Landmark Links November 8th – Size Matters

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Lead Story…. CIO Magazine posted a thought provoking piece last week about how first time private equity investment managers consistently outperformed established managers from 2000-2012.  Many of our investor clients are private equity funds and I worked for a commercial real estate pension fund advisor in a prior life.  Needless to say, this is a topic that fascinates me.  From CIO on how newer has been better when it comes to performance:

First-time private capital funds have consistently outperformed more experienced managers in recent vintage years, according to Preqin.

Newly launched private equity, private debt, real estate, infrastructure, and natural resources funds achieved a higher median net internal rate of return than established counterparts in every vintage year but one between 2000 and 2012, the report stated.

Private markets investors who took a chance on a brand new fund were rewarded with “strong (and in some cases, exceptional) fund performance, increased portfolio diversification, and experience with niche strategies,” said Leopold Peavy, Preqin’s head of investor products.

Overall, investors have grown more likely to invest with first-time managers, with more than half of surveyed investors saying they would at least consider committing to a brand new private capital fund, compared to 39% in 2013.

CIO didn’t give a reason for this outperformance but I have a theory as to why this happens, at least in the real estate world: Size matters.  A lot.  Most first-time funds are substantially smaller than established funds as they tend to attract less capital due mostly to a lack of investment track record.  Most managers aspire to grow their AUM because it means that they make more money.  Larger asset base = larger fees in dollar (if not percenage) terms.  However, while this growth in AUM might be a great deal for the manager, it isn’t such a great deal for their investors.  To illustrate why, lets look at the typcial life cycle of a fund:

  1. Fast Out of the Gate: In the early years, a typical real estate fund starts with a relatively small amount of capital.  Let’s say $200MM.  The young fund is running lean and can be extremely picky in choosing the deals that they enter into.  Why?  Because they don’t have a large amount of capital to place so they can do it on a highly selective basis.  This typically means off market deals and value-add opportunities that the big boys might consider too be a waste of time and difficult to scale.
  2. Asset Aggregation: By the time that our fund goes out to raise another investment vehicle they have done well.  Really well.  Their ability to be nimble and pick up smaller deals has led to outperformance of market benchmarks.  Large institutional investors take note and jump in, throwing money at the growing manager and allowing them to increase their AUM substantially.  The problem is that this comes at a price: once you take on the capital you have to place it.  This means no more small deals and less off market opportunities.  They just aren’t efficient enough to place a large amount of capital.  Our once-nimble manager now needs to target more capital intensive but often underperformign segments like class A office and large portfolios in order to get money out.  Their performance suffers accordingly and falls back to the pack.
  3. Maturity: The fund is now a steady market performer – maybe beating benchmarks by a little bit.  However, in a market where AUM begets more AUM, they are a focused fundraising machine and able to raise capital well into the billions.  Their old 2,000sf class B office space is now a full floor headquarters in a class A building and they are staffed up accordingly, running a high G&A budget.  The only way to pay for all of the extra expense is to keep the fundraising gravy train going.  However, the returns aren’t what they used to be and top performers from within begin to go out on their own, only to re-start the cycle again.

The irony here is that the very thing that a manager wants – a lot of AUM is often responsible for suppressing returns as they grow.  It’s nearly impossible to have it both ways.  You can either beat the market by being relatively small and nimble or you can become a huge AUM machine.  It’s rare to have both.  Size matters a lot when it comes to real estate investment funds and it often correlates closely with how long they’ve been in existence.  It’s a lot harder to steer the Titanic than a Boston Whaler.

Economy

All About the Benjamins: Friday’s jobs report was pretty good despite the headline number coming in a little below consensus.  The big story: wages are rising.  See Also: What we know about the 92 million Americans who aren’t in the labor force.

Counter Intuitive: Will the rising number of retirees cause more inflation rather than less?  It’s not as far-fetched an idea as you may think.  See Also: Rising bond yields are telling us that inflation is returning.

Reading the Tea Leaves: How big data mining operations are combing social media and review sites to create a more detailed picture of US earnings.

