Landmark Links June 15th – Size Matters


Lead Story… The Census Bureau released it’s Characteristics of New Housing report last week.  My biggest takeaway from the report was how much the gap between for sale and rental housing construction has narrowed in recent years – most of this has come from the massive decline in for-sale housing construction but multi-family completions are up substantially as well.  However, there is also a big story within the multi-family data: the units that are getting built are increasingly in larger buildings.  Bloomberg’s Justin Fox highlighted this trend in a couple of fascinating graphs that illustrate this striking trend.

Fox goes on to give several reasons for the trend towards larger units including NIMBYs forcing construction out of the suburbs and into denser downtown areas, increasingly large investors desiring scale and changing consumer tastes.  However, there is one factor that largely goes unaddressed in Fox’s Bloomberg View article – cost, especially when economies of scale in operations are taken into account.

In theory, building smaller new buildings sounds great – it’s an under-served niche and one would think that yields are superior since the unit counts are well below the massive projects where institutional investors tend to bid land values up.  However, this rarely plays out in reality.  The problem is that there is simply not the economy of scale in operating a 20 unit building that there is in operating a 150 unit + building.  This means that expenses are often substantially higher as a percentage of revenue which leads to lower profitability on a cash flow basis.  Couple that with the fact that these projects are not desirable to large investors and often trade at higher cap rates than large buildings as a result and you have a recipe for under-performance which is why so few are getting built in the US.  This isn’t nearly as much of an issue when construction costs are low and yields are relatively high which helps to explain why it has gotten worse over time.  Unfortunately, the opportunity today is not to construct more small apartment buildings but to rehab older buildings and position them below the new larger projects.  We have seen this strategy deliver strong returns over the past few years, in part because the barriers to entry from new small product are so high.  US cities and suburbs could absolutely use more small apartment buildings which tend to be cheaper to rent and more desirable for families.  However, I don’t see it happening without some major advances in operating efficiency.


Narrowing: The Fed’s latest interest rate hike this week brings the yield curve one step closer to inversionBut See: Just because this economic expansion has been long does not necessarily mean that the US is due for a recession.

Missing Piece: How the rise of e-commerce helps explain why inflation has remained stubbornly low for so long.


That Didn’t Take Long: The Seattle City Council repealed their stupid head tax less than a month after passing it unanimously, apparently due to pressure from Amazon.

Just Take It: Landlords are having a difficult time selling struggling malls at any price.


Insatiable Demand: Despite their best efforts, western cities have thus far been unable to slow the flood of home buyers from China.

Size Matters:No one is developing small apartment buildings anymore.

Correlation or Causality? Since 2010, birth rates in the US dropped most in counties where home values grew most.

Only a Matter of Time: Based on the historical relationship, the 30 year mortgage should hit 5% when the 10-year treasury gets to roughly 3.25%.


Long Way Down: As recently as 2013, a taxi medallion in New York was worth $1.3MM.  Today, thanks to ride share services like Uber, they are worth somewhere between $160,000 – $250,000 each.

Long Shot: A proposal to split the state of California in three (which definitely won’t pass) will be on the November ballot because, why not?

World Cup Roundup: The story of how the USMNT fell apart and missed the 2018 World Cup.  See Also: The Brits may get all of the press but there ain’t no soccer hooligans like Russian soccer hooligans.

Hot Air: Researchers have found that Bitcoin’s price was artificially inflated by as much as 50% last year before the beginning of futures trading as large players effectively cornered the market.

Chart of the Day


Performance Anxiety: A group attempting to set the world record for the largest orgy in history in Las Vegas had to pull out after not enough people signed up.

Tastes Like Chicken: A guy served his friends tacos made from his own amputated leg without their knowledge, which is somehow (shockingly) not illegal in the US. (h/t Henry Baskerville)

Meow: A deaf and apparently clairvoyant cat is picking winners in this years’ World Cup and he was correct on the result of the opening game.

Reasonable Defense: A Kentucky man was pulled over by the police in Florida when they found a hatchet hidden in his car.  His excuse for having it?  “For protection from scumbags in Florida,” which is probably the most reasonable answer ever given.

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

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Landmark Links June 15th – Size Matters

Landmark Links June 12th – Shut Out


Lead Story…. Last week, the San Jose Mercury News ran a story by Marisa Kendal with the shocking title: Nearly half of Bay Area residents say they want to leave.  Of course, the primary cause was the astronomical cost of housing, because that seems to be the cause of angst that most Californians entertaining a move are feeling these days.  Indeed, the survey data from the public policy advocacy group the Bay Area Council upon which the story is based paints a rather bleak picture of the future for the region.  Via The Mercury News (emphasis mine):

Forty-six percent of Bay Area residents surveyed said they are likely to move out of the region in the next few years — up from 40 percent last year and 34 percent in 2016, according to a poll released Sunday by business-backed public policy advocacy group the Bay Area Council.

The numbers show a disturbing trend in one of the nation’s most expensive housing markets: Workers desperate for a better quality of life and without housing options will go elsewhere, potentially plunging the region into a financial downturn.

