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Don Tishman's Real Estate Development and Investing Solutions

Don Tishman has 40+ years experience as a real estate developer and will answer your questions about real estate development and investment

Friday, May 29, 2009

drop- House prices vs. DJI

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. 

 


     
    change
Jun 2,’08-       12,209 -5%
     
Sept 28,’08      10,325 -18%
     
Oct 6,’08           8,451 -22%
     
Oct 27,’08         9,321 9%
     
Mar 2,’09           6,628 -41%
     
Mar 30,’09         8,017 17%
     
may 29,’09        8,500 6%
     
posted by Don Tishman at 5:07 pm  

Thursday, May 28, 2009

retail-2009?

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.

posted by Don Tishman at 10:59 am  

Wednesday, May 27, 2009

Buildings are an economic enterprise

IF YOU ARE IN OR NEAR NEW YORK CITY THIS SUMMER ,THERE IS A GREAT FRANK LLOYD WRIGHT EXHIBITION AT THE GUGGENHEIM MUSEUM AS THIS IS THE 50TH ANNIVERSARY OF THIS MUSEUM DESIGNED BY WRIGHT.  THERE ARE OVER 400 OF WRIGHT’S DRAWINGS IN THE EXHIBITION.  MANY OF THE DRAWINGS ARE FOR PROJECTS THAT WERE NEVER BUILT.

Recently I read a biography of another greatly appreciated 20th century American architect, Louis Kahn. In this collection of his work, many of the designed projects were never built. 

Some of this failure to build was because both of these men worked throughout the Great Depression when very little was built by private capital. Wright’s career lasted almost 70 years. Most of Kahn’s work was after WWII. Herein lies the rub.

A private building, regardless of the architect, is an economic enterprise. The owners plan on investing X dollars in year one. By sometime in year three their investors expect to begin to earn their projected return on their investment.  If the building is going to cost appreciably more than the original projections, it will not be built. You may ask why not increase the rents or selling price because of the increased costs? A good and valid question. Except that the rents and the selling price are set by the market. There is no room to increase same. When the original prices are set the developer adds from 10% to 15% because of what this new development will offer. This is about as far as it is prudent to project. A college, university or hospital has the same limitations. A State or City issues bonds to pay for the anticipated cost, if the cost goes over this estimate where will they get additional funds from? There are a legion of lawsuits where the architect tried to collect for the drawings of a project that went over budget. Most held that the contract was for a drawing of a building that would cost $X, if the cost was appreciably higher in most cases the architect lost.   

Many experienced general contractors who are trying to get an extra approved will argue that these additional funds will increase the value of the building and therefore cause the rent or sale prices to rise. The value of the building being developed is based on only one thing- the value of the future income the building earns. The building cost is NOT a factor of value, but a limitation of the feasibility of the project.

I think that many architects believe in their design- but do not consider the cost as a primary factor. One of the complaints heard about Louis Kahn was that he was never finished with the final design. Since 1865, inflation has been a constant of about 2.5% per year. If a building is delayed 5 years, the cost will increase at least 12.5%- making the development not feasible. In recent years the annual building cost increases have been over 6%.  I have had the approval process through planning take as long as 7 years. Imagine what that does to a project budget. 

That is why most private developers do not put their projects out to public bid. Instead, they work with the architect and the general contractor from day one. Together, at the outset, they set a detailed building budget. From the earliest drawings, the developer, architect and contractor decide if each drawing will meet the limitations set by then budget. How can they do this? In order to do this, the group must understand what the target market expects from the new development. What the intended users are being provided by the competition is a given. The question is what are we going to add to get extra income.

Years ago, the National Association of Home Builders had me teaching a seminar to home builders about the advantages of developing multi-family buildings.  In those days it cost about $15,000 to build an apartment. The cash flow from this was about $600 per year or about a 4% return. I showed them if they put in a pool, etc , for a 200 unit project, the cost would be about $40,000. or about $200 per apartment. If they charged $20 per month for the pool, etc. the annual return was 120% – the return on the total investment went from 4% to 6% – a 50% increase. 

