My expertise (such that it is) lives in the universe of Finance and Economics, but I tend to specialize in the real estate arena. That means, I spend a lot of time looking at maps. (Somewhat ironically, my main hobbies — flying and boating — also require a lot of map work. Go figure….)
With that in mind, someone sent me a link to a great piece in the Washington Post called 40 Maps That Explain the World. Click on it yourself. The maps are somewhat interactive (you can expand them for detail, and there are cross-post to other articles and explanations). The maps are extremely thought-provoking, and some take a bit of time to fully comprehend.
If THAT wasn’t enough, apparently other writers are starting to compile their own “40 Maps” lists. One of the better ones, albeit somewhat more U.S. centric, comes from the website twistedsifter.com, and is called 40 Maps That Will Help You Make Sense of the World. Whether they do or not is still up in the air, but they do make for fun reading.
One of my favorite regular “reads” is the Survey of Professional Forecasters” from the Philadelphia Federal Reserve Bank. The main survey comes out quarterly, with occasional special editions thrown in along the way. The brilliance of the survey is its simplicity — ask a large panel of economic forecasters where they think the economy is going in terms of a handful of key indicators — GDP, unemployment, inflation. Then calculate the median and the range of responses.
The medians are fairly predictable and “sticky” (that is, this quarter’s results look a lot like last quarter’s). However, the interesting stuff is buried in the way the distribution of results change. For example, both the last survey and the current survey find that the largest number of economists think unemployment will average between 7.0% and 7.4% next year (with a median of 7.1%), down somewhat from this year. That’s pretty predictable stuff. However, this year’s distribution is skewed to the low side (a very large number of economists think unemployment will dip this year and end up as low as 7% on average) but next year, the distribution is fairly even, with the bulk of economists forecasting anywhere from 6% to 8%. In short, 2014 is pretty cloudy right now, and that means that hedging your economic bets isn’t a bad idea.
GDP projections are somewhat less rosy. In the previous survey (2nd quarter, 2013), the largest number of economists projected 2013 GDP in the 2% to 3% range, with the median at 2%. Today, that has dropped a full half-percentage point, down to 1.5%. Previously, 2014 was projected at 2.8%, and that has now been downgraded to 2.6%, although as we’ve already established, 2014 is pretty much a guessing game.
Inflation continues to be pretty-much a flat line, with a lot of “1.8%” and “2.0%” on the chart. In short, hardly anyone sees inflation above 2.3% or so in the foreseeable future.
To download the full report, go to http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/2013/survq313.cfm
Housing starts reportedly dipped 9.9% in June, with the bulk of that in multifamily starts. A few quick points about that. First, rebounds from a recession are anything but smooth. Come back in December and we’ll see what the trend line looks like. Second, note what happened to apartments. While apartment vacancies are still very healthy (5% range, nationwide), there are signs we’re getting a bit overbuilt in that sector. There was a huge rush, and I wouldn’t be surprised if many (most?) of the equity investors and lenders are looking for a chance to catch their breath.
Finally, I’ve opined in a number of places about the loss of construction talent and infrastructure. The long, deep recession really cost us in skilled labor (apprentice programs all the way to master crafts people) and in entitled land. A lot of building sites which were carrying entitlements (zoning, permitting, concurrence requirements, etc.) saw these vital legalities pass into the sunset (most of these had “build-by” dates). Even worse, many local planning and permitting offices are short-staffed, as cities and counties had to decide between laying off under-utilized permitting staff or over-utilized cops, firefighters, and EMTs. Guess what decisions councils and mayors made? On top of that, these understaffed departments will be the last to staff back up to normal.
Sigh….. normal housing starts in America post-WWII are about 1 million per year. When the total got down to, say, 800,000, the Fed would goose the monetary base, banks would make loans, and builders would fire up the pick-up trucks. When starts got above 1.5 million, the Fed would dim the lights a bit, and builders would go fishing. Overall, starts came in at 836,000 in June, down from May but amazingly up 10% from last year. Prior to 2008, a sustained level of starts in this range would be emblematic of a recession. Today, it’s good news. Go figure.
Oh, and one other quick thing — one pundit (I want to say on CNBC) recently suggested Ford, Chevy, and Chrysler as plays on housing starts. When starts go up, Ford sells more F-series pickups. Reportedly, Ford profits to the tune of $10,000 for each of these main-stays of the building site, and currently sells 72,000 of them a month. Do the math.
