Landmark Links August 14th – Temptation

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Every now and then one comes across an idea so dreadful that it’s almost as if the people behind it have run out of ideas and are simply throwing shit up against the wall in a desperate attempt to find something that sticks, consequences be damned.  This crossed my mind last week as I read about a hair-brained program from Freddie Mac to offer cheap(er) mezz loans in exchange for rent caps (h/t Dave Kidder).  From Erika Morphy of Globe Street (emphasis mine):

Freddie Mac has launched a new mezzanine loan pilot for multifamily borrowers that provides favorable pricing and additional debt capital in exchange for keeping the majority of rents in the property at levels affordable to low- and moderate-income families.
The mezz loan provides the borrower an additional 10% of the loan amount for up to 90% LTV at a below-market interest rate. Currently mezz debt is pricing above 9% so the program will provide financing under that rate, according to Amanda Nunnink, senior director of Production and Sales at Freddie Mac Multifamily. The larger the loan — and hence the more units that will have fixed rents — the more aggressive the pricing will be, she said.

The average loan size will likely range from $2 million to $3 million.
The point of the program is to make it worth the while of property owners not to raise workforce housing rents, Nunnink told GlobeSt.com. “This program allows the property owner to achieve the same returns via the workforce housing mezz loan as they would through a standard rent increase.”

The program has safeguards to ensure that the property owner doesn’t raise the rates after securing the financing including a penalty of 5% of the mezz loan amount for noncompliance.

Before going into some of the myriad of issues with such a program, I want to be clear: affordable housing is a catastrophe in many parts of the US right now.  Development of rental product is booming but nearly all of it is high end due to the increasing costs of land, construction and regulations/fees.  Older, more affordable product is increasingly scarce as very little gets built and some buildings are bought up by developers who provide much-needed capital improvements and repairs of deferred maintenance but seek higher rents in return.  All this while the low end is clearly where the most demand exists as we sit today.  The result is a new push for rent control in expensive markets despite it’s abysmal track record in reducing housing costs for all but a very lucky few.

Freddie Mac has apparently seen the affordability crisis and come up with a program that allows for developers to “opt in” to a rent control agreement dictated by their financing agreements rather than by statute in order to get out in front of the issue.  There are a bunch of reasons that this program as currently constituted is a terrible idea but here are a few:

  1. Cost Inflation– what happens under this program if a re-assessment triggers a large tax increase or utility rates spike?  What happens if the local jurisdiction changes the rules for on-site managers, causing an increased cost burden?  Under this program, it appears as if the owner is SOL.
  2. Maintenance – Programs like this seem destined to lead to buildings that fall into disrepair as there are huge disincentive for landlords to invest in buildings since they can’t benefit from that investment.  Also, there is a massive incentive for landlords to skimp on reserves since it is one of the few places that they can effectively control (or at least defer costs), all to the detriment of tenants.
  3. Risk Versus Return – Multi Family yields are incredibly low today in expensive markets, meaning that the upside available to an owner largely comes via rent appreciation since cap rates are highly unlikely to compress further.  By taking advantage of this program, a landlord still takes on all of the risk of the market turning but reaps none of the upside of the market improving.  That becomes incredibly risky when leverage is as high as 90%.
  4. Cost of Capital – It’s not clear to me that the cost of capital is all that good.  The Low Income Tax Credit program that is currently utilized for much of the development of affordable housing has incredibly low-cost financing through Community Development Authority bonds that can provide leverage into the 80% range.  The cost of this debt can often be well into the very low single digits.  Add in the sale of Low Income Tax Credits and developer equity can be as low as 10% (maybe even less) of the stack with all other financing coming at an incredibly at a very low cost.  In contrast, this mezz loan program will be substantially more expensive and sit behind conventional debt – which is substantially more expensive than bond financing or using tax credit sales to finance a large chunk of equity.  Part of the reason that LITC deals work is that the cost of the financing is low enough to offset the risks laid out above.  That does not appear to be the case here unless of course the mezzanine financing is cheaper than the senior financing which would be insane on the part of the issuer who ultimately has to securitize it and sell.

The Low Income Tax Credit program is far from ideal in that it involves a complicated structure that can take a long time to put together with a credit valuation that fluctuates based upon tax policy.  However, its a lot better than rent control and it’s certainly a whole lot better than this.  Some landlords may be tempted to use the new Freddie program in an attempt to fix their cost of capital at a low level.  However, it will be to their own determent when costs increasing operating and maintenance costs eventually eat into their bottom lines without the ability to increase rent.  And how about Freddie Mac rolling out a product that blatantly encourages a buildup in deferred maintenance on their collateral, all while increasing leverage?  When it comes to market affordability, there is simply no substitute for making it easier for developers to build more units where they are needed the most.  The Freddie program doesn’t do that and is instead a band-aid that tries to treat a symptom rather than the disease (not enough affordable units getting built) itself, all while increasing risk in the system.  This will likely end in tears – don’t say that you haven’t been warned.