“They couldn’t be more clear what the big problems are — and it is exclusively about the cost of housing,” said John Grubb, chief operating officer for the Bay Area Council. “They don’t see…enough action coming, and so they’re looking at taking matters into their own hands. And unfortunately, what they’re going to take into their hands is the steering wheel of a U-Haul to go somewhere else where there’s a better combination of salary and lower housing costs.”


When asked to pinpoint the most important problem facing the Bay Area, 42 percent of those surveyed said housing — a dramatic jump from 28 percent last year. Meanwhile, 18 percent said traffic and congestion, 14 percent cited poverty and homelessness, and 12 percent said the cost of living.

Those problems spell serious disillusionment for Bay Area residents. Fifty-five percent of residents polled said they feel the Bay Area has “gotten pretty seriously off on the wrong track,” compared to 42 percent last year.

Taken at face value, the above-referenced data implies that the Bay Area housing crisis would solve itself over time – albeit painfully – as departing residents bring demand back into balance with extremely limited supply.  However, I’m afraid that the survey and the story may have missed a somewhat subtle but significant point since the data was not sorted by income , at least not in the official poll data on the Bay Area Council website.  The reason that this is substantial is that the Bay Area is not facing the type of demographic catastrophe that the survey results may appear to indicate.  In fact, the Bay Area is one of the few places in California where more people are still moving to than leaving, thus the rapidly escalating home prices:


That is not to suggest that the Bay Area (and the rest of coastal California) does not have a major problem because it does.  That major problem is that the people who want to move out are mostly poor and working class and the people moving there are mostly wealthy.  For the most part, the working class in the Bay Area in 2018 fit into one of four categories:

  1. They bought their home decades ago and are actually wealthy on paper but not making a high income.
  2. They are in a rent-controlled or subsidized apartment
  3. They are effectively homeless or live in a vehicle
  4. They commute a very long distance

Every time that someone in the first group sells, someone who makes a lot more money takes their place.  This means one less teacher, buss driver, janitor, line chef, server, etc in the Bay Area and puts even more pressure on limited subsidized units and long-distance commuters.  It also drives the cost of living excluding housing up since employers need to offer higher compensation in order to offset housing costs which eventually gets passed on to consumers.  The only winners are landlords.  It is impossible to have a functioning economy that consists of only wealthy white-collar workers without running into unsustainable cost of living issues.  That, and not a mass exodus is the problem that the Bay Area is really grappling with and there is nothing out there suggesting that it gets better anytime soon.


We’re Screwed: Medicare’s trust fund is set to run out in 8 years and Social Security’s will be gone in 16 years.  Or Maybe Not: Why Social Security is still pretty secure and how the crisis of 1982 provides a road map for the future.

Coming Home: One part of the tax reform that is living up to its promise is that companies are repatriating overseas cash.

Help Wanted: Oil prices are soaring and that means that west Texas is once again an employment hot spot as shale drillers in the Permian Basin ramp things up.  However, there are not nearly enough workers to operate rigs, leading to soaring wages and costs as well as tension between drillers and other regional employers.

Trouble Ahead?  Former Federal Reserve Chair Ben Bernanke says that the US will face a ‘Wile E. Coyote’ Moment in 2020 as the bill for late-cycle stimulus comes due.


Take Out: Target is using it’s acquisition of personal shopper app Shipt, which it acquired last year to allow for curbside pickup service at its stores.

Secondary Growth: Why the biggest markets for office growth are not what you think.


Still Going Strong: Almost 80% of single family homes in San Francisco are going above asking price.

Opportunity Knocks: Failing golf courses should be a natural source of new housing for under supplied cities…. if NIMBYs don’t get in the way.

In House: How modular construction can help drive down costs and spur more development.  See Also: If you want less expensive housing then make it less expensive to build.

Profiles – Anthony Bourdain Tribute Edition

You typically won’t hear me lament about the passing of a celebrity.  However, Mrs. Links and I are both huge Anthony Bourdain fans.  We watched his shows religiously, read his books and followed his travel advise.  His story was uniquely American – dishwasher/line cook gets a break and goes on to become an iconic journalist and chef – and his shows really did change the lives of many of the chefs that he highlighted as well as his viewers.  RIP.

The Article that Started it All: Here’s Bourdain’s article for the New Yorker from 1999 that led to a best selling book and later his shows.  If you haven’t read it before, it’s great.

Down to Earth: The reason that Bourdain was so well loved was that he was our most accessible journalistSee Also: Anthony Bourdain and the power of telling the truth.

Making a Difference: Jason Wang, owner of Xi’an Famous Foods which made it big after being featured on Bourdain’s show, enabling his family to live their version of the American dream and move out of a one bedroom apartment in Queens,  donated 100% of net sales to a suicide hotline charity last Friday in tribute.  Side note: Xi’an Famous Foods is amazing  should you find yourself in the NY area.

Chart of the Day

Back on May 22nd, I wrote about how mortgage lender profit was going to come under pressure since higher rates meant that refinances would dry up.  I also noted that a likely outcome would be relaxed credit underwriting in order to prop up origination volume.  These two charts do nothing to dissuade that view.


and Chaser:


When You Gotta Go: A Pennsylvania man was arrested after allegedly pooping on another man in an act of road rage.

So Many Questions: A Canadian couple lost custody of their baby daughter after a stuffed animal lion that the parents claimed was Jesus Christ acted as their lawyer in a custody hearing.

