Landmark Links May 6th -Exodus?

Rush to the Exit

Lead Story… We’ve been talking a lot about the Bay Area market over the past few weeks and there are a few signs that some of the most egregiously expensive ones like San Francisco are nearing a breaking point where even well-paid employees can’t afford to live there anymore and may begin to leave.  A survey by the Bay Area Council published earlier this week found that 34% of Bay Area residents are considering leaving due to high housing costs and traffic.  I know that I’m starting to sound a bit like a broken record but….

“We can whine about this, or we can win by solving our traffic and housing problems,” Carl Guardino, president of the Silicon Valley Leadership Group, told The Mercury News. “The last time the Bay Area had seemingly solved its traffic problems was the worldwide recession of 2008. A recession is not how we want to solve our traffic and housing problems.”

I think it goes without saying that relying on massive global recessions to correct your cost of living and traffic issues is far from a viable long term solution.  For years now, service workers, educators, policemen, firemen, etc have been priced out of these and similar markets.  It should not come as a surprise that Bay Area school districts are facing a teacher retention crisis along with their housing crisis.  Teachers haven’t been able to purchase homes in the area for years.  Now they can’t afford to rent either.  Their salaries aren’t adequate to justify a long commute.  Cities have been aggressively increasing teacher pay but they can’t keep up with cost of living increases:

For a teacher earning $73,000 — the average teacher salary in the nine-county Bay Area — a rent payment of $1,800 would eat up 30 percent of monthly income. And just finding a rental at that price would be very difficult in this economy. The average monthly price for studio apartments in the Bay Area is $2,137, according to RealFacts, and two-bedroom, two-bath apartments are going for $2,850 — and for much more in hot markets.

“Every year we have a problem. It’s always a challenge to make sure that the schools are staffed,” said Jody London, an Oakland Unified school board trustee. “But with the rapidly rising housing market, the fact is it’s crazy right now. And it’s getting harder for teachers to stay in Oakland.”

And that’s in Oakland, which, while expensive isn’t close to Silicon Valley or San Francisco.  So how do you fix things?  Beyond building more housing  (which many younger residents are now in favor of much to the dismay of aging hippy NIMBYs), one idea is dramatically build out infrastructure to the outlying suburbs in order to fix the commuting issue and add more units where it is more affordable.    The BART is already being extended but this would require something far larger (and more efficient for that matter) in order to work.  From the Bay Area Council survey mentioned above:

Rather than building more housing in the Bay Area, 60 percent of residents say it should be built outside the region, with 84 percent saying they support stronger transportation networks between the Bay Area, Sacramento and other areas in the Central Valley to take pressure off regional housing supply.

“This is an understandable reaction to decades of failing to keep pace even minimally with the Bay Area’s housing needs and the transportation to support it,” said Jim Wunderman, President and CEO of the Bay Area Council. “There’s now an entrenched misperception that our region doesn’t have the capacity to add the housing we need. What’s unfortunate is that pushing housing outside the region still doesn’t solve the problem of supply and affordability in the Bay Area. It simply means that fewer working families and workers in lower-income jobs can afford to live here. It hurts the diversity of our region and our economy. It also means workers are commuting longer and longer distances in their cars, which pushes up damaging carbon emissions.”

The issue is that it would cost a fortune, take forever to build and would likely lead to environmentalist/NIMBY lawsuits.  Think of this as a Marshall Plan to fix area housing…assuming that it can actually get done which is, IMHO a stretch.  What I can assure you won’t work is what the City of San Jose is currently doing.  Silicon Valley’s largest city (and the nations 10th largest) has a goal of building 35,000 new units between 2014 and 2023 with 60% of that total being affordable.  Sounds like a great objective until you get into the details.  Rather than incentivizing developers to build more units,  the city is charging them an increased impact fee of $17/sf on all housing built by those evil “for-profit” developers which will then go into subsidized housing, which is apparently what San Jose means when they say “affordable” since it gets incredibly difficult to build market rate housing that’s anything close to affordable when you start layering on fees. Naturally, developers are mostly staying away and the city built only 426 units of affordable housing last year, around 20% of it’s lofty goal of 2,100/year.