Economy

Carved Up: By the numbers, Turkey’s ongoing financial debacle/ lira devaluation rivals the that of the Thai baht back in the mid 1990s.

Everything Old is New Again: The political business cycle is making a comeback, according to Merrill Lynch.

Seller’s Market: The amount of investment capital looking to buy private businesses has reached an insane level.

Under Pressure: Online competition like Goldman’s Marcus platform is forcing banks to finally increase deposit rates.

Commercial

Changing of the Guard: Singapore has overtaken China as the top foreign investor in US commercial real estate in 2018.

Push Back: Spurred by residents, some cities are considering levying vacancy taxes on landlords who leave prime street level retail vacant for years waiting for a tenant willing to pay high rents.

Synergy: Co-working business are finding growth potential at local malls.

Residential

Fragmented: Low manufacturing profit margins, regional issues, scale and non-transferability of innovation make the notion of an Amazon of housing difficult.

Slowing: Redfin’s stock plunged 22% last week when it’s CEO gave guidance that suggested a significant slowdown in sales volumeSee Also: Spiking prices, rising rates and sluggish starts have led to less housing sales.  However, these same factors make it likely that inventory will stay low, meaning price increases will stall out but values will probably not fall much.

Off Target: Rents in expensive cities are falling for the wealthy but rising for the poor and middle class thanks to a large amount of new high end apartments coming online and almost no new low-end product.

Profiles

The Most Important Thing You’ll Read Today: Why booze is the secret to humanity’s success (seriously).

Misplaced Blame: The sorry state of the taxi industry in NYC is not about ride sharing but rather a system where the city’s focus on the short-term well-being of a small group of workers at the expense of the rest of the public.

Chart of the Day

Our developer and builder clients are reporting that it’s become nearly impossible to accurately underwrite construction costs.  This is why:

Source: The Daily Shot

WTF

Sign of the Times: Clip-on man buns are now officially a thing because Millennials.

Chip ‘n Dales: A drunk man performed a strip tease for a couple eating dinner at a Japanese steakhouse because Florida.  No word as to whether or not sausage was on the menu that evening.

Kids These Days: According to the Smoking Gun, young people are increasingly treating their mug shot sessions as if they were going to be posted on Instagram.  Perhaps this is why.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 14th – Temptation

Landmark Links August 10th – Reflection

golden_puppy_reflection

One of the best things about taking a long vacation is the ability to take a step back from the day-to-day demands of life and take inventory of what you are doing well and what needs improvement.  I started writing Landmark Links on March 19, 2015 as a way to sharpen my writing skills, better retain and think critically about what I was reading and get more exposure for Landmark’s brand.  Considering the WTF section and some of the images, the approach could best be described as seeking to both inform and entertain.  Most of those early posts were no more than 400 – 600 words long.  They typically didn’t include a feature story and had brief descriptions of the articles that were being linked to. Putting it together twice a week was really not much of a time commitment and took very little away from my day-to-day activities.

Today’s post will be the 325th edition of Landmark Links.  I’ve written each and every word in every single one of those posts (excluding quoted material).  As time has gone on, the size of the posts has increased substantially as has the amount of time required to write them.  What once took less than an hour to compile now takes substantially longer due to writing lead stores and compiling the shear number of links provided in each edition.

After reflecting a bit on vacation, I’ve come to the conclusion that spending 4+ hours a week on two long blog posts is starting to take away from other things that I need to put more focus on professionally and personally.  I still love blogging and have no plans to stop.  However, I’m going to start experimenting with the format a bit on here to see what works best to reduce some of the time commitment.  For the time being, I’ll still do the linkfest every Tuesday and Thursday with occasional lead stories when a good topic for discussion comes up.  This may evolve into a longer post once a week or more short posts throughout the week but I’m really not sure at this point.  While the format may be a bit shorter, the goal as always will be to inform and entertain.  I can’t tell you how much I appreciate all of you taking some time out of your day to read these posts.  Now, on to number 325!

Economy

All About the Spread: Banks aren’t suffering much from the flattening yield curve because they haven’t passed higher short term interest rates on to depositors.

Help Wanted: The number of unfilled jobs in the United States is accelerating higher.

Commercial

Recycled: A new report from CCIM found that the adaptation of obsolete commercial properties for new uses as institutional-grade product is going to be more important than ever in the coming years.

Hanging In There: The Dodge Momentum Index – considered a leading indicator for new non-residential Commercial Real Estate investment increased in July.

Residential

Elevated: Despite a sharp recent decline, framing lumber prices are still up 20% year over year.

