Don Tishman’s Real Estate Development and Investing Solutions

The economists are now saying the recession has bottomed out, but more important to those selling residential real estate, they said that the residential price dropping has finally bottomed out. 

“Home prices saw a “striking improvement in the rate of decline” in April and trading in funds launched today indicates investors believe the U.S. housing slump is nearing a bottom, said Yale University economist Robert Shiller.”

“At this point, people are thinking the fall is over,” Shiller, co-founder of the home price index that bears his name, said in a Bloomberg Radio interview today. “The market is predicting the declines are over.”

We have several condo developments where we are selling the final units. We have noticed a vast increase in traffic recently. Most of our offers have been attempts to buy the units for far less than they cost to build. We have resisted these. I hope Schiller is correct and we will start to receive offers that will at least cover  costs. 

This past March, the % of  consumer’s with confidence in the economy was about 22%.  It rose to 52% at the end of May. Today the June figures showed a 2% decline to 50%. Savings are up. The Billions the government has injected in the economy has had a positive effect.

Nevertheless, unemployment is at 10%. My daughter’s mother-in-law has been at Kodak for 32 years. The change from film photography to digital has caused huge layoffs at Kodak.  This was not caused by the recession but by technological change.  I am sure it has the same effect on Fuji, the huge film manufacturer in Japan. 

On another note, today President Obama gave a giant sigh of relief when he received news that Democrat Al Franken was finally declared the winner in the Minnesota Senate race that took place about 8 months ago.  Now Obama can muster the needed 60 votes in the Senate to stop a Republican filibuster against any of the Administration’s appointments or programs. Many of Obama’s appointments have been held up by Republican Senators who threatened a filibuster if these appointments were submitted to the Senate.  One example is in the Treasury Department where the Secretary of the Treasury has been shorthanded by the failure of the Senate to approve many appointments to this Department, a key place for programs to end the recession.  Now Obama’s concern is - whether the 60 Democratic votes will stay the course?  If the President does not now have his programs or appointments approved, it will be because of Democrats.  The Senate Republicans are off the hot seat. 

The weather in the Bay Area has been quite  hot- the other day it was over 103 in Pleasanton with a humidity of about 15%. I was worried about my  two Rottwielers, who have permanent fur coats. I brought them inside to air conditioning. Immediately, all of us  immediately fell a sleep for our siesta.

Manana!

Many of the acknowledged leading architects of the 20th Century believed that form follows function. They also believed that natural light was one of the primary elements of good design. This echoed what the builders of the great Gothic Churches of  11th and 12th centuries believed and built their churches accordingly. These churches have stood the test of time. They are things of beauty today, almost a thousand years later. Proving how important these beliefs in the importance of natural light have been for centuries. . .   Nevertheless, these creative, wonderful 20th Century  architects, whose work contains these same principals, were hardly the leading architectural money makers of their time. Some like Louis Sullivan, Frank Lloyd Wright and Louis Kahn left many unpaid debts to their estates.  These also include Corbusier Alto, Gropius, and Mies Van der Rohe, 

Much of these architects failed to see many of the  building they designed go into construction. In many cases this was the  result of the Great Depression, dictators in Europe and the then current “fads” in architecture. The first architectural exhibit at the Museum of Modern Art in New York did much to overcome the conservative fads prevailing at the time.  Unfortunately, this famous exhibit was early in the Depression and in the subsequent years until after WWII there was not much funding available for new buildings.

Why do I bring this up today? Each week I talk to discouraged architects.  Since  little or no new business has come their way, many want to leave architecture. I ask these architects  to look at the architects who are legends and still had these problems making a living. It is all in where the economy is when you make decisions.

When I was young and was developing many buildings, I thought I was  great- but in truth, it was the availability of financing that made my developments possible. Further, the lack of building in this country for many years created the demand, not me.

The same causes and effects apply to today’s developers and contractors.

There is a current exhibit of Wright’s work at the Guggenheim Museum in New York, which is celebrating the 50th anniversary of this Wright designed building. This exhibit contains drawings of elegant structures, most of which were never built.  Many were designed in difficult financial times. 

Tthere is 10% unemployment and most banks are not interested in loaning money to proposed real estate developments.  All of the design, construction, and allied industries are suffering. The unemployment in the construction industry is much higher than 10%. We must hope that as construction starts up, we will have enough craftsmen to build the buildings. 

Our population has continued to grow. Their has been very little development the last three years. 

Many “experts” say these economic times bottomed out in April. All we can do is hope the recovery begins sooner than later.