This how the add in’s for a development should be considered. Any questions?

posted by Don Tishman at 11:22 am  

Monday, May 25, 2009

Memorial Day- a sad day!

Today is a day of mourning for the war dead- both civilian and military. It is also a day for introspection about past wars and the unselfish sacrifices of the few for the many. It is a sad day.

I served in WWII in the U.S. Navy on submarines in the Pacific. There were 52 U.S. submarines lost with full crews during WWII. This was 22% of all submariners in the our Navy during WWII. This is the highest % of deaths in the U.S. Armed Forces. The German Navy lost approximately 80% of their submarines with full crews.  There were millions of civilians killed in WWII- by bombings, bullets, gas furnaces, fires, frost and starving. Germany lost over 7,500,000 military and civilians. Russia and China lost untold millions. Some historians put Russia’s losses at over 27 million people.

We grieve for all who were killed in wars.  

Every day we continue to read about people, whether civilian or soldier, killed in an armed conflict. 

Many of these conflicts are political and economic. Their solutions are political and economic. The present attempts to solve these conflicts are by the use of armed forces. The ultimate solutions will be political and economic. We must hasten those days.

May they all  rest in peace.

posted by Don Tishman at 8:51 am  

Tuesday, May 19, 2009

Privately owned public infrastructure

I have been laid up for a week or so- thus my limited contributions.

There is a great public debate in this country about private ownership of public infrastructure. The privatization of the Chicago Toll Road and the Indiana Turnpike have been successful. There has been little change in what the public is paying but it is generally agreed that service to the public has improved greatly. Some conclude from this that privately owned entities are operated with a better attention to providing service to their paying public customers, than public bodies do.

In England and Scotland, most of the busy airports are owned by a Spanish builder. This includes all three London airports and those in Scotland’s two principal cities. The anti-trust people in England have ruled that this a monopoly that is illegal. This authority declared that the owner had to sell two of the three London airports and one of the two Scottish airports. If you ever traveled to or from Heathrow, the huge London airport, you know that this airport could be better run. In a recent issue of the magazine Dwell, Heathrow was picked as the worst run major airport.

Imagine in this country if all three New York airports plus O’Hare in Chicago and LAX in Los Angeles were owned by one group. Would you hear any complaints?

When you go to get a building permit, sometime the plan checkers act as if they are doing you a great favor by examining your plans. If there were no building going , the plan checkers would not have a job. Many of them are finding this out today.

Years ago, I was teaching a number of seminars to the principal planners for every  city in California. I asked at the outset of each seminar, what they would like to get out of the course. Most of them answered the same way. Developers are screwing us and we want to know how to get back at them. This took me by surprise. It was clear that these public planners  considered private development as an adversarial relationship, not a method of community development. Most planners with a planning degree have had little technical training. These planners are dealing with very involved technical points.

The zoning code dictates the use that can be built on the property including density and parking. Let us assume that the proposed project meets the zoning requirements. The design of the exterior of the building is done by the architect. The interior of the building is dictated by the targeted users. The parking is set by the zoning code. Yet the hearings on the proposed use can last for years. What would happen if the city would contract out this work to an architectural firm? This would be for the preliminary approvals prior to the “planning body’s hearing”. Today if a council person hears objection to a proposed project in their district, they might call the planner involved and request a turn down. If the private firm was doing this pursuant to a contract, the council person might call and intimate that the contract may not be renewed if the council person was not satisfied with the firm’s recommendation. 

Let us look at the motivation involved- The elected official wants to stay in office. The official needs what? votes and funds to campaign with. The private firm needs to work within budgets to stay in business. Which scenario would you rather face?  Having developed in more than thirty U.S. major metropolitan areas, my choice is for the private group. 

