Landmark Links July 21st – Where is Everyone?

major league

Lead Story… I was talking with a client earlier this week about how long projects seem to be taking in the development world lately.  Across the board, we have found things moving a lot slower than they were just a couple of short years ago.  Lenders and capital partners are generally less aggressive than they use to be which means that the process of getting a commitment – let alone closing, takes a substantially longer time.  There are plenty of culprits here: in addition to the aforementioned tepid capital market, stifling bank regulations, the construction labor shortage, city issues, etc are all playing a role in dragging things out.  Our discussion focused on trying to identify the primary cause of all of the delays.  While there is a confluence of factors, I’m becoming more convinced by the day that this is an issue that starts in the city planning department.

Several years ago, builders were buying a fairly large number of projects at Tentative Tract Map and taking it from there, assuming that the hard work had been done once a project had run the gauntlet of discretionary approvals.  However, this assumption was proven false once the builders began to process non-discretionary approvals needed for grading and building permits to get physical construction underway.  The problem was that many planning departments were (and still are) woefully understaffed.  Today’s staffing levels may have been fine during the recession but are nowhere near adequate for a healthy, functioning market.  As a result, projects have taken much longer than anticipated to start, hitting returns hard and causing both capital partners and builders to pull back from buying earlier in the process and insist on only buying “shovel ready” sites.  This puts a higher degree of scrutiny and stress on the process.  Developers who could count on selling a site with a Tentative Tract Map in 24 months now have to underwrite 36 months or more to account for taking the project through final engineering in order to maximize value and ensure a capital event.  This means that carry costs are substantially higher and IRRs are lower, leading to a general desire to delay closing as long as possible.  Add in the fact that banks now do much more detailed underwriting before even issuing a non-binding term sheet and a crippling labor shortage and you have a recipe for major return-killing delays.

So, what is the culprit behind understaffed planning departments?  Conor Sen addressed the issue in a Bloomberg View column earlier this week about how low unemployment and tight state and local budgets have led to a shortage of public servants.  The story primarily dealt with police officers and teachers but could just as easily be applied to planning departments (emphasis mine):

Tax revenue from ordinary economic activity is volatile as is, but the unusual nature of the nationwide housing downturn in the 2008 recession had a profound impact on local tax streams. The run-up in housing prices during the boom years led to higher appraised values and increased property tax revenue for municipalities to spend. The bust led to lower appraised values and budget deficits that had to be closed, in many cases via spending cuts and layoffs, as the private sector was going through the worst recession in 80 years. While home prices have recovered to varying degrees around the country, appraisals often occur with a multiyear lag, which has constrained local budgets during the economic recovery.

The financial accounting of when tax revenue is earned and can be spent is one thing, but the governing philosophies of politicians during this economic cycle are another. Elected officials who came into office in the aftermath of the great recession were mostly focused on shoring up budgets. In part this was because the electoral wave in 2010 following the recession was dominated by austerity-focused Republicans, but it affected Democrats as well. Big city mayors, who tend to be Democrats, had to balance their budgets, and it’s hard to get people to agree to tax hikes to fund services when unemployment is high. Rainy day funds needed to be built up, and in some cases, pension costs needed to be addressed.

Look, it’s easy to bag on government employees and not all of the criticism is unfounded – there is quite a bit of waste in the sector, especially when it comes to guaranteed pensions.  However, it is absolutely necessary to have properly staffed government services.  Fire, police and teachers come to mind.  A competent and functioning planning department falls into that category as well, especially in the midst of a housing crisis brought about by too few units being built.  The results of under-staffing are the now-common developer/builder tales of projects stalling out for months at the plan check phase.  Sen makes a great point about this being an incredibly difficult situation to remedy (emphasis mine):

In the same way that over-hiring during the boom years came back to bite governments, under-hiring now is going to increasingly lead to pain when governments are inevitably forced to catch up. Government payrolls didn’t hit bottom until January 2014, nearly five years after the technical end of the recession. They are back to their level from December 2007, when the recession began. By comparison, over that same time frame, private sector payrolls have increased by 8 million workers.

While it would be nice to think that government has gotten dramatically more efficient over the past decade, the combination of tight budgets and recession-scarred governing mentalities means that public sector employment is short of where it needs to be to return to pre-recession levels of service.

Reality is that there are certain tasks that the private sector can’t accomplish without well-functioning government agencies.  Your local planning department is one of these roles.  In an ideal world, the development process in California would be a lot simpler than it is.  However, we need to deal with the way the world is, not the way that we think it ought to be.  It seems a bit ironic for someone with largely libertarian political leanings like me to be writing this but we need more government hiring in planning departments to get things moving again.  Until that happens, the delays will continue.


Catching Up: Low income earners are seeing weekly pay gain faster than other groups.

Standing By: The Federal reserve has indicated that they may pause their planned rate hikes if inflation continues to come in weak.


Tidal Wave Investors are piling in to alternative investments in general and commercial real estate in particular in a desperate search for yield.

Exodus: As companies re-locate to big cities, suburban towns are left scrambling.

Make it a Double: Retail developers are lobbying cities to allow walking around with open beverage containers to generate buzz in retail spots.  (h/t Stone James)


Fire Hose: Foreign buyers are buying US homes at a record rate, boosting prices in supply-constrained coastal markets, as the dollar plunges.

