Landmark Links November 8th – Size Matters

funniest-urinals-around-the-world-5

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 September 30th – Careful What You Ask For

crowds

Lead Story… Anyone who has ever dealt with addiction will tell you that the first step towards recovery is admitting that a problem exists as opposed to sticking ones head in the sand an denying it’s presence.  Ever since the end of the Great Recession, we’ve faced a different sort of housing crisis: one defined by an inadequate amount of residential development taking place in our most productive cities.  This has led to skyrocketing rents and home prices and resulted in an affordability crisis.  The primary reason, as outlined here numerous times is that restrictive zoning and a grueling discretionary approval process in our most productive cities make it incredibly hard to develop more density which is desperately needed to accommodate an ever-growing population.  When demand exceeds supply prices go up.  Despite the contentions of some anti-growth city dwellers, housing is not immune to the basic laws of economics.

Nearly all land use politics is local in nature and it’s incredibly difficult amend restrictive zoning.  The reason is simple: existing owners benefit from scarcity of new housing units since it leads to increased values.  They also tend to prefer less traffic and crowding. Existing owners will always be a more powerful and well-organized constituency than aspiring owners or renters which is why NIMBY’s wield so much power and influence over local government.

Over the past few years, there has been a growing consensus from economists on both the left and right that restrictive zoning and so-called slow growth development restrictions are a leading cause of income inequality and cause a drag on economic growth.  State and even the Federal Government are finally taking notice and acknowledging that this is a big problem that cities aren’t likely to solve on their own because they don’t have the stomach to push back against the NIMBYs.  It’s very rare that governors opine on local land use decisions.  However, CA Governor Jerry Brown did just that earlier this year when he attempted to make it easier to build apartments and condos – and was ultimately unsuccessful.  As rare as it is for governors to get involved in local land use issues, it’s pretty much unprecedented for a president to do it.  However, earlier this week, President Obama did just that.  From Politico (emphasis mine):

The Obama administration Monday is calling on cities and counties to rethink their zoning laws, saying that antiquated rules on construction, housing and land use are contributing to high rents and income inequality, and dragging down the U.S. economy as a whole.

City zoning battles usually are fought block by block, and the president’s involvement will create friction, particularly among environmental groups and the not-in-my-backyard crowd. But the White House jawboning is welcome news to many others, including mayors and builders increasingly foiled by community opposition to development.

The White House published a “toolkit” of economic evidence and policy fixes to help local political leaders fight back against the NIMBYs that tend to hold sway over municipal zoning meetings.

“In more and more regions across the country, local and neighborhood leaders have said yes in our backyard,” the paper states. “We need to break down the rules that stand in the way of building new housing.”

The prescriptions call for more density, speedier permitting and fewer restrictions on accessory dwelling units such as basement and garage apartments. The plan rejects some of the arguments made by environmentalists, labor unions and other liberal constituencies that have stood in the way of development and endorses changes long sought by builders and the business community.

“When unnecessary barriers restrict the supply of housing and costs increase, then workers, particularly lower-income workers who would benefit the most, are less able to move to high-productivity cities,” said Jason Furman, chairman of the Council of Economic Advisers. “All told, this means slower economic growth.”

Ultimately, there really isn’t much that the Federal Government can do directly to tackle this issue.  However, the administration’s 2017 budget request includes $300 million in grants to help mayors update zoning rules, and the Department of Transportation has begun considering plans for housing growth and affordability before approving funding for some transit projects.  Both of those measures are amount to little more than a drop in the bucket but it’s now clear that both State and Federal Governments are increasingly less reluctant to tackle this issue.

The aspect of this that I find most interesting is that we now have the president and the governor of the nation’s most populous state, both of whom are Democrats taking a public position on an issue that opposes strong Democratic constituencies.  Most every city in the US with a housing affordability problem has a strong Democratic majority – the only one that I was able to find with a Republican majority was San Diego and only by a very slim margin.  Aside from the NIMBY’s, development has frequently been opposed by constituencies that lean hard left: primarily environmentalists and labor unions – who want everything built with expensive union labor.  I’m highly skeptical that anything will actually come from this effort as it’s incredibly difficult and not exactly a desirable outcome for the State or Federal Government to start influencing local land use politics since it’s an area where one size typically does not fit all.  However, it’s a sign of just how serious this problem has become when politicians such as Governor Brown and President Obama both were compelled to take positions that run counter to some of their core constituencies.

Economy

Getting Out: Foreign central banks are selling US Treasuries at an unprecedented pace.