Many years ago, I was involved in the city government of Columbus, Ohio. The Columbus water department was notorious for dealing withe public in a nasty manner. Almost 50 years ago, a new mayor was elected. His executive assistant meet with e staff of the water department and told them they worked for the public not the opposite, the public worked for them. He demanded better service for the public. He told them if the Mayor’s office received complaints about their service to the public , after an investigation the Mayor  found that the complaint was justified, this would be made part of their employment record. After a certain number they would be brought up for suspension or even be terminated.  Within a short time there were very few complaints about the water department. Their collections materially improved.  After this administration left, the water department went back to their nasty ways.

Public employees with civil service protection have a opportunity for steady employment regardless of the economic times, while private employees employment are more subjected to the economy. The recent huge employee layoffs in private business is example of this. The representatives of public employees fight privatization of public infrastructure for this very reason. They point out that public employees make less than equivalent private employees but accept this because of their job security. Are the protection of these public jobs the overriding consideration to keep public infrastructure in public governmental control? What do you think? What are your experiences?

posted by Don Tishman at 9:10 am  

Sunday, May 10, 2009

Were Sullivan and Wright successful architects?

To best answer this question, let’s start with a peak at the background of modern architecture.

For 5000 years, iron had been used in very limited supply because it could only be produced in very limited supply. The limiting factor was the limited availability of charcoal. After the blast furnace was developed in the 14th Century. The mighty forests of England and Central Europe were receding, seeing this danger, the production of iron was curtailed to prevent stripping of the forests. Finally, coal was introduced as an alternative to charcoal. Coal was in great supply. This was one of the great contributions to England’s development during the Industrial Revolution.  In the 18th Century bridges were built of cast iron and with advent of railroads, a demand for cast iron was created. In 1801, a cotton mill with an internal load bearing frame formed by cast iron stanchions and beams was successfully put in use. The load bearing external walls were load bearing masonry into which a delicate iron skeleton was inserted as though a shell. 

In 1851, Joseph Paxton built the Crystal Palace in London only using glass and iron. The building was over 750,000 square feet, and took only four months to build. A similar sized masonry building would take taken years to build. The impact of the Crystal Palace was overwhelming. Natural sunlight shown throughout the entire building. with the ever changing pageant of he clouds. The limiting factor was the internal spans. The arch of the middle arch spanned 70 feet. The side aisles rested upon a great number of closely placed columns. 

At about the same time in Paris, Henri Labrouste, a professor at the Beaux-Arts, resigned because of the rigid formalism of the Beaux-Arts and formed his own school. He built the Bibliotheque Sainte-Germaine in Paris, in the thick external walls of which there is a steel structure of arched shaped lattice girders carried on cast iron stanchions. The entrance to the reading room is startling. A glass wall, about 30 feet tall, its only feature being a few steel guides separates the reading room from the stacks.  Labrouste wrote his brother at this time: ” I tell the students repeatedly that the arts have the power to make everything beautiful, but the architectural form must correspond to the purpose for which it is intended.”  This changed one of the fundamentals of the Beaux-Arts- now a building must be designed from the inside out. This lead us to Louis Sullivan- the advocate of form follows function

Louis Sullivan- (1856-1924) the father of the high rise building.

The theory of using a steel skeleton in the construction of multi-story buildings originated in Chicago.  The really significant contribution of the Chicago School was the logical development of the steel skeleton as a load bearing structure and in evolving a characteristic form of architectural form for this new type structure.  Stanchions and beams can be connected so that the skeleton forms a rigid load bearing structure from from foundation to roof. Louis Sullivan had given the most searching consideration to the construction and functional problems of skyscrapers and his theoretical principles are as important as his buildings. 

One of the several architects Louis Sullivan worked for in Chicago was Dankmar Adler, who was so impressed with Louis Henry Sullivan’s drawing talent and his ability to devise architectural design that Adler made him a junior partner late in 1881 or early in 1882 and then full partner in the new firm of Adler & Sullivan, organized May 1, 1883. From the beginning of their association until July 11, 1895, when Adler temporarily quit architecture because of the national depression, Adler & Sullivan designed approximately 180 buildings. 