Dropping Like A Rock: The number of foreigners buying homes in the US is plunging and could portend a slump in high end markets.

Movin’ On Up: A glut of high end rental units in some cities has developers using apartment penthouses as lounge, pool and gym amenities rather than premium-priced units. However, the same trend has not occurred in the condo market.

Help Wanted: Despite high wages, young people still want nothing to do with construction jobs.

Profiles

Rigged: How an ex-cop fixed McDonald’s Monopoly game and stole millions.

Over-Reliance: The entire world economy runs on GPS and if it were to fail, we are basically screwed.

Wild West: Rising oil prices have led to increased production in Texas’ Permian Basin once again.  However, many of the well-paying jobs are in remote areas where there is little in the way of housing available.  This has led to a boom in man camps in West Texas.

Pump and Dump: I know this may come as a shock to many of you (end sarcasm here) but traders are routinely talking up thinly traded cryptocurrencies on message boards and then selling their positions in bulk.

Chart of the Day

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Source: Bloomberg

WTF

Equal Opportunity: There is now a graffiti camp for girls that teaches them how to break into boys’ club of defacing other people’s property.  Someone please stop the ride.  I want to get off.

Bad Vibrations: A sex toy that was mistaken for a bomb managed to partially shut down an international airport because Germany.

Not From The Onion: A parasite in cat poop could reduce our fear of failure.

That’s A No For Me: Someone came up with a mayonnaise-flavored ice cream (because hipsters) and it sounds worse than putting pineapples on pizza.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 10th – Reflection

Landmark Links July 24th – Misaligned

cross-eyed-steve-buscemi

Quick programming note: I’m taking off this afternoon for my annual east coast family lake trip tonight which means that I’m going to be on a news and social media diet (including writing this blog) for a couple of weeks.  I posted about why I do this last year if you’re interested.  See you in a couple of weeks!

Lead Story…  One of the most troublesome factors that allowed the housing bubble of the aughts to inflate was that the misalignment of interests in the originate-to-distribute lending model.   The near-complete lack of accountability and misalignment of interest in the process of originating mortgages, packaging them into securities, rating them, creating a bond and then selling that bond to investors allowed the bubble to grow to a size so massive that it put the entire world economy at risk was .  Treasury Secretary John W. Snow explained how this worked in testimony before the Committee on Oversight and Government Reform in the US House of Representatives in October of 2008:

“Throughout the housing finance value chain, many participants contributed
to the creation of bad mortgages and the selling of bad securities,
apparently feeling secure that they would not be held accountable for their
actions. A lender could sell exotic mortgages to home-owners, apparently
without fear of repercussions if those mortgages failed. Similarly, a trader
could sell toxic securities to investors, apparently without fear of personal
responsibility if those contracts failed. And so it was for brokers, realtors,
individuals in rating agencies, and other market participants, each
maximizing his or her own gain and passing problems on down the line
until the system itself collapsed. Because of the lack of participant accountability,
the originate-to distribute model of mortgage finance, with its once
great promise of managing risk, became itself a massive generator of risk.”

I bring this up in 2018 not to re-litigate the housing bubble but rather to point out how similar it is to another major consumer credit sector of the US economy: student debt.  In the world of student loans there are three major participants:

  1. Government backed lenders
  2. Students
  3. Colleges and Universities

Two of the three – students and the government (taxpayers) suffer losses when loans default, defer or get written off.  The third – colleges – gets paid upfront and then has no further financial responsibility despite playing an extremely important role in the development of the student who will ultimately repay the loan.  As such, colleges and universities can raise tuition and offer ever-larger benefit and pay packages to administrators with impunity since they will continue to get paid, regardless of what happens to the students in their charge post-graduation.

Today, nearly all student debt is originated through federal programs (excluding refinances of existing balances after graduation).  If there is a loss created through default, taxpayers are ultimately holding the bag.  Students in 2018 are able to borrow money to go to school with very little oversight or critical analysis as to whether or not the debt that they take on can actually be repaid based upon the amount being borrowed and the chosen course of study.  Student debtors are not able to discharge their loans through the bankruptcy process and today’s income-based repayment or deferral plans allow for substantial interest accrual and the possibility of a large 1099 if the loan is ever discharged – leading to a tax bill that will likely put the borrower back into deep debt, this time with the IRS.  Colleges, on the other hand have been given the ability to push the price of higher education into the stratosphere relying both on the largesse of the federal government and the fact that 17-year olds are not exactly paragons of thrift when making life-altering financial decisions that they are wholly unqualified to comprehend.

