Landmark Links August 19th – Ramparts!!!

Lightening_Caddyshack2

Lead Story…  In the all-time classic 1980 comedy Caddyshack, obnoxious condo developer Al Czervik, played by Rodney Dangerfield opines that:

“…golf courses and cemeteries are the biggest wastes of prime real estate.”

He was onto something.  It’s been well documented in the years since the Great Recession that golf courses are, by and large a terrible investment that almost never make money – often losing a lot instead.  In fact over 800 courses have closed over the past decade as a result of no longer being financially viable.  So, imagine my surprise when I saw a feature article in Bloomberg earlier this week about how shuttered golf course clubhouses have developed the strange behavior of spontaneously catching on fire:

The dark clouds rolled in over Phoenix’s Ahwatukee Lakes Golf Course in 2013, when its owner declared that the costs of keeping it open had outstripped what he was collecting in green fees.

Wilson Gee, a California businessman, shuttered the golf course, erected barbed-wire fences, and began looking for a buyer, telling reporters the land would never be a working golf course again. Homeowners, complaining he was turning the course into an eyesore in order to win approval to redevelop it into single-family homes, sued to reopen it. Gee shanked his first attempt to sell it in 2014, when one homebuilder walked away from a deal, but last year found a buyer in a Denver-based developer.

Then one night in February, the dark clouds turned to smoke, and a fire caved in the clubhouse roof.

It’s a local story, defined by conditions peculiar to Ahwatukee, a community of about 80,000 separated from downtown Phoenix by a collection of 2,500-foot peaks known as South Mountain. But the dynamics that bred the deadlock between the struggling golf course’s owner and its aggrieved neighbors are mirrored in communities across the country.

More than 800 golf courses have closed nationwide in the last decade, as operators grapple with declining interest in the sport and a glut of competition. Many of those shuttered courses were built on land proscribed from redevelopment by local zoning codes seeking to preserve open space—or, as with Ahwatukee, by deed restrictions intended to protect homeowners who had paid a premium to live near a golf course.

That leaves some golf course owners with the real estate equivalent of an unplayable lie: They can’t make money running the course, and they can’t recoup their investment by selling it.

“If you open a restaurant in a strip mall and you fail, you close shop and move on,” said Jay Karen, chief executive officer of the National Golf Course Owners Association. But for golf course owners, it’s much harder to pull the plug on a failing business; as courses fall into disuse, they become suburban zombies—not quite dead, yet far from alive.

“Nobody’s tracking what’s happening to the land,” Karen said.

Therein lies the problem: developers went on a golf course building spree back in the 1990s and early 2000s.  Back then, Tiger Woods was bursting onto the scene and golf was seen as a potentially lucrative investment as millions of Baby Boomers approached retirement which would undoubtedly be filled with more time spent on the links than ever.  When master planned communities were built, developers sold course-fronting homes for large premiums.  Fast forward to 2016 and the golf industry is dying a slow death.  Millennials, by and large have neither the time nor the money to play the game, causing a dramatic decline in club revenues and Nike has dropped out of the golf business as a whole as has Dicks Sporting Goods. In fact, participation is down a whopping 20% since 2003.  More from Bloomberg:

In April, fire ripped through the clubhouse at a shuttered western Kentucky golf course that had been the center of a lawsuit, burning through the afternoon until the roof collapsed over smoldering beams. On New Year’s Day, a former volunteer firefighter lit a small fire outside the vacant clubhouse of a closed 9-hole course outside Orlando, then returned three days later to spark a larger blaze, with the help of a can of paint thinner he had found there. And in September 2015, a fire reduced the 10,000-square-foot clubhouse at an abandoned golf course in Bakersfield, Calif., to only a few charred beams.

For John Rhoads, a homeowner in Sparks, Nev., a clubhouse fire at his local course, D’Andrea Golf Club, was both insult and injury. In 2012, its owner had asked members of the local homeowner association to pay an additional $28 a month for course upkeep, Rhoads said. The homeowners demurred, the course was shuttered, and the clubhouse became a magnet for vandals, who posted graffiti on its stucco walls and eventually burned it down. Now Rhoads worries that the owner is making an end run around the homeowner association to convert half of the course into new homes and a winery.

“This used to be one of the nicest golf courses in Reno-Sparks,” he said. Now? “Our property values are already down $25,000 a home.”

So what do you do with a shuttered golf course that has become blighted and attracts vandals and crime?  Developers would love to buy up courses and develop housing on them while dedicating a portion of the site for community agricultural use or park space as the sites are often prime develop-able parcels.  There’s just one problem: homeowners, especially those fronting the course want none of it being that they paid premiums for golf course frontage homes.  The last thing they want is a new neighbor in place of an old fairway.  This leads to an impasse between homeowners and course owners and almost no one is blinking.  Again from Bloomberg (emphasis is mine):

In the face of declining interest and competition driven by oversupply, course owners have gone searching for ways out. Some have donated golf course land to nature trusts and local parks, taking a tax break in return for preserving the open space. Others have inked deals with homebuilders—though those deals are often contingent on winning approval from homeowner associations or local governments.

