markets (property types and geography markets) appear to be in the expansion mode, with some (notably, apartments) potentially crossing the line into hypersupply.

In short, commercial real estate markets look healthy, absent the sort of exogenous shocks that sent us into the most recent recession.  That said, many of those same metrics read positive prior to the mortgage market melt-down.  Of course, commercial real estate actually faired pretty well during the recession, compared to many other asset classes, supporting the notion that in times of economic trouble, real estate equities can be great storers of value.

Written by johnkilpatrick

April 16, 2018 at 9:50 am

An important story on trade

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Alexis Crow, who leads the geopolitical investing practice at Price Waterhouse Coopers, has a stunningly important article on trade in today’s Washington Post.  I recommend you read it here.  In short, Trump’s trade war misses a very important point — the U.S. economy has matured from manufactured goods to services, and actually runs a net surplus of such services to the rest of the world.

As she notes, “Providing services is the heartbeat of America’s new economic growth, including IT and communications services, logistics, warehousing, leisure, hospitality, health care, business and legal services.“. She goes on to note that wealth created by America’s trading partners — China, Japan, etc. — translates into purchase of American services, including travel, media, IT, logistics, and entertainment.  By 2026, fully 81% of American jobs will be in such service areas, and our trade surplus in these areas is already nearly $300 Billion per year.

Written by johnkilpatrick

April 11, 2018 at 11:55 am

Damage to Reputation/Brand

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In my last post, I commented about AON’s Global Risk Management Survey.  I want to continue on that theme today, and continue to compliment the great folks at AON for a super job.

Number one on their list was Damage to Reputation / Brand.  The open the chapter on that with a wonderful story, which I will briefly retell here (with full attribution).  A worker in China purchased an electronic device and while charging it, the device caught fire.  He videotaped the incident and uploaded it to the internet.  The clip was soon viewed millions of times around the world.  Other customers reported similar defects.  Even though less than 0.1% of the devices sold were defected, widespread panic followed.  the company was forced to issue a world-wide global recall costing an estimated $5 Billion.  Ironically, this tech company became a victim of the tech revolution.

AON notes that widespread fake news, the lack of fact checkers on social media, and the political cross-fire following the US 2016 elections all have risk for brand damage.  AON estimates that there is an 80% chance a company could lose at least 20% of its equity value in a month over a 5 year period doe to a reputation crisis.

Eight years earlier (2009), Damage to Brand / Reputation was ranked number 6 among risks by respondents.  Today it is number one.  Reputation / Brand events often arrive with little or no warning, to cite the survey, and organizations are forced to respond quickiily.  As such, it is critical that companies have comprehensive reputation risk control strategies in place.  Such strategies include meticulous preparation and executive training, to help maximize the probability of recovery.

Thanks again to the good folks at AON for providing this information.

Written by johnkilpatrick

April 9, 2018 at 3:29 pm

AON’s Global Risk Management Survey

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The good folks at AON just shared with me their very detailed Global Risk Management survey for year-end 2017.  It’s a terrific document, very thoroughly researched, and I commend them for the effort they put into this.  (Full disclosure – neither I nor Greenfield, nor any of its affiliates, have any interest in AON.).  This is the sort of study that should be on the desk of every CEO who has globally-affected interests, and certainly real estate and private equity fall into that category.

The document is chock-full of good stuff, and I’ll revisit this in future posts.  Two interesting comments, however, hit me right up front.  First, and I’ll simply quote from the survey, “…developed nations, which were traditionally associated with political stability, are becoming new sources of volatility and uncertainty that worry businesses…”. Of course, they’re taking about the U.S. and its misguided trade war, BREXIT, the elections in Northern Europe, and the impeachment of the South Korean president.

Second, what are the top concerns for global businesses and wealthy families?  The list may come as a surprise to those who don’t follow these important sectors, but these certainly make sense in today’s climate:

  1. Damage to reputation/brand
  2. Economic slowdown / slow recovery
  3. Increasing competition
  4. Regulatory / legislative changes
  5. Cyber crime / hacking / viruses / malicious codes
  6. Failure to innovate / meet customer needs
  7. Failure to attract or retain top talent
  8. Business interruption
  9. Political risk / uncertainties
  10. Third party liability

I can tell you Greenfield is deadly serious about these issues.  You should be, too.

Written by johnkilpatrick

April 4, 2018 at 11:51 am

NYC Family Office Club

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I had the very real pleasure of attending the Family Office summit in New York City last Friday.  The meeting drew together about 400 individuals, give or take, who are involved in various aspects of management or advice to family offices.   Greenfield was, of course, the one of the leading real estate advisory providers there.