This is not the first time that I’ve written about college debt. It’s something that has been on my mind lately both as the father of two young children and someone who follows the housing market and sees how much this additional indebtedness is impacting young people.  In the past, I’ve mostly lamented the spiraling cost while pointing out that the ROI on a college education is still quite good, meaning that there was little that was likely to change anytime soon.  In reality, the problem can’t be fixed until colleges share accountability with government lenders and borrowers, finally aligning the interests of all parties.  This seems challenging as there is no way that colleges and universities are going to guarantee student debt repayment obligations short of federal mandate which I would consider highly unlikely.  However, there is another way that colleges could take some of the risk, align themselves with borrowers and make a solid if not spectacular return in the process.  That answer is income-share agreements.  From the Associated Press (emphasis mine):

As more students balk at the debt loads they face after graduation, some colleges are offering an alternative: We’ll pay your tuition if you offer us a percentage of your future salary.

Norwich University announced Tuesday that it will become the latest school to offer this type of contract, known as an income share agreement. Norwich’s program is starting out on a small scale, mainly for students who do not have access to other types of loans or those who are taking longer than the traditional eight semesters to finish their degree.

“Norwich University is committed to offering this new way to help pay for college in a way that aligns incentives and helps reduce financial barriers to degree completion,” said Lauren Wobby, the school’s chief financial officer and treasurer.

In contrast with traditional loans, in which students will simply pay down the principal and interest until there is nothing left, students with income share agreements pay back a percentage of their salary for a set period of time. Those touting the programs say they give colleges greater incentive to help students find high-earning jobs after graduation, because a higher salary means the school may recoup its investment in a shorter period of time.

For some students, income share agreements are seen as less risky, especially if they end up in a lower-paying job or struggle to find work after graduation. While students are unemployed or earning below a certain threshold they don’t have to pay anything back.

This idea is brilliant in its simplicity as it puts the onus on the college to prepare the student for the real world and deliver the value-add proposition that it claims to provide.  It also forces schools to assess risk with regards to repayment because overextending credit would result in real losses.  The colleges could (and should) get some degree of return for doing this which could actually help smooth out increasingly volatile endowment earnings.

Now, I’m sure that some of you will counter that this would lead to colleges to favor certain courses of study over others to which I would answer: that’s part of the point.  To wit: f I make $100,000 a year and you make $500,000 a year lenders will not extend me the same amount of credit to buy a home as they would to you, nor should they.  Why then should a student be able to borrow the same amount for an English or Art degree as they could for Computer Science or Engineering degrees that offer much better employment and earnings prospects upon graduation?  The short answer is that they shouldn’t.  That’s not how credit markets work…..unless of course there is a disincentive for a market participant to allow for this sort of behavior which is exactly what having colleges completely isolated from the consequences of default and loss is.  Please note that I’m not saying that a college shouldn’t extend credit to an Art or English major, just they shouldn’t extend as much credit as they would to a Computer Science or Engineering major.  That’s not discriminatory, it’s just common sense and is actually better for the student who will eventually be responsible for paying back the sum that has been borrowed.

The increasing college debt burden faced by young people is a headwind to the economy in general and the housing market in particular.  However, it’s something that can and should be solved and the first way to do that is through a level of shared accountability that is nearly non-existent today.

Economy

Ballooning: The federal budget deficit is on pace to push above $1 trillion in 2019, or 5.1% of GDP.  The deficit has only topped 5% of GDP twice since World War II, both of which followed massive recessions and high unemployment.

Wrong Direction: Thirty year olds are worse off today than they were in 1977 by almost every possible measure.

Commercial

Staying Power: Despite its planned phase-out, LIBOR is still the most important number in finance and it doesn’t appear to be going away anytime soon.

Lucrative Niches: Student housing, manufactured homes and industrial assets were the top performing commercial real estate sectors in the past 12 months while retail assets have continued to under-perform.

Residential

Priced Out: The average renter in California now needs to make over $100k a year in order to be in a financial position where rent is not taking up over 30% of their gross income.  In other words, good luck saving up for a down payment.

Shell Game: Secret home purchase deals in Miami completely dried up once the feds started watching in 2016.

Profiles

Sign of the Times: Big insurers are jumping into the market to insure against cryptocurrency hacking thefts.

Heaven: Hundreds of Golden Retrievers gathered at an estate in the Scottish Highlands to celebrate 150th anniversary of the breed at its birthplace.  The next time that I’m having a tough day, I’m going to think of this link. (h/t Steve Sims)

Chart of the Day

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WTF

No Sense of Humor: Millennials were outraged on social media after a minor league baseball team promoted an event called Millennial Night which included avocados, participation ribbons and napping stations.  What’s ironic is that manufactured outrage is another prominent Millennial stereotype.  Perhaps the team should have offered safe spaces as well.

In More Ways Than One: Poop is getting to be a big problem at the Burning Man festival.  It turns out that modern plumping isn’t readily available when a bunch of weirdos converge in the middle of a desert.