Back to my broken record: the only way to fix the affordability crisis is to build more units to satisfy the demand in the region.  That won’t happen so long as cities continue to hike fees to the moon and make the entitlement process increasingly difficult.

Economy

Leading Indicator: The Wall Street Journal has seemingly cracked the code to the health the tech sector: sales of ping pong tables from a store in San Jose.  Lets just say that the tables have turned.  I bet you can find a great ping pong table on Craigslist though.

How Low Can You Go: Earlier this year, the dollar was on a tear as the Federal Reserve indicated that they would raise rates at least 4 times in 2016.  That likely isn’t happening as a sluggish economy plus mounting financial disasters abroad have made the Fed increasingly dovish, sending the greenback into a tailspin and leaving it at a 15-month low.  Interest rates and mortgage rates have both stayed low now that sluggish growth appears here to stay for the foreseeable future.  If dollar depreciation continues, one must wonder if a resurgence by foreign investors is in the cards.

Commercial

Market Update: Our friends at JCR Capital see market fundamentals disconnecting from tepid investor appetite, creating opportunity.  As always, their quarterly market commentary is a must read.  It goes hand in hand with our comments about the land market versus the home sale market that we made previously.  In a related story, fundraising for private equity real estate funds is slowing.

Don’t Call it a Comeback: After starting the year off extremely poorly, CMBS loans for multi-family assets are making a comeback, albeit with tougher underwriting standards.

The Commercial Real Estate Market in Once Sentence: FOOP (Fear of over paying) is the new FOMO (fear of missing out).

Residential

Shots Fired: Bill Pulte, the founder and largest shareholder of Pulte Homes had some very pointed criticism of his hand-picked CEO Richard Dugas before the company’s annual shareholder meeting this week. Basically, Pulte accused Dugas, a former protege of being incompetent when it came to monetizing existing land positions, leading to poor company performance and demanded his resignation.  Analysts don’t anticipate Dugas leaving anytime soon.  In recent years, the company has focused on profitability over growth and was mostly sidelined from buying land positions in 2012-2013 when others were active.  Much of this stems from the Centex merger in 2009 according to the Wall Street Journal.  That transaction saddled the new company with a ton of land inventory that they had to write down effectively sidelining them from buying lots at a better basis when the market bottomed out.  They are still sitting on some of those lots today even while out buying more.

Sluggish: The previously-hot million-million-dollar-plus home sale market is slumping. See Also: Some of America’s fastest moving housing markets are slowing down.

Profiles

Hero: The next time that someone asks me why I like dogs more than people, I’m going to send them this:

A four-year-old white Labrador called Dayko has been hailed as a hero after rescuing seven people from the aftermath of the Ecuador earthquake – before dying from exhaustion.

RIP Dayko….and now I need a Kleenex.

Chart of the Day

I’m finding myself wishing that I was seeing more of this….

WTF

Finger Lickin’ Good: A woman in Florida (naturally) reported to local police that a chicken sandwich that she ordered “contained semen.”  Consider this a friendly reminder that fast food is disgusting.  Also, if you absolutely must eat at a KFC, don’t ask for extra mayonnaise.

Mistaken Identity: Villagers in Indonesia were disappointed to learn that an “angel” that fell from the skies is actually a sex toy.  The quote from this article is to good not to post:

The tale begins in Bangaii, days after an auspicious solar eclipse appeared over the region. A 21-year-old fisherman was walking the beach when he spotted a beautiful, lonely angel on the sand. Naturally, he took her appearance as a sign from heaven and he gently bundled her up and took her home.

There, he attired her in a blouse and skirt, which his parents changed daily as a sign of respect. Intrigued by reports (or maybe just really bored), local police visited the house to see the angel for themselves.

There, they made the less-than-holy discovery.

“It was a sex toy,” police chief Heru Pramukarno told a local newspaper.

What was unclear was whether that ruined or made the fisherman’s day.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links May 6th -Exodus?

Landmark Links April 29th – The Fix is (Maybe) In

pete-rose-as-envisoned-by-someone-with-no-eyes-and-no-soul

Lead Story…. Earlier this month we linked to a story about how the already-reeling CMBS market was about to take another hit via a “risk retention” provision due to take effect later this year that would take a big chunk out of issuer profitability.  The House Financial Services Committee voted on a bill dubbed the Preserving Access to CRE Capital Act which would lessen the potentially devastating impact on CMBS.  It passed with bi-partisan support:

The bill would exempt single-asset or single-borrower CMBS from the risk retention rule. It would also make it far easier for CMBS pooled together from different borrowers to get an exemption, for example by scrapping term requirements.

