Landmark Links November 8th – Size Matters

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

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

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

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

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

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

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

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

Economy

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

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

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

Commercial

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

Residential

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

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

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

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

Profiles

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

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

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

Charts of the Day

WTF

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

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 8th – Size Matters

Landmark Links August 9th – Flipper Does Seattle

Dolphin horny

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

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

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

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

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

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

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

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

North Tower

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

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

South Tower

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

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

Economy

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

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

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

Commercial 

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

Residential

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

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

Profiles

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

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

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

Chart of the Day

WTF

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

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 9th – Flipper Does Seattle

Landmark Links July 29th – Taking Out the Trash

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

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

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

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

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

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

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

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

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

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

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

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

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

Economy

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

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

Residential

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

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

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

Profiles

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

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

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

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

 

Chart of the Day

This warms my cold heart.

Screen Shot 2016-07-25 at 2.19.21 PM

WTF

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

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

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

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links July 29th – Taking Out the Trash

Landmark Links April 15th – Looming

Golden Gate

Lead Story…  Another day, another story about one of America’s astronomically expensive and typically chronically under-supplied markets getting hit with a massive wave of high end condos (and high end apartments).  Over the past few weeks, we focused on New York, Miami and even Hong Kong.  Today it’s the patron saint of expensive US housing markets, San Francisco.  Even casual follower of the residential real estate market are well aware of the lack of supply and nose-bleed prices that people pay to live in SF for a whole bunch of reasons.  However, as Wolf Richter notes in Business Insider this week, things appear to be changing.  According the the SF Planning department, there are 44,700 units in the pipeline from “building permit filed” to “under construction.”  That doesn’t include the 17,900 units approved but not yet permitted.  Nor does it include the 23,980 units that are approved in the Park Merced, Candlestick and Treasure projects that are approved but could take well over 10 years to build out.  That’s a ton of inventory coming online in a city with only 382,000 units in it’s existing housing stock.  The impact is already being felt in the condo market:

In the first quarter of 2016, various market segments in the city began to trend in significantly different directions. Houses, especially those below $2 million, are still often selling in a frenzy of bidding: Recent reports of houses selling with 5, 10 or more competing offers are not uncommon, especially in neighborhoods considered more affordable (by San Francisco standards). Demand remains very high, supply remains extremely low, and new house construction is virtually nil.

As of early April, the number of condo listings actively for sale in MLS is up over 40% year over year, and that does not include most of the new-construction condo units hitting the market (not listed in MLS).

These condos often go into contract during the construction phase, long before sales actually close, and access to information during that period is very limited. There can be no doubt that they comprise serious competition to resale condos in the areas they’re being built.

– Patrick Carlisle, Chief Market Analyst at Paragon

According to Richter “It’s chilling: for condos under $1.5 million, the number of withdrawn or expired listings soared 94%, and for condos above $1.5 million 128%.”

First off, this had to happen at some point but it should have been more incremental and should have happened earlier.  San Francisco’s market has been notoriously tight for years and the entitlement process there is reminiscent of running the gauntlet.  If entitlements weren’t so difficult to come by, many of these units could have been delivered years earlier when demand began to ramp up but construction didn’t.  Instead, many developers started at roughly the same while prices of SF condos ran up 70% in the interim, meaning that we now have a tidal wave of units starting to get delivered just as the VC market is slowing and tech firms are beginning to lay people off.  Reality is that the local market desperately needed more units but that doesn’t make it any less painful for the developers holding the bag or the home owners who bought in the late stages of the run-up.  Either way, we are certainly going to test the true depth of demand for high priced housing in the next few years.

Second, this is what happens when everyone builds the same thing.  The only thing getting approved in SF are high density, high end condos and apartments.  That’s where all of the units are so that is where the glut is going to occur.  Want to know why the single family home market is holding up much better?  Simple.  Almost no SFD’s are getting built so supply hasn’t increased.

Third, several fund investors the we respect a lot are telling us that they are taking a wait and see approach on current investment opportunities in anticipation that there will be large distressed opportunities in the NY and Miami high rise condo markets in the coming quarters that will result in a buying opportunity.  Their investment thesis is that many of these high end condos will end up going back to the lenders since foreign investors have begun to retrench from the market and there isn’t enough domestic demand to buy up the units at their high pro-forma prices.  I guess we can now add San Francisco to that list.