Monkeying Around: A Home depot worker was attacked by a spider monkey that got loose in the store because Florida.

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

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Landmark Links June 12th – Shut Out

Landmark Links June 8th – Long in the Tooth

Lead Story….  One of the most tiresome and overplayed tropes in the real estate industry is the baseball analogy.  Anyone who has ever attended a commercial or residential real estate conference has heard some version of the “what inning of the cycle are we in?” question posed to panel members who inevitably roll their eyes and give some sort of canned answer.  The problem with the question is that it’s mostly subjective since there are no clearly-established thresholds as to what puts a cycle into say the 7th inning as opposed to the 6th.  I suppose this is part of the reason that the question is so popular on conference panels: there is no wrong answer at the time and, with so many innings to choose from, positions are fairly easily defensible after the fact..

When it comes to the commercial real estate cycle, I prefer a different gauge based on permanent loan underwriting.  There are four cycle segments in so perhaps a football analogy using quarters is more appropriate (I know, just can’t quit the lame sports references).  The primary difference here is that unlike the baseball analogy, there are some fairly clearly defined lines between segments that tie back to how aggressive loans are underwritten.  Here are my “what quarter are we in?” guidelines:

  1. 1st Quarter: Early in a cycle and emerging from a recession, lenders tend to have very tight credit standards with high debt service coverage and yield to debt ratios .  There is less competition in the market so the relatively-few lenders who have capital to deploy coming out of a recession are able to originate new loans, even with very conservative underwriting and protective covenants.
  2. 2nd Quarter: As the cycle matures and it becomes more obvious that the market is now on solid footing, lenders begin to get more aggressive.  New capital coming in levels the playing field between borrowers and lenders.  Lenders lower their debt service coverage, debt yield covenants and amortization periods back to the historical norm in order to remain competitive.
  3. 3rd Quarter: New money continues to come to the table and lenders continue to push debt service coverage and yield covenants below the historic mean as the lending landscape becomes more competitive.  Partial-term interest only loans begin to re-surface in the CMBS world.  Underwriting gets aggressive but not yet crazy.
  4. 4th Quarter: Lender underwriting gets even more aggressive in an incredibly competitive landscape as more capital enters the market.  Values and rents have been going up for several years now and emboldened lenders compete with one another, lowering underwriting standards in order to get money out the door.  Low debt service coverage ratios, full-term interest only loans and low debt yields become the norm.  Lenders begin to size loans assuming a property is sold rather than refinanced in order to make the numbers work.  The more aggressive that things get, the less margin of error there is when the economic cycle turns and conditions begin to deteriorate.

Perhaps the best type of real estate debt provider to use for this gauge is CMBS since it is far less exposed to regulatory forces than bank lenders, is not geographically constrained and has substantial lending volume.  If we look at the CMBS market today, it is very clearly flashing signs that we are late in the cycle.  Via Bloomberg’s Claire Boston on how interest only loans are taking over CMBS (emphasis mine):

Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody’s Investors Service, a warning sign that the $517 billion market may be headed for harder times.

The securities are backed by as many interest-only mortgages as they were in late 2006 and early 2007, Moody’s said. Those loans are riskier because borrowers don’t pay any principal early in the debt’s life. When that period expires, the property owners are on the hook for much higher payments.

The percentage of interest-only loans in a commercial mortgage bond is an “important bellwether” for the industry, according to Moody’s analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do. Underwriters aren’t taking steps to fully offset the rising risks, the ratings firm said.

The riskier debt getting packaged into commercial mortgage bonds mirrors a trend that’s infiltrated many corners of the credit markets, from leveraged loans to residential mortgage securities: As investors have flocked to debt investments that seem safe, underwriters have been emboldened to make the instruments riskier and keep yields relatively high by removing or watering down protections.

Moody’s said fierce competition in lending has allowed “the vast majority” of borrowers with good properties to get the loosest kind of interest-only loans, and even debt tied to “lower-quality properties in secondary markets” now often has the borrower-friendly terms.

The growing percentage of interest-only loans is “a significant negative credit trend, as well as an important warning sign of deteriorating underwriting standards,” analysts led by Kevin Fagan wrote in a note this week.

In the first three months of the year, more than 75 percent of loans in commercial mortgage bonds with multiple borrowers were interest-only, the highest share since late 2006. On average, a borrower can wait nearly six years before paying principal, up from 2.2 years four years ago. Almost half of the pools of loans backing bonds included “full-term” interest-only debt, which doesn’t require principal payments until the full loan is due.

While interest only loans in the residential mortgage space are mostly a thing of the past thanks to better regulations, they are still very much alive in the commercial space as stated above.  Perhaps the biggest problem with where we currently sit is that commercial real estate lenders are running out of ways to ease borrowing conditions further and competition in the space is still fierce.  I suppose that full-term interest only loans could still get to a larger share of the market (they were well over 50% back in 2007), but I can’t imagine that is a great place for the market to be headed.  To be sure, the fundamentals in most commercial real estate markets and product types in the US still look very strong as vacancy is low, job growth is robust and rents are generally going up.  However, a look behind the curtain at how many projects are being financed does not paint nearly as rosy a picture, especially with rates on the rise.  Perhaps this uptick in interest only loans will prove to be benign as overall debt levels remain on the low end but the latest data from Moody’s on CMBS sure makes it feel an awful lot like we are in the 4th quarter.