Adler and Sullivan complemented each other perfectly. Recognized as an outstanding acoustical and structural engineer as well as a reliable architect, Adler ,nonetheless, understood his own limitations as a designer. Though eight years senior to his 26-year-old partner in 1883, Adler turned over to Louis Sullivan full responsibility for all composition and decorative work. Generally speaking, Adler took care of mechanicals and structurals, Louis Sullivan handled the art, and together they worked out the program. Their mutual talents were first recognized in the theater and concert hall genre. Beginning in 1879, with Louis Sullivan a free-lance assistant on Central Music Hall in Chicago, the partners produced eight reconstructions and one new theater over the next seven years, culminating in their grandest structure, the Chicago Auditorium Build ing (1886-1890).

The reconstruction of Chicago’s Hooley’s Theater in 1882 was the first commission to generate praise for Louis Sullivan independent of Adler. Louis Sullivan was, said one commentator, “the master spirit directing and shaping the creation” (1) of the new interior. By the time McVicker’s Theater was remodeled in 1885, Louis Sullivan ‘s work was “the best” of its kind in Chicago, according to one critic, “superior to anything heretofore seen in any public building in this country”, in the eyes of another. Even more impressive to contemporaries than Sullivan ‘s rich exfoliated ornament in a carefully coordinated array of colors, however, was his handling of incandescent light. Adler & Sullivan ‘s theaters did away with flaming chandeliers in favor of electric light fixtures worked into overhead decoration continuing down and around the room sides. The totality, evenness, and clarity of light startled observers accustomed to flickering gas lamps. Together with Adler’s impressive acoustics and uninterrupted sight lines, Sullivan ‘s lighting and ornament earned the firm a well-deserved reputation for excellence in theater design.

The same was said of Adler & Sullivan ‘s offices commercial structures, and factories. In the series of commissions in the 1880s-the 1881 Rothschild, 1882 Jeweler’s, 1884 Troescher, and the 1887 Wirt Dexter and Selz, Schwab buildings being the best known-they developed several trademarks. Using isolated footings instead of continuous foundations when possible, Adler widened the spans between masonry-clad columns, thereby increasing fenestration. In his facade compositions, Louis Sullivan projected the comparatively thin columns slightly forward of the building’s main mass. The result as his tentative thrust at a system of vertical construction as well as illumination “far greater than is usually obtained by other architects,” said a local building magazine. Their alleged motto, “let there be light,” this magazine continued, assured them “abounding orders from confiding clients.” Their private dwellings were also marked by “originality” and “common sense”.

This kind of reputation, but especially their theater successes, landed them the commission for the Auditorium Building on December 22, 1886. At $3,200,000, it was the costliest edifice in the city, and at 8,737,000 cubic feet of volume the largest in the nation. Running from Michigan Boulevard along Congress Street to Wabash Avenue, it was 63,350 square feet plan in 10 stories plus a seven-floor, 40 x 70 ft tower. The program was ultimately arranged as a 400-room hotel on Michigan and partway down Congress, 136 offices and stores on Wabash and in the tower, and a 4200-seat concert hall that, with support facilities, occupied half the total area and one-third the volume of the entire structure, the largest permanent concert hall ever built at the time. The non-steel building of load-bearing masonry walls weighing 110,000 tons confronted Adler with as many structural challenges as did the acoustics of the vast auditorium. But Louis Henry Sullivan solved them as successfully as Louis Henry Sullivan did the aesthetics.

