Landmark Links August 26th – Transition

Bruce JennerLead Story… Two particularly troublesome issues in the US real estate market are the need for more affordable housing and figuring out what to do with vacant malls and other underutilized retail sites.  The Westminster Arcade in Providence Rhode Island, the oldest mall in the US offers an interesting solution: converting un-used portions of malls to micro apartments:

As more people turn to the internet to buy what they need, shopping malls across the country are closing their doors. But one historic mall has found a creative way to re-purpose its former retail space: America’s first shopping mall, the Westminster Arcade in Providence, Rhode Island, has now been turned into micro lofts, offering people the chance to truly live inside a piece of history.

The Westminster Arcade opened in 1892, introducing the English-style indoor shopping experience to the United States. But in recent years, like so many other retail locations across the U.S., the mall had fallen on hard times. Despite undergoing a renovation, the space ultimately closed its doors in 2008 due to economic reasons.

But instead of being demolished, developers decided to give the mall a second life. The first floor is still being rented out as commercial space, but the top two floors have been turned into micro apartments. And the 38 units, which range in size from 225 to 300 square feet, are designed to accommodate the growing masses cramming into Rhode Island’s urban areas.

So far, residents are generally young professionals who don’t have much stuff, and so don’t mind living in such cramped quarters. Rent starts at $550 a month, and there’s already a waiting list of those eager to move into the “cozy” spaces.

This seems like an efficient way to kill two birds with one stone.  It’s relatively cost effective to build out the residential units since the structure is already there and just needs to be converted in order to transition to mixed use (I’m assuming that there are some issues with plumbing capacity so it may not work everywhere), meaning that rents can be on the low side for smaller units.  This is where the demand is anyway at a time when most new multi-family projects are expensive luxury product.  In addition, the upper-floor renters provide foot traffic to sustain the ground floor retail that now doesn’t need to rely on department stores.  To take it a step further, the department store spaces can be re-purposed for medical uses – which would fit perfectly if the apartment units were targeted towards seniors – or self storage which would be in high demand for residents of micro-units.  On the surface, it seems like a win-win.  Anyone out there have any thoughts as to why this wouldn’t work?

Economy

Still Holding Up: Despite some hiccups,  the underlying trend shows people are getting jobs, earning more money, and then spending some of those funds, meaning that the economy is still headed in the right direction.

Dirty Secret: There’s one part of central banking that central bankers often don’t like to talk about – their inflation targets are completely arbitrary.

The Old Fashion Way: How to get and stay rich in Europe – inherit money for 700 years.

Residential

Facepalm: The mayor of Palo Alto would prefer to see less job growth rather than more housing in order to “solve” his city’s housing crisis.  I guess when you buy a house for $490k in 1994 and it’s now worth $4mm, it’s difficult to see past the economic self interest in keeping housing scarce.

Rebuttal: I was going to write a rebuttal to the piece that I posted on Tuesday about the non-NIMBY argument for restrictive zoning but ran out of time.  Preston Cooper at Economics 21 did a better job than I would have anyway.  Long story short, it eventually results in the country looking like something moderately resembling The Hunger Games.

Imagine That: The 15% foreign buyer tax in Vancouver that we have posted about previously is already throwing ice water all over the already-cooling housing market there.  See Also: The white hot Seattle market is showing some early signs of cooling a bit. (h/t Scott Cameron)

Priorities: Apartment hunters are increasingly selecting units based on convenience for a very important family member: the dog.  As a self-professed crazy dog person I totally relate to this.

Profiles

Valuable Commodity: The fascinating story of how Instant Ramen Noodles overtook tobacco to become the black market currency of choice in America’s prisons (hint – the food there is really, really bad and getting worse).

Color Coordination: Great Britain decided that it was a good idea to give all of their Olympic athletes identical red suitcases which led to a hysterical epic FAIL upon their return to Heathrow after the closing ceremonies.

LOL: Looks like someone may have leaked the top secret recipe for KFC’s fried chicken.

Chart of the Day

Consider this your daily reminder that houses in CA are incredibly expensive

WTF

Friday Quiz: See if you can figure out whether or not some really arcane sports were ever actually in the Olympics.

Darwin Award Attempt: If you feel the need to jump from rooftop to rooftop to impress your date than you probably shouldn’t be dating.