Severe Impediment: Increased Student debt is responsible for as much as 35 percent of the decline in young American home ownership from 2007 to 2015 according to a new study done by the NY Fed.

Headed In the Wrong Direction: Venice Beach is one of the most desirable places to live in the US, yet it’s housing supply has been shrinking.


Can’t Beat ‘Em, Join ‘Em: Sears announced that they are going to start selling Alexa-enabled Kenmore appliances on Amazon, sending shares soaring.  See Also: Amazon can now crush a company (in this case home meal kit company Blue Apron) just by filing a trademark. And: How Amazon has become a problem for re-flationary monetary policy in Japan.

Dinosaurs? How technology could lead to banks facing Kodak-style obsolescence over the next 15 years.

Rise of the Machines: Walmart is increasingly replacing retail employees with robots. In addition, they area working on facial recognition software to detect customer dissatisfaction and adjust staffing accordingly.  How this will play out in practice will be fascinating since apparently, Walmart management is unaware of this website that sheds some light on what Walmart shoppers actually look like.

Zero Point Zero: In an extremely rare circumstance, a private equity fund that made highly leveraged plays on oil and gas back in 2013 is now worth essentially nothing.  The Orange County Employees Retirement System was an investor and has now marked their position to zero.

Chart of the Day

Courtesy of the WSJ Daily Shot

Mortgage debt service ratio is way down by the non-mortgage consumer ratio is way up:

The share of Americans who rent is at it’s highest level in decades:

Source: @MatthewPhillips, @FactTank

The ratio of home prices to incomes in Canada is insane:

Source: Capital Economics

Here’s who is buying US real estate:

Source: Wall Street Journal


Seems Reasonable: A man who was upset with AT&T trucks parked outside of his house took matters into his own hands and shot their tires out because, Florida.

Not the Sharpest Tool in the Shed: A man who “identified himself as a drug dealer” called police early Sunday to report the theft of cash and a small bag of cocaine from his vehicle because, Florida.

Can’t Catch a Break: In the latest round of terrible PR, rats fell from the ceiling at a Dallas-area Chipotle.  For those keeping score at home, they have now had issues with E coli and norovirus, as well as rats falling from the ceiling – in addition, I’m fairly certain that they put laxatives in their burritos.  Other than that, things are great.

When You Gotta Go: A bear wandered into a house in Wyoming, took two poops in the living room while several people were at home and then ran away.  I guess he just wanted some privacy.

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

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Landmark Links July 21st – Where is Everyone?

Landmark Links June 18th – Fake Out


Lead Story… Since the end of the Great Recession, California’s cities have failed to produce anything close to the number of housing units needed to accommodate the state’s growing population.  The responses from cities has run the gamut from inaction at best and open hostility to new development at worst.  We are now dealing with the fallout: a crushing housing affordability crisis in which a state with some of the highest wages in the nation also has the highest poverty rate.  This has finally got the attention of politicians in Sacramento who have offered up a slew of legislative measures to address the crisis.  Today, I want to focus on SB 35, authored by Senator Scott Wiener of San Francisco since it is the bill that has gotten substantial press of late since passing through the state Senate last month.  At a high level, SB 35 – also called the Housing Accountability and Affordability Act (per the OC Register):

Creates a streamlined approval process for multi-family developments that are in “infill” areas and jurisdictions falling behind on providing housing for all income levels.

Since 1967, California cities and counties have been required to develop plans every 8 years for construction of new residential units in their communities under the Regional Housing Needs Assessment (RHNA).  Under the RHNA, cities and counties are required to account for units at all income levels under a jurisdictions housing element. The problem is that there is no enforcement mechanism for cities who choose to ignore their own plans.  In other words, it’s little more than urban planning Kabuki theater where cities put on a big show to pretend to care about housing and then quickly give in to NIMBY constituents when it’s over.  If you want more background on why the RHNA is a farce, Liam Dillon of the LA Times  wrote a terrific piece about it late last month.  So, how does SB 35 aim to fix things? Here is the press release from back in January (emphasis mine):

Today, Senator Scott Wiener released a detailed description of Senate Bill 35 – the Housing Accountability and Affordability Act – which he first introduced in December. SB 35 will create a streamlined approval process for housing when cities are not meeting the housing creation goals required by the Regional Housing Needs Assessment (RHNA), which will expedite the construction of affordable housing. SB 35 also creates a more robust reporting requirement for housing production by requiring all cities report their annual housing production to the California Department of Housing and Community Development (HCD).

Before I jump to my analysis of a couple of major issues, I want to be clear on one thing: this bill is a step in the right direction.  The RHNA is generally a good idea but needs an enforcement mechanism, otherwise it’s existence is pointless.  This should have been done years ago before we got to today’s miserable state of affairs but this is at least a start.  Here’s more from the above-quoted press release (emphasis mine):

Under SB 35, if cities aren’t on track to meet those goals, then approval of projects will be streamlined if they meet a set of objective criteria, including affordability, density, zoning, historic, and environmental standards, and if they pay prevailing wage for construction labor. Currently, RHNA goals are reassessed and updated every 8 years. Under SB 35, cities will submit their progress on housing production to HCD every 2 years. If the city is not on track to meet its RHNA goals at one of these progress checks, streamlining will be in effect for the entire next two-year cycle. A city is “on track” if it is 1/4 of the way to its goal by year 2 of the 8-year cycle, 1/2 of the way to its goal by year 4, and so on. The streamlining applies only to the income levels that aren’t being built for – so if a city is building sufficient market-rate units but not enough low-income units, the project must add low-income units to qualify for streamlined approval.

