Posts Tagged ‘Wall Street Journal’
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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Need a job?
I pulled up behind another car at a stop light yesterday and couldn’t help but notice a license plate surround for the local construction laborers union, plus a labor bumper sticker in the back window. This attracted my attention because the vehicle in question was a late-model Cadillac Escalade.
Admittedly this may have been an outlier, but all across the U.S. there is a huge demand for entry level construction trainees. Here in Seattle (a high-wage, high cost-of-living area) entry level “no experience, no education” wages are in the high-teens per hour, rising rapidly to $50k per year with a modicum of experience. Take some winter months to go get trained in plumbing, electrical, or HVAC and the annual income gets into the high 5 to low 6 figures pretty quickly. (The average plumber in Seattle makes $95,000 per year, according to Salarylist.com.) Some sources put this number somewhat lower, but you get the point.
Ironically, these jobs are going begging, and the reasons are varied. Many young people are scared off from a job that evidently requires a lot of outdoor work and physical stamina. Yet, as one young woman in a carpenter training program noted, “If you work hard and you put in your effort, they’ll take you over somebody else who is muscle…” Baby boomers seem to think that if their children don’t go to college, they’ve failed as parents, and so the percentage of construction workers under age 24 has declined in 48 states since the peak of the housing boom.
Wall Street Journal has a great article this morning called “Young people don’t want construction jobs. That’s a problem for the housing market.” It is indeed. It is one reason why home construction per household in America is at its lowest level in 60 years of keeping records, according to the article. The reasons include lack of vocational programs in high schools, although many of these are coming back. The Home Builders Institute, affiliated with the National Association of Homebuilders, has as many as 6,000 young people in their training pipeline at any given time.
I’m not suggesting — nor is the WSJ, that flooding young people into construction jobs will change the housing affordability metric overnight. The homebuilding industry is still replete with problems such as a trade war with our principle material suppliers, a lack of housing infrastructure, and short-term financing issues. Nonetheless, young people might want to be reminded that a surprisingly large number of CEOs in the construction field got started with a hammer in their hands.
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The long lost shopping mall?
Common wisdom holds that the shopping mall is on life support. I venture into maybe one or two a year, and my most recent ventures weren’t very encouraging. Two recent Wall Street Journal articles illustrate the complexity of repurposing.
First, in a January 24th article by Ester Fung, “Mall Owners Rush to Get Out of the Mall Business”, the Journal notes that even the big-names in the biz are making use of strategic default to get rid of underwater properties. Citing data from Morningstar, the story detailed that from January to November 314 loans secured by retail property were liquidated, totaling about $3.5 billion. According to the story, these liquidations resulted in losses of $1.68 billion. Washington Prime, CBL and Simon have all sent properties back to lenders in recent months. Ironically, these big players have seen no dings to their credit ratings, and the equity market in fact views these put-backs as evidence of financial discipline. On the downside, surrounding properties, such as out-parcels and other nearby retailers, such as restaurants, that depend on spillover from the mall, are suffering from the loss of shopper attraction.
One alternative to strategic default is a revamping of the real estate itself. This often includes attracting a new or new type of anchor tenant or demolishing the mall entirely to make way for offices or apartments. Unfortunately, as detailed in a February 14 WSJ piece by Suzanne Kapner, existing tenants often have covenants or restrictions standing in the way of such revamping. In “Race to Revamp Shopping Malls Takes a Nasty Turn”, Ms. Kapner outlines how many department stores want to protect existing parking or existing exclusivity through “reciprocal easement agreements”. For example, large swaths of unused parking space have value for repositioning. However, as Gar Herring, chief executive of the MGHerring Group, a regional mall developer, put it, “But if you want to put a snow cone shack in a parking space furthest from the mall, you need the agreement of every department-store anchor.” Currently, for example, Sears is suing a mall developer in Florida to prevent it from adding a Dicks Sporting Goods as an anchor. Lord & Taylor filed suite in 2013 to stop a Maryland mall’s demolition to make way for offices, residential properties and a hotel. The retailer claimed violated an agreement signed in 1975 that prevents the landlord from making changes to the property without its consent.
