Posts Tagged ‘Home Depot’
WSJ Property Report
Three things caught my eye in the Wall Street Journal’s Property Report this morning. The first two were a positive note about Home Depot — which is doing a land-office business — and a related note about the aging of American homes. Let’s start with the second point first.
The National Association of Homebuilders reports that the median age of a home in America is now 37 years, up from 31 years just a decade ago. Mathematically, that’s an extraordinary increase. It basically means that very few new homes have entered the housing stock in the past 10 years, and almost no homes have been torn down or in some way converted to some other use. That’s the point NAHB is trying to make. Our aging housing stock is a drag on the economy. People who might have been employed in higher wage construction jobs are now serving coffee at Starbucks. This ultimately means that our flat-line inflation in America has, to at least some degree, been achieved on the backs of stagnating wages.
Of course, this means good things for home re-hab shops like Home Depot. If you’re house is getting older, you have two choices. You can sell it and buy a new one (making the NAHB happy) or you can buy a can of paint or some new kitchen cabinets at Home Depot. (Full disclosure — the folks at my local Home Depot know me by name.)
As for the third point, while wage stagnation is decidedly affecting the middle class, there is no such problem in the luxury class. Belmond Hotels, owners of some of the world’s premier hotels, are considering buy-out offers. Financially, this suggests they think we may be at the top of a cycle, and it’s hard to imagine that they could wring any more profits out of their properties than they do already. Ergo, it may be time for them to cash in, and rumor has it some sovereign wealth funds are offering top dollar. (Full disclosure — Belmond owns the Charleston Place in Charleston, SC, where I spend every New Years. It is one of my favorite hotels in the world.)
By the way, Belmond is one of those fascinating stories that underscores the globalization of commerce. Belmond was actually founded with the acquisition of the Hotel Cipriani in Venice, Italy. It owns the Orient Express, which is run out of its Paris Office. Corporate offices are in London, and today owns properties in 22 countries, including the historic 21 Club in New York and the Copacabana in Rio. The legal headquarters, however, are in Hamilton, Bermuda, and the stock trades on the NYSE. Go figure….
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Real Estate Marketing Focus
I’ve observed over the years that real estate investors, developers, and such try to aim for the “middle”. It’s a defensive strategy. Lots of community shopping centers got built before the recession hit, not because they were hot or trendy or even hugely profitable, but because they were generally considered to be “safe”. The same was true with single family subdivisions, all of which looked pretty much alike by 2006. Lots of “average” apartments were built, Class B to B+ office buildings (some of which marketed themselves at Class A, but could get away with that only because of demand), and plain, vanilla warehouses were added to the real estate stock.
Now that we’re (hopefully!) coming out of a recession, it may be a good time to dust off some basic truths about business in general as it applies to real estate. Sure, there’s a very strong temptation to rush to the middle again, and in the case of apartments (for which there is a demonstrably strong demand right now), that may not be a bad idea. Nonetheless, I recall one of the great pieces of advice from Peters and Waterman’s In Search of Excellence: “average” firms achieve mediocre results. The same is frequently true in real estate.
Case in point — there was a great article on page B1 of the Wall Street Journal yesterday titled “The Malaise Afflicting America’s Malls”. by WSJ’s Kris Hudson. (There’s a link to the on-line version of the article on the WSJ Blog.) Using Denver, Colorado, as an example, they note how the “high end” mall (Cherry Creek Shopping Center), with such tenants as Tiffany and Neiman Marcus is enjoying sales of $760/SF. At the other end of the spectrum, Belmar and the Town Center at Aurora are suffering with $300/SF sales from lower-end tenants. Other malls in Denver are shut-down or being demolished and redeveloped. For SOME consumers and SOME kinds of products, in-person shopping is still the normal. It’s hard to imagine buying a truck load of lumber from Home Depot on-line (and Home Depot has done very well the past few years), although even they have a well-functioning web presence for a variety of non-urgent, easily shipped items.
I noted recently that some private book sellers are actually doing well in this market, and have partnered with Amazon to have a global presence. (We buy a LOT of books at Casa d’Kilpatrick, and nearly all of them come from private booksellers VIA Amazon’s web site.) On the other hand, it’s hard to imagine buying couture fashion over the web. Intriguingly, Blue Nile, the internet-based jeweler, notes that their web-sales sales last year (leading up to Christmas) were great at the both ends of the spectrum, but lousy in the middle. Stores like Dollar General, who aim for a segment of the market below Wal Mart, have done quite well in this recession (the stock has nearly doubled in price in the past two years). Ironically, Wal Mart, which is increasingly being viewed as a middle-market generalist retailer, hasn’t fared as well. Target, which seems to aim for the middle of the middle of the middle, has seen it’s stock price flat as a pancake for the past two years, and Sears, the butt of so many Tim Allen jokes, is trading at about half of where it was two years ago. These lessons are being lost on some retail developers, but being heeded by others. Guess who will come out on top?
So, who needs offices, warehouses, and other commercial real estate? Businesses at the top, middle, or bottom? If we follow the adages of Peters and Waterman, we’ll expect the best growth — and hence the most sustained rents — at the top and bottom of the spectrum. (Indeed, even in apartments, one might build a great case that the best demand today is at the low end and high end). However, we’re willing to bet that developers will aim for the middle, as always.
From a small northwestern observatory... 