Basing his facade composition loosely on Henry Hobson Richardson’s Marshall Field Wholesale Store (1885-1887) in Chicago, Louis Sullivan articulated the granite-and-lime-stone exterior in a rhythmic and utilitarian manner befitting ting both the cultural and commercial nature of its interior functions. The lavish auditorium, the main dining room, and the banquet hall were among the finest interior spaces Louis Henry Sullivan ever conceived. Taking his cue from Adler’s acoustical requirements, his Auditorium Theater featured four elliptical arches, wider and higher toward the rear, dividing the ceiling into smooth ivory panels of the most delicate lace like tracery. The arches were not structural, although they appeared to be, and Louis Henry Sullivan made them the basis of his decorative scheme. Chevron moldings divide their faces into hexagons enclosing foliated designs that lower into electric lights, into grilled bosses hiding air inlets, and into smaller triangles with additional foliage. The lights run down the arches and across the boxes illuminating the entire room softly and completely. To the rear of the hall where the coved ceiling soars dramatically to provide sight lines for the gallery, Louis Henry Sullivan placed an immense stained-glass skylight. In the great hall, one reviewer wrote, “the sight is one of the most remarkable . . . in the world”, an assessment echoing the general sentiment, including that of Montgomery Schuyler, the sober Architectural Record critic, who concluded, after considering the pros and cons of the building, that Louis Henry Sullivan was “one of the most striking and interesting individualities among living architects”.

The problem was the high-rise office building, the skyscraper, as it came to be called in the 1890s. The challenge for Louis Henry Sullivan was not so much structural, for most of the load-bearing and mechanical obstacles to great height had already been solved, as it was the aesthetics of structure. Louis Henry Sullivan was convinced that this historically new building type required a new design treatment, not one based on analogies to other kinds of buildings or one rooted in history, as most architects believed. Louis Henry Sullivan saw the skyscraper as a symbol of U.S. business that was the basis of the national culture, and therefore as an opportunity to create a long-anticipated indigenous architectural style. So when Adler and Louis Henry Sullivan received a commission in 1890 from St. Louis brewer and real estate promoter Ellis Wainwright for what came to be a 10-story rental structure, Louis Henry Sullivan made the most of it.

His solution to the skyscraper problem did not come easily. Frank Lloyd Wright, his principal assistant at the time, remembered how Louis Henry Sullivan struggled over the facade composition, leaving the office for long walks, throwing away sketch after sketch, until finally Louis Henry Sullivan burst into Wright’s room and threw a drawing on the table. “I was perfectly aware of what had happened,” Wright recalled. ‘This was Louis Henry Sullivan ‘s greatest moment-his greatest effort. The ‘skyscraper . . . as an entity with . . . beauty all its own, was born” with a steel frame.

Louis  Sullivan outlined his skyscraper theory six years later in his most famous essay, ‘The Tall Office Building Artistically Considered”. By carefully analyzing the program requirements, Louis Henry Sullivan decided that skyscrapers had three major clusters of functions, each of which should be expressed separately. The first was public-seen on the one-or two-story base-consisting of entering and leaving, meeting and greeting, waiting, shopping, and locating the entrance from the outside. The second set of functions was private: various kinds of office work. And the third was architectural: the housing of mechanical equipment and storage in an attic that could also serve as an aesthetic device for terminating the facade in a decisive way

Louis Henry Sullivan had in fact designed the Wainwright Building according to his as yet unwritten theory, with a two-story base treated in an expansive, sumptuous way with an easily identified entrance flanked by broad display windows; a shaft of seven identically articulated floors to indicate the similar nature of work in the various offices; and a richly decorated attic suggesting a crisp termination, and that the functions there were of yet a third and different order.

All this was but one aspect of Louis Sullivan ‘s thinking. It was necessary to differentiate the three principal functions, to be sure, but it was equally important to unite them harmoniously at the same time, because Louis Sullivan believed, as Louis Sullivan had written earlier, that every building should reveal “a single, germinal impulse or idea, which shall permeate the mass and its every detail,” so that “there shall effuse from the completed structure a single sentiment . . .”. What was the skyscraper’s single sentiment? Or, as Louis Henry Sullivan asked himself in his 1896 essay: “What is the chief characteristic of the tall office building?” Louis Henry Sullivan answered in some of his most direct but most memorable prose. “It is lofty. … It must be tall, every inch of it tall. … It must be every inch a proud and soaring thing, rising in sheer exultation . . . from bottom to top . . . without a single dissenting line”. So Louis Henry Sullivan recessed the horizontals, projected forward the structural columns and nonstructural mullions, and took the corner piers all the way from sidewalk to cornice. His “system of vertical construction” was now complete.