Fight!  Watch a group of women beat the crap out of each other in a Chicago Walmart.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 26th – Transition

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 August 16th – Out of Balance

Usain Bolt

Lead Story… They say that demographics are destiny and by 2030, 56 countries will have more people aged 65 and above than children under 15.  By 2075, there will be more people 65 and older than children under 15 worldwide.  This is the result of two developments that have been taking place in developed countries for decades: 1) People are waiting longer to have kids and then having fewer of them; and 2) People are living longer.

The implications of this demographic imbalance in a world with an ever-growing pension bill are huge.  From Bloomberg:

While the prospect of longer lives is a good thing, problems arise when a shrinking work force cannot foot the pension bill. Several decades ago, you could have had about 10 workers per retiree, but that could shrink to the point where in Italy,  for example, you had three workers per retiree. While the political choices are unsavory — increase taxes or cut benefits — governments are running out of time to act.

As partially outlined above, the potential solutions are relatively straightforward, if difficult:

  1. People in developed countries need to start having more kids.
  2. Retirement ages need to increase substantially since people are living much longer.
  3. Benefits need to get slashed or begin at a substantially older age since pension plans were not designed to support people who live as long as they do today while retirement ages stay the same as they were decades ago.

Option one is a trend that likely won’t reverse for a whole bunch financial and cultural reasons so I’m guessing that the solution will have to come from two or three or some combination thereof, both of which are politically toxic in today’s global political climate.  Or we could just bury our heads in the sand, pretend that the problem doesn’t exist and continue to borrow money to bridge the gap.  On the plus side, at least interest rates are really low……

Economy

Confidence Inspiring: Federal Reserve officials are beginning to question accepted wisdom about what actually causes inflation.

Vultures Circling: PE funds have now raised over $100 billion to buy oil assets that no one else wants.

Pay the Toll: German Banks are now charging depositors to hold deposits as negative rates take a toll.  I’ve said this before and I’ll repeat now: there is no way that this isn’t deflationary.

Commercial

Let’s Make a Deal: Lease incentives are becoming a major feature of the San Francisco apartment market for the first time since 2009.  See Also: as rental supply grows, landlords negotiate.

Residential

Confidence Game: Home builders are becoming more optimistic about the market for single family homes as the supply of existing homes continues to tighten which they believe will lead to more starts.  One word of caution here: in this cycle, with it’s emphasis on proximity to cities, existing homes typically have a large advantage over new homes in that they are both less expensive and have location advantages.  See Also: Calculated Risk says that the slow, sluggish housing recovery is still on track.

Profiles

Plenty of Blame to Go Around: California’s gas prices are sky high compared to the rest of the US.  Stringent environmental regulation is partly to blame but that’s only part of the story.

Life Lessons: An old friend of mine, Charlie Buckingham recently competed in sailing at the Rio Olympics in the Laser Class.  Charlie finished 11th out of 46, missing out the the medal race on a tiebreaker.  It was a strong finish against the best sailors in the world in arguably the toughest Olympic sailing class, although I know that he had been aiming higher.  He penned an excellent short piece about what he learned on his Olympic journey for Sailing World Magazine.  The article is ostensibly about sailing but extremely applicable to life in general.  Here’s a quick excerpt but I’d highly recommend reading the whole thing:

Plan to be flexible
Sailboat ­races are in a constant state of flux. The fleet changes positions around you, the wind shifts and changes velocity, and you need to keep your own boat moving as fast as possible at all times. All of this makes it hard to plan the perfect approach in ­advance. Detailed plans can even give a false sense of security, causing one to ignore the present. Have the outcome in mind, but be open and ready to adapt to what is thrown at you during the race.

Tinfoil Hats: Believe it or not, there are still people who believe that the earth is flat and think that there is a massive conspiracy to cover it up.  Mic.com published a feature article last week that took a deep look at this and other kooky conspiracy theories.  It’s as entertaining as it is bizarre.

Chart of the Day

WTF

Hell NO: Burger King is coming out with a hamburger-burrito hybrid called a Whopperito featuring the same disgusting, artificially smoke-flavored beef found in a Whopper.  The race to the bottom by fast food restaurants continues unabated.

A Sucker Born Every Minute: Sketchy bootleg LA celebrity tour buses are lying about where stars live and causing serious and frightening issues for homeowners when stalkers show up at their homes.

Video of the Day: I could watch this video of a Pittsburgh Pirates fan going for a foul ball and ending up with a plate full on nachos on his face all day.

