Landmark Links November 22nd – GOAT

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First off, I’d like to wish each and every one of you a very happy Thanksgiving.  I’ve really enjoyed writing this blog over the past year and a half or so and am very thankful to all of you for visiting it.  This is going to be my only blog post this week as I’m certain that you have better things to do on a long holiday weekend than surf the web as do I.  Enjoy the time with your loved ones and we’ll be back full time next week!

Lead Story… Every once in a while, I come across a profile that is so fascinating that it makes sense to feature it here even if it’s not real estate related.  Today’s lead story feature is a long-form Bloomberg profile of Renaissance Technologies (and the employees-only Medallion Fund  in particular), the world’s most successful and possibly most secretive hedge fund.  I found this particular story so intriguing because it gives the reader a great glimpse of what it takes to be the best in a deeply cutthroat industry and how adaptation is key, even if you are on top.  It’s a fairly long read so it’s perfect for the upcoming long weekend.

Anyone who follows financial media has heard that hedge funds have had a rough go of it lately.  The strategies that they employ are getting crowded with competitors making it hard to find an edge, leading to benchmark under-performance and pressure to cut fees or face redemptions.  However, there is at least one fund, run by a highly secretive team of PHD’s, mathematicians and scientists that hasn’t just beaten the market. It’s torched the market, it’s competitors and pretty much any asset class that you can imagine since the late 1980s…and that’s AFTER you account for it’s astronomical fee structure. That fund is Renaissance Technologies Medallion Fund (whose only investors are Renaissance employees) which was founded by Jim Simmons.  BTW, this is not a Madoffesque scheme just waiting to blow sky high once the market turns.  It’s very real.  From Bloomberg’s Katherine Burton (emphasis mine):

The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”

Few firms are the subject of so much fascination, rumor, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. (The company also operates three hedge funds, open to outside investors, that together oversee about $26 billion, although their performance is less spectacular than Medallion’s.) Apart from Simons, who retired in 2009 to focus on philanthropic causes, relatively little has been known about this small group of scientists—whose vast wealth is greater than the gross domestic product of many countries and increasingly influences U.S. politics—until now. Renaissance’s owners and executives declined to comment for this story through the company’s spokesman, Jonathan Gasthalter. What follows is the product of extensive research and more than two dozen interviews with people who know them, have worked with them, or have competed against them.

Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice. Screaming battles seem to help a pair of identical twins, both of them Ph.D. string theorists, produce some of their best work. Employees aren’t above turf wars, either: A power grab may have once lifted a Russian scientist into a larger role within the highly profitable equity business in a new guard vs. old guard struggle.

For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees.

Fees, by the way are 5% on the AUM and 44% of the profits.  So, yeah it’s expensive but the after-fee returns are nothing short of spectacular.  By the way, this is an employees only fund so they are investing their own cash.  No outsiders allowed.

There are a couple of points in the article that describe what makes Renaissance different different from most funds.  The first was that they are looking to hire mathematicians, coders and PHD’s, not your typical Wall Street folks:

Encouraged by Medallion’s success, Simons by the mid-’90s was looking for more researchers. A résumé with Wall Street experience or even a finance background was a firm pass. “We hire people who have done good science,” Simons once said. The next surge of talent—much of which remains the core of the company today—came from a team of mathematicians at the IBM Thomas J. Watson Research Center in Yorktown Heights, N.Y., who were wrestling with speech recognition and machine translation.

If you want to outperform, you have to be different from everyone else.  In a highly competitive field, there isn’t much of an edge to be had by doing the same thing as your competitors and trying to be better at the margins.  To truly bring performance to the next level, it’s sometimes imperative to go about doing things in a completely different way.  The second thing that caught my eye was the focus on data.  Not just gathering data but rather compiling it in such a way that it’s usable in testing an investment thesis:

Renaissance also spent heavily collecting, sorting, and cleaning data, as well as making it accessible to its researchers. “If you have an idea, you want to test it quickly. And if you have to get the data in shape, it slows down the process tremendously,” says Patterson.

The business that Renaissance is in is possibly the most data intensive of any field and they have mastered gathering and use of that data in a way that few have.  The third, and perhaps most critical success factor highlighted in the article was the willingness to constantly adapt, despite perpetually outperforming their peers:

In the early days, anomalies were easy to spot and exploit. A Renaissance scientist noted that Standard & Poor’s options and futures closing times were 15 minutes apart, a detail he turned into a profit engine for a time, one former investor says. The system was full of such aberrations, he says, and the scientists researched each of them to death. Adding them all up produced serious money—millions at first, and before long, billions.

But as financial sophistication grew and more quants plied their craft at decoding markets, the inefficiencies began disappearing. When Mercer and Brown joined they were assigned to different research areas, but it soon became apparent they were better together than apart. They fed off each other: Brown was the optimist, and Mercer the skeptic. “Peter is very creative with a lot of ideas, and Bob says, ‘I think we need to think hard about that,’ ” says Patterson. They took charge of the equities group, which people say was losing money. “It took them four years to get the system working,” says Patterson. “Jim was very patient.” The investment paid off. Today the equities group accounts for the majority of Medallion’s profits, primarily using derivatives and leverage of four to five times its capital, according to documents filed with the U.S. Department of Labor.

If you’re on top, it’s fairly easy for stagnation to take hold.  After all, why change things if you’re outperforming all of the time?  The ability and willingness to constantly evolve without allowing performance to slip is easier said than done.  If you have time this weekend, you won’t regret reading the entire piece.

Economy

It’s a Long Way Down: A protracted bond bear market is not a sure thing.  That being said, a lot investors searching for yield in long duration instruments are doing the equivalent of picking up nickels in front of an oncoming bulldozer.

Of Broken Clocks: The perennial cycle of “experts” predicting recessions is a complete joke.

The Void: Vocational training was once the norm in high schools.  In the era of hyper-competitive college prep it’s fallen by the wayside.  Here is why we desperately need it to return.

Commercial

Cookie Cutter: You can thank banks and their insistence on credit retail tenants in order to get project financing for the chain stores that are taking over much of America.

Residential

Please Make it Stop: A 157 unit condo project in San Francisco’s Mission District proposed by Lennar got shot down in a massive way last week.  That, in and of itself isn’t news.  What I do find incredible is these two quotes from an excellent synopsis of the NIMBY shit show (it was extreme even by SF’s incredibly low standards) from CurbedSF:

Many of reasons were given, but the one that stands out most is the frequent references to President-elect Donald Trump, who may well have clinched the decision against developer Lennar.

