Landmark Links June 9 – Headed in the Wrong Direction

Wrong Way1

Lead Story…  Regular readers of this blog have probably noticed that I’ve been geeking out over the past couple of weeks on articles about how inefficient the American construction industry has become .  I recently read an opinion piece by Bloomberg’s Noah Smith that looked for reasons why this is so (emphasis mine):

There is reason to suspect that high U.S. costs are part of a deeper problem. For example, construction seems to take a lot longer in the U.S. than in other countries. In China, a 30-story building can be completed in only 15 days. In Japan, giant sinkholes get fully repaired in one week. Even in the U.S. of a century ago, construction was pretty fast — the Empire State Building went up in 410 days.

Yet today, it takes the U.S. many years to spend the money that Congress allocates for infrastructure. New buildings seem to linger half-built for months or years, with construction workers often nowhere to be found. Subways can take decades. Even in the private sector, there are problems — productivity in the homebuilding sector has fallen in recent decades.

That suggests that U.S. costs are high due to general inefficiency — inefficient project management, an inefficient government contracting process, and inefficient regulation. It suggests that construction, like health care or asset management or education, is an area where Americans have simply ponied up more and more cash over the years while ignoring the fact that they were getting less and less for their money. To fix the problems choking U.S. construction, reformers are going to have to go through the system and rip out the inefficiencies root and branch.

First off, I have to confess that I had no idea that the Empire State Building was finished that quickly (I’m not going to comment on China because 15 days seems sketchy and China building standards are, shall we say loose).  By way of comparison, the Freedom Tower in lower Manhattan, which isn’t that much larger than the Empire State Building took a whopping 7 years to complete once ground was broken and technology today is far, far beyond where it was back in 1930.  Also, the quality of workmanship in the Empire State Building is quite impressive – as anyone who has been there can attest, it’s not as if they were cutting corners.  To take this a step further, it takes over a year (nearly the same amount of time to build a 100 + story tower in the 1930s) to build a 3 story custom house in my hometown of Newport Beach.  Side note: I only wish that statement was hyperbole.  If this isn’t indicative of the structural inefficiencies Smith mentioned in the passage above, I don’t know what is.  Smith concluded:

The U.S. construction sector is sick, and the disease must be diagnosed. Otherwise, infrastructure debates will continue to seesaw between those who are willing to spend too much and those who are willing to let the system crumble because it costs too much to repair.

I wholeheartedly agree.  We can’t solve a problem that we don’t even fully understand.  I suspect that the culprit here is incremental changes to the way that we develop and construct over time that have been championed by strong constituencies (corporations, labor unions, utilities, etc) and eventually became the norm.  The inefficiencies have now calcified to the point that it’s nearly impossible for incremental reforms to make a difference.  Constituencies are now so well-entrenched that pretty much any effort to truly diagnose the problem gets written off as being agenda driven.  That needs to stop but probably won’t any time soon.

Economy

Depressing: Drug related deaths are soaring in America, shedding light on both the opioid epidemic and the reason that so many people remain out of work in a multi-year recovery.

Trouble Ahead?  After bingeing on credit for a half decade, U.S. consumers may finally be feeling the beginning of the hangover.

The World’s $100 Trillion Dollar Question: Why is inflation still so low across the globe?  Hint: look at demographics in the world’s leading economies.  See Also: Adults in wealthy nations do not expect their children to earn more than they do.

Commercial

This Seems Obvious: New data shows that performance on construction loans is much more sensitive to the economic cycle than the performance for commercial real estate debt backed by income-producing properties.

It’s All About Who You Know: Banking relationships are even more important as the multifamily market tightens according to PNC.

Residential

Enough Already: Repeat after me if you have any knowledge of basic laws of supply and demand – luxury development is not to blame for San Francisco’s (or anywhere else’s) affordability crisis.

Profiles

Hipsters Gonna Hipster: Millennials are increasingly taking relatively low-paying old-timey jobs such as butchers, barbers and bartenders primarily because 1) They are now considered to be cool again; and 2) Their parents are still subsiding them.

Staying Power: After an epic, record setting winter, there is still 8 feet of snow left in parts of the Sierra Nevada Mountains in June.  Looks like Mammoth is going to stay open daily into August.

What A Mess: Post-bankruptcy Puerto Rico is a complete dumpster fire.

Chart of the Day

WTF

You Might Have a Problem If: The emergence of the ‘pornosexual‘: internet users who shun sex with real people.  And then we wonder why population growth sucks in first world countries.

Mother of the Year: A mother let a snake bite her daughter while posting a live feed to Facebook because, Florida.

Extra Toppings: An Alabama cop found a metal bolt in his Arby’s roast beef sandwich after taking a bite.  The sandwich was promptly taken to a lab for testing where it was determined that it was the healthiest part of the meal.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 9 – Headed in the Wrong Direction

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