Brilliant Disguise: A man in China tried to smuggle his pet turtle through airline security by disguising it as a hamburger.  He was busted when security agents noticed “odd protrusions” sticking out of a hamburger in his bag.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 16th – Out of Balance

Landmark Links August 12th – Why We Can’t Have Nice Things

kids making a mess

Lead Story… In a profoundly disappointing but not remotely surprising story, labor, environmental and tenant advocacy groups have effectively nuked CA Governor Jerry Brown’s plan to streamline approvals for housing developments, imperiling it’s chances of passing through the legislature this year.  Brown’s plan essentially would have allowed development “as of right” so long as it conformed with underlying zoning and allowed for a certain number of affordable units.  This would have effectively subverted the veritable maze of discretionary approvals currently required in some municipalities.  First, construction union leaders threw a hissy fit because the plan didn’t include enough goodies and hand outs for union labor to buy – I mean win – their support.  Next, environmental groups (Side Note: in California, the term “environmental group” is nothing more than a euphemism for  NIMBY) opposed the plan because they don’t want anything built under any circumstances ever if it’s anywhere near the expensive – and often developer-hostile neighborhoods where they reside and Brown’s plan would effectively take away a major lever of control – discretionary approval – that they have held in the development approval process.  Third, some renter advocacy groups joined in with the construction unions and environmentalists because they apparently aren’t all that sharp and don’t realize that they are being bamboozled into opposing something that would ultimately lead to lower rents which would benefit them the most.  i guess that no good deed goes unpunished.  From the LA Times:

Labor and environmental groups say they are done negotiating over Gov. Jerry Brown’s housing plan – LA Times

“After several meetings without an agreement on a variety of requested changes, we believe it is time to focus on real affordable housing solutions that don’t directly undermine local voices and place communities and our environment at risk,” said a statement from the State Building and Construction Trades Council, Sierra Club and Tenants Together, who are among a coalition of more than 60 groups who joined to oppose the governor’s housing proposal.

Cesar Diaz, the legislative director for the State Building and Construction Trades Council, confirmed that the coalition would not participate in further discussions over the plan.

“This needs much more time and a policy-vetting process,” Diaz said.

Yes, this is depressing but it isn’t at all surprising to anyone who has spent any time in a field related to development in CA.  Any time that someone makes a proposal that attempts to fix out badly broken housing system, existing stake holders dig in their heels and do anything in their power to stop it.  This, as today’s headline suggests is why we can’t have nice things in California – namely an affordable and moderately functional housing market.

Today I’d like to present a counter example to illustrate what a functional housing market looks like.  There is a major global city that is fully built out with a population of over 13 million (far larger than any city in CA).  This city is a major global finance and trade hub.  It is land constrained and effectively fully built out, yet housing prices haven’t budged in nearly 20 years.  The city that I’m referring to is Tokyo and Robin Harding of the Finacial Times published a very important story about how regulation impacts housing cost called Why Tokyo is the land of rising home construction but not prices last week.  First off, I want make something clear.  The Japanese respect property rights to a level that’s almost inconceivable in California.  According to Takahiko Noguchi, a regional planning head in Tokyo:

“There is no legal restraint on demolishing a building.  People have the right to use their land so basically neighbouring people have no right to stop development.”

In other words, Tokyo has become the anti-coastal California where housing supply is created to meet demand without mountains of red tape and shrieking NIMBY obstructionists.  The outcome has been so dramatic that it’s a bit shocking to those that don’t live there.  From the FT (highlights are mine):

Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).

Tokyo’s steady construction is linked to a still more startling fact. In contrast to the enormous house price booms that have distorted western cities — setting young against old, redistributing wealth to the already wealthy, and denying others the chance to move to where the good jobs are — the cost of property in Japan’s capital has hardly budged.

This is not the result of a falling population. Japan has experienced the same “return to the city” wave as other nations. In Minato ward — a desirable 20 sq km slice of central Tokyo — the population is up 66 per cent over the past 20 years, from 145,000 to 241,000, an increase of about 100,000 residents.

In the 121 sq km of San Francisco, the population grew by about the same number over 20 years, from 746,000 to 865,000 — a rise of 16 per cent. Yet whereas the price of a home in San Francisco and London has increased 231 per cent and 441 per cent respectively, Minato ward has absorbed its population boom with price rises of just 45 per cent, much of which came after the Bank of Japan launched its big monetary stimulus in 2013.