One Size Doesn’t Fit All:  Median income in Los Angeles County is $45,000.  However, new research by economist Ross DeVol of the Milken Institute found that a resident would need to make $145,000 in order to spend 30 percent of earned after-tax income on rent for a two-bedroom apartment in Los Angeles County.  There is no one size fits all solution when it comes to determining what constitutes middle income in a country with increasingly stratified regional cost of living.

Giving Away the Farm: Stanford will give you $160k towards your MBA…if you agree to work in the Midwest for a couple of years after graduating.

Commercial

Filling the Gap: Private equity funds offering bridge and mezzanine financing are increasing taking share in the commercial real estate industry as traditional lending sources dry up.

Follow Up: As a follow up to a story that we posted a few weeks ago, it’s really difficult to sell an office building that looks like a picnic basket.  Newark Ohio’s famous Longaberger Basket Building is heading to foreclosure due to a large delinquent property tax bill. (h/t Tom Farrell)

Residential

Widening Gap: Bay area wages are soaring, having risen by approximately 30 percent in the past five years.  However, they still can’t keep pace with Bay Area home prices which are up 87% over that same time period.  But See: Some of America’s hottest housing markets are showing signs of cooling off and incomes are now rising quicker than home prices.

Back to the Stone Age: Communal living is a hot new trend with young people in urban areas.  However, it’s really not new at all and is actually a repeat of the way that people lived during the middle ages.

Double Wide: As the US faces a building home affordability crisis, it would make sense that mobile home sales would be taking off.  However, mobile home deliveries are actually soft and the reasons likely have a lot to do with expensive financing and social stigma.  Looks like a market segment desperately in need of a re-brand.

Profiles

Scam: Ever wonder why get rich quick schemes cause otherwise intelligent people to let their guard down?  It’s all in the messaging.  As an aside, if you ever come across someone touting their IQ in marketing material or any sort (including their CV), RUN. (h/t Stone James)

GOAT: Vin Scully, the voice of the LA Dodgers (and arguably all of baseball) for the past 67 years is retiring this weekend at the age of 89.  Los Angeles fans were incredibly fortunate to have both Vin and the late Chick Hearn of Lakers broadcast fame on the radio for decades (if you want to appreciate just how great Scully is, have a listen to some of the dreck that they put on the radio in NY).  This oral history of Scully’s career from ESPN is a great read.

Deflated: The collectible car market is headed in reverse and is well off of it’s highs from just a few years ago.

Christmas Idea: If any of you feel the need to buy your favorite blogger a Christmas present, this motorized, ride-able suitcase called the Modobag is near the top of my list.

Chart of the Day

This is not cyclical

WTF

Repent, the End is Near: Toilet frogs are becoming a problem in parts of Florida.  You read that correctly, frogs are coming up through the plumbing and showing up in toilets in Florida homes.  I think there is a biblical plague reference in there somewhere….

He Who Smelt It…: A new study finds that couples who fart in front of each other have healthier relationships and stay together longer.  I’ve been telling this to Mrs. Links for years.  She’s not impressed.

Product Review of the Week: Sugarless Haribo Gummy Bears sound delicious and healthy too:

“OMG. Everything previously written is true. It’s all true. Don’t eat more than 15 in a sitting unless you are trying to power wash your intestines.”

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links September 30th – Careful What You Ask For

Landmark Links August 30th – Size Matters

Eggplant

Lead Story…  New homes have been getting larger for quite some time, since the end of the Great Recession to be exact.  Conventional wisdom had held that the size of homes would shrink after the Great Recession due to more focus on affordability and reduced financial capacity of buyers.  However, except for a brief blip in 2009 where new homes shrunk, it didn’t happen.  Instead, mortgage credit shut off for all but the most qualified buyers (read: wealthier) which pushed builders to focus on higher-end, larger homes where mortgage financing was available rather than smaller, entry level homes where mortgage financing was scarce.  This led to much hand wringing among urbanists and others that McMansions, which, in addition to being ugly are often bad investments would continue to be a dominant feature of the suburban American landscape.  The starter home market has been slow at best (McMansions make crappy starter homes for a whole bunch of reasons) and many astute housing market observers have noted that we need to see decreasing new home sizes in order for that market to emerge from it’s slump.  Fast forward to 2016 and it might finally be happening.  From CNBC:

For the first time since the recession, home size is shrinking. Median single-family square floor area fell from the first to the second quarter of this year by 73 feet, according to the National Association of Home Builders (NAHB) and U.S. Census data. That may not sound like a lot, but it is a clear reversal in the trend of builders focusing on the higher-end buyer.