Today the figures on the consumer cost for the last year where released, showing the biggest decline since 1950. it would have been even larger except for the increases in gas prices. The rising price of gas puts ceilings on consumer spending. The more we spend for gas the less we spend on everything else. Today, oil futures dipped below $70 barrel from a recent high of $74.65 price - your pump price drop?

Our economy that is dependent on consumer spending- 70% of the Gross Domestic Product is consumer spending.

That should put to bed the nervous cries that we are on the verge of spiraling inflation.

Despite Wall Street’s recklessness with credit derivatives that recently came close to ruining the world economy, Wall Street is fighting proposals to regulate  these instruments. These Wall Street whiners remind me of the man who murdered his parents and then asked the Court for mercy because he was an orphan.  Nevertheless, the wizards of Wall Street, through their vast army of lobbies, have been able to successfully water down these regulations

Today some more ” good news”- S & P downgraded the credit ratings of 25 major banks including Wells Fargo who recently said they  did not need TARP help. 

The recent increase in the interest rates for home owners has led to a decline in applications for home loans for purchasing a home or for refinancing.

Today banks badly need capital,  even though the banks recently raised $100 Billion and have had TARP funds available. As a result, the banks must receive more cash deposits from their customers.

How? To get a bank loan, the customer must maintain accounts with  large balances in the bank the customer is borrowing from. This is great for established companies with such balances. What about firms without large cash balances?  Very difficult to borrow. 

Many years ago, this was standard practice.  As competition for loans increased, loans were made with no strings attached. 

When the recovery comes, this will again be the case!  Until then hang on!!!

With all of this not encouraging news, at noon today Eastern Time- the DJI WAS SLIGHTLY UP.

Today the Mortgage Bankers Association announced that mortgage applications are down and home lending  rates are rising. This is a blow to the Fed chief who has been promoting a policy to increase real estate sales and refinancing.  The housing industry has started on the road to recovery over the last month.  This is a huge threat to this recovery. This also affects the industries that depend on home sales: appliances, building materials, furniture, floor coverings, etc. This is a huge part of the Gross National Product, more than autos, that demands that the President and Congress work on it ASAP.

I have been reading a collection of columns by the renowned architectural critic, Ada Louise Huxtable. Her work has appeared in the NY Times, New Yorker magazine, and the Wall Street Journal. She does not believe that politics and architecture are compatible.

 in her review of the Rayburn House Office Building - “Architecturally is a national disaster” She calls it “Corrupt Classic” and to summarize ” The Rayburn Building is the third solid gold turkey in a row to come from the office of the architect of the Capitol, J. George Stewart, who is not an architect”

Next is the John F. Kennedy Performing Art Center is “appalling”.  She says that the “architect strived for something timeless, but produced meaninglessness,”and finally “ the building is a “national tragedy”.

The James Madison Memorial Building, an addition to the Library of Congress. “After 32 years of planning , twenty years of architecture, nine years of construction under  the direction of two Librarians of Congress, two architects of the Capitol, three chairmen of the Senate Office Building Committee, four chairmen of the House Office Building Committee, and seven chairmen of the Joint Committee on the Library, -”The Madison Library is dead on arrival.” Even the most superficial research indicates that other countries are building national libraries in less time that relate better to the state of architecture and science”

“The new Museum of History and Transportation of the Smithsonian Institution is the latest of the capitol’s stillborn monuments”. ” What went wrong? The obvious thing, in Washington. A joint congressional was set up for the museum, authorized to advise the Regents of the Smithsonian on the design and construction of the building.  This is not the first time the Congress has overstepped itself in the arts. It has proved once again that it is more qualified to legislate than to design, although the recent record might suggest they have done more designing than legislating”

Since Huxtable’s scorching architectural critiques of the last 40 years, a Washington, D.C. non-profit corporation has developed many local and federal government buildings- many as public/private partnerships.

I writing a list of do not miss architectural masterpieces throughout the world. I would greatly appreciate your suggestions. This blog is also read in 29 other countries. Please send me your suggestions. 

thanks

Every assumption that we have is vulnerable to an unexpected event. A good example of this is contained in a recent book, The Black Swan, by Nassim Taleb in which he says throughout ages, it was assumed that all swans were white, then a black swan was seen in Australia and the whole theory collapsed. Taleb writes ” The world we live in is vastly different from the world we think we live in”  He, a Wall Street trader,  applies this to the financial world which he says consists of MBA’s in expensive blue suits living in a fantasy world in which they believe that the future can be controlled by sophisticated mathematical models and elaborate risk management systems.    