In Tokyo there are no boring conversations about house prices because they have not changed much. Whether to buy or rent is not a life-changing decision. Rather, Japan delivers to its people a steadily improving standard, location and volume of house.

Japan
So how, exactly did this come about?  Some of us remember tales of the runaway Tokyo real estate market and subsequent crash in the 80s during the great Japanese boom and subsequent bust.  It may seem odd that a place that produced such an epic real estate boom and subsequent bust would be home to a stable, efficient real estate market.  Again, from the FT:
“During the 1980s Japan had a spectacular speculative house price bubble that was even worse than in London and New York during the same period, and various Japanese economists were decrying the planning and zoning systems as having been a major contributor by reducing supply,” says André Sorensen, a geography professor at the University of Toronto, who has written extensively on planning in Japan.
But, indirectly, it was the bubble that laid foundations for future housing across the centre of Tokyo, says Hiro Ichikawa, who advises developer Mori Building. When it burst, developers were left with expensively assembled office sites for which there was no longer any demand.
As bad loans to developers brought Japan’s financial system to the brink of collapse in the 1990s, the government relaxed development rules, culminating in the Urban Renaissance Law of 2002, which made it easier to rezone land. Office sites were repurposed for new housing. “To help the economy recover from the bubble, the country eased regulation on urban development,” says Ichikawa. “If it hadn’t been for the bubble, Tokyo would be in the same situation as London or San Francisco.”
Hallways and public areas were excluded from the calculated size of apartment buildings, letting them grow much higher within existing zoning, while a proposal now under debate would allow owners to rebuild bigger if they knock down blocks built to old earthquake standards.
All of this law flows from the national government, and freedom to demolish and rebuild means landowners can quickly take advantage. “The city planning law and the building law are set nationally — even small details are written in national law,” says Okata. “Local government has almost no power over development.”
Note that this is not all that dissimilar from the proposal that Gov Brown made where the State of CA would set policy from the top down since cities have shown absolutely no inclination to get their shit together when it comes to housing policy.  When the Japanese crisis hit, policy makers did something that those in the US have been unable and unwilling to do: liberalize development regulation to spur economic growth – which also led to a subsequent dramatic slowing in housing costs due to a pickup in efficiency.  Remember the Tokyo example next time someone makes an economically illiterate statement that building more market rate won’t make housing more affordable.  Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting different results.  Japanese policy makers understand this, Californians apparently don’t.  The simple fact is that coastal CA cities will not get housing costs under control until they start doing things differently, much like Japan did in the midst of their economic crisis.

Economy

Debt Decision: Plunging interest rates have lowered the cost of borrowing over long time periods, making it appealing for the government to roll short term debt into longer term maturities.  See Also: It’s never been cheaper for cities and states to borrow money so why are they so reluctant?

Opposite Result: There is early evidence that negative interest rates are actually encouraging savings, rather than discouraging it as central bankers had hoped.

Pendulum Swing: In the never-ending tug of war between labor and capital, labor is gaining an upper hand as the job market tightens.

Residential

Landmark in the News: Landmark’s own Tom Farrell had a prominent quote in a feature Wall Street Journal article entitled  Lopsided Housing Rebound Leaves Millions of People Out in the Cold.  : The whole piece is well worth a read:

Tom Farrell, director of business development for Landmark Capital Advisors, which counsels investors on real-estate projects, said risk appetite is low, particularly outside core markets.

“We’re often saying ’You all want to be in the same spot, and you’re tripping over each other,” he said. “It’s just difficult to get people out to those secondary markets.”

Profiles

Early Exit: Startups are opting to sell rather than IPO as investors look to cash out early.

The Rise and Fall: How Yahoo went from tech powerhouse to also-ran and why Verizon bought it.

Chart of the Day

WTF

Headline of the Week: It’s hard to beat Subway rider smokes crack and strips naked before shocked witnesses on No. 3 train when it comes to news headlines.  Especially when said headline includes pictures (before the guy took his clothes off, thankfully).

Swipe Right: Judging by usage numbers and the 450,000 condoms provided to athletes, Tinder and the Olympic Village are a perfect match.