But in his 1896 essay Louis Sullivan had one more point to make, the most important point of all. Working from the particular to the general, Louis  Sullivan advanced his “final, comprehensive formula” for the solution of the skyscraper problem, indeed, of all architectural problems. All things in nature had shapes, forms, and outward appearances “that tell us what they are, that distinguishes them . . . from each other,” Louis Sullivan asserted. “Unfailingly in nature these shapes express the inner life,” and when analyzed reveal that “the essence of things is taking shape in the matter of things.” Life seeks form in response to needs, the life and the form being “absolutely one and inseparable.” “Where function does not change,” Louis Sullivan insisted, “form does not change,” so it was “the pervading law of all things . . .that form ever follows function. That,” Louis Henry Sullivan emphasized, “is the law”. With the Wainwright Building and the assertion of “form follows function,” Louis Sullivan’s place in architectural history was assured.

Irrespective of the acclaimed buildings Louis Sullivan had produced, the rejection of the “Chicago School” in the U.S. brought Sullivan little business. The Beaux-Arts architecture was the architecture most popular in the United States. Sullivan’s influence in the European architectural  movement  however, was huge. Aalto, Le Corbusier, Gropius, van der Rohe, agreed with Frank Lloyd Wright about the great influence that Sullivan had on each. Sullivan died penniless in 1924.  Eight years after his death, in 1932, The Museum of Modern Art in New York performed a great service to reviving modern architectural thinking in the U.S. by showing examples of a few Beaux-Arts  American buildings compared to buildings of Sullivan, Le Corbusier, Aalto, and the Bauhaus. This did much to change the face of American high rise buildings.

Frank Lloyd Wright(1867-1959)

Through the turn of the century, Wright’s distinctively personal style was evolving, and his work in these years foreshadowed his so-called “prairie style,” a term deriving from the publication in 1901 of “A Home in a Prairie Town” which he designed for the Ladies’ Home Journal.  Wright echoed Sullivan’s strong distaste for Beaux-arts styles and its gaudy decorations.

Prairie houses were characterized by low, horizontal lines that were meant to blend with the flat landscape around them. Typically, these structures were built around a central chimney, consisted of broad open spaces instead of strictly defined rooms, and deliberately blurred the distinction between interior space and the surrounding terrain. Wright acclaimed “the new reality that is space instead of matter” and, about architectural interiors, said that the “reality of a building is not the container but the space within.” The W.W. Willits house, built in Highland Park, Illinois in 1902, was the first house that embodied all the elements of the prairie style. His masterpiece of the prairie style is the Robie House, built in Chicago in 1909. 

In 1910, Wright left his wife and five children to move to Europe. He prepared a set of drawings based on Sullivan’s theories that were then published in Europe. This brought these new architectural concepts to young, architects who loved the concept that form follows function. They were revolting against the elaborate ornamentation of the beaux-arts. 

All though Wright’s work was revered in Europe, the end of the Chicago School meant Wright had great difficulty getting work in the U.S.  Dvelopers only wanted Beaux-Arts buildings. Wright was completely isolated  A famous European architect, Bruno Taut, who loved Wright’s work,   visited this country and said in his book ” even to mention Wright’s name was shocking”  Only with the rising influence of the new European architecture did American begin start to take an interest in Wright’s work.  

Nevertheless , Wright is now recognized  as one of the great pioneers of modern architecture. His Fallingwater has been named the outstanding building of the 20th Century.

Now- the original question- Were Sullivan and Wright successful architects? Does a fickle public determine success? 