An increase in home size post-recession is normal, historically, as credit tightens and more wealthy buyers with more cash and better credit, rule the market. As with everything else in this unique housing cycle, however, the trend this time is more profound.

“This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers,” wrote Robert Dietz, NAHB’s chief economist. “But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory.”

Sales of newly built homes jumped more than 12 percent in July compared to June, according to the Census, and the biggest increase was in homes priced in the mid to just below midrange. The median price of a new home sold in July fell 1 percent compared to July a year ago. Again, not a huge drop, but a reversal from the recent gains in new home prices.

“The majority of it is a question of affordability,” said Bob Youngentob, president of Maryland-based EYA, a builder concentrating largely in urban townhomes. “People want to stay in closer-in locations, at least from our experience, and closer-in locations tend to be more expensive from a land and development standpoint and so, the desire to be able to keep people in those locations is translating into smaller square footages and more efficient designs.”

This is undoubtedly a positive development in the market so long as the trend holds.  What makes it even more significant is that the internals or the numbers behind the size reduction are also very positive.  First off, new homes are getting smaller at a time when new home sales have risen to a level not seen since 2007, confirming that this isn’t a trend based on weak sales volume or diminished starts in select geographies that favor smaller units.  Second, home prices fell, albeit only by 1%.  Often times, falling prices are viewed as a negative.  However, in this case, they should be viewed positively since, along with shrinking new home size and increased new home sales, they imply that product mix is moving in a more affordable direction.  Size matters and the shrinkage that new homes are experiencing could be the best news for the US housing market in quite some time.

Economy

Much Ado About Nothing: This far, experts’ dire claims about economic calamity following the Brexit haven’t amounted to much at all in the real world.

Bottom Rising: Low paying industries are seeing the fastest wage growth in the US which has positive implications for everything from consumer spending to housing.  See Also: Laid off American workers are having a better go of it than they had been over the past few years.

Staying Away: The Fed’s dislike of negative interest rates is likely to make them an observer of the controversial monetary policy rather than an implementer.

Commercial

Cookie Cutter: How over regulation led to the ugliest feature of most American cities and towns – the strip mall.

LA’s New Skyline: How Chinese developers are transforming downtown LA, just as they did in cities in China.

Residential

Alternate Universe: Only in the bizarro-world of California land use politics would construction labor unions undermine a bill that would have created substantially more construction employment opportunities.

Dumbfounded: Suburban NIMBYs oppose any and all development then act puzzled about why Millennials don’t want to move to their communities.

Profiles

Consider The Source: How Jose Canseco went from baseball’s steroids king/whistle blower to Twitter’s favorite financial analyst.

There Goes the Neighborhood: There is a new startup in Silicon Valley called Legalist that relies on an algorithm to predict court cases and will fund your business-tort lawsuit in exchange for a portion of the judgement.

Worth Every Penny: In honor of National Dog Day last week, here is a breakdown of just how much we spend on our four-legged best friends.

Chart of the Day

Mom’s basement is a really popular address in New Jersey

Source: Curbed

WTF

No I Will Not Make Out With You: A Mexican teen died from a blood clot that resulted from a hickey that his girlfriend gave him.

Bad News: A new study finds that reading on the toilet is bad for you.  Just like that, my reading location for much of Landmark Links’ content became an occupational hazard.

Priorities: An 18 year old girl who escaped from an Australian correctional facility messaged police via Facebook to ask them to use a better picture of her than the mug shot that they posted.  She even provided a picture that she wanted them to use.  Of course, police were then able to track her phone and arrested her soon after.

Video of the Day: A video taped melee on a NY subway that resulted from a crazy woman getting on a packed subway with a bucket full of hundreds of crickets and worms that she was trying to sell made me laugh so hard that I cried. And yes, I’m aware that this probably makes me a terrible person.

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

Visit us at Landmarkcapitaladvisors.com

Landmark Links August 30th – Size Matters

Landmark Links June 17th – WTF

Caddyshackfisher

Lead Story….  Generally, I try to keep this blog focused on national and regional real estate and economic issues (and strange news out of the swamps of Florida).  Ever so often though, a local story comes up that illustrates the bat-shit-crazy nature of entitlement and real estate development in coastal California and the discretionary gauntlet that developers must run in order to get a project approved.  Today is one of those days.