Hindsight is 20/20: A 20 year old Dallas rapper was sentenced to 12 years in prison after bragging about committing crimes including drive by shootings and other acts of gang violence on Facebook.  Perhaps sharing this on social media wasn’t a great decision.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 24th – Misaligned

Landmark Links July 20th – Alternative Use

toilet grill

Lead Story…. Every once in a while I like to write about real estate related startups that seem interesting – either in a good or bad way.

As I’ve written previously, restaurants are facing a difficult business environment as upward wage and rent pressures mount and delivery services continue to eat away at the most profitable part of their business – booze sales.  Far from being the savior of retail as they are frequently portrayed, I believe that restaurants are entering a period where their margins will be under even greater pressure once we hit a period of economic weakness.  One particular area of concern for restauranteurs is the demise of business lunches, leaving many upscale establishments formerly reliant on the expense account crowd in a bind where they can’t cover overhead due to slow traffic if they open before dinner.  As a result, more restaurants are staying closed until dinner but rent doesn’t get pro-rated only to times when the establishment is open, making the slope to break-even all the steeper.

So what’s a restaurateur to do in the face of revenue and cost pressures?  A new startup called Spacious with locations in NY and SF has a plan to marry underutilized restaurant space with the need for cheap and flexible office space.  From The Seattle Times (emphasis mine):

The company that laid the extension cords and power strips across Elite Cafe’s copper tables is called Spacious. Since it was started two years ago, Spacious has converted 25 upscale restaurants in New York and San Francisco into weekday work spaces. Membership, which allows entry into any location, is $99 a month for a year, or $129 by the month. With $9 million in venture capital it received in May, Spacious plans to expand this year to up to 100 spaces.

A restaurant makes for the perfect conversion, the Spacious team argues. Bars become standing desks. Booths become conference rooms. The lighting tends to be nicer, less harsh and fluorescent, than an office, and the music makes for a nice ambiance.

Originally, the founders of Spacious thought they would have to sell restaurateurs on the idea. Instead, restaurants, struggling to pay rent and wages and frustrated with disappointing lunch traffic, are coming to them, eager to strike deals for a slice of the membership dues. Only 5 percent have made the cut to become Spacious spaces, said the company, which is unprofitable.

Spacious is part of a broader debate over how to use spaces in cities as people increasingly buy items online instead of in stores and as labor costs make restaurants an even more challenging proposition. A membership model is the future for bricks-and-mortar spots, according to the Spacious team, and restaurants are the easiest first step.

“Actively consuming isn’t what we want to do with the space in our neighborhoods anymore,” said Chris Smothers, 30, a Spacious co-founder and its chief technology officer. “Retail spaces are designed for you to come in, make a transaction and get out, and that’s why you feel weird in a coffee shop all day, because all of these spaces are designed for you to leave.”

As stated several times previously, I’m not a big fan of co-working business plans that take on long term lease obligations and invest their own capital into tenant improvements yet rely on short term revenue – all while offering premium services.  This idea seems different in that restaurants – who are desperate for revenue to cover their costs are much more likely to cut tenant-favorable deals than office landlords who are experiencing high demand and low occupancy.

One aspect of Spacious’ business plan that I find interesting is that it’s not exactly high tech – at least by today’s startup standards.  Yes, there is a website that allows subscription purchases, shows locations and provides real-time data on how busy each one is, but other than that it’s mostly just sandwich board signs, power strips, wifi networks and coffee.  One of the hallmarks of recent successful startups is the monetization of excess capacity in society – whether than means seats in a car, bedrooms or server space.  Underutilized restaurant dining rooms certainly seem to fit this category and the result is potentially win-win: restaurants generate some revenue without any additional overhead and workers get access to a flexible work space for substantially less than half of what WeWork would charge for a hot desk.  The company isn’t yet profitable but has raised $9mm in venture funding and I think its one to watch as monetization of excess building capacity becomes more mainstream.

Economy

The Long Wait: Inflation is once again eating away at gains in nominal wages casting doubt as to when real growth will finally materialize.  See Also: America’s wage crisis no longer looks temporary.

Hang Loose: Despite much hand wringing, monetary policy is still incredibly accomodative by historical standards.

Commercial

Space Wanted: US warehouse supply is at it’s tightest level in two decadesSee Also: Industrial land prices are near parity with multi-family prices in some markets.

Tag Team: Walmart and Microsoft are deepening their tech partnership in an effort to compete with Amazon.  See Also: Amazon’s share of the US e-commerce market is now 49% or 5% of all retail sales.  And: Google takes aim at Amazon with it’s $550mm investment in Chinese e-commerce giant JD.com.

Residential

Missing the Mark: Housing starts fell 12.3% last month on a seasonably adjusted basis, missing projections by a wide margin and dealing another blow to a housing market struggling with an acute shortage of properties available for sale.