Closing In: Two more Federal Reserve hikes will put interest rates at just about the bottom end of what is estimated to be a neutral monetary policy meaning that the autopilot is about to switch off.

Time to Get Busy: US births decreased again in 2017 for the third straight year.

Inverted: There are now officially more job openings than unemployed people in the US.


Big Data: Tenant rep specialist Savills Studley is rolling out an AI-powered platform that extracts data from leases.


Unintended Consequences: CEQA was designed to protect the environment, not fight housing for homeless people.  However, that is exactly what NIMBYs are using it for.

Misfit: Why shiny new apartment towers likely won’t fit the future housing needs of Millennials as well as new suburban housing would.

It’s All Relative:  Vancouver’s housing market is even more insane when you consider how low its median household income is relative to other high priced markets like San Francisco.


Hype Factor: This is a rather depressing take on the current state of Silicon Valley:

Moreover, the Silicon Valley game changes from “who’s smartest and does the best job serving customers” on relatively equivalent funding to “who can raise the most capital, generate the most hype, and buy the most customers.” In the old game, the customers decide the winners; in the new one, Sand Hill Road tries to, picking them in a somewhat self-fulfilling prophecy.

Depressing: How robocallers make money even if you don’t pick up the phone.  I wish that someone would make a move where the main character snaps due to excessive robocalls, goes rogue and hunts them down one by one.

Money Back: Tesla is facing accelerating rate of Model 3 refunds as production woes continue and buyers become frustrated with extended wait times.

Real Life Sopranos: This ProPublica story about a sketchy trash hauler in NYC with mob ties is insane.

Chart of the Day



Beam Me Up: A man who was caught masturbating at a bus stop told police that he was Captain Kirk from Star Trek because Florida.

I Can’t Believe This Worked: A man who claimed that his girlfriend chocked to death because he was well-endowed was found not guilty because Florida.

I Give Up: Google is eliminating it’s egg from their salad emoji because apparently it was offensive to vegans.  Ladies and gentlemen, 2018.

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

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Landmark Links June 8th – Long in the Tooth

Landmark Links June 5th – Asking for Trouble


Lead Story….  Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.”  In recent years, the idea of the Fed targeting asset prices as well has been hotly debated in economic circles.  In a recent research paper circulated by the National Bureau of Economic Research, influential economist Michael Woodford of Columbia University suggests that the Fed should housing prices into account when determining interest rates.  Woodford suggests that the central bank should “lean against” housing when prices are rising and ease when home prices are falling. Greg Robb of Market Watch provides a little more color (emphasis mine):

At the moment, policy prescriptions like the well-known Taylor rule have traditional target variables only for inflation and the output gap. In his paper, Woodford suggests that a new variable for housing prices be added to the Fed’s policy rule.

IMHO, this is a terrible idea for a couple of reasons.  First off, housing is but one asset class in the world’s largest and most dynamic economy.  Using a blunt tool to craft monetary policy around a single asset class seems insane.  Second, it takes for granted the fact that the relationship between interest rates and housing prices is much more complicated than often acknowledged.  In reality, home prices are more a reflection of inventory than they are of interest rates (but rates do play a role):

In a perfectly efficient market, low rates open up home ownership to more people since falling monthly payments make qualification easier.  Builders step in to capitalize on the marginal demand that had been pulled forward with lower rates by constructing more homes.  At the same time, owners of starter-homes put their houses on the market and move up once they can afford to upgrade thanks to lower mortgage payments. When rates rise, the increased marginal demand from first time and move-up buyers recedes and we are left with excess inventory which would eventually lead to lower prices.  This makes sense in theory and sometimes happens in practice which is why it’s so commonly thought that interest rates are the primary driver of home values.

However, what happens if builders don’t construct very many new units and existing stater-home owners stay put during a period of low rates?  In that case, rising rates do not have much of a negative impact on home prices.  In fact, they tend to make owners even less likely to sell (why move if your mortgage rate will be higher) which further dries up already-low supply, potentially pushing prices even higher.  If this scenario sounds familiar, that’s because its what is happening today, which should be proof-enough that tying Federal Reserve policy to housing price fluctuations is foolish. Influencing the price of housing is relatively straight forward: if lower prices are desired, make it easier and cheaper to build more of it and do the opposite if higher prices are the target outcome.  Unfortunately, this is easier said than done in today’s political climate.


Glass Full: Any way that you look at it, the economy is basically on fire, as shown by Friday’s jobs report.  See Also: We’ve run out of words to describe how good the jobs numbers are.

Done Deal: A June Fed rate hike is now a sure thing and there are likely more on the way.

Whiplash: New tariffs intended to bolster the American steel and aluminum industries are starting to have the opposite effect in a key part of the U.S. supply chain: steel.


Don’t Call it a Comeback: REITs were the strongest performing major US asset class in May.  See Also:What REITs tell us about the commercial real estate’s market’s direction.