There is a property in Costa Mesa near our office called the Autoplex Strip Mall.  It’s an older project that was built back in the 1950s or 1960s (I’m guessing) that has several automotive repair shops, small restaurants and gyms as tenants.  It’s a bit of a hodgepodge to say the least.  It’s also at the foot of the John Wayne Airport runway. Seriously, planes are taking off over your head and the runway ends right across the road.  I want to be upfront about three things here: 1) I know one of the owners well but have actually never discussed this project with him (I first became aware of it about a week ago when a tenant was handing out flyers – we’ll get to that later); 2) One of the sandwich shops in the center is a Landmark favorite and we go there at least twice a week – we do not want to see it go; and 3) Landmark is not involved in current or future financing of the property at this time.

Now that we have that out of the way, the center has become financially unsustainable due to the decline of the auto tenants that dominate it, due in part to dealerships incentivising repair services and parts in house.  As such, the owner made the strategic decision around a year ago to process a zoning change and redevelop the property as self storage along with a food hall concept that I believe is modeled after 4th Street Market in Santa Ana.  The owner proposed a sustainable structure that would reduce traffic, improve curb appeal and make the property economically viable in the future.  They also gave the tenants advance notice last August rather than evicting them before the process as many landlords do when they are re-developing.  Groundbreaking wouldn’t happen until at least October, 2017.

On the surface, it looks like the owner did everything right:  he left the tenants in place to give them plenty of time to find a new locations, designed a sustainable, aesthetically pleasing building that provides amenities that the area needs, reduces traffic impact and is economically viable.  But doing things right doesn’t count for much when it comes to the bizarre and often borderline-capricious world of land entitlements in California.  As the Daily Pilot reported, the project lost a 4-1 vote at planning commission:

The Costa Mesa Planning Commission recommended Monday that the City Council deny a proposed 744-unit self-storage project, saying the developers should do more to soften the blow for business owners who would be displaced by the project.

Commissioners voted 4-1, with Chairman Robert Dickson dissenting, to advise the council to reject plans to demolish the 37,883-square-foot Autoplex strip mall at 375 Bristol St. and replace it with a two-story facility with about 98,800 square feet of storage space, plus a freestanding 5,000-square-foot food hall and a 1,200-square-foot management office.

A project getting shot down at the Planning Commission level is not newsworthy in and of itself.  It happens all the time.  In fact, Planning Commission merely makes a recommendation to the City Council and Council then gets the final vote on whether or not the project gets approved.  What is unusual here is why this proposal got shot down.  Again, from the Daily Pilot (highlights mine):

Commissioners repeatedly praised the project’s design but were concerned by the strident opposition of Autoplex tenants whose shops would face the wrecking ball if the proposal moves forward.

“I have a lot of trouble approving this project, not because there are deviations with it or because I think it generates traffic or that it’s too tall, but because I don’t think we’ve done enough good-faith efforts to deal with the ramifications of the project,” Commissioner Colin McCarthy said.

So the Planning Commission denied a project, not because it was poorly designed or didn’t fit the surrounding area but because they had concerns about the existing commercial tenants in a complex that isn’t economically viable.  Apparently the Costa Mesa Planning Commission missed the 8th grade civics class where property rights was discussed.  How did the tenants manage to put so much pressure on Planning Commission?  They put together an organized campaign and were handing out fliers to their customers asking them to write emails to the Commission in order to oppose the project.  I know this because I received one.  But it gets even worse.  Planning Commission actually asked project spokesman Paul Freeman whether relocation assistance had been considered for displaced businesses.  Mind you, this isn’t a situation where a developer is tearing down affordable apartments to build a new tower, displacing long-time residents who can’t afford new housing in the area.  These are commercial tenants operating for-profit businesses in a center that someone else owns that is becoming economically obsolete.  When asked for comment about relocation assistance, Mr. Freeman sounded understandably frustrated:

“We haven’t discussed that and I don’t know what precedent there is for that.  At the end of the day, what do we have? We have a property owner making a decision that the current business model is not sustainable. And what have we brought in? We’ve brought in a project that has less traffic, no variances. It increases the most popular uses, the food, and is a really beautiful building.”

In an added bit of absurdity, commissioners acknowledged that the property owners have a right to redevelop the property (at least they got that part right) but still held on to the notion that the tenants somehow come before that right.  In an email to the Daily Pilot, Mr Freeman wrote that it seemed that the property owners were being

“Effectively punished for doing the right thing. Rather than kick out the tenants immediately and go to the city with a plan to redevelop empty buildings, they chose to give years of notice and promise to pay in the event of early terminations.   The commissioners said they loved the project except they couldn’t support it owing to the tenants’ opposition, which commissioners took as a measure of the owners’ failure to do what they should have done to ‘work things out,’ I’ve rarely seen anything like it.”