Profiles

What Really Matters: Time (and how you use it) is the most valuable asset in the world and it’s not even close.

Authentic: Contrary to domestic opinion, Chinese tech is not an imitation of its American counterpart, it’s in a universe all it’s own.

Titans of Junk: Masayoshi Son, Elon Musk, Michael Dell and European telecom mogul Patrick Drahi have leveraged their companies up to their eyeballs in risky debt, making billions in the process.  However, the Federal Reserve’s rate hikes are bringing new financial pressures that could lead to disaster.

Chart of the Day

Home buyer sentiment is tanking

WTF

Like a Boss: A Memphis man stole his date’s car and then used it to pick up another woman and take her on a date.  Does anyone know when Man of the Year nominations are due?

Gotta Hear Both Sides: A Texas woman was arrested for biting off another woman’s nose and swallowing it after getting in a drunken dispute.  Mike Tyson was unavailable for comment.

Plan Ahead: A man who purchased a guillotine at a French auction is now having a difficult time figuring out what the hell to do with it.

Finger Licking Good: A man was arrested for swinging a boat anchor a group of other men due to a dispute over grilled chicken on the 4th of July because Florida.  Also, because Malibu rum, apparently.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 20th – Alternative Use

Landmark Links July 17th – Virtue Signaling

Vegan

Lead Story…  If you were following the news last week, you may have noticed that WeWork, co-working’s $20 Billion behemoth, made an announcement that it will no longer let employees expense meals that include meat.  Via Time Magazine (emphasis mine):

The startup has told its 6,000 global staff that they will no longer be able to expense meals including meat, and that it won’t pay for any red meat, poultry or pork at WeWork events. In an email to employees this week outlining the new policy, co-founder Miguel McKelvey said the firm’s upcoming internal “Summer Camp” retreat would offer no meat options for attendees.

“New research indicates that avoiding meat is one of the biggest things an individual can do to reduce their personal environmental impact,” said McKelvey in the memo, “even more than switching to a hybrid car.”

Regular readers of Landmark Links know that I have a saying when it comes to vegans: a vegetarian is someone who eats a plant-based diet; a vegan is someone who tells you that you need to eat a plant based diet.  You will probably never find a better example of that truism than WeWork’s new policy.  My first response after reading this announcement was to chuckle that a company with such a massive valuation that is losing money hand over fist in one of the best office leasing markets in history was spending time on something this trivial.  After all, WeWork had to invent a Frankenstein accounting standard that they called “community adjusted Ebitda” which eliminated marketing and G&A costs in order to come up with a scenario under which it could turn a profit when it did a bond offering earlier this year.  If you think that a company that relies on short term leases to generate revenue will be able to substantially reduce it’s marketing budget as it grows, then I have some oceanfront land in Vegas to sell you.  Indeed, WeWork does face much larger issues than some of it’s 6,000 or so employees chowing down on a burger, steak or chicken thigh at a work-related event.  However, the more that I thought about this policy, the more that I came to the conclusion that the move probably won’t hurt WeWork and could even help them.

The first thing that you have to realize about WeWork is that it doesn’t see itself as a traditional real estate company.  In fact, one of the co-founders went so far as to describe the company as a “state of consciousness.”  I have no idea what the hell that actually means but judging from the valuation,it has to be worth at least a few billion dollars.  In justifying this allegedly higher plane of existence that exists beyond the normal real estate universe, the company has to take positions that appeal to it’s base of users: mainly tech startups and young, affluent millennials who are more prone to attach their work to some sort of assumed greater cause.  Ignore for a moment how hard this policy will be to actually enforce: for example: for example, how hard is it to find vegetarian cuisine in Shenzhen or Warsawm, both of which have WeWork locations?  Also, what happens if someone orders vegetables that happen to be cooked in bacon fat?  Does that count or not?  And I’d hate to be the poor sap in HR who has to review all of the the receipts to ensure that no one snuck a burger in there.  The reality is that this is much more about virtue signaling than actually taking environmental action and it will likely sell well with the intended audience.

If WeWork really intended to do something good for the environment they could limit themselves to leasing space in LEED certified buildings.  In turn, this would put put pressure on landlords to make energy efficient and environmentally friendly upgrades so as not to get blacklisted by one of largest tenants in the market.  However, that approach wouldn’t result in anywhere near the amount of free publicity that this does because the vast majority of the general public doesn’t even know what LEED is but pretty much everyone out there has an opinion on veganism in general and the act of billionaire founders forcing it on their employees in particular.  You can’t buy publicity like that if you’re trying to appeal to the “woke” millennial crowd – nor should you since your finance department has already said that the company will never turn a profit unless the marketing budget is eliminated altogether.  So yes, it’s a publicity stunt but it’s also one that is already having the desired impact of inserting the company into the national news cycle.  I may not be a fan of the business model in the long run but people who created a $20 billion business out of getting VC’s to subsidize beer for hipsters are far from dumb.