Despite the clear good intentions, there are two big issues in that highlighted passage that will make it very difficult for this bill to do much of anything to mitigate the housing affordability crisis:

  1. Existing Zoning – The streamlined process only applies to projects that already comply with existing zoning.  This seems to makes sense until you consider just how much California cities have been down-zoned since the 1960s.  Want an illustration?  This graph is from a dissertation by UCLA Ph.D. student Greg Morrow and looks at potential residential capacity in Los Angeles:

         LA’s population was 2.5 million in 1960 and city zoning allowed for enough housing          for 10 million residents.  The population has grown to 4 million today but the city            only has capacity for 4.3 million people – nearly at capacity.  If this strikes you as ass-backwards, that’s because it is.  This is why streamlining only for conforming zoning doesn’t mean much.  The playing field has already been tilted so far that there simply isn’t much capacity left.  The only way to truly address this issue is through amending restrictive zoning which will still require the same brutal discretionary process that has us in this predicament to begin with whether this bill passes or not.

    2. Cost – The streamlined approval process only applies to projects that pay prevailing           wage for construction labor.  This is the equivalent of digging a hole next to your               house with a shovel in an effort to get up on your roof.  Much to the chagrin of                     certain powerful interests in Sacramento, increasing construction costs by 25% or              more does not make it easier to build affordable housing.  Governor Brown tried to           do something similar to SB 35 last year but scrapped the plan after union interests             insisted on inserting prevailing wage language because it would drive up costs to much to be economically viable.  Here at Landmark, we look at multi-family construction projects in California cities all of the time.  These days, they are barely clearing a 6% return on cost at stabilization.  Affordable projects are typically substantially lower and rely on the sale of tax credits and cheap bond financing to be viable.  That’s a 6% yield to take on construction and market risk.  Hardly a developer making a killing.  The counter argument to this is usually that land is overvalued and needs to fall.  However, apartment projects aren’t single family homes in Irvine where the land makes up nearly 50% of the home sale price. Land is typically around 15% of the cost of an average apartment project while construction costs are well over 50%.  If you increase construction costs substantially, it’s actually quite easy to get to the point where the project doesn’t work, even at a land cost of zero.  Any way that you look at it, increasing construction cost substantially is not a wise way to incentivize affordable housing development.  If the project can support the increased cost that’s great but a substantial number can not.

I really hope that I’m wrong and that bills like SB 35 lead to more development in areas of California where it is most needed.  However, the provisions in the bill that I mentioned above leave me with a very skeptical outlook.  In order to fix this problem, the state of California is going to need to take an honest look at the factors that are causing it in the first place and then take action that may piss off powerful political constituents.  We are no where near that point yet but, as a wise man once said, “the journey of a thousand miles begins with one step.”


Hoarders: Americans are holding a record amount of cash in checking accounts as the shadow cast by the Great Recession continues.

Can You Spare a Dollar: Americans are finding it hard to get a raise despite a tight employment market.  It seems as though companies have forgotten how to compensate workers fairly and workers have forgotten what they deserve.  Yet again the shadow cast by the Great Recession remains.

Wrong Impression: Markets rallied last week after the Fed gave what was widely perceived as a dovish testimony last week.  However, Bloomberg’s Tim Duy argues that dovishness was not the Fed’s intent at all.


Big Short Redux: Will the death of the shopping mall be the next big short for hedgies?


Barbarian at the Gates: Amid all of the hoopla around the Whole Foods acquisition, Amazon has quietly revealed a possible expansion into the residential real estate sales business as a potential new target of it’s disruptive business plan.

A Picture Worth 1,000 Words: Thanks to our friends at McKinley Capital Partners for this amazing chart that summarizes why California is so expensive and Houston is not.

Side Effect: Why a subdued housing recovery has resulted in lower volatility in the stock market.


So It Begins: Amazon anti-trust concerns are starting to emerge in Washington and on Wall Street.

Vomit Comet: Self driving taxis have two major problems: 1) people are slobs; 2) many people are drunks and tend to puke in moving vehicles after a night of boozing.  Both make it incredibly expensive to maintain a fleet when it comes to cleaning.

Can’t Make This Up: Nevada is in a weed state of emergency as newly-opened dispensaries run out of product.

Chart of the Day

Consumer credit update, courtesy of the always insightful WSJ Daily Shot:

Credit card debt, as a percentage of disposable income, has been far below the peak levels, barely rising over the last few years.

On the other hand, auto loans and student debt levels, as a percentage of disposable income, are at record highs.

With persistently low interest rates and a post-recession decline in mortgage balances, total interest obligations as a percentage of disposable income remain benign.

Source: Wall Street Journal


Goals: An unidentified person ripped one on an American Airlines flight, forcing an evacuation.  Update: the airline is now denying it.  However, if my teenage years taught me anything it’s that he who denied it, supplied it.

There’s a Metaphor In There: A truck carrying 7,500 lbs of slime eels overturned in Oregon and shut down a highway.  The pictures are epic.

Withdrawal Symptoms: A man who was stuck in an ATM machine escaped by slipping “please help” notes through the slot.