 The moral of this story is that no good deed goes unpunished in the wacky world of California entitlements.  Ironically, the landlord would have been better off servicing the tenants with termination notices rather than letting them stay in place while entitlements were being processed, leaving them to effectively organize their opposition.  The leases between the Landlord and Tenant should govern the rights of each party, not Planning Commission which should stick to reviewing projects relative to zoning and design conformance with surrounding neighbors rather than sticking it’s nose where it clearly doesn’t belong.  Hopefully Costa Mesa City Council overturns this nonsense in short order.

Economy

Stuck in the Mud: As expected the Fed didn’t raise rates at their June meeting.  In addition, Janet Yellen acknowledged that the forces holding rates down may be around for a long time, causing the Fed to rethink the anticipated pace of future increases. The 10-Year US Treasury Bond is now at it’s lowest yield since 2012.  See Also: The German 10-Year bond yield dipped into negative territory for the first time on record this week which begs the question: is German government debt riding a bubble?

Wage Rage? Despite the latest blah jobs report, the Federal Reserve Bank of Atlanta’s wage growth tracker is indicating that the labor market is tightening which should lead to higher wages.

Black Box: China’s 134 city commercial banks which hold 15% of the nation’s commercial banking assets are piling into opaque investment products as bad loans are increasing. This financial engineering could lead to catastrophe if credit quality continues to decline.

Residential

End Around: The California Environmental Quality Act or CEQA has long been utilized as a weapon against new development by NIMBY’s, environmentalists and extortionist attorneys.   But developers are fighting back.  Their newest weapon?  The ballot box.

Nowhere Near the Top: Real estate licensees boomed back in the bubble days.  As Calculated Risk shows, despite increasing prices, they are still way down (31.9% for agents and 11.8% for brokers) from the highs.

On the Ledge?  Luxury urban housing is one segment of the market that has performed quite well in this cycle.  According to Chapman University Economist Joel Kotkin, it was largely built on a myth: that wealthy retired Baby Boomers were going to move to urban markets in droves.  In reality, there has been more migration by Boomers to the suburbs than there has to the city even as the luxury urban pipeline continues to expand.  The buyers (and renters) of the luxury urban units are often wealthy foreign nationals, a source of demand that can change based on several factors including capital controls and currency fluctuation versus the dollar.  Foreign demand is waning and Kotkin believes that the luxury urban market will soon be on the ropes. Contra: How an influx of younger, wealthier residents has transformed US cities.

Profiles

Linked Up: Microsoft bought Linkedin for over $26 billion this week in a transaction that may have been more driven by Linkedin’s reliance on stock-based compensation of the than many realizee.  See Also: Why is Microsoft borrowing money to purchase Linkedin when it has $100 billion of cash on it’s balance sheet?  Taxes.

Shake Down Street Vendors: Street vending in NY was once a path to a better life for many immigrant entrepreneurs.  However, the black market for cart permits, spurred on by city over-regulation and limits to the number of permits issued can cost a vendor tens of thousands of dollars a year often traps would be entrepreneurs in a spiral of low wages that’s virtually impossible to escape.

Chart of the Day

WTF

He Who Smelt it Dealt It: A smelly fart in a Key West bar led to a brawl, because Florida. See Also: A Florida man’s flatulence in bed resulted in a can of pepper spray being discharged and the arrest of his wife.

Fairy Tale Romance: Meet the pig and kangaroo who have been carrying on an illicit affair on an Australian farm for more than a year.  I honestly can’t do this justice with words so I’m going to post a couple of pictures.

A Sydney student photographed a kangaroo and a pig getting intimate while on a research trip to the Northern Territory Mr Frazer said when the kangaroo was 'finished' the pig tried to jump on his back to 'reciprocate'

FAIL: A few years ago, villagers in Xianfeng, China brought in 73 of macaque monkeys to live there in order to increase tourism.  It didn’t work but the monkeys don’t seem to care.  Their numbers have multiplied to 600 and they have now overwhelmed the village, damaging crops and biting tourists.

That’s One Way to Deal with It: A New Mexico man set fire to his apartment to avoid escape his neighbors’ loud sex.

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

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Landmark Links June 17th – WTF