Some called the development racist, and the sitting supervisors racists too. One referred to rich homeowners as an “invasive species.” Another delivered his argument with a Bernie Sanders puppet.

I haven’t a clue how a building could possibly be racist nor what Donald Trump has to do with a proposed development in a city where probably a dozen-or-so people actually voted for him.  Combine that with the absurdity of a sock puppet speaking at a public hearing and that, kids, is why we can’t have nice things at least when it comes to housing in California.

A Step in the Right Direction: Housing starts surged in October but still have a long, long way to go.

Assembly Line: A shortage of construction workers in many US markets has builders turning to a potential solution that they have traditionally derided: prefab production.

Profiles

Best Shot: Why this is probably our last best chance to fix our infrastructure and refinance America’s debt into longer maturities at low rates.

Just in Time for Black Friday: I have a much better idea for you than standing in line at your local mall or Walmart waiting to do battle with fellow shoppers over a toaster oven.  Instead, check out Honey, the browser add-on that automatically applies coupon codes to your online order and finds the lowest price on Amazon.  Whoever invented this deserves a Nobel Prize if only for doing something to reduce some of the chaos early this Friday morning.  You’re welcome.

Beyond Just Texting: Cars are safer than ever but we just experienced the biggest spike in traffic deaths in 50 years.  The likely reason?  Apps that encourage driver interaction and serve as a distraction to drivers.  See Also: Tech-distracted drivers are turning parking lots deadly.  And: Rain triggers 570% increase in LA freeway crashes because LA drivers suck.

Chart of the Day

Source: CNBC.com

WTF

Just When You Thought The Election Was Over: A mall Santa Claus in Florida (of course) was recently relieved from his duties for telling kids that Hillary Clinton was on the naughty list.

Extra Sausage:naked man was caught breaking into a pizza parlor in Maryland on a surveillance camera.  He caused several thousand dollars in damage but only got away with some change and is still at large.

Pole Position: Someone apparently thought that it was a good idea to have a pole dancing float in a North Carolina holiday parade.  The entire state of Florida is pissed that they didn’t think of it first.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 22nd – GOAT

Landmark Links November 4th – Who’s On First?

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Lead Story…. It seems like nearly everyone in the real estate industry likes to use the baseball analogy to describe the real estate cycle.  There’s a little known rule that every home builder/developer conference has to have a panel where participants are asked what inning the current cycle is in by a moderator.  I suppose that this was considered either novel or informative at some point but today it’s neither.  The problem is that it’s difficult to classify real estate, especially real estate development in such broad and generalized terms.   Whenever I’m asked such a question, I answer the same way: what asset class and what market?  Another important clarification is the time frame of the recovery that began the cycle in question.  Most people consider our current cycle to have begun in June of 2009 which was when the National Bureau of Economic Research (NBER) marked the end of the last recession.  However, when it comes to home building and by extension the economy as a whole, it’s not that simple as Bloomberg’s Conor Sen wrote this week (emphasis mine):

The National Bureau of Economic Research marked the end of the last recession at June 2009. Similarly, the stock market hit bottom in the first half of 2009. The four-week moving average of initial jobless claims peaked in April that year. And the unemployment rate peaked in October. All of these suggest a broad-based trough at some point during 2009, making the economic expansion at least seven years old by now.

But given the severity of the financial crisis and the shock to the economy, the beginning of the recovery was not like moving from recession to expansion. It was more like moving from depression to recession. Rather than a normal business cycle in which four steps forward are followed by two steps back, the Great Recession was more like five steps back. Should the ensuing first two or three steps count as part of the next expansion, or something else?

The growth in the early part of this recovery was abnormal. Part of it was caused by government fiscal stimulus, which proved to be inadequate and was then followed by federal, state and local austerity. Part of it was caused by a “dead cat bounce,” as output fell so hard, below consumption in industries like the auto sector, that a certain amount of recovery was inevitable as producers had to increase output merely to match consumption. And then some part of the recovery was caused by the energy sector and the boom in fracking, a localized boom that eventually went bust.

So what went missing in those first few years of “recovery”?  The answer is home building which is the reason that I think much of the current cycle’s math is a bit off.  More from Sen (emphasis mine):

The missing piece was housing, the bread and butter of the American economy. The Housing Market Index from the National Association of Home Builders didn’t begin to increase from depressed levels until October 2011. Similarly, single-family-building permits didn’t begin to increase from depressed levels until 2011. It’s here, in late 2011, that I would claim the current expansion began, making it barely five years old, quite young in the context of a downturn that lasted four or five years rather than just two.

Ultimately, housing is the driver of the U.S. economy, which is why any understanding of the recovery of the economy must factor in the recovery of housing. Single-family-building permits peaked in the second half of 2005. Subprime mortgage originators started going bankrupt in 2007, the same time that housing prices started falling significantly. Outside of globally attractive real estate markets like San Francisco, New York and Miami, housing prices and activity continued to fall well into 2011.

The early years of the housing recovery, from 2010 to 2012, were more driven by investors and institutions buying foreclosures and investment properties with cash than by owner-occupiers coming back to the market. In the past few years, housing demand has been soaking up inventory created during the bubble years and pushing home prices back toward their mid-2000s levels. First-time home-buying remains below normal.

Only now are we seeing tertiary markets like exurban areas start to expand again, and construction remains below the level of household formation. One of the metro areas that was a poster child of the housing bubble, the Riverside-San Bernardino metro area in Southern California, is still building 80 percent fewer single family homes than it was at the peak of the last cycle.

That last highlighted section is something that I’ve written about frequently.  Although LA, Orange County and San Diego get a lot of attention for their great weather, beautiful beaches and affluent communities, it’s actually the Inland Empire that is the engine of growth in Southern California.  Especially when it comes to creating new housing for first time buyers and blue-collar workers that can’t afford to live closer to the coast.  That this region is still building 80% fewer units than it was at the peak of the last cycle is nothing short of shocking.  IMHO, it can’t be classified as much of a recovery at all.  As Sen points out in his article, every economic sector doesn’t necessarily recover in unison.  Just because tech has boomed or energy has boomed then busted doesn’t mean that other sectors are doing the same.  When it comes to a traditional growth sector like housing, this can have a massive impact on a regional (or even national) economy.  For some traditional growth markets like the Inland Empire, perhaps the appropriate question isn’t what inning of the cycle we are in but rather when the recovery will actually begin in the first place.

Economy

Even Keeled: Calculated Risk’s Bill McBride is still not on recession watch.