FAIL: Man tries to light house on fire in broad daylight but lights self on fire instead.  To make matters worse, the whole thing was caught on a security camera including the hysterical part where he tries to put it out.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 12th – Why We Can’t Have Nice Things

Landmark Links August 9th – Flipper Does Seattle

Dolphin horny

Lead Story…  I came across a story from the Seattle Times this weekend that reminded me of perhaps the most obvious sign that a real estate market has overheated: Flipping.  First off, not all flipping is created equally and there are two primary categories of flippers:

  1. Fix and Flippers: This type of real estate investor looks for bargain properties that need some work, completes improvements – cosmetic or otherwise and sells…hopefully at a profit.  The flipper calculates what they can likely re-sell the house for, how much money they will need to spend on upgrades and repairs and what profit margin they need to make and bids on the subject property accordingly. It’s a legitimate business that is highly reliant on execution rather than purely market direction.
  2. Speculators: As the name implies, this type of flipper is extremely reliant on the direction of the market.  Speculative flipping is a pure risk play with little to no skill required other than filling out a contract (and possibly a loan application) which is often done with the help of a realtor anyway.  A speculator puts a new home or condo under contract before it is complete, waits for the market to go up and sells at a higher price.  Builders often offer lower prices in the early phases of a project in order to generate sales momentum and raise them incrementally in later phases.  Speculative flippers hope to capitalize on that momentum as well as an upward-trending market.  This type of flipping was made popular during the housing bubble, and returns were often juiced with a BS subprime loan that had a low teaser payment, the potential for negative amortization, and little to no documentation.  There isn’t any real business plan here as the speculative flipper isn’t adding any value whatsoever to a brand new property.  There are only three outcomes here.  When the market goes up, you make money.  If the market doesn’t move, you lose a little bit of money (after sales and closing costs are accounted for) assuming that you can sell in a timely manner.  If the market goes down, you lose your ass, especially if other flippers in your condo development or subdivision are present and flood the market with inventory as conditions are softening.

This brings us to Seattle and it’s white hot market.  It’s been well-noted that Seattle is one of the top-performing housing markets in the US.  Back in May Curbed posted a story about how the average Seattle listing sells in a mere 8 days.  News outlets in the Pacific Northwest have also run stories about people camping out to reserve downtown condos. All that considered, the story from the Seattle Times about how flippers in a downtown condo called Insignia were making flip profits on homes that had never been occupied was somewhat surprising as I can’t recall seeing this sort of thing since the mid-aughts:

Just how hot is the Seattle real-estate market? People are now reserving condos under construction and then flipping them for a six-figure profit before they even open.

Matt Goyer, a local real-estate broker and blogger, combed through some recent sales at the new Insignia high-rises in the Denny Triangle. He found several brand-new condos that their owners reserved during construction over the last couple of years and just sold again before ever living in them.

The condos fetched an average of $637,000, up from their original purchase price of about $526,000 — a profit of 21 percent.

That’s pretty good money for a speculative play with no value add component whatsoever even after sales commissions and closing costs are taken into account.  I have to admit that I was somewhat relieved when I went to Matt Goyer’s blog referenced above to find out a few more details.  The good news is that this isn’t rampant.  There were only a hand full of speculative flips out of the 348 units in the project:

The North Tower of Insignia has now closed 207 of 348 units with 130 left to close and only 11 left to sell. We’ve seen a handful of resales come up in the North Tower were people are flipping their units, having never occupied them. Curious about this we decided to dig in more and found only four flips so far which feels like a low percentage overall.

North Tower

402N – Pending. Listed for $629,500. Originally bought for $516,000.
503N – Sold for $629,950. Originally bought for $530,000.
808N – Pending. Listed for $649,950. Originally bought for $534,000.
905N – Pending. Listed for $639,000. Originally bought for $525,000.

And here’s a look at the South Tower, though some of these are legit resales where folks lived there and then decided to sell.

South Tower

209S – Sold 4/19/2016 for $680,000. Originally bought for $587,600.
405S – Sold 2/22/2016 for $730,000. Originally bought for $646,500.
511S – Sold 5/21/2016 for $794,000. Originally bought for $705,000.
1601S – Sold 3/21/2016 for $795,000. Originally bought for $695,200
1706S – Pending. Listed for $1,119,800. Originally bought for $1,032,900.
1802S – Sold 3/19/2016 for $915,000. Originally bought for $844,000.
1907S – Pending. Listed for $1,415,000. Originally bought for $1,291,290.
2107S – Sold 2/27/2016 for $1,350,000. Originally bought for $1,249,800.
2207S – Sold 2/23/2016 for $1,358,000. Originally bought for $1,259,800.
3806S – Sold 4/18/2016 for $1,750,000. Originally bought for $1,611,540.