In the financial world extreme events occur and are substantially underestimated because the events are unimaginable. Regardless, the MBA’s attribute their successes to their skill and their failures to random events. They believe in the efficient market theory that states the stock market can not be beaten on a consistent basis because all available information is already built into stock prices. The stock market is rational. This has been the prevailing dogma in academic circles and is a basic premise of most MBA programs. 

This theory has been attacked by a few non-believers who showed that mass psychology, herd behavior can have a huge effect on stock prices- Maybe the stock market was not as efficient as believed? We had the dot-com bubble, followed by the housing bubble.  The inaccurate efficient market theory was believed in by most of our financial leaders. Recently, our economic and government leaders were confidently believing in the efficient market theory while a dangerous combination of bubbles, lack of government controls, fatal bonus programs and complicated AAA rated instruments led to the destruction of billions of dollar investors value.  The MBA’s, still employed, continue to  study their mathematical models and elaborate risk management systems as if the present stock market disaster did not occur. They demand that their bonuses must not be touched because of random event.  In their desire for mathematical order, the economic establishment (WALL STREET) plays down the role of bursts of irrationality.    In a new book, The Myth of the Rational Market, Justin Fox points out that business school professors in their academic cocoons were sealed off from reality. They continued to write articles and books about their mathematical models that developed an internal logic that had nothing in common with the real financial world. These became the basis of the MBA courses and the beliefs of their MBA students.

Studies after studies have shown that 20 randomly picked stocks do outperform actively managed mutual funds. The risk management models in use today exclude the very events that they claim that they are protecting their investors who pay them from. The MBA’s purport a technical sophistication based on the development of modern finance theory and information technology. The tools for quantitative analysis have created a false sense of security for the MBA’s. their investors and the regulators. Who are these MBA’s responsible to: their investors, their firms, or merely themselves and  their bonuses, power and advancement? The paying of bonuses to employees of nearly bankrupt financial organizations from taxpayer funded stimulus funds gives the answer.  

We have government regulation of the stock market and the regulations were enacted  because trust is the key to financial markets. The recent economic disasters have revealed that many of the Wall Street firms are filled with irresponsible players whose only responsibility is to themselves, not their firm or their investors. Both financial  businesses and government must be willing to take responsible actions to reestablish  public trust in the system.  Wall Street has an army of lobbyists fighting the proposed new regulatory mandates for all financial institutions. This huge lobbying efforts are partially funded by taxpayer stimulus funds. Make sure your representatives in Washington stand up to this Wall Street lobby. Write to them!

 When many hedge fund managers makes billions a year, the rest of the economy is shortchanged. It is a Zero Sum game! We must have a return to sanity!

The Public-Private Investment Program(PPIP) announced recently by the Obama Administration may be on hold because of the improved financials of major banks.  Time to reconsider PPIP!

Here are some excerpts from today’s Bloomberg web site- bloomberg.com

” The Federal Reserve may not start lending against residential mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, Federal Reserve Bank of New York President William Dudley indicated. “We’re still in the process of assessing whether a legacy RMBS program is feasible, and if it were feasible, whether it would be significant enough to make a major impact,” Dudley said at a conference in New York hosted by the Securities and Financial Markets Association and Pension Real Estate Association. His comments today add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds. The Federal Deposit Insurance Corp. yesterday delayed a test sale of bad loans held by U.S. banks that had been billed as a tryout for its role.  ”Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” FDIC Chairman Sheila Bair said yesterday in a statement in Washington. She added pushing back the pilot sale will give regulators time to assess details of the troubled asset programs.

Since the PPIP was announced, U.S. banks have raised capital through stock sales and by converting preferred shares, and as of yesterday the total reached almost $100 billion, according to data compiled by Bloomberg.”

During the 1990’s the FDIC sold  blocks costing hundreds of millions dollars  of foreclosed commercial developments. This meant that a relatively small group of investors had a great opportunity to purchase these incomplete and completed projects at bargain basement prices. After these sales there was practically no financing available for the development for commercial properties for almost ten years. By the early 2000’s the  demand for commercial property was so great that new commercial projects were developed. 

What many fear is that these proposed sales of large blocks of foreclosed residential properties by the PPIP  would have the same effect on future residential development as the 1990 FDIC sale of commercial properties had on commercial development. This long term termination of residential development would have a huge impact on the economy. In addition to the havoc to the home building industry, a similar effect would be felt by the appliance industry, the floor covering industry, the furniture industry, house ware industry  and everything else that new home owners purchase. This is a major part of the Gross National Product.