Setting the Stage: The Fed didn’t raise rates at their November meeting but certainly indicated that they are open to doing so in December.  See Also: The Fed’s latest statement indicates that they are not going to target inflation rates above 2%.

Commercial

Going Strong: Chinese investment in US commercial real estate is still on the rise.

Residential

Put a Lid on It: Low FHA limits are killing home building in California’s secondary markets.

Imagine That: San Francisco home sales surged in September thanks to a large supply of newly-completed condos.

The Oracle of Home Building? Berkshire Hathaway just purchased the largest home builder in Kansas City.  It’s the just the latest purchase for Warren Buffett who has been buying up builders in the south and Midwest.

Profiles

Ain’t No Free Lunch (Or Shipping): Why the free shipping that you love so much from online retailers is mostly a lie.

Shocker: This years Black Friday deals will probably be exactly the same as last year’s Black Friday deals.

Subprime Redux: Rising automobile repossessions show the dark side of the car buying boom.

SMH: The University of California at Irvine, which is in Landmark’s back yard wants to be the Duke basketball of online gaming (aka video games).  Ok, fine but can they please stop calling it a “sport”?

Chart of the Day

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WTF

Hero: A woman sustained burns after causing a fire by farting during a surgery, igniting a laser.  Pain is temporary but glory lasts forever.  See Also: Ten people who were arrested for farting.

Guaranteed Contract: Former NBA star and certified crazy person Gilbert Arenas just received the final check from the $111MM contract that he signed in 2008. If you’re not familiar with Arenas, he once got into a locker room altercation with a teammate that involved a firearm and hadn’t played in the NBA in nearly 5 years. Great investment. (h/t Tom Farrell)

That’s Going to Leave a Mark: A drunk 28-year old Florida man fell out of his pickup truck on the way home from a strip club and immediately ran his leg over before it crashed into a house.  He’s apparently still at large.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 4th – Who’s On First?

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 18th – On Point

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Lead Story…. A bit short on time this week so I’m going to outsource the lead story.  Joe Bosquin of Builder Magazine wrote a wonderful summary about how California priced itself out of the market for entry-level home buyers titled The Unintended Consequences of Law. Spoiler: it has everything to do with Prop 13 and CEQA.  Bosquin’s piece as good as an explanation for our absurd housing prices in the Golden State as you will find.  Yours truly gets a bit more than a quick mention and they included an article  that I had written for Builder (and Landmark Links) back in May about why our impact fees are so high compared to the rest of the country.  By the way, the non-partisan Legislative Analyst Office published a piece in September in which they confirmed my thesis about the relationship between Prop 13 and impact fees.

Here’s an excerpt from Builder but you should really check out the entire article.  It’s a quick and easy read even if you aren’t a housing and development nerd:

According to a widely referenced 2015 report from the California Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan fiscal and policy analysis arm, since 1980, California has built half of the housing units it needed—about 100,000 per year—to keep up with demand. And that’s just in aggregate. In high-demand locales like the San Francisco Bay Area and Los Angeles, the housing deficit is even greater. “Most of California’s coastal counties needed to build three times as much (or more) housing as they did,” the report claims.

Stated differently, during the past 36 years, California did not build the additional 3.6 million homes that it needed to keep its skyrocketing prices in check. To put that number in perspective, it would take the collective efforts of every home builder in the country, building nonstop at 2016’s projected pace of 1.26 million housing starts, three years to put a dent in the state’s problem.

The report concludes that NIMBYism, local communities’ lack of financial incentives to approve more housing, and anti-growth proponents who go to daunting lengths to block development have contributed to the problem, as well as more inveterate challenges such as a scarcity of suitable land along the coast and an ever-increasing population.

The LAO report found that the average cost of homes in California is two-and-a-half times higher than the rest of the country, and rents are 50% higher. It also points to evidence that high housing costs were making it difficult for companies to recruit employees, even in Silicon Valley, and threatened the state’s jobs base. Other reports that came out in its wake highlighted a net migration of 625,000 people out of the state from 2007 to 2014, primarily among lower income earners, attributed to housing costs.

All of which leads to the question, how did California get to a place where it tacks $75,000 onto the cost of a new home in the midst of a housing crisis that’s eroding its jobs base and pushing the country’s most populous state into an unwinnable war of the haves and have nots?

First off, major thanks to Joe Bosquin for writing this.  Also, a big shout out to Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association for calling the rest of us who cited facts in the article “morons” after he apparently couldn’t counter the points that we had made on factual grounds.  I’ll wear that one as a badge of honor.

Economy

Glass Half Empty: The downside of our technology revolution is a lack of job creation.

Warming Up: Wage growth is now at the highest level that it’s been in a year but the stock market might not be thrilled.

Visual Representation: 27 fascinating charts that will change how you think about the American economy.

Useless: The WSJ surveyed economists and found that 59% believe that there will be a recession in the next 4 years.  For those not familiar with this sort of methodology, 4 years is an incredibly long horizon in which to forecast such things.  The incredibly-accurate Bill McBride thinks that we are in the clear for 2017 and likely 2018 as well (although he cautions that even 2 years out is too far to accurately forecast).

Commercial

Bucking the Trend: While most benchmarks have remained low this year, LIBOR has climbed substantially mostly due to new money-market rules which could lead to an uptick in financing costs for commercial real estate.

Supply Exceeds Demand: Rents in Manhattan are falling as listings surge 35%.

Residential

Selection Bias: All of the Urban revival stories that you read these days are really about the amount of money flowing into urban centers than the number of people.

Viva Mexico: A condo boom in Tijuana, coupled with easier border crossing rules for regular commuters could help ease a housing shortage in San Diego….but is not without it’s risks to American buyers.

The First Step: The Federal Reserve has now acknowledged that we have a housing affordability crisis.  Admitting that you have a problem is the first step to recovery.

Profiles

Prime Time: Nearly 60% of US households and 75% of those that make over $112k per year are now Amazon Prime members.  Let. That. Sink. In.

Screen Shot 2016 10 14 at 11.00.26 AM

Pay For Play: For-profit college Devry University has finally agreed to stop using the bullshit claim that 90% of it’s graduates seeking employment found jobs in their field within 6-months of graduation.  The action came as part of a settlement with the Department of Education over misleading advertising.  That claim would be impressive (and improbable) if it was made by Harvard, let alone a lowly for-profit school that may or may not be a diploma mill depending on who you ask.

Foot in the Door: How Uber plans to conquer the suburbs by partnering with cities to ease parking congestion.

But First, Let Me Take a Selfie: Companies are starting to use facial-recognition apps that utilize smartphone snapshots to verify identity.