Commercial

A Different Type of Farm: How vertical farming technology could lead to higher demand for warehouse space and more efficient food production.

Residential

Easier Said Than Done: The McKinsey Global Institute thinks that they can “fix” housing in CA by targeting vacant land tracts in urban infill areas for high density development. Conor Dougherty and Karl Russell of the NY Times lay out why this is largely doomed to fail (and in some cases already has).

Rise of the Machines: This homebuilding robot being developed in Australia could lower construction costs substantially….but could eliminate some construction jobs.

Off the Grid: Tesla’s new solar roof tiles and battery packs could completely alter the way that America generates and uses home electricity.

Getting Out of Dodge: Tech workers and startups are getting out of Silicon Valley and moving to new markets with a much lower cost of living.  This isn’t going to have any impact on the Apples and Googles of the world but the next generation of small startups could come from much more diverse locations.

Profiles

Tear Jerker: Meet the Cubs fan who drove 600 miles to sit in a cemetery and listen to the Cubs win the World Series with his father at his grave, keeping a promise he made decades ago.

Skimmed: Great profile from Bloomberg on how The Skimm (the first thing that I read most mornings) became a must-read for Millennials.

Nip and Tuck: More Americans 65 and older are getting plastic surgery than ever before….and not only in Newport Beach.

Charts of the Day

WTF

Innuendo: I found something that both Hillary and Trump voters can agree on – Anti-Prop 60 (for those not from CA, that’s the one where they are trying to make condoms mandatory in pornos) ads are the best political ads ever.

Squirrels Gone Wild: A squirrel went on a rampage in a retirement community resulting in a resident calling 911. Once again, because Florida.

Seems Reasonable: A drunk Russian man murdered and dismembered a friend for insulting his accordian skills because, Russia.

A Little Wired: A man was caught driving through a family neighborhood with wires attached to his genitals because, Florida.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 8th – Size Matters

Landmark Links November 1st – Musical Chairs

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Lead Story…. I’ve spent quite a bit of space on this blog talking about segments of the real estate market that have been struggling of late.  From high end apartments and luxury condos in NY, SF and Miami to dying shopping malls in middle America, to struggling suburban office buildings, there’s been plenty to go around.  Today, I’m going to focus on a struggling segment that we haven’t paid much attention to: super high-end retail.  It seems that landlords at the extreme high end of the retail spectrum have been pushing rents like crazy lately, and now they are paying the price as even cream-of-the-crop retail tenants can’t afford it anymore.  Bloomberg ran a story that focused primarily on NY’s iconic 5th Avenue, home of the world’s most expensive retail rents.  From Bloomberg’s Sarah Mulholland:

Landlords on Manhattan’s Fifth Avenue are sitting on a record amount of open space as retailers balk at committing to expensive new leases in one of the world’s most prestigious shopping districts.

The availability rate on the famed strip, home to Saks Fifth Avenue and Tiffany & Co.’s flagship store, jumped to 15.9 percent in the third quarter, up from about 10 percent a year earlier, according to Cushman & Wakefield Inc. The rate has climbed steadily this year, surpassing the prior peak of 11.3 percent, set in the fourth quarter of 2014.

The rise of empty storefronts isn’t limited to Fifth Avenue. It’s part of a Manhattan-wide space glut as retailers — buffeted by e-commerce, tepid demand for luxury goods and a strong dollar that’s eroded tourist spending — push back against rents that have soared to records. Leasing costs have increased in tandem with property values in the past five years, outpacing gains in merchandise sales and making it impossible for retailers to run profitable stores at many locations, according to Richard Hodos, a vice chairman at brokerage CBRE Group Inc.

