From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘THe Economist

Real estate and the “long game”

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The two big economic stories right now — and probably for the rest of the year — will be the impact of the Euro problems and the impact of the impending “fiscal cliff” in the U.S.  We don’t want to minimize the significance of either of these impending problems on the financial world in general and real estate in specific.  Indeed, either of these problems has the potential to bring down the global house of cards.

Nonetheless, it’s important to keep our eyes on the longer trends within which these crises exist.  The exit strategy for either of these crises depends heavily — maybe even totally — on the trajectory of these longer-term trends.

A very brief article in the current issue of The Economist caught our eye this week.  The article was about the disparity between the median population age of various countries and the average age of that country’s cabinet ministers.  The goal was to show that in the “rich” world (e.g. — Germany), the cabinets more closely resembled the general population, while in the “emerging” world (e.g. — India, China) there was a large disparity, with attendant potential instability.  In that context, however, the article wasn’t very compelling — the U.S. has a huge disparity, while Russia has a high degree of alignment.  Go figure. What caught our eye, though, was the variation in population age among various countries, and the implications for long-term growth.  Quite a few years ago, I was at an academic conference which discussed the increasing age of the population in Europe, and in that context how Europe had the potential to be the next Japan.  An aging population has very significant implications for real estate — particularly in the commercial sector.  As a decreasing portion of the population is working to support a larger and larger retired segment, there is both a generic malaise inherent in the economy (unless high increases in productivity are induced) and a decreasing need for commercial real estate space (particularly in offices, warehouses, and manufacturing).

In that context, the emerging nations of the world have an edge — note the low median ages in India, China, Brazil, and Canada.  Ironically, the U.S. is also in that mix, and to a lesser extent Australia and Russia.  At the other end of the spectrum, Japan and Germany have nearly the same median age problems.  The latter is most problematic, since the German economy has been entrusted with bringing the Euro zone out of its doldrums.  Clearly, a rapidly aging German population has less need for commercial real estate, but also less ability to drag the ox cart of Europe along the road to recovery.  Britain, solidly part of Europe but outside the Euro, has a somewhat younger population — indeed slightly closer to the U.S. than Germany and about equal to economically stalwart Canada.  The short-term horizon will continue to fuel real estate challenges and opportunities, but the “long game” context needs to be taken into account as opportunity-seekers consider down-the-road exit strategies for today’s purchases.

Written by johnkilpatrick

July 31, 2012 at 6:45 am

Retail and the Internet

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First, if you can only read ONE magazine every week, it must be The Economist.  If I were to go into hibernation for a year (or 20, for that matter), a cover-to-cover read of the current issue would bring me up-to-date on pretty much every topic of major importance, both in the U.S. and globally.  And no, I don’t get a kick-back from them on subscriptions.

The current issue has not one but TWO thoughtful pieces on the impact of the internet on retailing.  From a real estate perspective, this is of vital importance for three reasons.  First, internet retailers actually DO occupy space, but it’s a very different kind of space than most-bricks-and-mortar retailers occupy.  (For more on my perspective on this, read my interview about Amazon in Seattle’s Daily Journal of Commerce this past week.)  Second (as the Economist articles point out), many retailers “get it” but many don’t (more on this in a minute).  As a result, some retailers thrive (Apple and Disney are two cited examples, but I’d also note Seattle’s Nordstrom as a firm that grasps how to thrive in both markets).

The third reason is a bit more subtle.  The Economist quotes Roy Amara, the American futurologist, who says, “We tend to overestimate the effect of technology in the short run, and underestimate the effect in the long run.”  As a small-e economist, I would note that in the long run, internet retailing has the very real impact of making American business more productive, in terms of “unit of output” per “unit of cost” (or “unit of labor”), which is a very good thing indeed.  Why?  Simply put, the developed economies (U.S., Europe, and Japan, for starters) are fighting a demographic battle.  Japan and Europe are more-or-less losing.  Their populations are becoming increasingly older, and their population growth is basically flat.  The U.S. is barely winning the demographic battle, ironically thanks in no small part to immigration (both legal and otherwise).  Why is this important?  Simply put, increases in GDP are necessary in order to create jobs and to support the increasing costs of an increasingly aging population.  There are only two real ways to accomplish this (note the word “real”, as in without inflation):  either grow the working-age segment of the population (we’ve already thrown in the towel on that one) or make equal strides in productivity.  Hence, the information age allows fewer workers to generate greater productivity in order to support a population in which increasingly large segments are not part of the productive landscape.

As noted, some bricks-and-mortar retailers “get it”.  For many segments of the shopping landscape, an on-line substitute just won’t do.  Apple figured this out with the Apple Stores, which are slick looking, very efficient, and a far better solution when need instant answers or want to buy something “Apple”.  By the way, I have an Iphone which I acquired from an ATT store.  I have to go back into that store occasionally for upgrades or accessories — it’s near my house and thus very convenient.  I can’t help but notice that they’ve re-done the store in much more of an Apple-esque image.  Accident?  I don’t think so, plus the shopping experience is much more efficient and enjoyable now.