Short Supply: Increased RV ownership has led to the problem of a lack of adequate storage for the vehicles as the trend toward urbanization and higher land prices continues. (h/t Scott Ramser)


Overstated: There have been more than a few dire predictions about how recently-passed tax reform will cause a flight of high net worth residents from California.  Here’s why the true impact will likely be minimal.

Echoes of the Past: In a flashback to the mid-aughts, private mortgage companies are making a ton of money off originating loans to people with no savings, poor credit, or low income, often with little to no down-payment.  However, this time the government is largely on the hook as much of the mortgages are originated through federal affordable housing programs.


Power Grab: Silicon Valley financiers are increasingly losing leverage to star entrepreneurs in today’s founder-friendly era as large investments from mutual funds, sovereign wealth funds and SoftBank mean that VCs are no longer the only game in town.

So 2010: America’s teens are increasingly choosing YouTube, Snapchat and Instagram over Facebook.

Storage Wars: Renewable energy growth has been faster than almost anyone expected and costs have plummeted.  The next big thing in the space will be storage, which is required for it to achieve full potential.

This Makes No Sense: Coffee waste (dried husks that encase coffee beans) are selling at a 480% premium over coffee itself mostly because hipsters.

Chart of the Day

The labor force participation rate looks a lot better when adjusting for demographics.

Source: New York Times


Natural Selection: The US Geological Survey issued a warning, telling people not to roast marshmallows over lava on the Big Island of Hawaii.  Sometimes I wonder how humans haven’t gone extinct yet.

Science: Ever wonder how much fart is in the air on your plane at any given time?  Here’s the answer. (h/t Steve Sims)  It’s called science:

For instance, British Airways uses the Airbus 380 – which seats 525 – to fly from London to Singapore, a journey that takes 12 hrs and 50 minutes (we’ve rounded it up to 13 hours to account
for the time you’re waiting to get off the plane.

In 13 hours, your average human would let out 0.54 litres of farts- with the added cabin pressure that goes up to 0.7 litres.

If you times that by 525 passengers, that means the cabin would collect 368 litres of fart in the air across 550 square metres of cabin space – this would be halved because of air filtering to 184 litres.

Grounded: A plane headed to the Spanish island of Gran Canaria had to make an emergency landing when a passenger’s body odor became so overwhelming that it caused several passengers to vomit. (h/t Steve Sims)

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

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Landmark Links June 5th – Asking for Trouble

Landmark Links June 1st – Fish Out of Water


Lead Story… Curbed ran a provocative blog post this week, posing the question “Can tech outsmart the housing shortage?”  Author Patric Sisson rightly pointed out that tech was by and large late to the real estate space but has been making headway with ventures ranging from WeWork to Fifth Wall Ventures to AirBnb.  The amount of new capital pouring into the real estate startup space is unprecedented, as pointed out by Omri Barzilay of Forbes earlier this year (emphasis mine):

The last decade has witnessed an exponential growth in real estate tech startups. Globally, the number of startups rose from 176 in 2008 to 1,274 by 2017. In the same period, cumulative investments in these startups soared from $2.4 billion to $33.7 billion.

However, as pointed out in the Curbed post, very little of this capital has been effectively deployed in the residential housing space to help relieve today’s crippling shortages, which ironically tend to be most acute in tech-dominated markets.  So why haven’t tech startups been impactful in dealing with today’s housing shortages?  I want to provide a bit more color from Curbed before explaining why (emphasis mine):

In real estate, as in other industries being transformed by technology, you can measure the commercial and cultural shift through language. An entire glossary of new terms—coliving, microunits, smart homes, and coworking—have taken root thanks to a speedy adoption of new technology.

These companies have endeavoured to solve some pretty vexing problems: They’re building community (WeWork). Making cities more affordable (Starcity). Helping people stay in their homes (Airbnb). Streamlining and simplifying the process of finding a roommate and paying rent (Common). Helping new businesses grow and thrive (WeWork again).

But are these companies fundamentally “disrupting” housing? And, perhaps more importantly, are they using their funding and talent to truly solve U.S. cities’ acute housing shortage and affordability crisis?

If that’s the bar to which these companies are being held, it’s arguable that they’ve fallen very short. As urbanist, author, and editorial director of SPUR Allison Arieff told Curbed, “Don’t try and disrupt everything. Focus on actual problems.”

Over the past decade or so, the tech industry has been largely focused on monetizing excess capacity – so-called disruption.  Each of the startups listed above along with ventures like Uber, Lyft and even Amazon (to an extent) have a business model defined by finding an under-utilized good (vacant office space, empty car seats, a guest room), creating a marketplace for that good and then collecting a fee as compensation for providing a means for owners to monetize it.  However, housing does not have an excess capacity problem.  In fact, it has the exact opposite – a scarcity problem.

The tech startups that focus on housing tend to be oriented towards concepts like co-living which is little more than a very expensive version of a business that has been around forever – the Single Room Occupancy unit or SLO.  In addressing housing this way, tech startups are personifying Abraham Maslow’s famous quote: “If all you have is a hammer, everything looks like a nail.”  There are only so many units in existing buildings that can be partitioned off to provide beds (and little else) for city residents.  Those units may also be fine for 20-something singles but are hardly conducive to raising a family.  More from Curbed (emphasis mine):

Younger generations, saddled with astronomical urban real estate prices, yet drawn to the economic activity and energy such cities offer, will always be willing to cram themselves into increasingly tiny spaces. When it comes to housing, cities need a bigger pie, not more fashionable ways to sell smaller slices—served with a side of community. But tech is more than happy to build a better cubbyhole.