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

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Landmark Links June 18th – Fake Out

Landmark Links June 14 – Serious Modification Required


Lead Story… In today’s economy, disruption seems to happen at an ever quickening pace.  However, as noted here previously, the real estate industry has been highly resistant to change.  Whether talking about Realtors and their 6% commissions or the construction industry’s lack of technological innovation, real estate has proven to be among the more difficult industries to disrupt.  However, changes appear to be happening, albeit somewhat quietly on the commercial brokerage front.  The Financial Times ran an article a couple of weeks ago about the changing role of intermediaries in the London commercial property markets that could have just as easily been about the US.  From the Financial Times (emphasis mine):

Since at least the mid-1800s, London-based commercial estate agents have sat at the centre of most UK property and land deals.

But many of the largest agents are now having to adapt their business models for fear they could fall victim to a technology-enabled removal of the middleman, a trend that has already reshaped consumer industries such as retail.

On the one hand, there are shared workspace groups such as New York-based WeWork, which last week unveiled plans for its largest location globally, with a deal to lease 280,000 square feet on London’s South Bank. Using apps to market flexible offices, they have cut agents out of smaller leasing deals. On the other hand, multibillion-pound landlords are bringing functions in-house for which they once relied on agents.

The resulting pincer movement has prompted the largest UK and US agents to shift focus to long-term advisory income as they anticipate a reduction in one-off deal fees.

The question that needs to be answered here revolves around the value that agents or intermediaries provide.  Typically, that value has been to act as a gatekeeper or matchmaker of sorts to manage relationships between landlords and tenants or to make introductions between buyers and sellers of property.  However, technology is breaking down walls and re-casting the traditional gatekeeper/matchmaker role as little more than an additional tax to be paid by market participants.  This trend is even more troublesome for  the middleman or matchmaker in an environment where ever-lower investment yields mean that investors and developers are looking to reduce costs wherever possible.  For a long time, the broker’s edge was market information which clients came to rely on them for.  However, comps are now largely available online and market data can be obtained through multiple subscription services, meaning that much of the information that clients typically relied on brokers for can now be had at a substantially lower cost.  The result is that days of the broker as a matchmaker and data provider where large one-time fees are generated for making introductions are coming to an end.  Those that are successful going forward will be the ones able to synthesize the now widely-available data into a coherent investment thesis rather than simply regurgitate it to win listings. This may be unpopular with a good portion of my readership but those that don’t provide some level of transactional and market sophistication (be that entitlement, market, finance, development, etc) are going to have a very difficult time surviving in the coming years. More from the FT (emphasis mine):

Agents need to think about what they do that adds value. Armies of grads creating brochures doesn’t really add value Andrew Miles, Realla
“Two years ago, [the serviced office group] Regus were paying us to deal with them. Now, we are seeing business-to-business deals without intermediation.”

Chris Lewis, head of office agency and consulting at DeVono Cresa, says: “Five to 10 years ago, if a company had a requirement for 150 people for two years, they would speak to their real estate adviser. Now they can go to The Office Group, WeWork, Regus or an intermediary broker.”

Such deals would previously have earned agents a fee of about 10 per cent of one year’s rent, he says. In a parallel shift, services such as Appear Here, a digital market for pop-up shops, are taking over some small retail leasing deals.

When it comes to bigger transactions, the threat comes from large landlords — the likes of Blackstone and British Land — which are now handling functions once carried out by external agents, says Simon Prichard, senior partner at Gerald Eve, a London agency.

“To justify their fees, property managers need to show they’re doing something. They’ve taken away from agents what agents used to do,” he says. For example, he says, in-house leasing teams handle marketing campaigns, attend meetings with lawyers and agree terms with tenants, although agents are able to provide the all-important contacts.

Commercial property sales have not yet moved online, but digital offerings in the residential market are forcing established agents there to change their models, offering a clue to how the commercial market may change.

So, what are brokers doing to avoid the fate of becoming functionally obsolete?  They are moving into market segments that require a higher degree of sophistication or moving towards recurring sources and away from transactions that generate large, one time fees.  The big boys are already making the shift:

Agencies have been quietly shifting into areas such as property management, which entail long-term contracts rather than one-off fees. Over the past two years Savills, the London-listed agency, has acquired Collier & Madge, managers of commercial properties; Chainbow, which manages residential blocks; and Smith & Gore, which specialises in rural estate management.

CBRE, meanwhile, said in its annual results that it “continued to shift toward more recurring revenue in 2016”, increasing such fees to 42 per cent from 37 per cent of its total.

Nabarro, a law firm, says agents are “seeking to move up the food chain by providing complex financial advice, which has traditionally been the territory of investment banks”. CBRE and JLL, for example, have corporate finance teams.

This is something that is a regular discussion point around the Landmark office.  In our view, the primary value add that we (or any other financial intermediary) bring to the table is the ability to understand and structure complex real estate development projects.  Our value proposition is straight forward: identifying capital sources is something that can be replaced by technology to some extent but sophisticated advisory, analysis, detailed capital market knowledge and advice really can’t be.  Marrying real-time information about what specific capital providers are looking for with underwriting sophistication provides somewhat of a barrier to entry against commoditization via technology.

Despite the above, its not all doom and gloom for traditional commercial real estate brokerage. The end of the FT article hit on a point that is perhaps the best argument for the continuation of the old business model, IMO: CYA (translation: cover your ass):

Mr Lewis, however, says agents’ role in brokering deals will survive — if only because companies’ property directors will always want to share responsibility and take expert advice.