San Francisco housing

Economy

Black Gold?  According to the talking heads, it was bad for the economy when oil prices were plunging so is it now good that they have rebounded to $40/barrel?  See Also: Why wasn’t there any economic boost from low oil prices?

It’s All Relative: Top Venture Capitalist Peter Thiel says that pretty much everything is overvalued but some things are more overvalued than others.

Get Real: Real (inflation adjusted) 10-year treasury yields have gone negative for the first time since 2012.

Commercial

Just Speculating: Growth in the San Francisco office market has been a safe bet for several years as VC money poured into new investments and tech companies gobbled up any available space in order to account for aggressive growth projections in a supply constrained market.  Times are changing though and the assumption that the good times would continue has put some speculative office investments at risk now that the VC spigot is slowing while several landlords are trying to unload buildings for over $1,000/sf.  At the same time, available sublease space from downsizing tech companies, an indicator of a slowdown, is creeping up.  From the Wall Street Journal earlier this week:

“We’ve started seeing the cautionary winds start blowing,” said Steve Barker, executive vice president at Savills Studley, which advises companies on their real estate. “In the last two to four months, you’ve really seen the impact of the strained capital environment hitting the real-estate market.”

A cautionary tale exists with online game maker Zynga. In 2012, the then-rapidly growing company bought its 680,000-square-foot building at 650 Townsend St. It saw plenty of space to grow, and at one point occupied 480,000 square feet.

Soon after, its growth stalled, and stock price plunged, layoffs followed, and now the company is trying to sell the building.

Subleasing, though, carries its own risks.

Health-care startup Practice Fusion, which leased former Zynga space in the same building, underwent layoffs in February. Now Practice Fusion, too, has put its 60,000-square-foot space up for sublease.

From what we’ve been hearing from local market sources, this is much more of an issue in downtown San Francisco which is heavily dominated by startups that aren’t profitable and are reliant on VC money fund operations.  It isn’t as much of an issue in Silicon Valley where huge and incredibly profitable mature companies like Apple and Google and the myriad of companies in their ecosystem have come to dominant the local commercial real estate markets.  Why? Because these companies don’t rely on VC money and aren’t impacted by it’s availability.  Still, it bears watching to see if the issues starting to appear in SF spread to other Bay Area markets.

Residential

Stay in School: New research suggests that student debt is a substantial impediment to college dropouts buying a home a home but only has a marginal impact on those with a Bachelor’s degree or higher.  Moral of the story: if you borrow money to go to college, you had better graduate.

Signs of Strength: Mortgage rates have dropped to an annual low and apps for mortgage refinances have been surging  for several weeks.  However, purchase money mortgage applications had not moved much recently.  That all changed last week when purchase apps increased to the second highest level since May 2010.

Graphic of the Day: I found this 3-D image from The Visual Capitalist fascinating:

The Salary Needed to Buy a Home in 27 Different U.S. Cities

Profiles

Long Shot: Leicester City entered the English Premier League season as a 5,000 – 1 underdog to win the league championship.  To put some context to that, you can place a bet with the same odds that Elvis is still alive.  Furthermore, the Cleveland Browns are only 200-1 to win next years Super Bowl.  You read that correctly, they were 25x LESS likely to win a championship than the Cleveland Browns. The key word there is “were.”  With 4 games left in the season, the perennial doormat which was nearly relegated last season is in 1st place, 7 points ahead of the second place Tottenham.  Hang in there Cleveland fans.  There is hope.

The New Buggy Whips? The i-Phone is doing to cameras what the automobile did to horse carriagesBut See: The Apple Watch has not been the FitBit killer that may thought it would be.

Really Bad Idea:  Stalkers rejoiced when new app allows anyone to spy on Tinder users and track them to their last location, an invasion of privacy that would make Zuckerberg blush. See Also: Body parts from a missing woman were found in a dumpster outside the home of a man she went on an online date with.