“I’m hard-pressed to think of many cases where there isn’t a higher or better use than a golf course for the site,” said Jeff Woolson, managing director of the golf and resort group at CBRE Group. “The only clear exception would be Augusta, Ga.”—the hallowed, Bobby Jones-designed course that hosts the Masters tournament each year.

Whatever happens to the shuttered courses, two things are for certain:

  1. We aren’t going to see many golf courses get developed any time soon
  2. The biggest winners will be lawyers who handle the inevitable litigation between desperate course owners and irate homeowners

By the way, does that last quote from Jeff Woolson from CBRE sound a bit familiar?  While I can’t speak to cemeteries, it turns out that Rodney/Al was a visionary after all.

Economy

Rise of the Machines: How China’s factories are increasingly reliant on robots as their workforce shrinks.

Bursting Bubbles: Sorry, John Oliver but subprime auto loans, while likely predatory in some cases, are not the second coming of the U.S. mortgage crisis.

Commercial

They’re Baaaack: After a brief respite earlier this year, Apartment REITs are buying properties again which is a sign of health for the sector.

Residential

Blame Game: The City of Vancouver is blaming foreign buyers for the crazy run-up in it’s housing market and has even gone so far as to enact a 15% tax on foreign purchases in a effort to keep foreign buyers away.  However, a new report by Paul Ashworth of UK based research firm Capital Economics says that foreigners aren’t the primary issue and rather blames irresponsible lending.

Imagine That: Only 13% of households in San Francisco can afford to buy a median priced home.  Ironically, that’s actually substantially better than 9 years ago when only 8% could afford to purchase a house.

Profiles

People of Walmart: Walmart has a major crime problem and it’s driving police crazy.  This story has it all: shootings, stabbings, kidnappings and hostage situations.  However, my favorite episode is the one where police found a meth lab in a large drain pipe under a Walmart parking lot in upstate NY.

Hero: Meet the 102 year old woman who credits her longevity to drinking.

Pants on Fire: Ryan Lochte may be a great athlete but he is also a massive, massive douchebag.

Chart of the Day

WTF

Monkey Business: Video of the day twofer:

  1. Watch a monkey wearing a diaper get in a fight with a Walmart employee in a parking lot.
  2. Watch a baboon in a zoo goes berserk when a little girl taunts it and flings it’s poop at her face.

How to Avoid the Gulag: Shockingly, North Korea is the most efficient country at winning medals at the Rio Olympics.  Let that sink in.

Must Be the Pleats: Meet the Olympic pole vaulter who missed out on a medal because of his…..um pole.  He now claims it was a wardrobe malfunction.  Let me just go on the record to say that I would have handled this ENTIRELY differently had I been in his position.

Ohio = Florida of the Rust Belt: A man from Ohio was arrested for having sex with a red van on Tuesday on the side of a public road.  Sentences like this are what make The Smoking Gun the finest news site in the world: “The victim was parked at the time, cops say.”

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 19th – Ramparts!!!

Landmark Links July 19th – One Size Fits All?

one-size-fits-all-rubber-duck

Lead Story…. Nobel Laureate Robert Shiller wrote a piece in the NY Times this weekend titled: Why Land and Homes Actually Tend to Be Disappointing Investments that caught my eye.  In the article, Professor Shiller discusses both farmland and residential land and makes a case they are both subpar investments over time (highlights are mine):

Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.

According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.

To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times — or, on average, 3.2 percent a year — from 1929, the year official G.D.P. numbers began to be kept, to 2015. That’s a much higher growth rate than for real estate. But why?  For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.  

The supply response to increasing demand may help explain why real home prices nationwide fell 35 percent from 2006 to 2012 (and even more in some cities). Investment in residential structures in the United States was at near-record levels as a percentage of G.D.P. just before the price declines. Prices have been rebounding since then — and so has construction of new houses.

 

While the idea of supply and demand balancing out the housing market makes perfect sense from a textbook economic perspective, it quickly falls apart when you take into account the most local of all factors that has quite possibly the largest impact on both land and home prices: politics.  Essentially, there are two primary restrictions to developing more residential units.  The first is geographical.  This includes mountains, bodies of water and scarcity of available water resources for new units.  The second is political.  This includes restrictive zoning, discretionary approval rights, etc.

Shiller’s analysis is perfect for markets with little to no geographical restrictions and even fewer political restrictions.  For example, land and home prices are incredibly stable in a place like Houston, Texas where new homes can be added quickly.  However, it fits poorly in coastal California which is hemmed in by mountains and the pacific ocean, has incredibly restrictive zoning and a populace with political leanings typically hostile to new development.  I was a bit surprised that Shiller wrote this piece as he knows what I just wrote better than anyone.  In fact, the Case Shiller Index that bears his name tracks housing prices in individual cities and backs up what I just wrote.  For example, look no further than the difference between the Case Shiller Chicago Index (the don’t track Houston) and the Case Shiller San Francisco Index to see how land use restrictions can lead to explosive moves in asset pricing when coupled with real economic growth.