If you’ve read up to this point, the solution seems simple: lower rents and occupancy will rise again.  Only it’s not so simple in a world where properties trade hands relatively frequently and every buyer needs to assume that they can push rents further than the last owner in order to make the numbers work at an ever-higher basis.  This is not an issue that is in any way unique to 5th Avenue, or retail space for that matter.  It happens in commercial real estate transactions everywhere in an upward-trending market.  However,retail in particular, especially the shopping mall space is proving to be a very difficult business as eCommerce continues to gain share and department store anchors continue to go dark putting many landlords underwater. The aspect of this story that is incredibly staggering is the astronomical rental numbers. Again, from Bloomberg’s Sarah Mulholland (emphasis mine):

On the stretch of Fifth Avenue from 49th to 60th streets, which commands the world’s highest rents, landlords are asking an average of $3,213 a square foot, up from $2,075 a square foot in 2011, Cushman data show. In the tourist-heavy Times Square area, rents stand at $2,104 a square foot after tripling over a four-year period.
The brokerage’s retail availability rate takes into account vacancies as well as stores occupied by merchants that plan to leave when their leases expire. Retailers that signed leases at high prices in the past several years and are seeking a tenant to sublease their space are also included, according to Steve Soutendijk, an executive director at Cushman.
“Tenants that signed at the absolute top of the market are looking to mitigate their exposure,” he said.

At this point, you are probably assuming that the rents referenced above are a typo.  I can assure you that they are very real.  And just how did they rise so quickly? Also, how much are they overvalued? Mulholland continues (emphasis mine):

Property trades are being based on achieving ever-higher rents, and nobody ever really looks at what retailers can afford to pay,” Hodos said. “In some cases, rents need to come down 30 percent or more for rents to be at levels where retailers are able to make sense of them again.”

It gets even worse if the project is levered since signing a lease below a certain amount could lead to negative cash flow or put the loan in default if debt service coverage is inadequate.  This is a great illustration of one of the worst aspects of real estate investment: garbage in, garbage out underwriting.  You can make an investment model hit a targeted valuation if you put enough inflation into a model.  However, in the real world tenants actually have to be willing to pay and those assumptions don’t work nearly as well as they did in the model. The result is that you end up with vacancy when no tenants are willing to pay above-market rent.  If the assumptions in the proforma are garbage, then the proforma will be garbage as well.  It doesn’t matter how good your analysis tools are if you don’t use them correctly.

There’s an old saying about 5th Avenue being a safe haven real estate investment where you can’t lose money.  However, that simply isn’t true if you overpay by making such aggressive leasing assumptions that you can’t fill vacant spaces.  Trust me, you can lose plenty of money that way, especially when your entire business plan is predicated upon getting a tenant to pay you thousands of dollars a square foot.

Economy

Long in the Tooth? Yes, the current expansion cycle has been quite long but don’t assume that the next president will face a recession.

Shifting Playing Field: Workers with specialized skills, deep expertise or in-demand experience will be the big winners in the gig economy.  Everyone else?  Not so much.  See Also: While services sector booms, productivity gains remain elusive.

Residential

Choppy: US pending home sales rebounded in September after a disappointing August but inventory stayed tight.

Profiles

It Was the Best of Times. It Was the Worst of Times: Twitter as an app is absolutely indispensable.  Twitter as a business is absolute sh&t. See Also: How Instagram and Snapchat led to Twitter killing Vine.

Bet on It: Why Microsoft and Google could become the bookmakers of the future.

Seems Reasonable: A divorcing couple went to court to argue over who gets the Cubs tickets. See Also: How a pirated television station turned the Central American nation of Belize into Cubs fans.

Chart of the Day

I live in an area with extremely high rents but this is unreal

WTF

Busted: Roses are red, someone got laid, parrot outs husband for cheating with maid.

Desperate: Lonely men are increasingly turning to digital assistants like Siri for love and ‘sexually explicit’ chat.