Chart of the Day

Things that we want are getting cheaper.  Things that we need are getting more expensive.

WTF

Hero: Regular readers know that I’m a sucker for a great headline.  Man ‘High on LSD’ Saves Dog From Imaginary House Fire is among the best that I’ve seen.

The Softer Side: That Russia is a bizarre place is pretty much self evident.  This new Vladamir Putin calendar featuring the Russian leader cuddling with kittens won’t do anything the change that perception.

Parent of the Year: A Pennsylvania woman has been charged with child endangerment after refusing to feed her 11-month old son anything other than fruit and nuts.  I’ve said it before and will say it again: veganism is a mental disorder.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 18th – On Point

Landmark Links October 14th – What’s the Solution?

ken-bone

Lead Story… A pudgy, mustachioed, red-sweater-wearing star was born during Sunday’s Presidential Debate.  Kenneth Bone was selected to ask the candidates one of the final questions of the night and, his earnest question about how to balance fears of fossil fuel job loss with environmental concerns, combined with his appearance resulted in him essentially taking over the internet…and cable news…and late night TV…and leading to a bunch of hysterical memes.  Mr. Bone was somewhat of a breath of fresh air in a night otherwise marred by childish personal attacks and enough bullshit to fill a rodeo ring. He put a serious question on the table at least for a few minutes and acted as a reprieve from all of the tiresome mudslinging.

Unfortunately, housing has played little if any role in this election cycle despite the critical role that it plays in the US economy and the supply and affordability crisis that we are now facing (to it’s credit, the current Administration has at least taken a public position advocating for more much-needed development even while the candidates rarely if ever mention it).  Among the biggest problems facing the industry today is a massive labor shortage.  That got me thinking: what if the housing industry had it’s own Ken Bone at the debate last weekend?  Rather than focusing on energy policy, his question would have gone something like this:

“What steps will your housing policy take to address the construction labor shortage, while at the same time increasing affordability for American families?”

Industry website Constructiondive.com posted a story based on the recent Construction Management Association of America’s National Conference & Trade Show in San Diego that essentially asked just that.  From Construction Dive (emphasis mine):

While the majority of the conversation around the construction labor shortage has focused on the trades, firms are struggling to snag qualified professionals and white-collar workers as well. A nationwide survey of 1,459 contractors — conducted by the Associated General Contractors of America during July and August — found that 69% are having difficulty finding workers to fill hourly craft positions, 38% are having difficulty hiring salaried field positions and 33% are having difficulty hiring salaried office positions.

“We’re already pressed in terms of the ability to service all the clients with what’s currently on the docket, let alone what’s coming,” said Allyson Gipson of Artemis Consulting, in San Diego. She noted that the recession led to a “geographical depletion of talent,” as well as a large void of industry expertise. 

The aging workforce is also a primary concern for construction professionals, as baby boomers are retiring, but a new generation isn’t filling their place.

On the construction services side, the recession brought increased competition as “everybody was scrambling for work,” Gipson said. Interest rates have remained consistently low, energy credit tax provisions have been extended and private sector spending has risen. All these factors have spurred a boom in multifamily, highway, retail and office construction, she noted.

However, with that increased construction spending comes more demand for services from an industry already struggling to keep up with current projects. Myrna Dayton, deputy director and deputy city engineer for the City of San Diego, said that despite the agency’s efforts to improve recruiting efforts, “We always seem to be short. It’s a constant struggle.” 

Construction Dive then laid out three potential tactics to help solve the labor shortage sumarized below:

Partner with schools and encourage internships to develop the next generation of industry professionals

The gap between graduation and employment can be especially daunting in the construction industry, where students must transition from a classroom environment to the field. Without classes that prepare them for real-life tasks and challenges of a day on the job site, students often struggle to succeed in the industry.

Change hiring requirements to adapt to current conditions

Experts also said standard hiring requirements are often out-of-date for the current industry environment. With owners mandating countless certifications, “those people who have the skills set are going down the road,” Gipson said. “The best construction managers running a building program aren’t all necessarily licensed architects.”

Find ways to attract millennials to the industry

The construction industry has consistently struggled to attract younger workers to fill the gap left by retiring professionals. “We have an industry that is less appealing to millennials,” Gipson said. “We’re not really a sexy industry.”

She encouraged companies to focus on cultivating interest in construction among middle school and high school students. As millennials seek to use their creativity in a work environment that offers autonomy, the industry can tout its ability to offer those kinds of roles.

While the above tactics are a good start, there is a simple reality that needs to be addressed: construction worker pay needs to increase in order to attract more workers.  In an environment where some coastal cities are moving towards a $15/hour minimum wage there is simply no way to entice someone to do manual labor if it doesn’t pay substantially more than making lattes.  However, unlike your typical fast food restaurant or coffee joint, home builders aren’t currently in much of a position to pass additional labor costs on to consumers since 1) They are constrained by mortgage qualifying criteria; and 2) Home building profit margins are already low leaving little room to raise prices and slow absorption without taking a major hit to the bottom line.  That being said, there is common sense solution that would allow builders to attract more workers while not driving prices higher or eating into thin margins: reduce the growing regulatory burden associated with new home building which has soared nearly 30% since 2011 to a whopping $85,000 per new home.  This was partially addressed in the Obama Administration’s Housing Development Toolkit that was released last month.  Reforms that reduce the regulatory burden back to even their 2011 levels at least theoretically allow for construction wages to adjust higher in order to attract workers to fill the many vacant construction positions today without driving up prices or killing builder returns.  Reducing red tape and it’s associated costs, along with the three strategies that Construction Dive outlined above would go a long way towards solving the construction labor shortage and allowing the construction industry to once again become the economic growth driver that it has historically been.

Economy 

Stable and Slow: Great post and chart from Cullen Roche of Pragmatic Capitalism about how economic expansions are getting longer despite (or perhaps because of) slower growth rates.

Golden

See Also: Millennials aren’t as big spenders or risk takers as prior generations were and that is likely to have a profound impact on the economy.

Running on Empty: Nearly 7 in 10 Americans have less than $1,000 in savings including 29% of those who make over $150k and 44% of those who make between $100k and $150k.

Right on Schedule: So far, 2016 is going pretty much exactly as Bill McBride of Calculated risk predicted it would: slow, steady growth.

Residential

Shady Subprime Redux: Why the hell is the Federal Government allowing solar panel loans with 10% interest rates to get senior priority to GSE backed mortgages in the event of a default?