Economy

Offset: Despite some positive movement, wage gains are still largely being offset but price increases.

Muted: Inflation is still tame despite all of the rhetoric to the contrary.

Forever Behind: Part of the reason that the oil market is cyclical is that extraction tends to lag behind price substantially.

Commercial

Vanishing: The great New York City department store apocalypse is for real.

Hanging In There: Despite plans to replace it, LIBOR is still hanging around in a lot of newly-issued loan docs.

Residential

Held Back: Student loans, high rent and location preferences are among the largest impediments to Millennial home ownership.

Offset: The fact that housing has trailed the economic expansion could provide a tailwind as the market plays catch up to the broader economy.

Profiles

Late Entrant: Why Uber will eventually prevail in the scooter wars despite currently not having a market position.

Hold Out: The Blockbuster video in Bend, Oregon is the last one left in the US and the owner has no plans to close anytime soon.

Don’t Call it a Comeback: How Microsoft and CEO Staya Nadella won back Wall Street after years of stagnation.

Chart of the Day

Real Wages Have Stalled Out:

WTF

Panic Attack: A burglar in Vancouver got stuck in an escape room when he tried to rob a local business and had to call 911 in order to get out.

Round Trip: A man was sent back to jail after refusing to pay for his cab ride home after his release from said jail because Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 17th – Virtue Signaling

Landmark Links July 13th – Risky Business?

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Lead Story…. During the mid-aughts housing bubble, there was a very common business plan regularly deployed by housing speculators.  It roughly followed this script:

  1. Buy a house as an “investment.”
  2. When that house appreciates in value, either refinance or take out a line of credit against it.
  3. Use the proceeds as the down-payment for another house.
  4. Repeat over and over again.

The business plan was effective as a generator of paper net worth until the market crashed.  However, it often burdened the speculator with negative monthly cash flow due to over-leveraging which was made doubly risky by the fact that the leverage often came in the form of ticking-time-bomb negative amortization loans.  When the bubble popped, the speculators lost their “investment” homes (they often had little to none of their own capital in anyway) which piled up as distressed inventory.  A substantial amount of this distressed inventory was eventually purchased as rental investments by deep-pocketed investors as the market bottomed.  Meanwhile, builders failed to ramp up development enough to satiate demand, sewing the seeds of today’s affordability crisis.  I bring this up after reading a recent story in the Wall Street Journal about how investors are deploying more money into higher end homes.  The story, written by Ryan Dezember and Laura Kusisto contained the following tidbit that I found particularly interesting (emphasis mine):

These investors’ war chests have been swelled by rising home prices, which give them more valuable collateral to borrow against to buy more. Transcendent’s fund will add about $750 million of debt on top of investors’ $250 million or so, giving the firm spending power of about $1 billion over the next three years. Mr. Kavana expects to develop as many as 3,000 homes for his predominantly Chinese clients, each of whom will hold title to specific properties.

Even if the parallels aren’t exact, there are some definite echoes of 2005 in this.  Once again, investors are taking equity out of existing properties and using that equity to purchase new ones in order to aggregate ever larger portfolios.  However, there are several key important differences between the bad old days and today:

  1. Today’s investors are much better capitalized and can withstand market fluctuations whereas the mom and pop buyers in 2005 were not.
  2. Rents are still rising today in most markets they were mostly flat in 2005.
  3. The loans secured by today’s investment properties are much more stable than the pick-a-payment rubbish largely being used for cash-out refinances in 2005
  4. Today’s well-capitalized investors are typically more interested in cash flow and are generally not leveraging up anywhere close to the point where cash flow would not cover debt service.  In contrast, the speculators of the mid-aughts were frequently not cash flow buyers and were mostly focused on appreciation.

Even taking the four points above into consideration, I still have a hard time getting my head around the idea that deep pocketed investors are pushing – just as their mom and pop predecessors were – to add on leverage late in the cycle in order to generate AUM growth.  As an aside, the execution of this business plan is likely to have a negative impact on an already-abysmal supply situation in the markets where it is deployed.  This cycle has been a long one already and still appears to have some legs.  However, at some point it will come to an end just as all economic cycles do.  When that inevitability arrives, I find it hard to believe that landlords will look back favorably on their decision to pull equity out of investment homes in order to buy more in 2018.

Economy

Muted Impact: Rising gas prices are eating into the tax cut savings of Americans.

The Globalization Effect: Since the mid 1990s, prices have collapsed in areas of the economy subject to foreign completion but soared in areas protected from foreign competition.

Pushing Back: Judges are beginning to question the special status that student debt receives in not being able to be discharged through bankruptcy.  Allowing its discharge through bankruptcy would not only help the economy by allowing borrowers to get out from underneath unsustainable debt loads but also force lenders to give far more scrutiny to these loans with regards to the borrower’s ability to repay.