But First, Let Me Take a Selfie: Drunk driving Texas A&M student takes naked selfie, runs into police car.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 1st – Musical Chairs

Landmark Links October 25th – When Will The Empire Strike Back?

darth-vader

Retraction: Before we get to today’s post, Leonardo DiCaprio’s rep announced that he doesn’t support the anti-density initiative that I spoke about on Friday, despite his name being all over it’s literature.  Maybe he is a regular Landmark Links reader and didn’t like getting called out 😉

Lead Story…. Since I began writing this blog last year, one of my main areas of focus has been how the historical relationship between primary and secondary markets has broken down in this cycle, especially in CA.  In the past, the inland production markets would heat up when prices rose along the coast.  This lead to a virtuous cycle where housing starts beget jobs which beget more employment, wage growth and ultimately more household creation and home buyers.  This cycle has been different for several reasons:

  1. Difficulty of inland builders to develop affordable homes profitably due to low FHA caps and high impact fees
  2. Growth in preference for urban living among wealthier adults
  3. Declining home ownership percentage impacts the marginal entry level buyer more than the affluent one and historically, the marginal buyer is more likely to look inland for housing.

It’s become fairly common in our industry to look to increases in FHA limits as the salvation of the secondary markets.  However, for that to occur in any substantial magnitude (all indicators point to a small increase next year),  Congress would have to revise the statutory formulas that they set back in 2008 to govern FHA limits.  As my colleague Larry Roberts wrote in OC Housing News, that is far easier said than done:

Through the lobbying efforts by the National Association of Homebuilders or the National Association of Realtors, Congress knows exactly how the conforming loan limit impacts home sales and new home development.I recently spoke with Scott Meyer and Michelle Hamecs of the NAHB. They provided me their NAHB Issues Update that detailed the FHA loan limit issue (click here for that document). It isn’t ignorance to the problems the prevents Congress from raising the limit.

The conforming loan limit demonstrates the tug-of-war between two conflicting desires of policymakers.  On one side, advocates for the housing industry and advocates for expanded housing opportunities to all Americans want to push the loan limit higher. On the other side, the more fiscally conservative lawmakers want to lower the limit to restore the prior mandate of insuring loans only for lower- and middle-income Americans. Further, they want to reduce the potential liability for the US taxpayer, who would currently cover all the losses if the market crashes again.

If the conforming loan limit were reduced, it would decrease the potential liability for taxpayers and reduce the size of the GSE operations and make it easier to someday dismantle them; however, the last time the conforming limit was dropped, Irvine, CA witnessed an 84% decline in sales volume in the price range no longer financeable with GSE loans. Ouch!

There is no doubt that increasing FHA limits would help.  There is nothing particularly healthy about having a market that is 100% reliant on government-backed loans to function but unfortunately that’s the hand that we have been dealt.  Raising FHA limits attacks the problem from the bottom of the prospective home owner pool by allowing buyers at lower price points to purchase homes with much lower down payments than what’s available using a conventional mortgage.  Today, I want to look at a different scenario that could play out in the next few years.  It’s more from the upper end of the pool where coastal renters could find themselves once again looking inland if prices continue to rise.  Today, I’m going to focus on Orange County and the Inland Empire but the demographic dynamics that I’m going to focus on could apply to many affluent coastal regions and their less-affluent inland neighbors.

On the surface, things look great in Orange County.  Economic growth is strong as is employment and home prices are now above their prior peak.  Development is humming along and occupancy levels are extremely high in commercial and multi-family projects.  In addition, OC has diversified it’s economy quite a bit as finance and tech have taken a large role as the County has become less dependent on real estate.  However, as the OC Register detailed last week, Orange County has a growing demographics problem and I think that the Inland Empire just might be the prime beneficiary.  The problem isn’t that Orange County isn’t creating jobs.  It is and we actually have the lowest unemployment rate in Southern California.  It’s that the jobs being created often don’t come with wages that would allow someone to live here.  Combine that with relatively few new housing units being built and the cost of existing units rising quicker than inflation and you have a recipe for what economists predict will be a declining population of prime workforce age population (25-64 year olds) from 2010 – 2060.  From the OC Register (emphasis mine):

“They say demographics are destiny,” Wallace Walrod, the Orange County Business Council’s Chief Economist told the conference. “It is imperative that everyone in this room understand the consequences of pending demographic shifts.”

The national trend of aging baby boomers moving into retirement, he said, is “magnified and exacerbated” in Orange County, where the over-65 population is on track to nearly double by 2060 to “a staggering 26.2 percent.”