Now that banks have increased their base capital by almost $100 Billion, their ability to lend increases by almost a trillion dollars. They now should be able to handle their “toxic” assets themselves without resort to taxpayers funds. As you know from previous blogs I have written, I think we should leave the lenders and their helpers, where they have put themselves.. They must take their losses and go on from there. This will substantially reduce the proposed budget deficits and the interest that the taxpayers would have to pay for borrowing these huge sums.  These lenders rushed to make a big dollar from this loans. Why should every taxpayers in this country take over their obligations?   Risk is supposed to be proportionate to the projected gain. As you know from previous blogs I have written, I think we should leave the lenders and their helpers  where they have put themselves.. These lenders must take their losses and go on from there- I thought that was what capitalism is all about.

Comparing the drop in median house prices to the Dow Jones Industrials( DJI) is very revealing.

According to figures of the National Association of Realtors (NAR), from April, 2008 to April 2009, the median price of a home dropped 15%, In the west the drop was 23%.  The biggest difference was the number of sales. From 2006 to 2008, the number of sales dropped by more than 30%. This means the total $ sales volumes dropped close to 40%. Remember the high in home prices was in 2005. This why many realtors are looking for other sources of income.

The weekly closing prices of DJI paint a very different picture. What I have read is the stock market disaster was in the end of  Sept. 2008, these figures challenge this.   The lowest weekly closing price was on March 2,2009.  The volume of sales in Jan. 2008 was about 3.6 M shares. The highest volume was on October 6th, 2008 when 8.6 M shares traded. Since then, the volume has fluctuates  between 5.7M shares to 7.5 M shares.

The DJI for Jan 2, 2008 was 12,209. Today’s closing price was 8,500 - a drop of 30%. 

This. too, has led to many stock brokers being fired.  I would deduct that the real estate bust have may  been longer and more challenging financially. 

The stock market is stabilizing and key banks earnings are up. The Conference Board’s Consumer Confidence Index surged in May. The Dow Jones Index jumped after seeing this. Remember consumer spending is about 70% of the Gross Domestic Product. Has the increased consumer confidence translated into increased consumer spending? 

The Gross Domestic Product dropped 6.1% in the first quarter of this year. The U.S. savings rate has increased from a year ago when the rate of savings was 0% . The savings rate from 2005 to 2008 was between 0% to 1%. Today the savings rate is 4.2%.  

Ever since home equity loans sustained consumers lifestyles, retailers expanded assuming that the level of consumer spending would continue to grow. As a result, the retailers expanded. Today the retail market is overbuilt.

The U.S.. had over 100,000 fewer store in 2009 than 2008. The largest % losses were in gas stations and motor vehicle and parts dealers. Recently Circuit City, Costco Home Services, Goody’s, Gottchalk’s, Home Depot Expo Design Stores, Levitz, Linen’n Things, Mervyn’s. Sharper Image, Virgin Megastores, Wickes Furniture and others went out of business. Others have gone into Chapter 11,  Filene’s Basement,Ritz Camera, and Z Galleries, but the very tight credit market makes it questionable whether they will survive. Retailers are closing underperforming stores. Chains that are highly leveraged will have difficulty surviving this economic downturn.  The International Council of Shopping Centers predicts that 73,000 stores will close in the first half of this year. The collapse of the housing market is directly linked to the troubles of retail landlords and tenants in California’s Central Valley and Inland Empire, Arizona, Florida and Nevada. 

Urban retail is doing better than suburban retail. Despite this. even rents in the most fashionable shopping areas have been on a downward trend. ThIs year in Beverly Hills, on the very fashionable Rodeo Drive retail rents have dropped more than 25%. In New York City’s Fifth Avenue rents have dropped at least 15%. IN Miami’s Lincoln Road rents are dropping at least 27%. The rents in Rodeo Drive average $400 per sf, on Fifth Avenue -$1400 per sf, on Lincoln Road-$94 per sf. In the hardest hit markets, retail rents have dropped as much as 40%

Many markets have retail vacancies over 12%. 

The economy has also has winners. Discounters like Wal-Mart have same store annual increases. Grocery sales are up. Dollar store chains are rapidly expanding. Drug stores are recession resistant for two reasons: the aging population ensures more demand for healthcare, second the advances in medicine have significantly increased prescription drug consumption. McDonald’s and other fast food chains have record same store sale increases. These chains expand via franchisees. This places the financial risk on the franchisee and not the company. 

Survival is what 2009 is all about for retailers. The strongest will benefit from the elimination of competitors and the best tenant market in years.

Much of the foregoing I learned thanks to a recent report by Ross J, Moore and Garrick Brown of Colliers International.