Still, this is the type of activity that can spread quickly when word of flipping success gets out and people start talking about it at cocktail parties.  As stated earlier, speculative flipping takes requires little-to-no skill set, only enough cash for a down-payment and some large huevos.  So, is this a big issue?  Of course not, at least currently.  Fortunately, we are not seeing much evidence that this sort of thing is rampant and a small hand-full of units in a high-end Seattle condo project are not much reason for concern.  It does bear monitoring though if speculative juices start flowing more broadly again…..

Economy

Momentum: A second straight month of strong job gains has re-framed the economic outlook as the Federal Reserve continues to ponder what to do next.

Catch Me If You Can: Roughly 16% of the 43MM Americans who have student loan debt are in long term default.  The federal government is locked in a battle to get them to pay with taxpayers are on the hook for the $125 billion that they owe.

Anything That Isn’t Nailed Down: Central Banks are now starting to buy corporate bonds as they search for ever-more unconventional ways to spur growth.

Commercial 

Going Hungry: Farmland just experienced it’s first decrease in valuation since 2009 as corn and soybean prices extend their slumps.

Residential

Haves and Have Nots: Downtowns throughout the rust belt and parts of the northeast are increasingly becoming a center of economic growth at the expense of close-in suburbs.

Hitting a Different Target: DR Horton designed it’s entry level Express line to appeal to Millennial first time home buyers.  However, downsizing Baby Boomers seem to like it a lot as well.

Profiles

Solar System: Can Tesla go from a luxury car company to a one-stop-shop clean energy empire?

The Science of Speed: What’s behind Usain Bolt’s record setting runs?  It’s not that he goes faster than other runners but rather that he doesn’t slow down as quickly once he reaches peak speed.

To the Moon: Seattle is becoming the Silicon Valley of space start-ups.

Chart of the Day

WTF

Verified: A new study based on Facebook profiles just confirmed every cat person stereotype you can imagine:

After analyzing the aggregate, anonymized data of about 160,000 U.S. users who’ve posted photos of dogs and/or cats, Facebook found that dog-posters tend to be more extroverted, more upbeat and luckier in love than their feline-photographing friends. Meanwhile, cat people tend to be single, to express a “wider range of emotions” (including, chiefly, exhaustion and annoyance), and to harbor an unusually strong interest in fantasy, anime and science fiction.

High Voter Turnout: Because what wealthy town wouldn’t want their mayor involved in a meth-for-sex bust?

Dumpster Diving: Philadelphia has a problem with residents renting dumpsters to use as neighborhood swimming pools in it’s streets, causing the city to issue a statement telling them to knock it off.  If you have ever known any Philadelphia Eagles fans, this will make perfect sense.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 9th – Flipper Does Seattle

Landmark Links July 29th – Taking Out the Trash

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Lead Story… Regulatory changes are rapidly leading to the demise of one of the seedier portions of the real estate industry: Non-Traded REITs.  I’ve written about Non-Traded REITs a couple of times before.  For those of you not familiar with the product, Investopedia defines a Non-Traded REIT as (emphasis mine):

A form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate. A non-traded REIT does not trade on a securities exchange, and because of this it is quite illiquid for long periods of time. Front-end fees can be as much as 15%, much higher than a traded REIT due to its limited secondary market.

Basically, it’s exactly like a traded REIT, only far less liquid and with much, much, much higher fees.  This definition doesn’t even get into the other myriad of above-market management fees that the Non-Traded REIT companies charge their investors.  If you can’t already tell, I’m no fan of this “asset class”…or really any other that exists mostly to enrich sponsors and sales people at the expense of unwitting investors.  That’s why I was incredibly pleased to find an article earlier this week in Investment News entitled Nontraded REIT sales fall off a cliff as industry struggles to adapt outlining how regulator changes have crippled the third-tier brokerages that traditionally fed capital to Non-Traded REITs.  This is not a business with a bright future:

Sales of nontraded real estate investment trusts, the high-commission alternative investments sold primarily by independent broker-dealers, have fallen off a cliff.

Heading into 2016 facing a number of hurdles, namely a flurry of legal and regulatory changes that would quickly impact how brokers sell them, the nontraded REIT industry’s worst fears have come true.

Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.

Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.