If tech startups are going to make a dent in the housing shortage, they are going to need to do more than wring efficiency out of excess capacity that largely doesn’t exist.  Instead, efforts needs to be put into streamlining approvals and developing better building technology.  There are some companies focusing on construction – Katerra comes to mind for one.  However, these segments of the market tend to be more difficult to scale, more human and require more human input.  In the end, the solution is both simple and complex at the same time: if a housing startup is to be successful it must first build a lot of houses.


Help Wanted: The case for low-skilled immigration is stronger than ever from an economic standpoint as available jobs go unfilled.

Tapping the Brakes: Financial turmoil in Italy, Turkey and Argentina has led to investors unwinding bets that the Fed will pick up the pace of interest rate increases.

Best and the Brightest: More than half of the most valuable US tech companies were founded by first or second generation immigrants.


Foot in the Door: Amazon believes that selling you groceries is the key to selling you everything else which is why Whole Foods plays such a key role in their business plan moving forward.

Rollback: How the Volker Rule’s proposed revision could add liquidity to CMBS.

Parking Needed: The warehouse boom is making truck parking an increasingly in-demand product type.


Unexpected: The relationship between mortgage rates and real house prices is far less stable than commonly thought.

Sensing a Trend: There should be no doubt that excessive student debt is hindering home buying among young people.  However, one must also take the choice of major into account.  Borrowing $300k for a master’s degree in history or $86k for a Ph.D. in music composition as two of the subjects in this NYT feature article did is probably not a wise idea whether you prefer to be a renter or an owner.

Not Just A City Problem: Rural America has a problem that mirrors its urban counterpart – plenty of jobs but not enough housing for workers who don’t qualify for public assistance but can’t afford a luxury home.


Lifeline: Families in the dystopian hellscape that is 2018 Venezuela are finding some refuge in mining cryptocurrency, which is still profitable there thanks to the government giving away electricity for free.

The House Always Wins: Sports betting is a substantially lower margin business than commonly believed.

Long Way Down: General Electric was once the envy of the corporate world.  Then it decided to become a finance company in the run-up to the Great Recession and an oil services company in the days before the oil bust and everything went to shit.  Here’s a great recap of everything that went wrong.

Two Weeks Notice: High profile young traders who made a fortune trading cryptocurrency are bailing on Wall Street banks.

Chart of the Day

Boom goes the dynamite…..

Italy 2 Year

Source: Wall Street Journal


Lock Them Up: Butcher shops in Great Britain are being vandalized regularly because vegans.  Reminder: 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.

Sure: An Indian man had to go to the hospital to have a 6 inch shower head removed from his rectum after he “accidentally slipped” in the bathroom.  In related news, I accidentally enjoyed a glass of wine with dinner last night.

Destined for Greatness: A woman named Crystal Methvin was arrested for possession of crystal meth because Florida (h/t Henry Baskerville).  For those of you tracking such things at home, there are now no less than two women residing in the great state of Florida who are named after crystal meth.

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

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Landmark Links June 1st – Fish Out of Water

Landmark Links May 29th – Relaxed


Lead Story…. As most of you are probably aware a measure that rolled back some provisions of the Dodd Frank Act was signed into law last week.  Somewhat buried in the bill was a provision that could have a major impact on commercial real estate development and construction lending: a change to the capital contribution language for Basel III’s High Volatility Acquisition, Development and Construction (HVCRE) financial requirements.

Before your eyes glaze over and you skip to the WTF section to avoid reading about bank regulatory minutiae, allow me a few sentences to explain why this is a very, very big deal.  I think its safe to say that HVCRE turned the construction lending world on its head when it was first rolled out in 2015.  HVCRE was the portion of the Basel III bank regulations that sought to limit the risk that banks took in lending for high risk real estate projects – meaning construction and development.  It accomplished this by requiring banks to reserve 12% of capital against loans classified as HVCRE as opposed to only 8% for non-HVCRE commercial real estate loans, thus making it quite punitive and expensive for lenders to finance projects that didn’t comply.

One of the most challenging provisions in the HVCRE classification rules was the borrower needed to have 15% of the as-as completed value of the project – as determined by an appraisal – contributed as cash equity.  Here’s why that has been problematic: Let’s say that you own a piece of land and you have either 1) owned it for a long time and it has appreciated substantially in value; or 2) you have caused the value to go up substantially above your basis by entitling entitling it.  Now you decide that you would like to develop it. Under HVCRE rules, in order to obtain debt capital to improve the site, banks were required to size the loan based upon your cash basis in the land, NOT the actual value of the land when it was contributed as collateral.  This caused all sorts of problems for long term owners or those who had taken entitlement risk as they were now required to either put in substantially more cash, effectively over-collateralize the project in order to get a loan or bring in an equity partner, substantially diluting returns in the process while taking on the same amount of risk.  This was clearly punitive from a bottom line perspective for a developer / long term owner.  It was also a pain in the ass since it meant that someone who owned a property for years would have to establish a cash basis, accounting for costs going back to the purchase of the property – which could be decades in some cases.