Unlike California as a whole, every age cohort other than seniors is shrinking in Orange County, where the median age has risen from 33 to 38 since 2000.

Most worrying, the prime working-age population – 25-to 64-year-olds – is expected to dip by 1 percent by 2060, even as overall population grows by 15 percent.

By contrast, working-age groups in Riverside and San Bernardino counties are on track to grow by 61 percent and 47 percent, respectively.

“We are losing not only our 25 to 34 year-old workforce – millennials – but also losing K-12 and the college-age cohort as well,” Walrod said.

The trend, he warned, “could devastate O.C.’s pool of workers, creating talent gaps as large swaths of the workforce retires, leaving open positions that will likely go unfilled.”

The Register went of to identify the the obvious culprit: housing.  I frequently hear friends, neighbors and co-workers and neighbors who live in Orange County complain that the area is being over-developed.  The stark reality of simple math shows that view couldn’t be more wrong.  Again, from The OC Register (emphasis mine):

A severe housing shortage has turned Orange County into one of the most expensive markets in the nation, with median home prices exceeding $650,000 and average monthly rents at about $1,900. Higher-density developments that could alleviate the shortfall are often opposed by current homeowners.

Rising values are “good news for current homeowners, but bad news for those looking to afford to relocate to O.C. or to buy a house and stay here, especially millennials,” Walrod said.

As a result, he added, “domestic outmigration has been accelerating.”

The report projects that “new job creation will significantly outpace projected new housing units over the next two and half decades, resulting in a housing shortfall that will grow from a current reading of 50,000-62,000 units to a staggering 100,000 units by 2040.

Many workers are being forced into neighboring counties to find more affordable housing, increasing their commute and complicating their work-life balance.”

……

According to the report, it takes an hourly wage of $32.15 to afford a two-bedroom apartment in Orange County, putting it out of reach for minimum-wage workers in the county’s fast-growing service sector, given the current California wage floor of $10 an hour.

The story goes into much more detail about a developing skill gap and low wage job boom.  However, I want to keep the focus on housing for this post.  Note the above projections about working age populations in Riverside and San Bernardino Counties (growth of 61% and 47% respectively from today until 2060).  Those are massive numbers that will create a strong demand for housing and not all of it will be entry level.  If you take the median income required to buy and rent a median-priced home in Orange County today, it is around $100k (assuming you can put down 20%) and $70k, respectively, so there are a lot of people with well-paying jobs that fall below that amount.  Given the fierce opposition to density in the OC, it is likely that those numbers will only increase.  Also, keep in mind that the averages above are for the entire county.  The most desirable areas with the best school districts can easily be double those amounts which is incredible when you consider that median income to afford an apartment in the neighboring IE is around $55k.  At some point, something has to give.  My guess is that it’s a move towards more relatively affordable housing markets, in this case the Inland Empire.

I want to make an important caveat about what I wrote above: I haven’t a clue as to when this change will actually take place and more affluent workers will start to look inland to buy or rent.  However, one thing that I’ve learned witnessing our current market is that things change incredibly quickly once they hit a critical mass.  Just a few short years ago we were subject to an endless barrage of “renting is superior to buying” articles in the mainstream and business press.  Just this week, Bloomberg ran a piece that argued that it’s almost always better to buy.  Such an article would have never seen the light of day in 2011.  Both types of articles are virtually assured to be wrong since they argue in absolutes. In reality it’s sometimes better to buy and sometimes better to rent but that level of nuance doesn’t lead to many page views.