Borders didn’t make it, but Barnes and Noble seems to be hanging on, in no small part because of the adaptation to the internet.  Interestingly enough, many “mom-and-pop” booksellers were predicted to go out of business due to Amazon, yet many of them have thrived by partnering with Amazon and doing what entrepreneurs do best (catering to “niche” needs).  Last time I bought a “new” book it was a Christmas present, and I got it at a deep discount at Costco.  The last 10 books to come into the Kilpatrick house, though, came from small-town retailers who had partnered with Amazon, and to whom we paid full-retail.

Interesting side note — ONE of these retailers was Seattle’s Goodwill store, who have cataloged their bookshelves and partnered with Amazon to sell used books.  (My congratulations to my good friend, Ken Colling, the CEO of Seattle Goodwill, and no, I didn’t get a penny’s worth of discount.)  Also, by the way, it was cheaper for me to go on-line to Seattle Goodwill, buy the book, and have them mail it to us, than for us to drive to downtown Seattle and buy the book the old fashion way.  Is Goodwill going out of business because of Amazon?  Far from it — this is a windfall for them.

As The Economist notes, and I concur, retailers are struggling to figure out this new paradigm.  They are also coping with an explosive growth in shopping space — between 1999 and 2009, shopping space in the U.S. ballooned from 18 square feet per person to 23 square feet.

A final note:  The Economist deals primarily with the experience in the U.S..  Clearly in Europe and Japan, this is also a struggle and perhaps an even worse one.  However, this information-age paradigm shift is occurring right as many developing nations (China in particular) are seeing an emerging middle class, and the retail-therapy that permeates middle-classes everywhere.  Retail real estate developers who look at the Chinese economic trends and think that China may need as many square feet of shopping experience as Americans have come to enjoy over our cultural history may need to think again.  The simultaneity of the emergence of the information age with the emergence of a Chinese middle class (not to mention the cultural history, which in China may favor small, entrepreneur-driven businesses) may portend a very different retail future.

GDP, Housing, and post-Thanksgiving musings

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First, the good news.  My good friend, Dr. Bill Conerly, in his Businomics blog of 11/17, brought to my attention Dr. Mark Perry’s Carpe Diem post of that same date.  Dr. Perry brings up two great points, both good news for the U.S.  First, the global GDP is poised to hit $50 Trillion for the first time this year, up 2.7% from last year.  Second, and a bit unfortunately, this good news isn’t evenly distributed.  Somewhat surprisingly, the U.S. share of Real GDP has held fairly constant for the past four decades, hovering between 25% and 30% of the world’s total.  While the U.S. share is down slightly from its peak a decade ago, it’s actually higher today than it was in the early 1980’s.

Courtesy Dr. Mark Perry, Carpe Diem

The most interesting — and obvious — observation is that growth in the Asian share has come at the expense of the Europeans.  For more, I’d refer you to Dr. Perry’s exellent commentary on this.

In addition, this week’s Economist magazine just hit my mailbox.  I cannot speak to highly of this weekly — anyone who really wants to be informed on the complexity of the world needs to read it cover-to-cover the moment it’s printed.  It comes with a decidedly British feel and a slightly right-of-center focus, but with those caveats aside, it’s simply the best news magazine in the world.   And no, I have to pay for my subscription just like everyone else.

This week’s issue has an intriguing piece on the softness of global housing market.  I’ve long held that corrections in the U.S. bubble were triggered by the inablity of the secondary financing market to accomodate slight changes in underlying default rates.  In short, the secondary market is basically made up of derivatives of derivatives of derivatives.  Each layer of “securities” (a more ironic name for these instruments could not be found) assumes away a certain level of risk, applying a totally falatious reading of Markowitz.  However, the pain in the U.S. market may be close to ending, as the bubble in home ownership rates nears a nadir.

The more global problem, however, is that other markets have not fallen in the same way as the American market.  In the U.S., house-price-to-income ratio now stands below 80 (1977 to 2011 average = 100).  On the other hand, Britain and France — two economies with some pent-up troubles ahead of them — both stand at between 120 and 140, and indeed France is near its peak for the past three decades.  (Britain is slightly down, but not by much).  By their measure, most of Europe (except Germany and Switzerland) is in trouble, as well as Canada and Australia.     Japan has now declined even more than the U.S., but Japan’s market was widely considered to be terrifically overvalued before (maybe even worse than America’s).

While this is new territory for most countries, Britain’s housing market got out-of-whack back in the late 1980s, and fell about as far, relatively, as the U.S. market has fallen in the past few years (and over about the same time frame).  If Britain’s experience provides any indication for the U.S., it’s market stayed relatively low for several years before rebounding.