“For corporates and for landlords, if anyone ever says ‘we want to look at this deal and see how you got to this point’, it’s good to be able to point at a third party who has given you advice and support rather than take it all on yourself.”

In an increasingly litigious time, no one wants to have to answer to investors or a board without having another party to deflect blame to if things go sour.  Perhaps the future of the traditional brokerage model is that of the professional scapegoat.


Strung Out: Goldman Sachs thinks that the opioid crisis has gotten so bad that it is affecting the economy by lowering the participation rate.

On the Other Hand: It’s more than a bit of a stretch to assume that young men are actually giving up work to play video games all of the time.

Trouble Abroad: Prices are cooling in China, which should worry anyone watching the recovery in the U.S.

Dragging Out: Why the robot takeover of the economy is proceeding more slowly than expected.


The Secret’s Out: Two new exchange traded funds have been launched specifically to bet on the decline of the American mall.  Just my opinion but the bearish sentiment here is getting a bit crowded.

Good News for Office: Working from home was supposed to be the “next big thing” in employment but the permanent telecommuter is going extinct. thanks to more team based work environments and employees taking advantage of employers who offered the perk.

Company Town: Facebook is building it’s own mixed-use village of 1,500 homes in Menlo Park to house it’s workers and combat the California housing crisis.


This is What Happens When You Don’t Build: California is home to 12% of the population of the United States yet accounts for a whopping 40% of available home equity.  Trust me, it’s not all due to the great climate.

From the Way-Back Machine: 10 year ago this week, S&P announced the first major downgrade of subprime mortgage-backed bonds.


What VC Bubble? A dog walking/pet sitting company has raised $105MM in venture capital over the past year. That’s $105MM to walk dogs and pick up shit.  Given that this is a revolutionary business plan with incredibly high barriers to entry, I’m sure that the returns will be amazing.  Now, if you don’t mind I’m going to go have a beer and ponder my life choices.

Get Rich Slow: This short article on the fractal nature of compound interest is much, much more interesting than you would think.

Damn: Amazon Prime is on pace to become more popular than cable TV.  Just another reason that Bezos is on pace to become the richest person on earth.

Ouch: Morgan Stanley came out this week and downgraded Snapchat, a company that they helped to bring public a short time ago after the stock has tanked post IPO.  This almost never happens.  Moral of the story: sell to Facebook if you have a technology that Zuckerberg can easily copy.  See Also: Snapchat spurned Mark Zuckerberg’s buyout offer back in 2013 so he destroyed them by transforming Instagram.

Chart of the Day



Gimme Cookie: Police found 314 grams of cocaine in a Cookie Monster doll because, Florida (h/t Henry Baskerville)

Missing Something? Health inspectors found a breast implant inside a bar utensil holder at a Texas strip club.

Knockout: A golf ball diver punched a gator to escape an attack because, Florida.

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

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Landmark Links June 14 – Serious Modification Required

Landmark Links July 11th – Sitting This One Out


Lead Story….  Landmark Links is back this week after a much needed break.  I spent the week before last at the Pacific Coast Builders Conference (PCBC) in San Diego and wanted to share a few observations.  PCBC is the premier residential home building and development conference on the west coast.  Attendance appeared to be good and the mood was generally upbeat.  That being said, I couldn’t help but notice a bit of a disconnect between developers/builders and capital providers.  In general the developers and builders were more upbeat and bullish while capital seemed to be a bit more cautious.

One of my favorite parts of the conference was the annual Capital Markets Survey put together by Steve LaTerra and Jeff Myers of Meyers Research, LLC.  In conducting the survey, they questioned multiple capital providers about their market outlook, targeted investment areas, deal structure, etc.  They present the findings in one of the PCBC Land and Capital sessions.  The presentation slide that I found most interesting was the question to investors about where we are in the cycle:


Source: Meyers Research, LLC

Clearly, a growing portion of capital providers believe that we are topping out.  In fact, it’s nearly equal to the percentage that believe we are still “on the rise.”  Here’s why I find this so interesting: typically in the so-called late innings of a real estate cycle, cash would be pouring in to ever-riskier sectors (mainly development, entitlement and higher risk construction plays) and development – measured in starts – would be booming.  This is usually the time when contrarian investors typically begin to either sell or take short positions against companies that they believe are over-exposed when the cycle inevitably turns (think investors who went short mortgage bonds in 2005 and 2006 or builders who sold their companies or just stopped buying new land).  Commercial real estate and multi-family have been on a tear and capital has been plentiful during the run-up.  However, residential for-sale development has not participated up to this point.  Investment terms are getting more difficult: co-invest amounts are higher, preferred returns are higher and investment horizons have been reduced.  The reality is that in this strange, long duration cycle, there really is no contrarian position to be taken at the moment.

IMO, there are two factors at play here:

  1. Residential land development and home building is getting lumped in with commercial.
  2. We are in different points of the cycle across different parts of the residential spectrum.

