Don Tishman's Real Estate Development and Investing Solutions

The U.S. unemployment rate remains over 9%.  Economists state that many of these lost jobs are lost forever. That the jobs lost were caused by mismatch between the jobs available and the skills that people have.  In the 1960′s recession, the economists said the same thing. Within 2 years all the seemingly lost jobs  were filled.   In the 1980′s recession, the economists said the same thing. Within 18 months  all the seemingly lost jobs  were filled.    In fact ,the same things were said in the Great Depression , yet all these lost jobs were filled.

Compare this continued high rate of unemployment for many Americans  to the financial condition of U.S. public companies. Recently, the U.S. rating agencies raised the credit ratings of over 700 companies. This is the largest such increase in over 50 years.  The ratings agencies based these improved credit ratings on the huge cash surplus in the companies whose credit ratings were increased.

Another sign of corporate huge financial success is the Dow-Jones Index is completely recovered from the disaster that started in September, 2008.

With all this cash in their hands, why don’t these companies invest these funds in American businesses?  One answer is that the Federal Reserve has made available loans  to these companies at about a 1% interest rate. The borrowers  take these loans and then  can buy Treasury notes that pay 4% interest . Say this company borrows $100,000,000 for the Fed.  The cost per month for this loan is $83,333. With none of their cash invested, the Treasury notes this will pay the company $333,333 each month. The difference per year is $3,000,000 using taxpayers funds instead of the company’s cash surplus.

This is called arbitrage -earning more interest on an investment than the interest cost on the debt proceeds used to make that investment. …

There are several ways of stopping this practice. The Federal Reserve could simply stop making this low interest loans to companies that have a strong, liquid , balance sheet.  Congress is aware of this problem.  Congress restricted this practice by banks and issuers of municipal tax exempt bonds.    It cost the Federal Reserve more than 1% to make this loan. Who is covering this loss ? The American taxpayer is paying the difference. Will Congress restrict subsidized loans to companies that have a cash surplus?

America’s leading companies have  cash surpluses . How do we get these very successful companies back to investing in America? One way is consumers showing confidence in our economy.

The prospects for our economy are getting stronger and stronger. Consumer spending has been up to 70% of our Gross Domestic Product(GDP).  The last two prior Xmas sales have been very discouraging. They showed the consumer was scared of our economy’s prospect. Finally,the recent large increase in 2010 Xmas sales is encouraging. The consumer is showing reborn confidence in our economy. The prospects for 2011′s economy are much stronger.  This  better economy should see many of the eliminated  jobs filled again.

Happy, healthy, and prosperous 2011 for all.

Here are some fascinating facts from the Urban Land Institute’s Urban Land that demonstrate great opportunities for architects, contractors, developers, and all who service these entities.

“The world of land use in the midst of change. The year 2000 was the midpoint of two decades in which urban cores were being rebuilt as places to work and live, not just work and leave. A downtown migration of affluent, childless professionals and empty nesters created a development boom, in many cases breathing new life into old space and allowing cities to reinvent their economies.

While this downtown growth has resulted in a remarkable shift in how we view our cities, it’s but one aspect of the evolution in urban growth that is going to intensify in the years ahead. What we learned from this phenomenon is that there is a market for compact, mixed-use design, smaller housing space, and transit-oriented development that minimizes the need to drive. But perhaps the bigger lesson–one we are still learning how to apply–is that there is a demand for at least some aspects of this type of development that stretches beyond downtown cores and into outlying suburbs. In other words, growth in the suburbs does not inevitably mean sprawl.

Going forward, our decisions on what and where to develop will be guided not by a plentiful supply of land throughout urban regions, but rather how best to use the land that is left.  Vast demographic, financial, and environmental shifts are necessitating a major overhaul in what and where we build and will continue to do so in the decades ahead.

Among the forces of change now in place:

• The US population has grown by more than 100 million people since 1970, with up to 150 million more people expected over the next 40 years;
• The first wave of baby boomers are hitting 65. Many will shun or delay retirement and stay in the workforce, and many, if healthy now, will still be alive in 40 years;
• The children of baby boomers, Generation Y (the most technologically connected and largest generation in US history) has started to enter the housing market and workforce;
• Household size is shrinking, due to more people living alone, delaying marriage and childbirth, and having fewer children;
• The US is now the largest importer of oil, rather than the largest exporter, leading to stepped up efforts to develop alternate sources of energy;
• The US transportation infrastructure system, once a world leader due to the interstate highway system, is now falling far behind Asia and Europe in terms of transportation investments;
• Concerns over climate change have resulted in an increasing number of state and local government mandates aimed at limiting carbon emissions from vehicles and buildings; and
• The worst economic downturn since the Great Depression plunged credit markets into prolonged turmoil; left many markets with unprecedented housing foreclosures; and caused a decline in the homeownership rate and possibly a change in the perception of homeownership as the American Dream.

With job growth still slow and the economy inching toward recovery, it is difficult to predict exactly how the development activity that lifted up downtowns over the past several years might similarly boost suburbs in the future. But clearly, the majority of the growth that will occur will do so not in downtowns, but in the suburbs. And in these areas, less land will have to be used to accommodate more people. This change in how suburban areas grow will have a major influence on the environmental and economic sustainability of entire metropolitan regions.