The Economic Growth, Regulatory Relief and Consumer Protection Act that was signed into law last week amended this onerous provision with the following passage (emphasis mine):

(c) Value Of Contributed Real Property—For purposes of this section, the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property as determined under standards prescribed pursuant to section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the extension of the credit facility or loan to such borrower.

It’s difficult to overstate how much of a big deal this is for CRE sponsors who have a low basis in a property and want to take out a loan to re-position or build it out.  The HVCRE classification made a mess of commercial real estate finance for several years, dis-incentivizing property owners from developing underutilized property and stymieing banks who would have otherwise lent in the space. I, for one am thrilled to see that mess finally start to get cleaned up.


Monkey See, Monkey Do: Several Silicon Valley cities are contemplating head taxes similar to the one recently passed by Seattle, purportedly to deal with the negative consequences of rapid economic growth caused by refusal to build adequate housing.  Looks like the culprits behind the problem are going to try to bite the hand that feeds once again.

Wreaking Havoc: The dollar has been on the rise for a couple of months now and its causing all sorts of issues in emerging markets.


Unique Issues:EB-5 defaults are on the rise and having a capital source that is fragmented, unsophisticated and dealing with potential immigration consequences make them particularly challenging to deal with.


Just the Beginning: Private equity rentals, rising costs, tax disincentives, a construction worker shortage and growing household formation point to the housing supply crisis continuing to get worseRelated:US Home values are surging at their fastest pace since before the financial crisisSee Also: To solve affordability crisis, Bay Area housing stock must grow 50% in 20 years.

Big Business: How Wall Street and Silicon Valley institutionalized the formerly mom and pop industry of house flipping.

Start Up Round Up: Open Door Labs Inc is new startup wants to help you trade in your old home and put you in a new one (h/t Scott Ramser) See Also: Ribbon is a startup backed by some large investors that partners with buyers to submit a cash offer in exchange for a fee, making it more likely that the buyer’s offer is accepted.  Ribbon’s equity is then refinanced out after closing.


Tremendous Store of Value: Over $1.2 billion in cryptocurrency has been stolen by hackers since the beginning of 2017.

Unicorn Killer: Awesome New York Magazine profile of John Carreyrou, the Wall Street Journal reporter who took down scam blood test company Theranos and it’s founder Elizabeth Holmes.

Astronomical: Escalating tuition and easy credit have yielded a class of student-loan borrowers with spectacular debt they may never pay back.  The example of the orthodontist who has student debt over over $1MM in this story is unreal.

Chart of the Day 

This is going to leave a mark

Source:Global Macro Monitor


Frivolous: Two McDonalds customers are suing the fast food giant for $5MM over being charged for cheese that they don’t want on their Quarter Pounders because Florida.  (h/t Mike Deermount)

Sendoff: A woman was fired from her job at a Michigan company for bringing laxative-filled brownies to a coworker’s sendoff party (h/t Steve Sims).

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

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Landmark Links May 29th – Relaxed

Landmark Links May 25th – Still Dancing

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Lead Story…. In the dark days of mid-2007, right before the subprime bust and ensuing financial collapse nearly brought down the world economy, former Citigroup CEO Chuck Prince made an interesting statement during an interview with the Financial Times. Prince answered a question about his firms market posture at a risky moment with a quip that would forever be immortalized in the annals of financial history as one of the stupidest things a CEO of a major bank has ever been quoted as saying.  Via Time Magazine (emphasis mine):

The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.

He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.

As we now know, several months later the music did stop, global liquidity all-but dried up, the economy ground to a halt and Prince – along with several of his cohorts at other major banks – was shown the door for behaving recklessly.  The reason that this is still relevant in 2018 is that its the classic example of someone who is supposed to know better making a dumb statement that most observers know would age terribly, the only question being how long this would take.

The current economic cycle may have had its very own “music is still playing” moment  last week when California League of Cities spokesperson Dane Hutchings made an absolutely absurd statement about pension fund returns in an interview with Chief Investment Officer Magazine.  While Hutchings is nowhere near as high profile as Prince was, he still is a person of influence when it comes to the nations largest pension fund, CalPERS.  Hutchings take on CalPERS projected returns may prove to be just as ill-fated as “we’re still dancing.” Via Chief Investment Officer (emphasis mine):

The legislative representative to the League of California Cities urged the CalPERS Investment Committee Monday to think “out of the box” in finding a way to exceed its 7% investment return projections, saying that cities won’t be able to pay their monthly contributions to the pension plan if returns are that low.