Times have changed dramatically. Stanger estimates total nontraded REIT sales in 2016 will reach between $5 billion and $6 billion, or roughly 25% of their level in 2013. That year, former nontraded REIT czar Nicholas Schorsch and his firm, American Realty Capital, were at their zenith, and broker-dealers fattened their bottom lines from REIT commission dollars.

All that has changed as sales of nontraded REITs at independent broker-dealers have dried up. Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.

Other broker-dealers are reporting similar results. Sales of nontraded REITs at Geneos Wealth Management are down 60% to 65% year to date, according to Dean Rager, the firm’s senior vice president.

So, what led to fundraising for an investment product like this tanking?  Two new regulations.  The first one, from FINRA introduced a new rule whereby brokers selling illiquid investments need to make pricing transparent.  Seems reasonable.  The second, which will come into effect early next year will introduce a fiduciary standard for brokers working with client retirement accounts as opposed to the lower “suitability” standard currently being used.  Also seems quite reasonable.  The result is a nearly impossible fundraising environment when:

  1. Brokers have to show clients that the fees that they would pay are exorbitant (and there is no way that a broker would sell Non-Traded REIT shares without the high fees); and
  2. There is no chance that a broker can recommend an investment where a return of over 17% must be achieved just in order to break even by offsetting the 10% broker fee and up-to 5% upfront fee to the Non-Traded REIT sponsor.

If this industry is going to survive, it will need to change substantially, meaning lower fees and far more transparency.  The thing is that, at a certain point, there is basically no reason for it to exist since investors can always buy far more liquid Traded REITs.  The good news is that would-be investors are far less likely to be taken to the cleaners.  The other good news is that there are other real estate alternatives with a far better alignment of interest between investor and sponsor that will likely to be the beneficiary of capital that would have otherwise gone into Non-Traded REITs.  Good riddance.

Economy

Yield Curve Update: The yield curve continues to contract.  However, unlike in past cycles, it may not be signalling a recession and instead a response to the international hunt for yield spurred on by negative interest rates and foreign economic chaos.  Either way, it doesn’t give the Federal Reserve much latitude.

And You Think We’re Bad: The incredible story of how Italian banks used high pressure sales to entice Italian households to load up on their risky subordinate debt during the financial crisis, imperiling their economy today.

Residential

This is Why We Can’t Have Nice Things (or Affordable Housing): …..At least not in San Francisco.  A proposed housing development in the Mission district lost 85 percent of it’s unit count at planning commission, shrinking it from 26 new units to only 4.  The reason: Planning Commission decided that it wanted to preserve the auto body shop that currently resides on the site.  Ironically, the same people opposed to this project will continue to shed crocodile tears about how San Francisco has become un-affordable due to a complete lack of common sense or economic literacy.

Crickets: The lack of affordable housing in the US should be a major campaign issue but neither party seems to want to touch it.

Rocket Fuel: Bay Area private bank lenders are offering wealthy techies 0% down mortgages with low interest rates to buy homes up to $2mm, fueling concern about both bubbles and growing inequality.

Profiles

What’s in a Name?  Lenders are continuing their age-old practice of re-branding loans to high risk borrowers.  B&C lending became stigmatized so they re-branded it “subprime.”  After “subprime” blew up, they started calling it “near-prime.”  When near-near prime doesn’t go well, get ready for not-quite-prime.

The Tortoise and the Hare: Video games that are immediate mega-hits often flame out almost as quickly.  I’m looking at you, Pokemon Go.

The Machine that Builds The Machine: Take a tour through Tesla’s 5.8 million square foot Gifafactory Sparks, Nevada.

Follow Friday: If you’re on Twitter check out @DPRK_News  It’s a satirical North Korean news feed and one of the funniest things I’ve seen.  Here’s a couple of sample tweets:

 

Chart of the Day

This warms my cold heart.

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WTF

Born to Ride: Watch a Walmart customer on a Rascal Scooter rob a store an then get away after ramming an employee into a dumpster with his trusty steed.  When you see what the employees and customers who tried to stop him look like, the fact that he escaped on a Rascal Scooter will make more sense.

Worse Than Tofu: Cockroach milk could be the superfood that the world has been waiting for.  No, this is not from The Onion.

Entrepreneurial Drive: Drug dealers in Rio are selling Olympics branded cocaine to take advantage of their city hosting the games.  Who says there is no economic benefit to hosting the Olympics?

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 29th – Taking Out the Trash