The shopping mall is three different things. From a consumer perspective, it’s a place of gathering and consumption. Indeed, the loss of the shopping mall, which replaced Main Street, has sociological implications as well. Does Amazon.com now become a place of gathering as well as consumption? That’s an interesting subject for another day. Second, from a business perspective, the mall is a bundle of contracts, and sorting through those contracts will keep lawyers and real estate experts busy for some years to come. Finally, a shopping mall may be, in some circumstances, a valuable piece of real estate. Repositioning that real estate, either as retail with different tenants and focus, or as something other than retail, will be an interesting story in the coming years.
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Corporate Investment — Much ado about…. something
I can’t believe it’s been a month since I posted — I’ve been traveling almost constantly the past few weeks, and between that and the elections, my dance card has been fairly full.
The trigger for day’s post was an article in the Wall Street Journal on Monday, “Investment Falls off a Cliff”, with obvious homage to the impending fiscal cliff. I don’t want to minimize the danger of the “FC”, and in fact all bets are really off if the worst case scenarios come to pass. Here at Greenfield, we don’t really believe Congress and the White House will both fail to blink. Nonetheless, “keeping your powder dry” is always good advise in perilous times.
I’d like to comment on two things, though. First, while direction of corporate investment isn’t good, it’s not quite “double dipping” just yet. Indeed, one might argue that the current downswing in investment is nothing more than seasonal backing-and-filling.
courtesy, Wall Street Journal
Note that after coming out of the recession, overall investment spending took a brief respite in early 2011, as well. Of course, equipment and software appear to continue healthy, but structures are dragging the overall index down. Part of this can be explained by the relaxation of the apartment construction surge that we saw over the past several quarters. Many analysts now believe the demand-overhand in apartments is close to saturation (or at least satisfaction) and this sort of slow-down is neither unusual nor unhealthy. Note that the NFIB optimism survey is still trending upward, although the Business Roundtable CEO survey (which surveys heads of larger firms than the NFIB does) had turned downward. I suspect that’s a rebound effect — small businesses are still clawing their way out of the recession, and are less affected by what may happen if the FC becomes reality. The larger firms were the first to enjoy the fruits of the recovery, and would be the worst hurt by tax increases and the FC cutbacks (particularly in defense). Nonetheless, both of these sentiment measures are well off their 2009 bottoms. Consumer sentiment, which ultimately drives much of this, is as good as its been since before the recession.
Second, I’m concerned about the negativity spreading to real estate. Note that real estate investment comes in three flavors — development, capital gains, and income. The downturn in investment has SOMEWHAT negative implications for the first. Real estate developers will have to be more careful in a slow-down environment, but that’s been true throughout this recovery. Financing is difficult, even in the “hot” apartment market, and so admittedly the commercial real estate developers may be in for a tough run. (Residential development, on the other hand, is rebounding nicely.) Capital gains is a “long game” anyway. Certainly the tax changes which seem inevitable in 2013 and beyond have negative implications for the buy-and-sell crowd, but the returns to those who can hold thru cyclical downturns have always been healthy even after tax considerations.
Real estate income (primarily REITs) may actually be benefitted by a slight retrenchment in development. If and as the economy continues to rebound, offices, warehouses, and shopping malls continue to fill up. Lack of new supply (from a cyclical downturn in development) benefits the sort of existing structures which are typically part of a REIT portfolio. As always, investors will be benefitted from looking at good managers with top-drawer properties and a history of increasing FFO.
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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.
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Lehman back in the news
This is really an update to my recent post about BofA and Sam Zell’s acquisition of Archstone (http://wp.me/pqerO-7k). As it turns out, the remnants of Lehman had HOPED to do an IPO on Archstone, something that BofA and Barclays had opposed. Now, with Zell’s acquisition of BofA’s share, he has both put a stake in the heart of that hope, but also set a value for the assets at about $16 Billion. Given the convoluted ownership structure of Archstone, Zell has a veto over any of Lehman’s restructuring plans.
Elliott Brown and Robbie Whelan have a great piece on this in tomorrow’s Wall Street Journal. (http://tinyurl.com/749ffa4). Zell wants all of Archstone, and with Equity Residential would be America’s largest apartment landlord, with stakes in more than 190,000 units. Technically, Lehman could block Zell’s offer by coming up with the cash, and they’ve been talking with both Blackstone and Brookfield. However, part of Lehman’s accounting was a valuation of Archstone’s management and “brand” at around $1 Billion. With Zell already owning Equity Residential, that brand value is negligible to him. In short, Zell is in a fairly strong bargaining position to get what he wants.