Pretty much every commercial real estate trade group in the US supports this bill for good reason according to Konrad Putzier from The Real Deal:

In February, turmoil in global bond markets and the prospect of risk retention rules combined to drive mid-sized CMBS lender Redwood out of business and led to broader concerns over the health of the CMBS market. “We have concluded that the challenging market conditions our CMBS conduit has faced over the past few quarters are worsening and are not likely to improve for the foreseeable future,” the firm’s CEO Marty Hughes said in a statement on Feb. 9.

Bond markets have since calmed. The spread between 10-year Treasury swaps and most types of CMBS bonds fell between February and April, according to Trepp.

But the onset of risk retention could drive spreads up again at the worst possible time. A staggering $99.47 billion in U.S. CMBS loans are set to mature in 2017 – up from $52.42 billion this year – according to a recent report by Morningstar Credit Ratings. 46.9 percent of those loans have a loan-to-value ratio of 80 percent or more (see chart above), and Morningstar reckons “successfully refinancing many of these loans will be very difficult without sharp improvement in cash flow through 2017.”

It still needs to be voted on by the full House but this is a step in the right direction.  If lawmakers decide that they want to crack down now to lessen future risk of this sort, it could lead to some very rough times for the industry with the mountain of maturities in 2017.  Stay tuned…. (h/t Ethan Schelin)

Economy

Casino is Open for Business:  For those of you who haven’t noticed, commodities from oil to metals have rallied hard over the past few weeks, leading in part to the Federal Reserve openly pondering whether or not to raise rates in June.  However, fundamentals haven’t really changed.  Commodity markets are still oversupplied and economic data from both China and the United State is still soft at best.  Rupert Hargreaves over at Value Walk explains what has changed: Chinese investors are pouring money into the commodity future casino betting on more infrastructure stimulus:

It has since been touted that the tidal wave of money hitting commodity futures could be from the legions of private investors in China who are looking for somewhere to park their excess cash or gamble with.

This new market phenomenon coming out of China is something Bank of America Merrill Lynch’s China equity strategy research team looked at last week in a report titled, Commodity futures, Game of Thrones?….

….As China’s economic outlook is still extremely uncertain and investors are reluctant to invest in any real businesses, they have been shifting money around to invest/speculate in various assets that they believe have a good chance of increasing in price. China’s A-share rally, corporate bond rally and most recently the spike in demand for properties is possibly all the evidence you need to support this view.  Add loose credit conditions, margin trading and a small market that’s relatively easy to manipulate into the mix and you get all the right conditions for an asset bubble.

The BAML report sited above used this chart to illustrate the point of just how much money is pouring into the Chinese commodity futures markets:

Commodity BoA chart one

 

 

 

 

 

 

 

 

 

The reason that I’m posting this is twofold: 1) Sometimes fund flows between asset classes or rank speculation is more important than fundamentals in the short or even medium term; and 2) This sort of thing could have a very real impact on the US economy if it persists and the Federal Reserve starts to see the impact of higher commodity prices in real inflation data.  In other words, don’t believe everything that you see.  See Also: In (not at all) coincidental news, commodity hedge funds are hot again.

Avoid at All Costs: In a sign of just how much tech companies are shunning the public markets, there could be more tech de-listings than IPOs in 2016.  See Also: Tech companies are raising money under “dirty” structured deals with toxic terms in order to maintain sky-high valuations and avoid going public as VC investment continues to wane.

Commercial

On the Ropes: Suburban malls are hot garbage right now as anchor tenant department stores are closing up in droves, often causing a reduction in foot traffic that kills off other smaller retailers and results in virtual retail ghost towns.  This may not be an issue for high end retail centers but I can’t imagine a worse landlord situation than a mall anchored by Sears, JC Penny, KMart, etc.

Residential

Last One In: I’m generally a huge fan of the OC Housing News site.  This has to be one of Larry Roberts’ (Irvine Renter) best posts ever:

Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude and behavior.