There is so much wrong with this statement that it’s somewhat difficult to know where to start but I’ll take a stab at it:

  1. The market doesn’t give a damn what your needs are as in investor.  It could care less that California and it’s cities can’t afford the astronomical and stupid commitments that politicians made to public employees.
  2. Achieving higher returns means taking on a higher level of risk.  This is the case always and forever.
  3. The larger that a fund becomes, the more difficult it is to outperform the market.  CalPERS currently has $341.5 billion in assets.  At that size it is virtually impossible to outperform the broader market.
  4. If bonds return 3% for the next decade (28% of CalPERS current portfolio) and stocks return 5% (50% of CalPERS current portfolio) then the remaining 22% of the portfolio which is invested in real estate, private equity and other alternative investments would need to earn a whopping 16.6% net of fees in order to achieve a 7% yield which is just not going to happen.  What this means is that CalPERS is overstating their return already.  Seven percent is too aggressive but no one is willing to admit that because it would reveal an even more massive deficit than the $153 billion already reported.  Instead, they continue to partake in a strange variation of Kabuki Theater where everyone involved knows they are screwed but no one is willing to admit it publicly.
  5. We are in year 8 of an epic bull market.  If a fund can’t achieve its returns during this period, it probably won’t ever happen.  Also, taking more risk to shoot for a higher return this late in an economic cycle is incredibly unwise.

Ironically, this is not the first time that stakeholders have pushed CalPERS to push the pedal to the floor in order to attempt to plug a funding gap.  The pension fund infamously got aggressive at the wrong time during both the tech bubble of the late 1990s and the real estate bubble of the mid aughts.  The last time around ended in tears when CalPERS decided to double down on land development and housing construction around 2006-2007 figuring that they would cash in on a boom that would never end.  Things went poorly to say the least.  In one particularly glaring example of greed, stupidity and style drift, a CalPERS advisor who specialized in urban infill development persuaded the fund to invest in the recapitalization of Newhall Land and Farming.  Newhall is a massive 15,000 acre master planned community in the suburbs north of LA that was still in it’s early phases and would be contributed to a new venture called LandSource along with a hodgepodge of other land and development assets of questionable quality.  CalPERS invested $1 billion in that deal and lost ever single penny by the time that the dust cleared.  As a result of that and other missteps, CalPERS decided to pull out of the home building and land development market at the worst possible time, failing to capitalize on the recovery in land and home values while also cutting the legs out of much of the private builder community that they had previously financed in the process.  In doing so, CalPERS effectively made their own contribution to the massive affordability and supply crisis that we are experiencing today.

There are going to be painful decisions to be made about public pensions in the coming years no matter what.  I sincerely hope that CalPERS ignores the League of Cities and doesn’t give into their stupid and financially illiterate request to layer on risk in order to plug a massive funding gap at a very mature point in the economic cycle.  Then again, past missteps and current denial about projected returns don’t give a whole lot of reason for hope.


Baby Bust: US births have hit their lowest number since 1987 as the fertility rate last year saw it’s largest one-year decline since 2010.

Straight Up: Oil prices are up nearly 50% year-over-year.

Priced Out: Jobs in construction, logistics, and call-center employees are increasingly missing from expensive metros. But pricey metros have more than their share of tech, science, and high-end service jobs.

Subsidized: A large portion of the US economy has become Movie Pass – selling services and products at an unprofitable discount with the difference made up by investors, all in the name of growth.

Rollback: The House and Senate both passed a bi-partisan revision to the 2010 Dodd-Frank law that will cut regulations for small lenders and substantially raises the asset threshold at which larger regional lenders automatically face stricter rules.  However, Dodd Frank’s major planks such as emergency government powers and curbs on derivatives will remain in place.  The bill does include mortgage-underwriting-standards relief for banks with fewer than $10 billion in assets.


Mixed Use: US mall owners at the ICSC RECon convention in Las Vegas highlighted re-positioning plans to replace vacant former JC Penney and Sears stores with apartments and hotels.

Hanging In There: Commercial and multi-family originations were up 1% over 2017 in the first quarter of 2018 despite the headwind of higher interest rates.

Bottoms Up: Store owners and downtown planning committees in cities around the U.S. are organizing shop crawls—often with alcohol flowing—to spark consumer interest in an era of online shopping.


Too Big to Fix: No one can figure out what the hell to do with Fannie Mae and Freddie Mac which are still under federal conservatorship and more critical to the US mortgage market than ever before.

Nobody Walks in LA: Los Angeles has long been known as a town that loves its cars.  However, traffic and high priced parking, along with a bunch of newly-constructed high end urban condos have wealthy buyers increasingly paying a premium for walkability.

Pack Them In: Shared housing startups are taking off as housing expenses in high cost cities make it more necessary than ever to have roommates.


This Sucks: America is losing the battle against robocalls as auto-dial fraudsters continue to blast out millions of calls at little cost, utilizing software that disguises their identities despite harsher penalties for getting caught.

Locked Out: Shoppers who create headaches for Amazon by returning too many items or reporting too many problems with orders are getting banned from the service without warning.

Under the Counter: It’s still early but California’s underground pot market continues to thrive after legalization at least in part because of high state taxes and a complicated Federal tax structure that can drive marginal rates as high as 70%.

Chart of the Day

Despite worries about Baby Boomer retirement tanking the economy, the working age population is still growing:

Source: The Fat Pitch


Get Out: A NY couple is suing their son in order to evict him from their home after he refused to move, get a job, pay rent or help out around the house because Millennials.

Super Poopers: Police in Ohio are on the lookout for two people who have been caught on camera entering an under-construction home several times over the past few weeks to poop on the floor.

Plunger Needed: A high school in North Carolina was evacuated this week after a clogged toilet led to an odor so toxic that several students complained of teary eyes and burning throats.  (h/t Steve Sims)

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

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Landmark Links May 25th – Still Dancing