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Housing Finance — Take 2
Again, from the Wall Street Journal, we find reasons for concern. The “Ahead of the Tape” column in today’s Journal, we find an excellent — but troubling — article by Kelly Evans titled “Economy Needs a Borrower of Last Resort.” It really follows my theme from yesterday, and I couldn’t agree more.
Graph courtesy The Wall Street Journal
Imagine a dollar (or a hundred thousand dollars) injected into the system which is loaned to a family buying a new home. They pay the builder, who deposits the money in the bank (actually, paying off the construction loan) and then that money can be loaned back into the system. Some of it bleeds off into taxes, exports, and such, with each iteration of the deposit-and-loan cycle, but still, the money cycles thru the system. Since each subsequent deposit and loan doesn’t happen instantly, there is a little bit of a lag. Nonetheless, over a short period of time, the system should work. The math behind this is called the “Cambridge Velocity Equation” and it’s been known to economists for hundreds of years.
So, since November, the FED has purchased $684 Billion in bonds, which SHOULD have resulted in trillions of dollars in new money creation. Instead, M2 (the abbreviation for the money supply, defined as all of the cash, bank deposits, and money market funds in the system) has only increased by $326 Billion, suggesting that the velocity of money is about 0.5. Note that it SHOULD be 2 or 3 or more in a vibrant economy. This means that for every dollar injected into the system by the FED, half of it has dissipated.
As the article points out, this is why the recovery has remained so anemic. I would posit that a big problem is in the home loan business, which is far weaker than merely “anemic” — it’s on life support with the undertaker waiting in the lobby.
Kelly Evans posits that the market needs a lender of last resort, which is exactly what I was saying yesterday. Unless and until the system starts turning into the skid, by fixing the totally busted mortgage market, a double-dip recession seems inevitable.
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Housing — and today’s WSJ
The front page of the Wall Street Journal today is plastered with the story of the continued problems with house prices, courtesy of info from the S&P-Case Shiller Index. I’ve commented on this several times before in this blog, but it bears further investigation.
Prior post-WWII real estate recessions (if we can call them that) have been quickly self-correcting. Stagnation in house prices lead to increased investment, as buyers look for deals and bankers need to make loans. As such, real estate recessions rarely have actual price declines, but instead are marked with volume slow-downs or price stagnation.
This recession is very different. Bankers are highly reluctant to make loans, in stark contrast to prior recession-exits. Regulatory problems, lack of bank capital, a doubling of REO portfolios, lack of cash from retail buyers, and a real fear (by both bankers and buyers) that collateral values will continue to decline puts the market in a continued downward spiral. To make matters worse, since many owner/sellers (particularly the most fragile ones — in the “zero down payment” starter homes) are themselves faced with economic travail and often the need to move to find work, the potential for further foreclosures down-the-road is very real, thus further driving down prices. Add to this the fact that a very big chuck of the U.S. economy is housing-related (contractors, developers, bankers, realtors, and many other intermediaries), it’s easy to see that a sustainable jobs market is hard to envision without “fixing” the housing problem.
We can re-examine the causes of this crisis over and over, but very few analysts are focused on the cure. Pilots are taught that when airplanes stall and go into a spin or a downward spiral, after “pulling the power” the pilot has to do something that’s rather counter-intuitive: point the nose downward and actually fly INTO the stall to get out of it. It’s like steering a car INTO the skid on an icy road. It’s very counter-intuitive, but it’s necessary. (The “black box” — it’s actually orange — recently recovered from the Air France 447 crash showed that the two very junior co-pilots who were at the controls when the plane went into a stall tried to pull BACK on the stick, when they should have pushed FORWARD. If they’d thought back to “Flying 101” they might be alive today.)
The “thing missing” from today’s market is the national policy in favor of affordable housing, which was manifested through Fannie-Mae and Freddie-Mac. Pulling the plug on the secondary market (which was at the core of the housing bubble) basically took our financial markets out of the housing business. Now that the price-bubble has bursts, our financial markets need to step back up to the plate and provide some liquidity. Admittedly, a “fixed” market will need to provide better risk-measures and possibly some hedging tools, but these are details that can be worked out once we get the plane flying again. I hate to say this — I’m generally a “free-market” kinda libertarian guy — but the government will need to step up to the plate as a guarantor of last resort…. and yes, I know the U.S. government is effectively broke. However, until it gets the housing market back on its feet, it’s going to stay broke. At some point, they need to steer the car into the skid.