First off, it has not been a secret that commercial real estate (excluding retail) has been booming for several years.  Capital has been aggressive as rents have risen, vacancy has declined and cap rates have compressed.  It makes sense that investors in that space would start to feel as if it is late in the cycle.  However, residential land development and home building has not enjoyed anything close to the same availability of capital.  I’ve previously written about why the “too much money chasing too few deals” phenomenon that has been a feature of the commercial real estate capital markets for years hasn’t translated to residential.  Since commercial the commercial market is much larger, it makes sense that commercial cycle outlook would cast a shadow over residential.

If you live in a production market like California’s Inland Empire, you’d be forgiven for wondering how a cycle can be coming to an end if it’s just beginning.  Areas like the Inland Empire (and Sacramento, for that matter) have seen little development during this cycle relative to the past, especially at the entry level.  Development has just recently started to ramp up and sales are booming again.  However, if you are in an high end market, especially along the coasts, home prices have been rising for years but there is still a substantial deficit in the number of units being produced versus demand.

It’s entirely possible that we could be in the late innings of the cycle at the high end but have a ways to go in entry level markets.  What will be interesting is watching how capital responds.  If investors continue to pull back in the belief that we are in the late stages and don’t invest in land development, the supply deficit could continue to grow, exacerbating the home affordability problem further.  Either way, a very large portion of the for sale residential development spectrum has effectively sat out this cycle.  Investors have remained incredibly disciplined in not chasing returns.  The question is will they be able to maintain this disciple if the market continues to tighten while they are sitting on the sidelines.


No Problem? A lack of worry about the economy is worrisome unto itself according to Greg Ip of the Wall Street Journal:

If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.

In other words, it would look a lot like the present.

See Also: Four problems looming over the historic US expansion.

Whipsaw: The yield curve had been flattening since early this year but reversed course last week amid a worldwide government debt selloff.  See Also: Jeff Gundlach sees more pain for bond bulls as hedge funds make exit.

Pile Up: The car recession really is a thing, excluding SUVs and trucks.

Uneven: Arizona, Connecticut, Mississippi, Nevada and Wyoming still haven’t regained their levels of gross domestic product from before the financial crisis.

Contrarian Opinion: How Amazon’s growth could spur a capex boom rather than widely anticipated disinflation.

Time to Get Busy: The US fertility rate just hit a historic low which has some demographers concerned.


Into the Abyss: The 1031 exchange could be on the chopping block and Congress’s lack of progress on tax reform could mean that there won’t be any offsetting provisions to help soften the blow.

On the Bright Side: How the retail apocalypse can lead to a suburban renaissance.


Opening the Floodgates? Credit rating agencies are dropping tax liens and civil judgements from some consumers’ profiles if information isn’t complete.  At the same time, Fannie Mae and Freddie Mac are allowing borrowers to have higher levels of debt and still qualify for a home loan.  In other words, mortgage lending conditions are easing as the market continues to get more expensive.

Disconnect: Federal housing policy focused on boosting demand (tax breaks, access to credit, 30-year mortgage, etc) but largely ignoring supply issues has no chance of solving the new housing crisis.


Rise of the Machines: Why two thirds of jobs in Las Vegas could be automated by 2035.

Pokemon No: A year after Pokemon go took the country by storm (for a few weeks anyway), popular so-called augmented reality games are still rare.

Chart of the Day

And here you thought that the US was expensive….

Source: The Economist


All that Glitters: A naked Arizona man who was covered in gold pain was found wandering through a Walmart parking lot and arrested.  Shockingly, drugs were involved.  (h/t Darren Fancher)

Why Did the Chicken Cross the Road?  Probably to get away from this guy, who had to register as a sex offender after pleading guilty to sexually assaulting a live chicken in Oregon.  Trust me, if you look at the mug shot, this will all make sense.

Meanwhile, In Florida: A Jacksonville man sat on a loaded gun on the drivers side of his car and shot himself in the junk.

Video of the Day: Chaos in Moscow as people flee flying porta potties during a massive storm.  In Soviet Russia, porta potty poop on you.

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

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Landmark Links July 11th – Sitting This One Out

Landmark Links July 4th – Happy Birthday America!


No regular blog today because, lets face it, you (should) have far better things to do on the 4th of July than read this blog.  So, get out, have fun and be safe – and be sure to check out a bunch of weirdos devour a disgusting amount of hot dogs in a few short minutes.   However, if you absolutely must spend time on the internet, enjoy this compilation of Ultimate Firework Fails.

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

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Landmark Links July 4th – Happy Birthday America!

Landmark Links June 30th – Atonement


Lead Story… I’ve been at PCBC in San Diego this week so my time to write has been somewhat limited. However, I wanted to take a few minutes to highlight a newly-discovered subscription resource that has been incredibly valuable for writing this blog.

First off, I have a confession to make: I’ve been mooching off of the Wall Street Journal for for a while.  For years, the way around the Journal’s porous paywall was one of the worst kept secrets in journalism.  As originally conceived the paywall was a way to ensure that only actual subscribers had access to articles but there was a fatal flaw to that business plan: Google Search results.  An article that sits behind a paywall gets pushed further down in Google Search which is one of the main generators of web traffic, resulting in less page clicks and lower rates with advertisers.  The WSJ didn’t want to deal with this so they came up with a way of splitting the baby: if someone Googled the article title or URL, they could bypass the paywall and get access to articles.  This means that cheap, lazy people (me) could take advantage of the system and get access without paying.   Earlier this year, the Journal acknowledged that they had made it way too easy for people to get content for free via Google so they changed it.