For the uninitiated, a Family Office is more-or-less what it sounds like.  A family views its financial and other holdings as something to be managed for the benefit of the entire multi-generation family.  A very, very rough division might categorized those families with a billion dollars of net worth or more, families with $100 million to a billion, and families with aggregate net worth below $100 million.  For the first category, the family office is usually a separate business enterprise managing just that family.  It may directly employ one or more attorneys, accountants, and investment advisors, or at the lower end of the scale perhaps just one or two professional managers with other professionals on retainer.  The family office manager ensures that the assets are well invested and well managed, that the taxes and other bills get paid on time, and that the family estate is managed.

In the middle category, a professional manager may oversee several families, or in some cases a management team may oversee a dozen or more families.  The suite of services is somewhat less (estate management and day-to-day bill paying may not be on the table).  At the lower end, for families with $50 to $100 million in investable net worth, there are trust companies that manage the money and make sure the tax accountant gets everything needed.

It goes without saying that above a certain level, every wealthy family has some sort of family office.  To quantify this, the wealthiest 0.1% (that is, one tenth of one percent) of American families have an average net worth of $200 million.  Ahem… That’s 125,000 families.  It perhaps goes without saying that these families are shown the best investments, receive the best legal, accounting, and advisory services, and expect mind-boggling results.

Now, you’d think that the lessons learned from these uber-wealthy families and their advisors would have little to do with the average American family, but indeed that’s far from the truth.  Amazingly enough, the lessons learned here are applicable to every family in America, indeed the world.  I’ll summarize just a few.

  1. The family matters more than the money.  Indeed, the wealthy families I’ve spoken with manage their money carefully and purposefully to knit together the family across generations.  Even so, only 30% of earned wealth hangs around past the third generation.  Why?  The biggest single issue was family disputes.
  2. There is an extraordinary global industry of lawyers and others devoted to family reputational management.  Managing a family’s reputation is paramount.
  3. Most wealth families expect their investment advisors to preserve wealth.  They already know how to make money, they just don’t want their advisors to lose it.  That said, they don’t like blind pools, they want to be in control of private equity investments (but are open to partnering with other families or “sidecar” arrangements) and prefer private equity to public.
  4. Wealthy families and their investment managers are rarely open to an investment “pitch”.  They want to get to know an investment manager first, and may not be open to an investment until the third or fourth idea.

There were a lot of other details, and I’ll leave those for another time.

Written by johnkilpatrick

March 29, 2018 at 2:18 pm

Posted in Economy, Finance

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Extraordinary women in aviation

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It’s women’s history month, and as an avid pilot, I’m terrifically impressed with the women I’ve met in the front seats of airplanes of all stripes.  With so many famous male flyers (Yeager, Glenn, Lindbergh, Doolittle, Curtis, the Wright Bros), we lose sight of the fact that women have been there from the beginning.  Here are just a few, off the top of my head:

In 1910, Blanche Stuart Scott was the first woman to fly solo, and later became a test pilot for Martin Aviation.  She was also the second woman (also in 1910) to drive across the U.S., and the first to drive east-to-west (NYC to San Francisco).  She went on to become a Hollywood script writer.  In 1948, Chuck Yeager took her on a ride in a Lockheed TF-80C trainer, making her the first woman to ride a jet.

In 1911, Harriet Quimby became the first woman to earn a pilots license in the U.S., and in 1912 became the first woman to fly the English Channel.  As a side venture (!) she wrote screenplays and seven of her movies were directed by the famed D.W. Griffith.

Katherine Stinson became the 4th woman to earn a U.S. pilots license in 1912, and became the first woman to be licensed to carry the U.S. airmail.  She became one of the first female flight instructors shortly thereafter, and set the aviation speed record in 1917 on a flight from San Diego to San Francisco.

Bessie Coleman was the first African American aviator in 1922. The daughter of sharecroppers, she fell in love with aviation, but no American flight school would give her the time of day, both because of her gender and her race. She taught herself French, and went to France to enroll in a flying school there. Returning to the U.S., she became famous in the barnstorming circuit, but tragically died a the age of 33, in 1926, rehersing for a show.

Beryl Markham was one of the first African bush pilots in the 1920’s and 30’s, and in 1936 became the first person — male or female — to fly the Atlantic from east to west. (Lindbergh flew from west to east. Markham’s passage was the more difficult due to prevailing eastbound winds.)

Jackie Cochran was the first woman to break the sound barrier in 1953.  She’d founded the WASPs in World War II, and still holds more aviation records than any other pilot, male or female.  She was the first woman to pilot a bomber across the Atlantic (in WW-2) and after the war, was commissioned a Colonel in the newly formed U.S. Air Force reserves, making her the first woman pilot in the USAF.

Jackie Cochran’s co-founder was the somewhat lesser known Nancy Harkness Love, who founded the Women’s Auxillary Ferrying Squadron (actually, several squadrons) that was eventually merged with Cochran’s group to form the WASPs.  Love was certified on 19 different military aircraft, including the P-51 Mustang.  She was eventually commissioned a Lieutenant Colonel in the Air Force Reserves.

So, there’s our history lesson for today, folks.




Written by johnkilpatrick

March 13, 2018 at 11:04 am