Don’t get me wrong, I’m a great fan of REITs in general (my dissertation was on REIT IPOs). Nonetheless, the great returns of 2009-2012 (which followed the NASTY collapse of 2008) seem to be a thing of the past.
For the half-year ending June 30, REITs are only doing “pretty well”, with a few surprises on a sector-by-sector basis, particularly compared with the 12.6% return in the S&P500 over the same period:
Health Care (9.4%)
Self Storage (9.0%)
Note that these returns include dividend yield, which is typically in the 3% – 4% range. This means, for example, that residential and retail returns are almost entirely from dividend income.
So, what’s going on? Part of the problem is what we’ll call “fulfilled expectations”. In the run-up to 2013, some areas were pretty exciting. Residential, for example, has returned an amazing 284% since the trough of the market about 4 years ago. Retail has returned about 300% over that same period. (Of course, all of these sectors suffered a blood-bath in 2008, so as usual, timing is everything.)
Over the past couple of years, apartments have been springing up like mushrooms on a warm spring morning. Investors have been very excited for a while, but excitement is beginning to wane. How many new apartments do we need? Retail is sluggish for different reasons — recent reports show double-digit increases in on-line retail, but flat-lines in department store sales. Even Wal-Mart is wondering where their customers are going to come from.
Lodging/Resorts have some excitement, with new records being set in both volume and prices. However, as I’ve noted elsewhere recently, this may come back to haunt buyers. Health Care, of course, is a play on Obama-care.
Finally, over the past two months, the entire sector has been shaken by fears of increased interest rates, which impact REITs in two ways. First, the fundamental cost of doing highly-leveraged business goes up. Second, with higher short-term rates, REITs begin to pale as income-producing vehicles.
I just returned from a fantastic weekend and series of meetings in Jackson Hole. I had the pleasure of moderating a panel on real estate and sitting on a panel on alternative investments. I’ll share some of my thoughts over the next couple of posts.
First, the “big picture” on real estate mid-year. While many metrics look favorable, the patient isn’t fully ready to go home from the hospital yet. Structural issues still abound, including permitting problems in many major cities and counties (a result of budget cuts and short staffs), mortgage-backed securities pipelines still getting re-routed, and a lack of development infrastructure (permitted and enabled building sites, skilled labor, and such).
Apartment vacancies are projected to rise slightly this year, but there is a lot of new product in the pipeline. I fear that the increased vacancy will all fall on the shoulders of the new apartments. Stay tuned.
High-end hotel funds are paying silly-money for properties right now. Thus-far in 2013, we’ve already seen transaction volume equal to all of 2012 (about $8 Billion in the U.S.) with substantial private money coming in from abroad. Hot cities include Atlanta, Houston, and New Orleans. Resorts account for about 25% of the total, and slightly over half are single-asset purchases.
More later, including some observations about the housing market and the retail sector.
Happy New Year! It’s been a very busy month, evidenced by the lack of blog posts the past few weeks. The holidays, coupled with a mind-numbing travel schedule (and a broken lap-top! This is a new one!) kept me off the internet more than usual. In fact, I’m writing this from my hotel room in Charleston, SC, where Lynnda and I go every year to join our great friends and extended, adopted family at Renaissance Weekend.
As an economist, I’m terrifically concerned with the Fiscal Cliff. I know it has dominated the media the past few weeks, and should certainly be on the minds of every thinking person, both in American and abroad. As I write this, the Senate has apparently passed some stop-gap measures which now require action by the House. (As one participant here at Renaissance put it – ”They didn’t just kick the can down the road, they kicked the whole store.”) Nonetheless, as serious as everyone (except, apparently, Congress) realizes it is, I’m afraid that most folks probably don’t fully understand how bad it really can become. Perhaps I can illustrate.
I think most folks would agree that government spending at all levels must be reigned in. The exact mix of cuts and taxes will differ between those on the left and those on the right, but all agree that the Federal deficit (both funded and unfunded liabilities) can’t go on at these levels for much longer. However, some politicians — who apparently flunked Econ 101 — think that the best way to cure the problem is to let the car drive off the Fiscal Cliff. They would use the analogy of a spend-thrift prodigal child, who needs “tough love” by simply being cut off from Mom and Dad’s largess.