Undue Risk: Believe it or not, Turkey has the world’s best performing housing market right now despite social unrest and the myriad of problems associated with sharing a border with Syria.  Generally speaking, Turkish borrowers are lightly leveraged and have an extremely low rate of default.  However, the Turkish home building market is beginning to show some serious signs of distress with sales slowing, incentives increasing non-performing development loans on the rise.  Why, you ask?  For one, developers are getting way, way over their skis in terms of leverage.  From Bloomberg earlier this week:

The share of Turkey’s borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation’s banking association. An increasing portion of those debts is going bad, with the industry’s portion of non-performing loans nearly doubling in the past five years.

“Mortgages are not the problem,” said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. “Developer leverage is.”

That sounds bad but it gets much, much worse.  It seems as if Turkish developers are also taking currency risk on top of the risk inherent in development in an effort to prop the market up and have now exposed their balance sheets to the whims of the US Federal Reserve.  Turkish developers are taking on debt and then offering below-market financing to home buyers as a loss leader:

To keep sales brisk, builders are helping buyers defray their costs. For instance, at Istanbul’s $1.5 billion Maslak 1453 development, whose name recalls the Ottoman conquest of Constantinople, the developer is offering to secure below-market interest rates and accept a 10 percent deposit — below the 25 percent minimum required for a bank mortgage…..

The dangers of a weakening currency are exacerbated for builders, because they account for a disproportionate share of Turkey’s foreign-exchange borrowing, Narain said. That creates a risk when their income is mostly in lira, a currency whose value eroded 20 percent over the course of last year.

Developers made up a fifth of the companies gaining bankruptcy protection from creditors in the first three months of this year, the most of any industry, Uysal said, citing figures from sirketnews.com, which compiles the data.

You read that correctly, they are borrowing in foreign currency (mostly dollars) when their revenues are in lira.  This would be very profitable if the dollar fell in value vs. the lira. That hasn’t been the case lately as Federal Reserve moves and rhetoric have driven the dollar higher, hitting Turkish developers hard.  I have never been involved in a real estate deal in Turkey but I can assure you that this doesn’t end well.  The developers are essentially taking foreign exchange risk in order to offer below market financing to buyers to boost absorption.  Development is risky enough without trying to take a currency bet to boost sales.

Not What it Used to Be: The wealth effect from rising home prices has been cut in half:

But See: Why the wealth effect is bunk.

Profiles

A Whale of a Problem: A 60,000-pound grey whale washed up on the beach at Lower Trestles San Onofre State Beach last weekend (it died of natural causes), drawing tourists and locals to pay their respects and take pictures.  Now comes the hard part for the California State Park System: exactly how do you get rid of a 30-ton rotting whale carcass that’s attracting sharks and stinking up the beach?  According to one resident: “It’s like the worst garbage smell you can think of,” he said, his eyes watering. “I almost threw up. It’s like death.”  Exactly what you want on your beach as we head into summer.  Apparently, the beach isn’t wide enough to bury the whale and it can’t simply be pushed into the ocean because the currents will likely push it back on the beach again.  The solution that officials have come up with is to chop it into pieces and take it to a landfill. As disgusting as that sounds, there aren’t many options and the situation is only going to get worse the longer that the whale stays on the beach decomposing. On the bright side, at least officials appear to have learned from past failures.  Back in the late 1970s, Oregon state highway officials strapped dynamite onto a dead rotting whale and attempted to dispose of it demolition style. That ensuing disaster that crushed a car 1/4 mile away lives on in what I still consider to be the most un-intentionally funny news segment ever aired.

Chart of the Day

Submitted from Visual Capitalist

Visualizing Data: How the Media Blows Things Out of Proportion

WTF

Employee of the Month: Watch a disgruntled airport employee destroy a jet with a backhoe.  I’m guessing this happened in Russia  mainly because this seems like something that would happen in Russia.

That Wasn’t on the Menu: Customer found a deep fried chicken head, beak and all in their meal at a fast food restaurant in France.  Let this be a reminder to all of you that fast food is disgusting.

Well Paid: Meet the Minnesota auto body shot owner who (allegedly) compensated his employees with meth bonuses.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 29th – The Fix is (Maybe) In