My comment about how quickly things change goes for regional and local trends as well.  For example, 15 years ago, pretty much no one with a college education wanted to live anywhere near downtown LA.  Within the past 10 years that has changed rapidly and an area which was once in the grips of urban decay has become one of the most desirable locations for young, affluent home owners and renters in the US.  Some of the same conditions that created the LA gentrification/urban renewal boom have caused the Inland Empire to lag: delayed household formation by Millennials, preference for urbanization among high earners and a downward trend in the percentage of Americans who own a home.  However, I have serious doubts that these are permanent trends and there are other factors at play already that could begin to create more inland demand:

  1. Addition of urban elements and amenities to existing CBD and downtown regions.  This is already happening in downtown Riverside as more density and foodie oriented retail are on their way.  There are other urban areas out in the IE that could experience the same thing over time, downtown San Bernardino for example.  It’s probably difficult to imagine right now but that’s ok.  Downtown LA as it currently exists was didn’t seem feasible back in 2001 either and I doubt that many of us foresaw luxury condos and apartments going up next to Skid Row.
  2. Self driving cars could help to ease commute stress in markets without mass transit infrastructure.  The technology is advancing rapidly and the Inland Empire will arguably be the region that will benefit the most in the US.
  3. Bank lenders are starting to compete with the FHA for low down-payment loans to entry level buyers.  Bank of America has been so successful with their 3% down program that they are doubling it.  These lending programs are still tiny by comparison but it wasn’t long ago that they didn’t exist at all.
  4. Millennials are getting older.  Many of the oldest Millennials are now entering their mid to late 30s which are the prime household creation years.  Once people start families, studies show that they are more likely to favor the stability of owning over the mobility of renting and the family-friendly single family home over an apartment.

The Inland Empire is down but I wouldn’t count it out over the long term.  The current trends that have hurt the housing market there aren’t likely to last forever and the region is adjacent to too many incredibly expensive areas to not experience some spillover as even relatively high earning families eventually get priced out of the coastal regions. Conventional wisdom is that only an increase in the FHA loan limit can revitalize the IE housing market.  In the short term, that may very well be the case but a sustainable recovery just might come from higher earners moving into the region.

Economy

The Walking Dead: How bankrupt oil companies that are continuing to pump could keep a lid on oil prices.

Stay In: It’s getting more expensive to eat out even as grocery prices are falling.

Commercial

The Spigot: Pension funds have been steadily increasing commercial real estate allocations for the past few years and that isn’t likely to change in 2017 despite signs of a maturing market.  See Also: REITS have become a more attractive target for activist investors.

High Times: A San Diego based medical marijuana landlord just filed for an IPO.

Residential

Further Afield: High prices and low yields near the coast have investors looking for rental homes in cheaper locations through management and investment services like Home Union, Investability and Roofstock.  However, a lack of local knowledge can lead to out of area investors paying the dumb tax by thinking that they are getting a good deal when they aren’t.

Profiles

Pull the Lever: How smart phones and app developers create digital addiction by mimicking slot machines.

Paradise: The Cubs paved the way for the Dodgers to come to LA by hosting their spring training on Catalina Island. See Also: For the Cubs oldest fans, this year could be their last chance. And: There are people trying to get 6 figure ticket prices for a single seat at World Series games at Wrigley Field.

Chart of the Day

WTF

Hard at Work: Meet the TV weatherman who got bored with his job after 23 years and decided to become a porn star.

Not a Detail Person: Russian oligarch has giant hideous boat built at a German port on the Baltic Sea. Ship draws too much to get out of the straits at the entrance to the Baltic. Epic FAIL ensues.

Lawsuit of the Year Nominee: A woman is suing KFC for $20MM because she felt that her bucket of chicken wasn’t full enough.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 25th – When Will The Empire Strike Back?

Landmark Links October 4th – I Guarantee It

rex-celebrates-copy

Lead Story… When home owners take out a mortgages and can’t afford to put down 20% or more of the purchase price, the lender makes them get something called Private Mortgage Insurance or PMI which protects the lender in the event of borrower default in exchange for a monthly premium.  It’s a well established insurance product that has been widely used for years.  Traditionally, rental landlords have not had a comparable form of insurance to rely on should a tenant default.  Typically, a landlord requires that a prospective tenant make an annual income of greater than 40 times the monthly rent with a credit score of no lower than 700.  If a prospective tenant can’t meet that requirement, they must find a guarantor who earns 80 times the monthly rent in order to qualify.  As you can imagine, this is not easy in markets where rent is high and vacancy is tight, especially for someone who is recently entering the workforce and has neither a substantial credit or income history.  Enter a relatively new business plan – payment insurance for apartment hunters from a startup called TheGuarantors.  From the Wall Street Journal:

TheGuarantors, launched in New York in 2014, sells payment insurance to tenants, providing landlords with a guarantee they will be made whole if the tenant becomes delinquent.