Commercial

Out in the Open: New research confirms something that I’ve believed for awhile – open office plans actually lead to less collaboration, mainly because people don’t like having conversations out in the open.

Disrupted: Uber and Lyft are forcing Southern California parking companies to adapt or die as wide-spread adoption of ride sharing leads to massive shifts in behavior.

Residential

Can’t Stop.  Won’t Stop: Home prices in San Francisco are going HAM as the tech boom refuses to fizzle.

Location, Location, Location: Millennials are more likely to give up desired home features in order to purchase a home in their ideal location.

The Perfect Storm: Why current trends point to the housing shortage getting worse.

Profiles

A Fool and His Money: Half of ICOs die within four months after their token sales are finalized.

Fleeced: How FanDuel’s founders got wiped out by Wall Street after two private equity funds used a somewhat obscure provision in their agreements to force the sale of the business at a discount.

Vanishing Act: Twitter is weeding out fake accounts at an unprecedented pace which basically means that Twitter will cease to exist in about 8 months.

Worthless: The US Mint lost an estimated $69MM making pennies last year.

Chart of the Day

WTF

Dual Threat: A man who had no arms was arrested for stabbing a tourist because Florida.  I’m not sure if the fact that I find this impressive makes me a terrible person or not.

Tastes Like Chicken: An Instagram “model” was attacked while swimming in shark infested waters in an effort to take a picture because millennials.

He’s Not Wrong: A drunk driver claimed that he was not drinking while driving but only swigging from a bottle of Jim Beam when his vehicle paused at stop signs and traffic signals because Florida.

Your Tax Dollars at Work: The US government is spending hundreds of thousands of dollars to find out how quail sexual behavior changes when they are high on cocaine. It’s called science.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 13th – Risky Business?

Landmark Links July 10th – Balancing Act

Old-Man-bottle

I’m busy cramming for my broker exam so haven’t had a lot of time to put together a lead story.  However, there is still a ton of interesting things happening the the world, real estate and otherwise so here’s your Tuesday linkfest:

Economy

Living On The Edge: Most rate forecasts indicate that the Federal Reserve will face a difficult decision sometime in 2019 – whether or not to push the federal funds rate above the 10 year yield and invert the yield curve.

Flipped: Private equity has gotten so hot that even second-hand funds are selling at a premium as too much capital continues it’s pursuit of too few good investment opportunities.

High Coupon: The rise of incredibly expensive unsecured personal loans is a troubling development in recent years.

Commercial

On the Rise: WeWork is on pace to double it’s revenue this year as it expands around the world.  However, this doesn’t change the fact that it’s still losing a massive amount of money in an incredibly strong economy.

Diminishing Returns: Rising US interest rates and dollar volatility against the yet and won are eating into the returns of Japanese and Korean investors in US commercial real estate as hedging costs soar.

Residential

Supply Meets Demand: A big spike in Seattle area homes for sale is slowing price growth because housing is not immune to basic economics.

On the Rebound: Freddie Mac projects that the home ownership rate for young adults will increase to nearly 60% from around 35% today as incomes increase and they start families.  This number is massive if accurate and I actually thought that it was a typo when I first read it, TBH.

Stampede: Wealthy people are flooding into Florida as a result of the tax reform law that dramatically reduced deductions for residents of high tax states.  I wonder how my beloved Florida swamp people are going to like an influx of billionaires.  But See: A new study by Stanford finds that migration among millionaires due to tax increases is almost non-existent in California.

Profiles

Monopoly: How one Chinese businessman came to control 70% of all Chinese fireworks entering the United States.

Buy Low: Instagram is now estimated to be worth more than $100 billion.  I’m old enough to remember being shocked when Facebook paid an “astounding” $1 billion to purchase the photo sharing app back in 2012.   Consider this one of many reasons why Mark Zuckerburg is the 3rd richest person on earth and I’m writing a free blog on WordPress.

Game Changer: How blogging changed Wall Street by offering transparency and unlimited access to investment advice when financial institutions wouldn’t.

Chart of the Day

Four of the top five reasons on here are economic.  This.  Is.  Not.  Sustainable.

WTF

Defining Moment: A deputy sheriff shot a large alligator with an AR-15 rifle after it trapped a teenage girl in a tree for over an hour because Florida.

Sea Weed: A man caught a 2 lb brick of marijuana while out fishing because Florida.

The Dog Ate It: A man arrested for DUI with booze on his breath and an open bottle of rum in his car claimed that it was his dog driving erratically and not him because Florida.

Send Nudes: Samsung phones might be sending private pictures to random contacts.  This is yet another reason that I have an iPhone.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 10th – Balancing Act