Both of these architects had little financial success- both have great influence on today’s architecture world wide. In most of their carreers their work was not the trend.  Compare them to the hedge fund operators who made more $$ in a day then they made in their lifetimes. Both these architects continue to be well respected world wide.  Their works continue to live on, while the architectural fads of yesteryears have long since faded away. 

It is a great victory for men who believed in what they did.

 

posted by Don Tishman at 2:37 pm  

Friday, May 8, 2009

Strange times

These are, indeed, strange times.  Unemployment increases, consume credit is contracted, and the Stock Market goes up.

Today, the U.S. Department of Labor announced that the unemployment rate rose to 8.9%, the highest rate since September, 1983. Unemployment is when you are off work for at least four weeks, and are diligently seeking employment.  Many are discouraged and have stopped looking for work. If you include this group in the unemployed, the unemployment rate is over 15%. 

How did the New York Stock Exchange react to this news?  As of 1 P.M. today, New York time, the Dow Jones Index was up 117 points, or 1.4%.  According to the Bloomberg Report, the reason for the rise in stock prices is “We appear to have passed the point of the most severe job losses,” said Dean Maki, co-head of U.S. economic research at Barclays Capital Inc. in New York. “It’s still a weakening labor market but it’s weakening less fast. There are a few headwinds to growth, and a recovery will” likely be “modest.”

The 15% real unemployment rate does not seem to phase the “Wall Street” experts, even though the “weakening less” was caused by the temporary hiring of Census workers for the 2010 Census- this hiring has been mandated by the U.S. Constitution since the founding of the U.S.  Someting that has happened every 10 years since 1790.  This is no change in the economy

Residential loans are still scarce, although the U.S. Treasury said the 19 largest U.S. banks passed their stress tests. Consumer credit has been reduced by banks to a new low.

In our markets, we are seeing more traffic, but no sales. 

I only hope that the good feelings on Wall Street are transferred to Main Street. Remember, 70% of our economy is consumer sales. 

This does not add up.  Unemplyment the highest in 25 years, Contraction of consumer credit, residential loans difficult to obtain, and banks given a clean bill of health.- no change in the Gross National Product?  Despite all of this, Stock prices are increasing What am I missing? 

My conclusion is despite the carefully calculated opinions of the army of economists employed by Wall Street, the only thing that motivates investors in the Stock Market is the desire to make money. The economists opinions are window dressings used only to make the investment bankers appear to be sages. What makes them invest is not the economists sage advice , but their intuition based on the “consensus on the Street”.

 Although their past performance record has its bumps, their “consensus on the Street” today is that things are turning around- they follow this like a flock of sheep running off a cliff.  First the devastating market crash of last fall- and now this upbeat market. My only hope that the Obama Administration will continue to cultivate this upbeat attitude on Wall Street. Eventually, maybe real people will sign in. 

Have a great week-end

posted by Don Tishman at 10:18 am  

Wednesday, May 6, 2009

Who will pay for the infrastructure after the stimulus pays 5%?

The American Society of Civil Engineers released their study of what it it will cost to to bring the U.S. infrastructure current in the next five years- $2.2 trillion dollars.  The stimulus funds provide $100 billion. How will the other 95% be paid for? Traditional funding sources, increased taxes and public bond issues, are now difficult to access. The alternative is private investment. Private capital investment in infrastructure in 2004 was $10 Billion while in 2008 it jumped to $180 million. The recent privatization of the Chicago Skyway and the Indiana Toll Road have been very successful in obtaining financing and the subsequent turning over the operations to private operators.  Generally speaking there is no powerful force to keep public expenditures within budget projections, while there is when private investment purchases an entity to make a profit – there is no alternative source of funds! 

 The public agency operator of a large infrastructure is losing money operating the entity.  The public agency issues an Request for Proposal(RFP) for a private entity to purchase and operate the entity with provisions that protect the public interest.    The response is overwhelming. The agency is offered Billions and the the cost to the public for the use of the infrastructure is protected.  THIS SOUNDS WONDERFUL. The history of two recent proposed purchases of public infrastructure shows how difficult this is to accomplish.