Under Pressure: Deutsche Bank says that rising mortgage rates in Japan, resulting from the BOJ’s plan to push long term yields higher could cause Tokyo condo prices to fall 20%.

Profiles

Water, Water Everywhere: Israel is one of the driest places on earth.  However, their focus on advances in desalination technology has provided them with something that would be unimaginable just a decade ago: a water surplus.

Fire In the Hole!  Samsung is ending production of the Galaxy Note 7 because the damn things keep lighting on fire.  See Also: Samsung is sending fireproof boxes and gloves to Galaxy Note 7 owners for their recall in case the devices spontaneously combust in transit.

Hope for the Future: A new study finds that only one of five Millennials has actually tried a Big Mac.

Chart of the Day

A 5,000 year low.

Even the ancient Egyptians didn't enjoy the low interest rates we see today.

WTF

Bone Zone: A porn company has offered red-sweater-wearing, presidential debate star Ken Bone $100k to appear in an adult film.

Peak Florida: “A 350-pound Florida man ran from a Walmart with two stolen TVs, but his getaway was compromised when his pants–containing his ID–“fell off as he ran away,” according to cops who yesterday apprehended the suspect, who had a crack pipe stuffed with Brillo buried in his anus at the time of his 3:43 AM arrest.”

Clowning Around: A couple in Wisconsin left their 4 year old kid at home alone while they terrified a neighborhood dressed as creepy clowns.  They are now facing child neglect charges.  See Also:  A British woman was so terrified by a creepy clown that jumped out of the bushes that she went into premature labor.

That’s Loser with an “L”: Some guys are paying over $1,200 a year for a fake girlfriend to text and Snapchat with them.  You can read the article if you’d like or just take my word that it’s every bit as pathetic as you are assuming.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links October 14th – What’s the Solution?

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 July 26th – Nip and Tuck

michael-jackson-before_and_after

Lead Story… Home renovations, which are already near record highs, are projected to accelerate over the coming year according to a new report by the Harvard Joint Center For Housing titled Above Average Gains in Home Renovation and Repair Spending Expected to Continue.  The study estimates that growth in the home improvement and repair space will reach 8.0% by the beginning of 2017, well in excess of it’s 4.9% historical average.  From the Joint Center’s press release:

“A healthier housing market, with rising house prices and increased sales activity, should translate into bigger gains for remodeling this year and next,” says Chris Herbert, Managing Director of the Joint Center. “As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs.”

“By the middle of next year, the national remodeling market should be very close to a full recovery from its worst downturn on record,” says Abbe Will, Research Analyst in the Remodeling Futures Program at the Joint Center. “Annual spending is set to reach $321 billion by then, which after adjusting for inflation is just shy of the previous peak set in 2006 before the housing crash.”

Housing sales do indeed spur renovation activity, but there is something else at play here not referenced in the study that we seem to be witnessing a lot of lately: a market with increasing prices, little move-up inventory and low sales will lead to renovations as well.  It’s been well documented that the number of move-up homes on the market has been shrinking, meaning that those who wish to trade up out of an entry-level home have few options that are often bid up to high sale prices.  Calculated Risk’s Distressing Gap chart helps to explain this: new home sales are still extremely subdued (although recovering lately) and existing home sales are still well off their prior peak despite a growing population.

In most markets, if you are an owner of an older, entry level home and you want to upgrade, there are currently few options despite the fact that you may be sitting on a large amount of equity as prices have appreciated.  At the same time, debt yields have plummeted, sending mortgage rates plunging to record lows.  So what do you do?  Tap into some of that home equity to fix up your existing home (and, for Californians maintain a low property tax basis).  This is a potentially-self-perpetuating cycle where starter homes get upgraded and people stay put longer, meaning that new construction is being relied upon for an ever-higher percentage of entry level supply.  However, it becomes particularly daunting to build new homes at an entry level price point when approximately 24.3% of the final sale price of a new home is attributable to regulation.  “We could see percentage growth rates in the remodeling and home- improvement sector that exceed those for new home construction in the next few years,” according to Brad Hunter, chief economist with HomeAdvisor, an online home services marketplace.  Great news if you own stock in Home Depot, Lowe’s, Masco, etc or own a home in an aging neighborhood where this is going on but I’m not as convinced as the Joint Center authors are that it will necessarily lead to higher sale volume.

Economy

Still Bright: Despite all of the noise and bold print headlines, Bill McBride of Calculated Risk still doesn’t see an impending recession.

Yellow Light: JBREC sees Baby Boomer retirement keeping a lid on US economic growth through 2025.

Flattening: Renters (at least those at the high end), are starting to get some relief from ever-rising rents as inventory grows.  This could lead to lower inflation, making it more difficult for the Fed to hike rates.  See Also: Yellen still waiting for overwhelming evidence to warrant a rate hike.

Commercial

Feeding Frenzy: Restaurants, not shops, are  increasingly becoming the driving force behind retail centers in the US. See Also: As e-commerce continues to hit retailer margins, the mall of the future will offer dinner, movies….and a colonoscopy.

Crowding Out: Vancouver’s port is facing a potential crisis as the local housing boom continues to encroach onto former industrial sites leaving operators with few options for warehouse space.

Residential

Telecommuting: The boom in co-working space, combined with insane home prices and rents in the Bay Area has made telecommuting from low-priced rust belt cities a reality for some former Bay Area tech workers.

Roadblock: Construction labor unions are  throwing a hissy fit and fighting Governor Jerry Brown’s plan to make it easier to build more housing in California because he has thus far refused to make a massive union handout part of the deal.

Sale of the Century: It’s apparently a great time to buy a mansion in the Hamptons as the market has cooled with sales down around 60% from last year……if you have around $10MM or so to burn.

Profiles

Dinosaurs: Believe it or not, VCR’s are still being produced in Japan but won’t be after this month.

The Juice is Loose: David Ortiz aka Big Papi of the Red Sox who was washed up a couple of years ago, hit a home run so hard that it got stuck in Pesky’s Pole, because steroids.

Chart of the Day

High Building Costs Make it Tough to Construct Affordable Homes

WTF

Lazy Shit: For those of you who don’t like to lift a finger to do much of anything, there is now an app called Pooper that allows you to summon someone to pick your dog’s poop up off the sidewalk or your neighbor’s lawn.  Don’t laugh, it was valued at $850MM in it’s latest funding round.

That Escalated Quickly: In-store video footage captured a man attempting to build a chemical weapon in a California Walmart.  See Also: Five weird crimes that could only happen in a Walmart.