I finally subscribed to the Journal earlier this year and wish that I did sooner.  Not only is the content excellent but it also gives you access to email newsletter services only available to subscribers.  I’ve become a particularly big fan of The Daily Shot, their morning email that illustrates major financial stories of the day in 30+ charts.  It’s now my first read of the morning and also has become a go-to resource for blogging.  In closing, if there is a newspaper or site that you enjoy reading, a subscription is a great investment.  Not only are you supporting good journalism but there are also side benefits like email newsletters that you wouldn’t otherwise discover.  If you are interested in financial journalism, there is no better place to start than the Wall Street Journal.  I’ll get off of my soapbox now.


All is Well: Fed Chair Janet Yellen said that the banking system is much stronger due to Fed supervision and higher capital levels and another financial crisis is unlikely “in our lifetime.”  While it is certainly stronger now than before the crash this has some strange echoes of her predecessor Ben Bernanke saying that problems in the mortgage market were “contained.”

Trashed: What happens if Illinois’ bond rating gets cut to junk status?

Bouncing Along the Bottom: Weekly initial unemployment claims increased last week but are still extremely low by historical standards.


Shocking: Mall vacancy increased in the second quarter.


Excluded: Why California’s housing element law is a 50-year farce.

Miscalculation: There is a very strong case to be made that housing affordability metrics should take transportation costs into account.

Long Way Down: There were two foreclosures this past weekend on units in One57 along Manhattan’s so-called Billionaires Row on loans of $35.3MM and $20.9MM respectively.  Both were to shell companies.  This raises the question: who in their right mind would lend that type of money against a home (spoiler: foreign private banks, apparently)?  See Also: In the “this shit is stranger than fiction” category, a money-laundering Nigerian oil magnate was behind the shell company in default on the larger of the two foreclosures.  I guess he was a bit more successful (at least for a while) than the Nigerian princes trying to send me $500k via email.


Paradigm Shift: Fixing busted iPhone screens is the new mowing neighbors’ lawns for enterprising high school kids.

Backstory: Here is the full story behind why Amazon acquired Whole Foods (hint: it was about more than just groceries).

Special Delivery: How the opioid epidemic has turned unsuspecting mailmen into drug dealers.

Chart of the Day

New home sales came in slightly above expectations amid persistently low inventories.

To put the inventory trend into perspective, the chart below shows the number of new homes for sale per 10,000 non-institutionalized civilians in the US. While we are off the lows, the supply is still meager by historical standards (going back to the 1960s).

The median new home price in the United States hit a record high of $346k.

Part of the reason for the jump in the chart above is the dip in the number of “lower-end” homes sold.

At the same time, sales of new luxury homes ($750k and above) rose to the highest level in a decade.

Source: The Daily Shot


Hit Me With Your Best Shot: A woman killed her boyfriend by shooting at a book he was holding over his chest.  They thought that the book would stop the bullet and were looking for viral youtube fame.  This has Darwin Award written all over it.

I Hate it When That Happens: An elderly flight passenger from Shanghai threw coins into engine for ‘luck’, which delayed take-off for hours.

Wasn’t this a Steven Seagal Movie? Venezuelan cop steals a police helicopter and drops grenades on country’s supreme court.

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

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Landmark Links June 30th – Atonement

Landmark Links June 27th – Out of Your Element


Lead Story…. It seems like everything in the real estate development industry is moving slowly of late.  Projects that would have taken a couple of months to close back in 2013-2014 now tend to linger for 4-6 months for one reason or another.  I’m of the opinion that there isn’t any one culprit but rather a collection of factors that add up to some big timing headaches.  City planning departments are understaffed, there is a massive labor shortage and it seemingly takes an act of Congress to get a bank to issue a term sheet on loans where they have indicated a strong interest.  Either way, extended delays seem to have become the norm and it’s making deals more difficult to get done.

Today I want to focus on an aspect of development that is causing timing headaches and is often a substantial impediment to a successful transaction: the different cultures of commercial real estate sellers and residential developers when it comes to due diligence.  It’s something that I had never really given much thought to until a client who is an infill developer brought it recently.  However, it’s something that we are seeing more of lately..

As most of you are aware, there is a lot of re-development going on in urban regions of the US where underutilized sites are re-developed from commercial to residential or mixed use.  As such, these transactions often involve a commercial owner/user or landlord selling to a residential developer who will take the site through the re-entitlement process.  Although no transaction is easy, commercial deals tend to have a fairly straight forward DD process: the buyer obtains copies of in-place leases, gets a property condition analysis, seismic report, Phase I Environmental and title report.  Attorney’s put together lease abstracts and estoppels.  The lender providing the acquisition loan has an appraisal done.  There’s a lot to get done but it’s fairly well defined process and most of the timing issues are within the control of the buyer.

Residential entitlement and re-development plays are pretty much the opposite in that they are anything but straight forward.  A residential developer needs to do all of the same DD that a commercial real estate investor does in addition to a whole lot more including: a market study, entitlement memo, planning department meetings, site plan draft, city council member meetings (if possible), engaging an entitlement consultant, etc.  The list goes on and on and many of these items are not completely within the developer’s control (city meetings, for example).  The environmental standards for residential are also higher (for obvious reasons) which means that additional testing is often required, especially if there has been any type of industrial use.