The Pennsylvania Turnpike is a 537 mile turnpike opened in 1940.  In November 2006, Pennsylvania Governor Ed Rendell and former Pennsylvania House Speaker John Perzel separately raised the idea of a long-term lease of the turnpike to a private group as a means of raising money to improve other infrastructure within the state, following examples of similar toll road lease arrangements in IllinoisIndianaTexas, and Virginia. Although no plans are immediately in place, Rendell and Perzel have speculated that a lease of the system could bring anywhere from $2.5 to $30 billion to the state.[24]

This idea faced criticism from the legislature, and instead a plan was created to lease Interstate 80 to the Pennsylvania Turnpike Commission and place tolls on it to fund transportation. However, this plan faced opposition from many people in Northern Pennsylvania who feared tolls on I-80 would hurt the economy of the region, which led Rendell to revive the plan of leasing the Pennsylvania Turnpike. In October 2007, 34 companies submitted 14 proposals to leasing the turnpike.[25] On May 192008, the Spanish firm Abertis Infrastructures, SA and Citi Infrastructure Investors of New York City submitted a record $12.8 billion proposal to lease the turnpike. Privatizing public operations is politically sensitive. Political opposition to these privatizations raises fears that the private profit-making entities would unreasonably raise toll prices, etc. Some entities like local the public employees unions will protest because its members may lose their jobs and their civil service protection. Others say if the private entities can do make money at these prices , why can’t the public agency do it?  The facts are that the public entity is losing millions every year and has been losing money for over 50 years. This deal fell apart when the winning bidder let their offer expire. All that means is the Turnpike will just continue to lose millions and the State will have to come up with a solution to fund this continuous deficit.

The Federal Aviation Administration (FAA) is spearheading a drive for the privatization of local airports. The City of Chicago issued an RFP for the sale and operation of Chicago’s Midway Airport. The City’s appraiser’s established the range of value of Midway Airport at $1.5 Million to $3 Million. The winning bid was $2.8 Billion. The FAA’s  privatization  legislation called for not only for Chicago to approve the sale, but also several adjoining cities. In addition 65% of the airport’s tenants have to approve the deal. Southwest Airlines, the major user of Midway was able to freeze carrier charges for six years and for the subsequent 19 years to limit increases in charges to the rate of inflation. The parties are still talking. 

This reminds me of an elderly housing development we were doing in Detroit 30 years ago. We needed a zoning change that the city administration had approved. The minimum age of resident in our development was 65 years old. A lady running for the Michigan Legislature opposed the zoning change on the basis that we were going to bring welfare mothers into this neighborhood.  As ridiculous as this may sound, this demagogue raised these issues at the City Council hearing and she had local people there to support her. A present U.S. Senator from Michigan was on the Detroit City Council then, asked our opponent how many woman over 50 were recent mothers? He kept the questions coming until the audience was all laughing at the opposition.  If Carl Levin was not there , we probably would have lost the zoning.

Recently, when the House refused to pass the stimulus bill before the election, it was plain that the stimulus was badly needed- both Obama and McCain had endorsed the bill. Regardless many in the House thought that because their opponents had spoken against the stimulus package , they would also oppose the bill to avoid letting their opponent having an issue.  Totally disregarding that the economy was close to collapsing.      

The demand for infrastructure capital has outstripped the available public sources. The present demand for infrastructure replacement and repair was best made vivid by the Minneapolis bridge failure. Investors regard public infrastructure investment as a very attractive asset class. Nevertheless, demagogues can raise issues that make these transactions very difficult or impossible. These risks will only raise the cost of this capital. It is imperative that guiding these transactions through the public processes is done by professionals with a great track record. The public must be better informed to have these failed bridges repaired before more lives are lost.

 


posted by Don Tishman at 10:58 am  
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