Tenement: Members of Australia’s Olympic team refused to move into Rio De Janeiro’s Athlete’s Olympic Village over safety concerns and issues with plumbing.  Rio’s mayor responded by offering to get them a kangaroo in order to help them feel more at home to which an Aussie team spokesperson replied: “we do not need kangaroos, we need plumbers to account for the many puddles found in the apartments.”  This has the potential to be a huge mess.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 26th – Nip and Tuck

Landmark Links June 10th – Border Skirmish

funny-cats-and-dogs-fighting

Lead Story… One of the problems with restrictive zoning is that it’s often highly inconsistent among neighboring cities meaning that a (relatively) more pro-development municipality often ends up picking up the slack for a more anti-development one.  It should come as no surprise that this issue is front and center in Silicon Valley as San Jose, one of the few moderately pro-residential development (less anti-development would be more accurate)  cities in the region is getting fed up with it’s neighbors.  The Wall Street Journal reports:

As Silicon Valley swelled with technology jobs for much of the past half-century, the city of San Jose was happy to serve as its bedroom community, blanketing vineyards and plum orchards with homes until it became the nation’s 10th-largest city.

But all that building has taken a toll, leaving this city of roughly one million people low on land and fiscally stretched. Now, grappling with soaring housing costs thanks to the region’s continued job growth, city officials are criticizing neighboring cities for failing to create enough housing of their own even as they continue to cut ribbons on new office buildings.

One recent target: nearby Santa Clara, which is planning a major development of offices and retail that includes little residential construction. San Jose has taken the rare step of publicly opposing the project, saying it would add far too many jobs, exacerbating the region’s housing shortage.

San Jose “cannot single-handedly solve the housing problem,” said Kim Walesh, the city’s economic development director. “It really is going to require other cities stepping up.”

So what’s the big deal if San Jose is mostly residential and neighboring cities like Santa Clara are mostly new retail and office?  The answer is simple: tax revenue and lots of it.  Retail and, to a lesser extent other commercial uses bring in recurring tax revenue to a city and requires very little in infrastructure such as schools, parks and other amenities.  Residential is the opposite.  It brings in little revenue after one-time development impact fees are paid and requires a lot of infrastructure.  If you want to see what happens when a city has very little tax generating retail and other commercial real estate, go to Google and type in Vallejo Bankruptcy.  What’s happening in the Bay Area is a classic example of too much of a good thing: tons of job creation.  This would be great if cities were willing to build housing but clearly they are not.  More from the WSJ:

“It is hard to understand how we’re going to get around this,” said AnnaLee Saxenian, a professor at the University of California, Berkeley, who studies Silicon Valley and other technology hubs. “The whole Bay Area really is having a very hard time creating sufficient housing.”

Housing has lagged behind commercial projects in part because it is less lucrative for municipalities. Land that goes to residential uses tends to bring in less tax revenue—and requires more services like schools and parks. San Jose last year estimated that for every 1,000 square feet of single-family housing, the city budget takes a net loss of $255 a year, compared with a gain of $1,064 for the same size commercial space.

That’s around 4x as much revenue  generated by commercial space.  In a perfect world, every city would develop both commercial and residential units but that isn’t currently happening.  San Jose is moderately more friendly to residential development than it’s hostile neighbors so it’s been bearing the brunt of any new housing supply and it’s citizens and government aren’t happy with neighbors not carrying their weight when it comes to proving new residents a place to live:

 

“This is a classic collective-action problem, where what is rational for each city’s individual perspective is highly sub-optimal for the region,” said Gabriel Metcalf, chief executive of the nonprofit planning think tank SPUR. “These supposedly local decisions have huge regional impact.”

Of course, conflicts over rapid growth have long been a feature of Northern California. But the latest tech boom has created so many jobs that it would take a massive building boom of housing to meet the demand.

San Francisco, San Mateo County and Santa Clara County together added 385,800 jobs between 2010 and the end of 2015, according to the California Employment Development Department. Over the same period, building permits were issued for just 58,324 housing units, according to the U.S. Census Bureau, enough space to hold roughly 150,000 new residents.

Left with little option, San Jose is fighting back and has taken the unusual position of suing Santa Clara over a large-scale commercial development that it claims would add a ton of jobs but little in the way of new housing:

Balance is central to the fight between San Jose and Santa Clara. A city of 120,000, Santa Clara two years ago struck a deal with developer Related Cos. to turn its golf course, previously a landfill, into a town square in the shadow of the new football stadium for the San Francisco 49ers. Plans call for 9 million square feet of development, or the size of three Empire State Buildings, including 1,360 housing units but dominated by retail and offices.

Santa Clara’s projections show that if the development is fully built, the city would add 49,000 jobs but just 16,000 housing units citywide by 2035.

“That is going to create demand for housing elsewhere, especially in San Jose,” said Ms. Walesh, that city’s economic development director. “It brings them more out of balance.” Santa Clara’s ratio of jobs to housing would rise to 3 to 1 under its projections, compared with 2½ to 1 in 2008 and San Jose’s 0.87 to 1 today.

“We’re responsibly growing our city as much as we can,” she said, including construction of many “high density projects that are well above our comfort zones.”

San Jose, meanwhile, is trying to steer itself more into balance. While city officials want to add 120,000 housing units by 2040, the city has just 15% of its land devoted to employment-heavy uses like office and retail. That compares with 24% in Santa Clara, and 28% in Mountain View, according to a recent SPUR report on San Jose.

The jobs vs housing balance issue is 100% due to restrictive zoning and the disproportionate influence that NIMBYs have on Silicon Valley land use politics.  The problem could be solved by simply easing zoning codes and reducing red tape and the brutal discretionary entitlement process that can ensnare a residential project for a decade or more.  However, in order to accomplish that you have to overcome the entrenched interests of existing NIMBY homeowners which is far easier said than done.  One irony here is that many residents oppose higher density in Silicon Valley under the guise that it could create more traffic.  However, higher density development would allow mass transit in the area to be more viable, as it is in SF and Oakland which could actually reduce traffic over time especially if higher density residential towers were built in commercial areas.  Don’t hold your breath though.  The most innovative place on earth also happens to be one of the most backwards when it comes to land use. 

 

Economy

In the Dark: Despite investor fixation with US Payroll data and other economic reports, figures often have a huge margin for error and are almost always revised after they are released, making the monthly numbers little more than just noise.  That brings us to this: the always-excellent David Rosenberg of Gluskin Sheff is getting nervous about the economy based on a trend that he is seeing in the employment data (from Business Insider):

Not just that, but there were downward revisions to the prior two months totaling 59,000 – something we have not seen since June of last year.