Everything is fluid in an entitlement deal.  The developer typically has a high-level concept of what the development will look like but specifics don’t get nailed down until later in the process.  Still, they have to court potential investors with a business plan that is still subject to change, based upon due diligence findings that ultimately won’t be fully known until the 11th hour.  It is often a sprint to the finish line in a somewhat chaotic fashion.  Entitlement projects are fun to work on but definitely not for the faint of heart.

The due diligence period for commercial deals is fairly straight forward and waiving DD is typically not to traumatic of an experience as unchecked items often get re-classified as conditions to close.  The culture around commercial transactions is usually for non-refundable dollars to be released fairly quickly since the buyer has a pretty good idea of what they are buying upfront.  Sellers and their brokers know this and it’s what they have come to expect.  On the other hand, feasibility dates for residential developers are something of a formality as they almost always get extended.  The inside joke among many residential developers is that a feasibility date is little more than the date when you ask for your first extension.  It’s almost expected that DD feasibility will get extended on an entitlement play.  No one particularly likes asking for or granting extensions but residential buyers, sellers and brokers recognize it as “business as usual.”

As you can imagine, this is creating a ton of friction as infill re-entitlement opportunities continue to become a larger part of the market.  Commercial buildings are typically sold by commercial brokers who have limited experience in residential entitlement and therefore expect a normal feasibility period where the buyer will go non-refundable at the conclusion rather than a request for an extension.  At the same time, residential developers have become accustomed to offering an aggressive feasibility period – they know that they won’t win the deal otherwise – and then asking for an extension as they would on a typical residential project.  The end result is a ton of frustration, conflict and dropped escrows.

This probably goes without saying but it really doesn’t have to be this way.  First off, if commercial sellers want to realize the additional value driven by selling their property to a developer who will entitle it for a higher and better use then they need to accept the down side as well – more moving pieces requiring more feasibility time.  Second, the expectations have to be set better upfront – feasibility for entitlement plays takes longer.  Period.  However, sellers want to have their cake and eat it too and buyers understand that they have to play the game with regards to over promising on timing and then hope that they are able to eek out a feasibility extension without having the deal fall out of escrow.  As much as I wish that it weren’t the case, I don’t see it changing soon.  Just chalk it up as another impediment to getting deals done in a challenging environment.


Taking Over: The latest report from the Census Bureau shows that Millennials have taken over in the US when it comes to demographics.

Delusional: Investors still think that they can make average annual returns of 8.6% per year investing in bonds and dividend-yielding stocks despite mountains of evidence to the contrary.

Too Far? Economic studies on Seattle’s 2016 minimum wage hike are starting to pop up.  The jury is still out but the results don’t look particularly good thus far for low wage workers.

Who’s In? An interactive history of US labor force participation.

Size Matters: Low gas prices and cheap financing have Americas back in love with  SUVs and pickups that many wrote off a few short years ago.


Transformation: How Tampa, Florida turned a dead zone into a vibrant downtown.  See Also: Reno is starting to look more like Silicon Valley.

Under the Radar: Elimination of interest deductability could wreak havoc on the real estate industry.


Priced Out: There is an increasing list of cities in the US where land prices and regulation have made it too expensive to build apartments.  See Also: Why can’t they build more homes where the jobs are?

The Verdict is In: California’s zoning and entitlement rules are a disaster for affordability.

San Francisco’s metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.


Caveat Emptor: Initial coin offerings are a thing and I don’t see how they could possibly be a good thing:

Since the beginning of the year, 65 projects have raised $522 million in these offerings, according to Smith & Crown, a research firm focused on the new industry.

It is a frothy, sprawling and completely unregulated way of funding start-ups, leaving even veteran technology watchers scratching their heads.

“It’s kind of like when you are a little kid and you know you are getting away with something,” said Chris Burniske, an industry analyst at ARK Invest. “It’s not going to last forever, but it’s fun in the interim. The space is giddy right now.”

Last month, a small team of computer engineers in Lithuania raised $14 million in 45 minutes by selling a coin, known as Mysterium, that is intended to give access to an encrypted online data service that is still being built.

The next day, a group of coders in the Bay Area pulled in $35 million in under 30 seconds of online fund-raising. The coders were offering Basic Attention Tokens, which will one day work on a new kind of ad-free web browser.

Then this week, a team in Switzerland raised around $100 million for a coin that will be used on an online chat program that has not yet been released, known as Status.

This will end in tears.

Wrecking Ball: News of Amazon moving into a market segment has resulted in $69 billion of lost market cap for competitors.

Culture Shock: Walmart acquired in an effort to compete with Amazon.  Then it banned office drinking.  This went over poorly.   If there is a better illustration of the difference between cultures in the old and new economy, I have yet to find it.

Unintended Consequences: Canada’s legalization of pot has resulted in a marijuana shortage.

Chart of the Day

Amazon now has a nearly 1% market share of ALL warehouse space in the US.  


Hot For Teacher: A teacher at a Christian pre-school in California was fired once it was discovered that she was working as a porn star at the same time.  All that I can say is that those parent teacher meetings must have been awkward when dads recognized her.

Seems Reasonable: Teen accused of pulling gun on Jack in the Box employees over missing chicken nugget.

FAIL: A fake cop pulled over a real cop and ended up behind bars because, Florida.

Please. Make. It. Stop.: Millennial men are bolstering the plastic surgery industry.

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

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Landmark Links June 27th – Out of Your Element