Shiller goes on to explain how adding density keeps land and housing prices stable over time (highlights are mine):

Of course, underneath every home is a piece of land. Although that is typically only a bit of former farmland, it is often in an urban or suburban area, where a plot of land tends to cost much more than in the country.

Sometimes that little piece of land dominates the value of the home, particularly in dense urban areas. But if we are to understand long-term trends, we need to realize what land represents, even in Manhattan or Silicon Valley or any booming area. People in such places usually aren’t buying land for its own sake but for the myriad services that housing provides. A home is not just a place to sleep and store clothing and keepsakes. It can be a place that is convenient to a stimulating place of work, good schools and entertainment and, indeed, part of an entire human community.

These services have developed enormously over the last 100 years, changing the spatial and geographic dimensions of housing. There are vastly more highways and automobiles, telephones and various electronic connections, enabling people to leave center cities and still obtain the housing services they want. Thus, from a long-term perspective, these developments relieved a great deal of the upward pressure on home prices in cities.

Right now, there are some interesting developments in the supply of housing services that economize even further on urban land. We have recently seen interest in “micro-apartments,” which may be little more than 200 square feet but manage to squeeze in a kitchen, a bathroom and an entertainment center. For many people, this tiny space, with its proximity to like-minded people, interesting neighborhoods and restaurants, is preferable to living in a house in a far-flung suburb. Carrying this idea further, keepsakes can be kept in remote storage, maybe deliverable someday, on demand, with driverless cars. Already, rules are being changed in many cities, including New York, allowing the little apartments to be built and to accommodate many more people per acre of city land. These factors could lead to near-zero future demands on valuable urban land.

First off, micro-units are wonderful as a means to drive housing prices down for those wishing to live in a high-priced urban area IF AND ONLY IF YOU ARE ACTUALLY ABLE TO GET APPROVALS TO BUILD THEM.  Clearly Professor Shiller has not attempted to get such a micro-unit development approved in a wealthy, coastal region of California – say Orange County, for example.  If a developer were to propose such a thing in a high-priced neighborhood, he’d be run out of town on a rail or worse for even daring to bring it up.  This type of concept that works great in some places (cities without restrictive zoning and economics text books) and not at all in others (pretty much every major city on the west coast and a few on the east coast as well).  In addition, adding density typically results in INCREASING underlying land values rather than causing them to fall. Please note that I’m not disagreeing with Shiller as to the premise of his article from a strictly economic perspective (at least when it comes to homes – not necessarily land) only noting that politics MUST BE taken into account because they play such an out-sized role in some regions.

I am far from an uber-bull when it comes to housing prices.  Trees don’t grow to the sky and asset values can go up in a straight line for an extended period of time.  That line of thinking has been fully debunked by the debacle that was the housing crash and Great Recession.  IMO, one buys a house for stability and as a hedge against future rising rents, especially in supply constrained regions.  If you are looking at a house soley as a means of making a large return on investment, you are doing it wrong.  Unlike say tech stocks, housing is a necessity.  Therefore the only way to properly judge it as an investment is versus the alternative: renting.  You either do better over time as a renter or an owner depending largely on economic and political factors where you live.  All real estate is local and making broad generalizations about housing supply being able to meet demand regardless of location and political climate is next to impossible even for an economist as accomplished as Shiller.

Economy

Bass Ackwards: How negative interest rates have turned the world’s economy upside down.

Delay: Britain has now pushed the projected date of the Brexit back to 2019.  The odds of this thing actually occurring are falling by the day.

Reaching: Someone published a research note on Seeking Alpha theorizing that the Pokemon Go app will lead to higher oil prices.  Color me skeptical.

Commercial 

That Didn’t Take Long: WeWork is cutting it’s revenue forecast and its CEO is asking employees to change it’s “spending culture.”

Residential

Over the Falls: London luxury home sales are plunging post-Brexit.

Profiles

Class Act: Tim Duncan was the greatest basketball player of his generation – sorry Lakers fans but deep down you know its true and not all that close.  True to Duncan’s persona, he left quietly, shunning the typically season-long distraction/going away party that players of his caliber so often demand in the modern era.

Fading Away: Why golf is going the way to the three martini business lunch.

Chart of the Day

The condo development capital stack is becoming a convoluted mess as banks pull back (h/t Tom Farrell).

(Click to enlarge)

WTF

Such a Bummer: McDonalds has stopped allowing customers to stream porn on their free in-store wifi.  It will be interesting to watch how this impacts the bottom line as I’m pretty sure that the free porn was the only reason anyone still went to McDonalds.

Headline of the Year Contender: Woman Decapitated By Passing Train During Sex will be a difficult one to beat.  In a twist that should surprise no-one, this happened in Russia and she was drunk at the time.

Inevitable: Someone shot a gun at a couple of teenagers playing Pokemon Go. Did it happen in Florida? Of course it did.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 19th – One Size Fits All?