Look at the pattern; +233,000 in February, +186,000 in March, +123,000 in April and +38,000 in May. Detect a pattern here (he asks wryly)?

You can see why I was gagging when I heard some of the pundits on “bubblevision” tell the anchors this morning that the Fed will look through one number. Dude – this isn’t one number. It is a pattern of softness that has been in effect for the past four months … and counting.

In terms of sectors, two developments really stood out and neither particularly constructive.

First, goods-producing employment declined 36,000, which was the steepest falloff since February 2010. But this is not just one data-point but a visible weakening trend – this critical cyclically sensitive segment of the economy has contracted now for four months in a row and the cumulative damage is 77,000 jobs or a -1.2% annual rate.

I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007.

Each one of these periods presaged a recession just a few months later – the average being five months.

There was just one time, in the 1985/86 oil price collapse, that we had such a huge decline in goods-producing employment without a recession lurking around the corner – but the Fed was easing then and fiscal policy was a lot more accommodative than is the case today.

Not even the job slippage in goods-producing sectors during the 1995 soft landing and the 1998 Asian crisis were as severe as what we have had on our hands from February to May.

For such a long time, the service sector was hanging in but services ultimately service the part of the economy that actually makes things.

Private service sector job gains have throttled back big-time – from +222,000 in February to +167,000 in March to 130,000 in April to +25,000 in May (ratified by the non-manufacturing ISM as the jobs index sagged to 49.7 in May from 53 in April – tied for the second weakest reading of the past five years).

Once again, a discernible pattern here, but it is where the slowdown is taking place that is most disturbing.

Rosenberg is not a broken clock and is one economist that I pay close attention to.  This post was published after last week’s big jobs report miss that essentially took a June rate hike off of the table.  See Also:  The yield curve is still flattening out.

Almost Zero: Toyota Finance Corp issued 20 billion yen ($186MM) of notes at a record-low yield of 0.001% earlier this week – and no that isn’t a typo.  The Bank of Japan dropped the yield on Japanese government bonds out to 10-years into negative territory, sending investors piling into corporate bonds as they attempt to generate a meager negative yield.  I’m still trying to wrap my head around this but the consequences are a bit scary.  If Toyota can borrow for nothing, why wouldn’t they take the company private, go on an acquisition binge or expand their credit business dramatically, basically becoming a hedge fund that could borrow cheaply and pocket a spread.  The possibilities are endless as are the unintended consequences.

Demographics are Destiny: Based on experience from previous economic cycles, the number of babies born in the US in 2015 should have gone up.  Instead, it actually fell, leaving the US mired in what some are terming a “baby bust” that has not improved since the Great Recession and housing crash.  These five charts from the WSJ show just how bad the baby bust has been.  The implications for future economic growth are not positive if the population shrinks.

 

Residential

No Need to Flip Out: Home flips are at decade highs but today’s flips, which often involve buying and fixing distressed homes with little leverage look very different from those during the bubble, many of which were strictly market dependent and highly leveraged.  That is a good thing.

Gimme Shelter: There is much debate about where we are in the housing cycle.  Cutting through that noise, top housing analyst Ivy Zelman makes a critical point: we simply don’t have enough places for people to live in the US.  From Business Insider:

“This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.”

Profiles

Technology is Bad for Your Love Life: Couples are having sex less.  The likely culprit according to one professor is Netflix binge watching.  See Also: Tinder blamed for a rise in STDs.

Vultures Circling: Distressed investors are circling the carcasses of distressed oil assets in North Dakota.

The Alchemist: Meet the Ukrainian refugee who made billions of dollars for Citibank by doubling down on subprime mortgage bonds at pennies on the dollar when everyone else was selling.

Chart of the Day

Almost back to the all time high?  Not so fast.

Source: Real Clear Markets

WTF

Vegans Gone Wild: I could fill the WTF section of this blog exclusively with crazy vegan Astories were I so-inclined.  Today’s story of bat-shit crazy vegan-ism:  An unhinged woman in Ontario who likely owns no less than ten cats paid $400 to “rescue” a lobster from a grocery store and ship it back to Nova Scotia where the dopey (but delicious) crustacean will likely be caught again and eaten, hopefully by me. Since crazy vegan stories are now considered news, this hysterical tale found it’s way into the Washington Post which used to be a serious paper.  If you want to lose all faith in the ability of all humans to think rationally, feel free to peruse the comments.  See Also: Kids find a new way to be a pain in the ass – by becoming vegans.

At Least He Appears to be Eating Well: Guns n Roses front man Axl Rose is demanding that Google take down unflattering pictures of him from a show several years ago because he apparently has absolutely no clue how the internet actually works.  Rose was overweight at the time that the pictures were taken, leading to some of the best internet memes ever created.  Here’s one example:

Axl Rose Wants Google To Remove The 'Fat Axl' Meme Off The Internet

Public Service Announcement: A windblown beach umbrella killed a woman in Virginia Beach.  909ers and other tourists take note: between runaway umbrellas and great white sharks, Newport Beach is unsafe.  Best to stay home this summer.  You can thank me later.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links June 10th – Border Skirmish

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

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

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

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

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

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

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

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

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

Economy

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

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

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

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

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

Commodity BoA chart one

 

 

 

 

 

 

 

 

 

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

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

Commercial

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

Residential

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

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

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

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

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

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

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

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

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

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

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

But See: Why the wealth effect is bunk.

Profiles

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

Chart of the Day

Submitted from Visual Capitalist

Visualizing Data: How the Media Blows Things Out of Proportion

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

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

Landmark Links April 26th – Disconnect

Disconect

Lead Story… Goldman Sachs published a research note last week that CNBC posted some excerpts of, making the case that the construction labor shortage isn’t to blame for the sluggish home builder performance:

“Our analysis of payroll growth and wage inflation data suggests that labor shortages may not be to blame for the mediocre level of housing activity,” Goldman Sachs analysts wrote in a report this week. “We find that, on the one hand, the construction sector has experienced the largest job growth over the past year.”

Construction growth has led all other sectors at 5 percent, according to the Bureau of Labor Statistics, but average hourly earnings in construction gained only 2.2 percent over the past year, which is about the national average.

“Economics 101 would suggest that, if labor shortages did in fact exist, upward pressure on wages would be more pronounced and payroll growth would be anemic,” the report said. “Therefore, the evidence from the industry-level employment and wage data does not support the existence of labor shortages in the construction sector.”