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Second quickie from the WSJ
On the same page (C-1), Nick Timiraos contributes “Critical Signs in Foreclosure Talks”. This is the followup to issues I discussed a few months ago regarding the botched foreclosure processes at many banks. Regulators had hoped to put in place a far-reaching settlement, to forestall many state Attorneys General from filing state suits which would put all of this in a variety of courtrooms (probably ultimately in a multi-district litigation in the Federal Courts, and from there… no one knows…). The regulators and the AG’s are on opposite sides, although both seem to agree that the banks need to be taken out back of the woodshed and given a good spanking.
I have zero sympathy for the banks — it’s one thing to create a high-speed mortgage assembly line, but even the auto makers have figured out how to keep track of the documentation on each car they make. Bankers (and the thousands of lawyers they employ) are supposed to be good at this stuff. If they can’t keep track of a $100,000 mortgage, how exactly do they keep track of a $100 checking account balance? (They do seem to be great at keeping track of every $1 I owe on my visa card.)
However, from a market perspective, this all has extremely serious implications. As I discussed some weeks ago, if the foreclosure log-jam isn’t fixed, the home credit market won’t get fixed either. Housing starts, existing home sales, and millions of jobs depend on straightening out this problem. Hence, this is not just a trivial argument about who gets to spank the bankers.
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Two quickies from the WSJ
Page C1 today has two important articles that caught our eyes. I’ll write about the first right now, and follow up with the other one later today. First, Kelly Evans contributes “Overlooked Inflation Cue: Follow the Money.” It shouldn’t come as a surprise to anyone that money supply growth in the western economies was rampant during the run-up to the current recession. In the U.S. and the U.K., M-2 growth peaked in late ’07 to early ’08 (you don’t have to be a monetarist to figure that out). The Eurozone kept pumping money at faster rates right up to mid ’09
Where money supply growth went from there, though, was a bit of a mixed bag. In the U.S., the annual growth in M-2 fell from a peak of about 12% right before the recession to a low of about 1.5% in early ’10, and has stayed below 3% since. (This basically supports my contention that the sturm-and-drang over QE-2 was all politics.) The U.K.’s growth rate peaked at about 9%, fell earlier than ours, and hit its bottom (about 2%) in mid ’09. Intriguingly, the U.K. money supply growth rate bounced back immediately, with the virtual money presses running full-speed to get the money supply growth rate back up to about 6% in early ’10, but then falling off to about 4% today.
In the Eurozone, the money supply growth tracked very closely with the U.S., bottoming with ours in mid ’10, but since then, the European bankers have started pumping money back into the system, with their M-2 growth rate headed continuously back upwards (at about 4% today).
There are two important implications for all of this (plus my afore-mentioned observation about QE-2). First, the three big western currencies are on decidedly different tacks. The idea of opposing viewpoints among the big western central bankers is not well explored in today’s decidedly multi-polar world economy. (Back when western banking was a closed system, everyone else in the world could only sit back and watch. Now that the Chinese — and even the Japanese with all their other troubles — are more than sidelines spectators, one can only wonder how disagreements among the western bankers will play out.)
Second, though, the really significant point is that despite all of the different paths of M-2 since 2009, all of the growth rates are decidedly down from the earlier peaks. From a real estate perspective, this has major implications. As investors diversify away from stocks, real estate and bonds have a certain equivalency. In a no- or low-inflation scenario, bonds are viewed as the more secure investment. In a higher-inflation world, real estate is viewed as a bond with a built-in inflation hedge. Hence, lower inflation portends well for bonds but poorly for real estate.
One might argue that healthy bonds means low interest rates for real estate, but this ignores the fact that interest rates are already at historic lows. Hence, what real estate needs today is a nice raison d’être, which a tiny bit of inflation would give it. I’m NOT pro-hyper-inflation, mind you, and inflation flat-lines are overall healthy for the economy. However, if real estate investors are hoping for an inflation kick, it doesn’t look like they’re going to get it.
A last minute edit — Later in the day, I noticed that yesterday’s USA Today had a “snapshot” (a little graphic in the lower left corner of the front page) titled “Which Investment Will Perform the Best”, taken from a survey recently conducted by Edward Jones. Topping the list was Technology (33%), follwed by Gold (31%), Blue-chip stocks (10%), Real Estate (9%) and International stocks (9%). Given that gold and real estate are both thought to be inflation hedges, it appears that the market still worries in that direction.
From a small northwestern observatory... 