Piece-meal, haphazard and poorly connected development is a thing of the past. This is what we can expect: building more densely to conserve energy, water and land; better coordination of land-use and transportation planning so more development will be oriented toward transit options; and reusing and adapting obsolete space in a way that reflects the changing needs and desires of a much more mobile society, a society in which many are likely to rent longer and change jobs much more frequently.

I see the coming decade as a pivot point for land use and community building. More than ever before, economic, social and environmental factors will elevate the importance of tailoring urban development to meet residents’ expectations for livability, amenities, flexibility, and choices in getting from one place to another. Ultimately, cities are about what’s best for people, not buildings and not cars. The places that get this right will be the winners, not just within the US, but globally.”

Another positive note I saw in GlobeSt.com that said that Chinese banks are looking to the West to make commercial real estate loans. The Chinese governments fear that the unprecedented scale of Chinese construction will cause their economy to heat up. They wants to slow down China’s huge  real estate construction boom, this is driving the Chinese banks to make commercial real estate loans in the West.  Our problems are exactly opposite,  we have very little construction. Our economy is going nowhere.

These mixed use developments will require construction loans. Today these are not available. Maybe U.S. bank regulators after seeing the Chinese banks entering this real estate market, will wake up and  urge U.S. banks to get back to making real estate loans, instead of what they have been doing urging banks to avoid real estate construction and development loans.

On Friday I was talking to an old friend who thinks about issues for quite awhile before expressing an opinion. He said that for our economy to prosper, it must depend less on consumer sales.  My immediate reaction was this would be a disaster.  As I mulled over  the words of my wise friend, I realized he was right. Here isa why:

The annual sum total of all U.S. business is the U.S. Gross Domestic Product (GDP). Consumer spending has been as high as 70% of the GDP.  In the recent boom years U.S. consumers reportedly were spending 107% of their income. Remember 30% of consumer’s income is spent for taxes.

The complaint of many economists is that the U.S. savings rate has been ridiculously low. The savings rate  in China has been up to 50% of their GDP.  In the U.S., up to this recession,  the U.S. savings rate was between 1% and  2% of the GDP.  Since the recession, the U.S. savings rate has risen to 6%. What does this mean?  The good news is that the increase in the savings rate means banks will have additional money to lend. This lending will create new jobs.  The decrease in consumer spending by the additional savings may be offset by the increase in the GDP resulting from the additional lending.

This increase in domestic saving, along with foreign capital inflows, can be the source of increased funding for  U.S. investment.  The surge in value of the stock market is evidence of the confidence of stock market investors in the anticipated increased availability of capital.

The savings rate in Japan was always at least twice of the U.S. rate. The decline of the Japanese economy paralleled  a decline in their savings rate. The Japanese savings rate is down to 2%

How big is the GDP?  If the savings rate is 6% of the GDP, how much are we talking about?

The last estimate of the GDP is $14,750.2 billion.

We are talking about trillions in savings. Enough for many, many jobs.

What are we waiting for? Banks let's get started!!!!

The stock markets are soaring above what they were when the market crashed in September, 2008. The wizards of Wall Street are are jubilant anticipating huge year end bonuses.  Unfortunately, there is no trickle down to many others. Unemployment is still very high. Architects, contractors, real estate developers, real estate brokers- to name a few- are suffering.

The nation is looking to the new Republican controlled House of Representatives for answers to this suffering.  The Federal Reserve  Chairman Bernanke is traveling the country trying to talk heads of big companies to start hiring. Many tell him that uncertainty of  Federal regulations are keeping them from hiring.  Many of these same companies are sitting on huge cash reserves. They are using this cash to buy existing companies, many of these purchases are not U.S. based companies.  This is one way to avoid regulation by the U.S, government.

The failure of many home loans  syndicated and sold by the wizards of Wall Street has caused much of suffering throughout the U.S. and many other parts of the world. The consensus is that is  what caused this recession.  These wizards were the same people who received most of the bail out money and are now very prosperous. Amid all the prosperity on Wall Street, there are murmurs of lawsuits between the wizards for fraud in the selling of these failed loans. FNMA and Freddie Mac have demanded that the  major banks and investment bankers to take back these failed loans and pay them billions for this failed lions. Major banks are being sued by hedge funds for selling them fraudulent loans because they knew these were bad loans. The banks deny this knowledge.  At the same time, these same banks are suing whomever sold these loans to them to take the loans back and pay the major banks because of fraud.  Some think this is double talk.

Nevertheless, our court system will finally get this horrible mess straightened out. I wonder if the rating agencies who made huge fees for givings these failed loans the highest possible credit ratings will also end up before the court system?

But there are millions of folks who will never recover what they lost as a result of the collapse of the real estate markets. Anyone who sold  real estate in the last few years suffered because of the market failure. Architects, contractors, accountants, attorneys, suppliers, designers, manufacturers, and so on and on – all lost business- many did not survive. None of these are enjoying the prosperity of Wall Street wizards.

These folks had nothing to do with the failed loan business- yet they suffered enormously.

The major component of the Gross National Product is consumer spending- in this country it can be as much as 7o% of the total national spending for a year. An encouraging note has been the early returns of this year’s holiday spending-So far  the consumer spending is more than the last few years- the biggest increase is in internet sales. .When the final count is in- we will learn much about what may happen to all of us in 2011.