Chart of the Day

LOL

crude

Source: The Reformed Broker

WTF

The Saddest Record: A Brooklyn man set a record by watching TV for 94 hours straight. That’s just under 4 days for those of you who don’t like math. This is one of those situations where there are no winners, only losers.

They Flying Farm – It’s gotten ridiculously easy (and cheap) to bring a comfort animal on a flight.  All you need is a doctors note and a $65 certificate for your pet. This started in 2012 when the US Department of Transportation amended a statute that was originally intended to cover guide dogs.  Since then, service animal registrations have risen from 2,400 to over 24,000.  It’s not just dogs and cats either. People are bringing all sorts of barnyard and exotic animals aboard especially in LA and NY, leading some to wonder how much is too much:

The zaniest anecdotes (like the “support pig” ejected from a D.C.-bound plane after it relieved itself in the aisle or the “therapy turkey” whisked via wheelchair onto a recent Delta flight) tend to go viral. But the habit has become particularly commonplace on the LAX-JFK route favored by fussy celebrities and industry execs.

Having to call home to say “honey, my flight is going to be late because a pig crapped in the aisle” was something that was only previously an issue in 3rd world outposts with names like The People’s Democratic Socialist Republic of __.  Now we have barnyard animals on planes in the US ostensibly to keep someone from getting nervous on a plane. I think it’s safe to say that this has gone a bit too far.

In Soviet Russia: Saying that Russia is a bit of a freak show is a bit like saying that water is wet.  It’s a factually accurate but unnecessary statement given that anyone over the age of four already knows it to be true.  Example A: a Russian entrepreneur recently opened a cafe in East Siberia that’s a tribute to Vladimir Putin.  It’s complete with Putin shrines and the toilet paper in the restrooms has pictures of Barack Obama and other western leaders on it. (h/t Steve Sims)

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 15th – Looming

Landmark Links April 8th – Hide and Seek

extremehideandseek

Lead Story… A major leak of over 11 million documents from a sketchy Panamanian law firm that specializes in helping people launder money through offshore shell corporations is casting light on one of the sources of demand for high end real estate in Miami. The list of clients included politicians, drug lords, celebrities, billionaires and some very close associates of one Vladimir Putin. NSA whistle blower Edward Snowdon called it the “biggest leak in the history of data journalism.”  We posted a piece a couple of weeks ago about how the downfall of Swiss bank secrecy (ironically pushed by the US) was turning US real estate into a haven for money laundering due to a lack of oversight when it comes to all-cash transactions.  The Mossack Fonseca law firm helped clients set up offshore shell companies in countries with lax oversight laws which then become vehicles to purchase real estate in NY or Miami where the true owner is obscured.  The US Treasury Department is getting concerned and recently started cracking down on shell companies purchasing high priced units in Manhattan and Miami.  Why is this concerning?  First off, it appears that a lot of this is dirty money: political graft, drug money, cash from arms sales, illegal business, etc. Second, it only serves to drive up costs for would-be homeowners by taking units off the market in cities where inventory is already tight.  Just in case you were wondering, this is not just a Miami issue.  It’s happening in Irvine (mostly Chinese money) and New York (Russian money) as OC Housing News astutely pointed out as well as pretty much every high priced coastal city.  Consider this yet another factor that is hurting affordability in expensive cities.

Miami

Economy

Broken Clocks: Talking heads and pundits are constantly calling for a recession for one reason or another. However, as Bloomberg’s Barry Ritholtz notes, the conditions for one to occur simply aren’t present at the current time:

We can create a basic checklist to tell when an economic expansion cycle has begun to have run its full course:

● Full employment (check)
● Wage gains (hardly present)
● Inflation (1.7 percent is far below recession levels)
● And last, an aggressive Federal Reserve tightening that takes interest rates too high. We are now at a mere 0.25 percent, perhaps going to 0.50 percent — hardly soul-crushing rates.
Thus, while we can easily imagine the necessary conditions for the beginnings of a recession, they are for the most part simply not present.

The Big Squeeze: A new type of student debt puts the onus of repayment 100% on parents rather than students.