Not all economists agree with this perspective, and many feel that systemic low interest rates make this particular measure of housing prices invalid.  The problem with this perspective is that European interest rates are rising, and may continue to do so in the wake of the various debt problems in the Eurozone.

Written by johnkilpatrick

November 27, 2011 at 1:18 pm

Food and real estate

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Great article today in The Economist on world-wide food demand/supply. This is a hot-button issue right now, because in the emerging world, food price inflation (along with energy inflation) is critical. For a copy of the article, click here.

The linkage between food demand/supply and real estate is critical, but less than obvious. IN a very simplistic way of thinking, increasing the food supply requires increasing acreage devoted to crop and grazing land, right? Actually, technology has disentangled this equation. During the past 40 years, the world has increased the production of some key crops (wheat, corn) by as much as 250% with little change in the amount of pasture and crop land in the world (according to recent data from the U.N.). The Economist estimates that demand increases in the next 40 years will only be a fraction of the increase in the past 40 years, nonetheless distributional issues (among other things) lead to regional shortages, price inflation, and erratic agricultural investment patterns.

From a real estate perspective, the real issues are in logistics and distribution. A generation or two ago, a significant portion of the world’s population lived either on the land (as subsistence farmers) or not far removed from the land (in villages or towns directly served by surrounding farms). This was even true in the U.S. — we tend to forget that prior to WWII, the majority of Americans lived on farms and ate what they grew.

Development of the developing world leads to a disruption between the source of food and the demand for food. First — and less obvious — city dwellers demand a more balanced diet. Millions of Chinese peasants who subsisted on a rice-oriented diet a generation ago are now moving to the burgeoning cities, and demanding meat, vegetables, and other staples we take for granted in the west. This phenomenon is being repeated all over Asia, Africa, and South America. Note that of the top 25 largest cities in the world, only six are in the U.S. or Europe (New York, Los Angeles, Moscow, Paris, Chicago, and London). This trend will accelerate in the future.

Thus, the problem accelerates. It’s not just a matter of moving a sack of rice from the Chinese countryside into Beijing. It’s a matter of moving a sack of tomatoes from Chile or a side of beef from Australia into Beijing. This requires not only transportation but also the multi-modal logistics train to support that transportation. This may very well be the most exciting real estate related challenge of the rest of this century.

Written by johnkilpatrick

February 26, 2011 at 9:40 am

Posted in Economy, Real Estate

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Housing equilibrium — part 3

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The Economist is simply the most informative magazine in the world today. If I came out of a coma, I’d want it as the first thing I read. One issue, and I’d feel fairly well caught up. The on-line version is an extraordinary supplement to the print edition, and may very well be a one-stop shop for economic research.

With all the obvious sucking-up out of the way (and no, I don’t get a free subscription — I pay for mine just like everyone else), the current issue has a stellar article titled “Suspended Animation” about America’s Housing Market. In prior missives on this blog, I’ve drawn linkages between the home ownership rate (currently at about 66%) and the housing bubble (best visualized with the Case-Shiller Index). The article makes that same comparison, without drawing the conclusions I do (see below).

When visualized this way, the linkage becomes fairly clear and obvious. Nonetheless, the real question is “where is the bottom”. There is significant anecdotal evidence to suggest we may be closing in on it right now, but then again, there’s some evidence to the contrary. On the plus side, a LOT of speculative cash is entering the marketplace right now, and about a quarter of all home sales in America are cash-only (see the front page of the February 8, 2011, Wall Street Journal). More interestingly, in the hardest-hit places, such as Miami, this percentage is approaching 50%. From a pure chartist perspective, we note that the C-S index has been “hovering” around 2003 prices for several quarters now. Back in my Wall Street days (LONG before the movie of the same name), the technical analysts would talk about “bottoms” and “breakouts” and such. Of course, residential real estate is not a security, per se (although mortgages are), and the comparisons fall apart at the granular level.

On the down side, the Fannie Mae/Freddie Mac controversies continue to simmer. The Obama Administration and the Republicans in Congress are finding common ground hard to find. The “Tea Party” Republicans want the government out of the home lending business entirely, which means privatizing the F’s. This idea is getting no traction at all among the Realtors and the Homebuilders, two typically “Republican” groups who generally sound like Democrats on this issue. One might blame this on grid-lock, but these are fundamental issues regarding the government’s role in the housing market which date back to the Roosevelt administration. Congress — both Republicans and Democrats — emphatically wanted to goose the home-ownership rate over the last twenty years, and empowered the F’s to do that. After that, the Law of Unintended Consequences got us where we are today. Now, in the words of Keenan Thompson on Saturday Night Live, everyone wants congress to “just fix it!” but with no solution in sight. Until this gets “fixed”, house prices will, at best, probably bounce along where they are today.

Written by johnkilpatrick

February 9, 2011 at 9:38 am

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