The offering is a symptom of a pricey market in which rents have risen faster than incomes and landlords can be picky about the qualifications they demand. Rents have climbed about 20% nationwide over the past five years while incomes have only recently started to rise.

The insurance, similar to the private mortgage insurance many lenders require of borrowers who have small down payments, provides a new level of protection for developers putting up new buildings in pricey markets where the applicant pool might be thin.

It could be a boon to landlords in places like San Francisco and New York in particular because rent growth has far outstripped income gains in recent years. Cliff Finn,executive vice president of new development at Douglas Elliman in New York, said 10% to 30% of the tenants in buildings he is leasing are now insured through TheGuarantors.

The premiums work out to somewhere between 2 weeks and 1 month’s worth of pay a year depending on the degree of risk and the program allows for borrowers with as little income as 27 times monthly rent and as low as a 630 credit score.  The balance sheet capital that TheGuarantors uses is from Hanover Insurance Group, a $5 billion dollar insurance company based in Massachusetts.  Another company, called Insurent is the largest in the industry, having issued over 13,000 guarantors since 2008.  A few of thoughts on this:

  1. If widely adopted, this type of insurance is likely to result in higher rents since it increases demand by creating more eligible renters without increasing unit count.
  2. Even considering point 1 above and the increase cost of living for a renter through the insurance premium, I would tend to think it’s a net positive for the economy since it allows for more household creation at the margin.  In other words, the kid who is living in his or her mom’s basement is likely able to qualify for their own apartment sooner.  That being said, the slippery slope here is that landlords make their qualification criteria more difficult and start effectively forcing the product on those who don’t really need it.
  3. This could be highly lucrative for the insurer assuming that renters are underwritten correctly and they are selective about markets.  It’s also not clear if the insurer is able to sublet the unit in the event of default during the period that they are on the hook for the guarantee.  If they are, it would be much easier to mitigate risk, especially in a market with low vacancy.

Overall, this seems like a fascinating business plan and definitely something that we will be keeping a close eye on to see how it plays out through the economic cycle.

Economy

Dropping Like a Rock: Grocery prices are plunging at rates not seen since 2009.  Great news for consumers, not so much for stores and suppliers.

The Haunting: The ghost of the Lehman Brothers failure haunts troubled Deutsche Bank, however the some of the parallels are a bit misleading.

Commercial

Running on Full: Despite somewhat of a construction boom, America is running out of apartments as occupancy hits a near-record  96.5%.

Residential

Reversal: Banks are starting to hold onto loans again and growing loan profitability is the reason why.  Data that was published by the Urban Institute last week showed that portfolio loans or loans that portfolio loans, or loans that banks make to keep on their books grew to 34%, the highest level since 2002.

Rise of the Machines: New technologies like self driving cars, ride sharing apps and drones could be a catalyst for suburban growth.

Profiles

The Prodigy: Theo Epstein became a hero in Boston after he put together the blueprint for the Red Sox to win two World Series championships after 86 years of frustration.  He’s now the general manager of the Cubs and has the team poised to end a 107 year World Series drought.  If they pull it off, he’ll become a legend.

Assholes: Emirates Air is going to start charging families for the privilege of sitting together on a plane.

Chart of the Day

Banks are actually holding loans on their books again.

WTF

Slow News Day: The Washington Post actually published an article last week posing the question of whether or not dog Halloween costumes are sexist.  I give up.

Cultured Idiots: Unwitting attendees at the NY Symphony Orchestra gave a rousing standing ovation for a North Korean propaganda song that is an ode to dictator Kim Jong Un because they didn’t know any better.

When Nature Calls: A woman from Memphis came home one day to find her front door open.  She walked inside to find that, not had her house been robbed, but the two burglars were having sex on her couch.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 4th – I Guarantee It