Economists, on the other hand, see two outcomes from this, both of which will almost certainly happen, and both of which are devastating. First, any system which is “shocked” will react in uncertain but probably negative ways. Markets and market participants loathe uncertainty, and we can already see pull-backs in durable goods and investments as both businesses and consumers demonstrate a liquidity preference in anticipation of the anticipated meltdown. The better analogy is like stopping or slowing a car — you can do it two ways. First, you can apply a slow and steady braking (the way they taught you in Drivers Ed), maintaining control of the vehicle until the car comes down to the desired speed or until it stops completely. Alternatively, you can drive head-long into a brick wall. Pretty much everyone can guess what happens under the second alternative, which makes Fiscal Cliff seem to be a very apt descriptor.
The second outcome — which is the least understood by the layperson, and is surprisingly poorly understood by public policy “types” — derives from the secondary and tertiary impacts. Imagine, if you will, a small town which is dependent on a factory for its “base” employment. The factory suddenly transfers a significant portion of its workforce and production to another plant many miles away. Those workers had been spending their paychecks locally, for groceries, haircuts, dental services, and the like. The plant had been buying local supplies, such as fuel, tools, and repair services. The loss of these ancillary benefits reverberate through the local economy, and are called “secondary” losses. Now, the grocer, the barber, and the dentist can no longer pay THEIR bills, and these are “tertiary” losses.
With the advent of the Fiscal Cliff, very sudden secondary and tertiary impacts will be felt throughout the economy. Lockheed, for example, will suddenly be told that certain Federal contracts will no longer be honored. They will lay-off tens of thousands of employees, who in turn will — ironically — look for welfare and unemployment assistance and will no longer pay taxes. These employees and Lockheed itself, for example, will quit buying things, and the list goes on.
Of course, the Devil is in the Details, as they say, and the exact set of ramifications won’t be known until payroll taxes go up, layoff notices go out, and certain government services cease. I would fully agree — and encourage — that our Federal government needs to be re-sized. Liberals and Conservatives may disagree on the exact degree of re-sizing, the appropriate mix of revenue and expense cuts to get to that new size, and the “things” which constitute necessary and fundamental government services. Indeed, this re-sizing and realignment should be the central theme of President Obama’s second term. I would posit that all of the other good things he wants to accomplish will be enabled by that sort of transformation. Nonetheless, driving the economy over a cliff is not the way for Congress to provide us with the leadership that we pay them to provide.
Flying back from Milwaukee to Seattle last night, I sat next to a fellow who owns several big truck dealerships in the mid-west. (Seattle, famed for Boeing and Microsoft, is the lesser-recognized headquarters of Paccar, the world’s third largest maker of heavy trucks, after Daimler and Volvo. Last year, they made and sold over $16 Billion worth of Kenworths and Peterbilts.)
ANYWAY, after the usual “how’s business?” question, I got an earful. Turns out no one’s buying heavy trucks right now, even though financing is historically affordable, and customers have cash. Why? Simply put, his customers are scared of the fiscal cliff. (We also talked about customers deferring potential acquisitions until after/if tax rates go up, but he said that this wasn’t a big issue in his surveys of customer sentiments.) He noted that demand for long-haul trucking was down, and noted that his trucking-company customers were reporting a lower volume of hauling for consumer retailers.
Now, if this was an isolated incident, we could write it off. However, the danger of the fiscal cliff isn’t just what will happen after January 1. Much like an impending hurricane, people are already packing their bags and getting out of the way or hunkering down and bolting the doors.
What is the impact on real estate? While it’s too early to completely quantify, clearly there is reluctance right now to make new investments in office, industrial, and retail. Add to this the realization that the apartment boom may have leveled off, and we have a fairly flat new development market on the horizon. This doesn’t bode well for real estate private equity firms that are focused on development profits or capital gains, but it does mean that income-oriented real estate (publicly traded REITs for example) may exhibit some buying opportunities due to both their tax advantaged nature. The most recent Current Market Commentary from NAREIT shows slight downward trends in apartment, office, and retail vacancy, with all three sectors showing positive rental rate growth (albeit at lower levels than earlier this year). The three-year moving average for renter household formation continues to trend upward, while the owner-occupied household formation is in negative territory (despite recent gains in home sales and housing starts).
Notwithstanding the dangers of the fiscal cliff, changes in non-farm payrolls have been strong and positive every month since mid-2010, and even though unemployment is higher than anyone wants to see it, the trend has been solidly downward since the peak of late 2009. As such, the fiscal cliff is the most significant economic problem on the horizon today. Fix it, and we continue on the track to full recovery. Let us drive off the cliff, and…. well, that’s a pretty good mental picture, eh?