Goldman instead pointed to permitting delays and land scarcity as the culprits, citing a report from JBREC’s Jody Kahn that we posted earlier this month:

A survey of 100 builders nationwide by John Burns Real Estate Consulting backs that thesis. They asked about costs that didn’t exist 10 years ago, and found high levels of builder frustration, not just from labor, but from cost overruns stemming from new regulations for house erosion control, energy codes and fire sprinklers. They also cited understaffed planning and permit offices as well as utility company delays.

“New regulations to protect the environment and to shore up local city finances have made it extremely difficult for home builders to build affordable homes,” the Burns analysts wrote. “Now, more than ever, the demand for affordable entry-level housing will need to be met by the resale market, since new homes have become permanently more expensive to build. We were overwhelmed by the reply as well as the builders’ level of frustration.”

I agree with what they are saying to an extent as the construction labor shortage Isnt the sole culprit, but first we have to put things in context.  Yes, we are rebounding but it’s from a very low level when it comes to construction employment:

The CNBC story made two important clarifications: 1) The labor shortage is a much bigger deal on the west coast (most of our clients would agree); and 2) The construction industry has failed miserably when it comes to to attracting younger workers and is stuck with an aging workforce (again, our clients have verified this):

There is a labor crunch, though, in some parts of the country, more so in the West, as a considerable number of the construction workers who left during the recession still have yet to return.

The average age of a construction worker today is far higher than it was during the housing boom, Michelle Meyer, deputy head of U.S. economics at Bank of America Merrill Lynch Global Research, said Tuesday on CNBC’s “Squawk Box.” Builders need to attract younger workers, but they seem, so far at least, unwilling or unable to pay them more.

IMHO, there are a number of issues conspiring to make this a very difficult environment for builders and developers.  Permitting delays, a lack of developable lots, low affordability, more stringent mortgage underwriting, people forming households later in life, labor shortages, high costs, lack of development financing, almost no new entry level product, etc.  Builders could probably overcome a couple of these but add them up together and you have the perfect storm for a relatively moribund home building recovery.  This sluggishness is leading to capital market pessimism.  Meyers Research noted last week that their investor round table is expecting a downturn in land in the not-too-distant future which is causing them to proceed cautiously:

  • The train may arrive early: While a national economic recession is still on the horizon, the recession is now expected within the next two years, which makes investing in a residential land opportunity more interesting.

  • Possible repricing ahead: In fact, some groups are suggesting that land will be “on sale” within the next 6-18 months. Widespread distress is not expected, but neither are decreasing home prices. It’s simply an expectation that some return-based land owners may be experiencing deal fatigue and be willing to accept a modest return rather than endure another cycle.

  • “Multiple” Opportunities: Some of the larger, more patient capital sources are expecting this to be an attractive buy opportunity where they can “play for the multiple”. The challenge is that few of these investors are looking to develop land. The heavy capital requirements of land development are not justifiable today and banks remain tepid toward land development. It is not a stretch to expect the for-sale market to remain under-supplied, or at least not oversupplied, for a protracted period. This condition surely will reduce the risk of capital loss for patient investors but make things challenging for home builders who need land as their most basic raw material.

At some point this becomes a self-fulfilling prophecy where lots fall in value due to a dearth of capital availability where investors pull back to wait for a better entry point.  This couldn’t be more different than the 2007-2008 scenario where there was plenty of lot and home supply that weighed on the market heavily once subprime lending (and demand from marginal buyers) vaporized.  No, in this case homes could actually keep going up in value, getting less affordable while new construction continues to slow and land development grinds to a halt.  Why?  Because people are still forming households and there is still demand that will likely continue to outstrip supply of development slows further.

Private equity investors made large investments in land coming out of the downturn, banking on a strong rebound when home values began to rise.  Many of them have been disappointed with the results and many portfolios haven’t hit expected returns despite home prices and lot prices generally rising.  This has mainly been due to the various headwinds facing development and home building that I mentioned above.  The prevailing view on Wall Street appears to be that land is overvalued but home prices may not be which is why Meyers sees the potential for land to go on sale while low supply keeps home prices elevated. Ironically, developers and their capital partners could have been spot on underwriting finished lot values and still under-performed due to permitting delays and cost inflation.  Developers and their equity partners are also struggling since home builders are now demanding finished lots whereas they were previously buying unimproved but mapped land and did their own improvements.  Improving lots is very capital intensive as mentioned in the Meyers report above and your average developer has a substantially higher cost of capital than a public home builder does.

I’m of the opinion that the correction has been underway since 2014 when builders essentially stopped buying paper lots in all but the most infill locations since underwritten returns on land improvement and horizontal construction are now higher (ask a west coast based land broker and they will likely confirm this). All told, we could be setting up for a somewhat bizarre scenario where land prices languish as development risk gets repriced while home prices stay firm or go higher.

Economy

Look at the Bright Side: As lucrative oil jobs dry up,  some workers are jumping ship to the growing solar energy sector.

Commercial

Just Speculating: Spec construction is on the rise as tenant demand continues to fuel the industrial sector.

Residential

There’s a Freeway Running Through the Yard: Buyers in high priced markets like Los Angeles will put up with a lot, including a home adjacent to the freeway to find something even moderately affordable. See Also: Home price surge stymies first time buyers.

Profiles

Keeping Up With the Googles: Traditional businesses are making their offices look like startups in a bid to appear “cool” to millennials.  However, what many of these traditional businesses run by 50 year old execs don’t grasp is that the appeal of the startup lies in the excitement of the concept, the culture and the idea that you are getting in on the ground floor….oh yeah, I almost forgot about the ability to participate in the upside if the company makes it big.  These are things that your typical advertising agency will never offer and nap pods, ping pong tables and hip office design in an old-school business are superficial and come off as pandering.

Better Off Just Dripping: The Dyson Airblade jet dryer is really bad for hygene. A new study shows that using one is akin to setting off a viral bomb in an already-disgusting public restroom.

Chart of the Day

The latest update of Bill McBride’s “Distressing Gap” doesn’t look to be closing anytime soon.

WTF

Makes Sense to Me: A woman in South Carolina crashed a car into a Walmart.  She claims that God told her to do it.

Video of the Day Twofer: Watching disgruntled construction workers battle it out on the street with heavy machinery is my new favorite pastime. (h/t Ian Sinderhoff)

The Law of Unintended Consequences: An animal rights activist group “freed” an ostrich from the circus.  It was promptly hit by a car and killed.  Turns out that ostriches aren’t well equipped to handle an urban environment in Germany.  Who would have though?

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 26th – Disconnect