Commercial

Conflicting Messages: REITs have become net sellers (h/t Scott Barnard) of assets while foreign investors and private equity are taking up the buying slack.  CBRE is saying that fundamentals are strong and they believe that the market is on solid footing (h/t Eric Snell).  However, there are a couple of significant developments to keep an eye on.  Historically, when private equity investors and foreign investors are buying while REITs are net sellers it is a contrary indicator that the market is near a top.  In addition, REIT yields are now below those of Baa bonds, (even when train-wreck energy and commodity company corporate debt is excluded)  which they historically trade at a premium to.  Again, this is not exactly a positive indicator historically.  A bull might point to the fact that the corporate bond market has been chaotic of late and that foreign investors are buying for different reasons this time around, primarily as a tax shelter in a stable country.  However, there is some mounting evidence that we might be in for some turbulence.

Residential

Struggling: Home builder stocks are taking it on the chin despite an economic environment that, at least on the surface should be favorable.

Don’t Call it a Comeback: Homes in the Rust Belt have largely been a dead asset in recent years as population has fallen and economic growth has been sluggish, keeping housing prices low.  However, shortages in certain key Mid-West markets could foreshadow an uptick in prices.

The Breaking Point: With venture capital investment waning and tech firms announcing layoffs, some tech workers in the Bay Area in particular and San Francisco in general are leaving town to get away from $4,500 per month rents and home prices well over $1MM. Thus far, Portland, San Francisco, Austin and even LA appear to be the beneficiaries as workers realize that there isn’t any point to paying that much if you don’t have the stock options to go along with it.

Profiles 

The Juggernaut: As we noted on Tuesday, Tesla pre-sold sold over 276,000 new Model ‘s for 2017 delivery (update: they are now over 325,000). As a point of reference for how huge this is, Audi only sells about 180k new cars a year in the US across all model lines. Despite some concern about Tesla’s capacity to manufacturer that many cars in such a tight time frame and then provide service, this is a game changer. So far, sales of electric cars have been a niche product measured in thousands of sales a year rather than hundreds of thousands. Tesla has now proven that the electric car can and will have mass appeal in the United States. In the meantime, they are using their cars as a platform to develop battery technology that will be used as a greener power plant for homes and businesses in the future. There is one other aspect to Tesla that I find fascinating: it’s an American company building a luxury car that can compete with any luxury brand in the world. When’s the last time that happened? Old school auto makers like GM, Ford, etc. have needed to appeal to a buyers patriotism to sell cars to American consumers. Why? Because the inferior products that they were building couldn’t compete against superior products from Japan and Germany on their own. Tesla not the only can compete, it is winning. On top of that, it doesn’t need a gimmicky patriotic marketing campaign to pull it off.

A Sucker Born Every Minute: Frank Bruni of the NY Times wrote a great satirical piece as an April Fools Day joke last week claiming that Stanford dropped it’s already record-low admission rate to 0% by not admitting any students to it’s class of 2020.  Right on cue, a lot of people on the internet fell for the joke because a lot of people on the internet are idiots. (h/t Tom Reimers – a Stanford alum)

Frivolous: A group of Patriots fans is suing the NFL for taking away their teams’ 2016 1st round draft pick as a penalty for Deflate Gate.  This is the end result when sports fans don’t have a life outside of their team.  I wish that they posted a picture of the fans who are suing with the article.  I’m guessing that they look like the Patriots equivalent of this.

Chart of the Day

WTF

Revenge Stinks: A Swedish man was arrested after a woman called the police on him for “revenge farting” in her apartment and leaving a disgusting smell after she declined to sleep with him.

Seems Reasonable: A Stockton, CA man is in police custody after he attacked a man with a knife on his front yard.  Why, you ask?  The man was pooping on his lawn.

Wimps: A British gym recently put up a billboard with a picture of an alien encouraging people together in shape because, aliens will go after fat people first when they land on earth. Right on cue, easily offended presumably chubby folks got offended and called for the sign to come down because it hurt their feelings. That sound that you hear is the worlds smallest violin in the world. Maybe if they spent the time wasted on complaining working out at the gym, they wouldn’t  have an issue. Just sayin’.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links April 8th – Hide and Seek