My attentiveness to this little blog of mine has waned the past few months. I’ve been terrifically busy, which is of course a “good thing” as Martha Stewart says.
That having been said, despite my “busy-ness”, I recently accepted a seat on the Board of Trustees of the Center for Wooden Boats. The CWB has been at the southern tip of Seattle’s Lake Union for many years, serving as an educational resource about our maritime heritage. Those of you familiar with the current re-development of that portion of Seattle will instantly recognize that the CWB is wonderfully located. Our next-door-neighbor is the old Naval Reserve facility, which has been converted to house the Museum of History and Industry. Together, these two fantastic resources now anchor a huge park/public space in the hottest part of town. To match the demand, CWB is now in the final stages of a multi-million-dollar capital campaign to fund a new education and meeting center.
CWB really has the potential to be a resource of national and even international recognition and quality. While many museums and galleries around the world are facing tough times, CWB continues to enjoy tremendous support. Naturally, the upsurge in attendance and attention have strained these resources, and part of my task as a new board member — coming from a finance/business perspective — will be to aid in the stewardship of this valuable center.
More later, but if any of you have any interest in how to engage or support the CWB, please let me know.
The gap in postings is a good indication of just how busy I’ve been the past several months. Whew….
Anyway, the latest semi-annual Livingston Survey just hit my desk from the Phily FED. Just to remind you, the Phily FED surveys a cross-section of top economic forecasters on four key issues — GDP growth, interest rates, unemployment, and inflation. Ironically, the survey came out before this week’s BEA announcement that GDP grew at an annual rate of 4.1% in the 3rd quarter (following a 2.5% growth in the 2nd quarter).
Nonetheless, the Livingston Survey gives a good snapshot of where professional forecasters think the economy will be over the next couple of years. Forecasters generally see GDP growth ending this year around 2.4%, increasing to an annualized rate of 2.5% early next year, and 2.8% in late 2014.
Interest rate forecasts were also surveyed before the recent FED pronouncements about tapering, although the general sense is that markets have been capturing the “taper” news for a while. Forecasters project t-bill rates to continue below 0.1% into 2014, rising to 0.15% by the end of next year, and 0.75% by the end of 2015. Ten-year bond yields should follow suit, with rates rising above 3% in mid-2014, up to 3.25% by the end of next year. Of course, time will tell on these projections.
Finally, unemployment is projected to dip below 7% after mid-2014, and finish the year around 6.7%. Inflation should hold below 2%, although it is projected to creep up somewhat from the current rates.
The Phily FED produces a series of economic surveys throughout the year. For more information, visit their research department.
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.