Trend Czar

Recession Signs

Your average economist doesn't forecast recessions -- at least publicly. Government economists like the Federal Reserve chairman would be open to severe criticism for talking the country into a downturn --creating a self-fulfilling prophecy. Corporate forecasters -- especially those tied to financial institutions -- court trouble with bosses if they turn too negative and turn off clients, who might nix new deals or investments over nervousness about a downturn. Instead most economists talk in code to protect their backsides, while offering enough hints at their thinking to have it both ways. I'm no economist, but when headlines appear like "Fed Expects Slowdown to Deepen" (New York Times 11/21) and "Slower Growth Lies Ahead" (Conference Board 11/21) you know trouble lurks.

Then I get a note with on the ground intelligence from a former high-profile real estate investment management CEO who writes:  "My Jaguar salesman and boat salesman buddies in Florida say we are in a recession as does my cabinetmaker in Atlanta.  Check out the number of condo ad pages in NY Times Sunday mag or New York magazine.  Venezuelans cannot get money out of country -- bad news for Miami.  Wait till all the fraud comes out re. subprime...  The sky is falling."   

And a neighbor, a partner in a prominent white shoe New York law firm, mentions disappointedly that business velocity began ebbing in August. He gossiped that another neighbor whose at another big name firm wouldn't be making as much next year either. Well, neither of them are bankruptcy attorneys.

Now, Thanksgiving sales numbers send mixed signals about Christmas gift spending and pink slips may increase at Wall Street firms soon.

Well, I'm sure you have your own stories. Beyond falling housing numbers and rising oil prices, plenty of signs start  blinking red.

© Miller Ryan LLC 2007

Canada's Edge

While Americans fret over the state of a sagging economy, most Canadians sit pretty. Longer institutional memories and tighter regulation have encouraged greater discipline in real estate markets. Housing development and lending haven't gotten out of control and the economy cooks along, underpinned by energy production (oil, gas, coal) in Western provinces. Hydro power in Quebec provides another energy asset.  Calgary, Edmonton and Vancouver showcase three of the most vibrant real estate markets in North America. Toronto, meanwhile, stands out as a North American global gateway -- attractive condos mushroom along the lakefront and across the center city. High-rise living overtakes single family in a metro offering 24-hour dynamics on a par with Chicago and San Francisco. This trend toward more vertical residences in infill areas closer to work centers will begin to pick up in many other cities as congestion forces more people to choose greater convenience over suburban lifestyles.

Concern grows about the strength of the Canadian dollar, which handicaps manufacturers exporting south of the border, especially around Toronto, North America's third largest industrial market.  Everyone watches for signals coming out of the States -- recession here ultimately dampens outlooks there.

For now, normally penny-wise Canadian consumers open their wallets and enjoy prosperity. Retailers expect a strong Christmas season and US markets should anticipate more Canadian tourists as well as investors looking to take advantage of the weak dollar while they can. South Florida condo markets look especially appetizing to warmth-starved Canadians anticipating sinking prices in an escalating bust. But Canadian hoteliers worry about Americans staying home in the face of the strong Loonie. 

© Miller Ryan LLC 2007

Easy to be hard

It's so easy to be doom and gloom in the current environment, and as the media knows all to well bad news sells. And I'll plead guilty -- read my previous blogs. One of my former colleagues e-mailed me some pertinent advice last week, providing some silver lining at the same time. "You can't be glass half full/half empty all the time.  Need one positive "story" every week - for example, it's good to be in a golf course community, senior housing, student housing, tech is back (I hope), medical offices, urban infill and river communities (Milwaukee, Providence, etc.), tremendous strides in building green, etc."

Well, we hit Green in our last blog.  Emerging babyboomer demographics certainly play into more golf course and resort communities for affluent, active seniors. Almost any real estate strategy involving medical facilities makes long-term sense. More older people translates into greater health care needs -- hospitals, physical therapy centers, doctors offices, testing facilities, nursing homes, and spas. The echo boom lifts student housing, although I don't think as many parents will be buying condo units for their matriculating offspring in the near term. Tech appears to be back, helping the brainpower centers around global gateway markets and various university towns. Beyond the handful of thriving 24-hour cities, several once forlorn urban centers indeed have made comebacks. Providence and Milwaukee are good examples in the northern industrial tier, but Denver's downtown offers a model for bringing back discarded CBDs in Sunbelt suburban agglomerations (Atlanta, Dallas, Phoenix take note). I'll have much more to say about all these topics in coming months.

As we approach the holiday, everyone should give thanks for the prosperity of recent years, and keep in mind it's the positive thinkers who see opportunities in downturns, typically reaping the biggest future returns. It's all about attitude.

And with that in mind, will your fare be turkey or vulture? 

© Miller Ryan LLC 2007

Green beats up brown

Developers latch onto LEED standards and tout the advantages of energy efficient buildings -- greater flexibility, healthier-happier employees, better lighting, lower heating/cooling bills and a host of other pluses with some hype included. The PR value of going green, both for builders and tenants, helps offset marginally higher construction costs and should permit for higher rents. Emerging Trends interviewees were quick to cite the green wave as "here to stay" and "no flavor of the day" fad.

In easy-build, growth markets, "brown" developers risk competitive disadvantage going head-to-head against green projects. But investors in existing properties need to factor green issues into their underwriting too. Non green buildings are difficult and costly to retrofit. Yesterday's A-quality product could turn into B-quality compared to new green construction. In high barrier-to-entry, difficult-to-develop markets like New York or Boston, existing brown building stock should be more insulated from a future green incursion. But if energy costs keep rising and carbon footprints remain a contentious issue, brown owners may be forced into those costly retrofits anyway.

Somehow you wonder whether the green wave will endure. Anyone who went to college in the 1970s learned about the greenhouse effect and desertification. We went through the insulation and solar heating craze of the early eighties. And people today grudgingly keep driving right through the $3 plus a gallon gasoline barrier. If you think energy prices will shrink from record highs then expect green fever to subside. But increasing worldwide energy demands and the growing global warming concerns suggest conservation and energy efficiency modes will take firmer hold. Property value gains had helped mask the increasing costs of electric, heating and gasoline bills. Recent reversals prod everyone to take greater notice of simple energy economics and 21st century realities. All that college stuff finally came true.

Do you buy into green or will brown endure?

Click here to see the results of Real Estate Media's 2007 Green Survey.

Addendum: In coming blogs I'll have plenty to say about  the nation's Infrastructure Crisis. For now,  Georgia needs to wake up to reality that prayers won't make up for decades of poor planning and wasteful behaviors. The governor might spend more time strategizing  on necessary policy changes and helping  constituents address a difficult reality than pandering for divine intervention. And folks in other parts of the country shouldn't snicker. Katrina, Minneapolis, and now drying-up Lake Lanier highlight a huge, emerging national problem. The looming Infrastructure Crisis will affect how and where people live and work (tighter growth controls and more zoning), and will hit everyone in their pocketbooks (lots of new taxes and fees). 

© Miller Ryan LLC 2007

Longer Odds?

I was just in Las Vegas -- gambling is admittedly not my thing, but this desert mecca always amazes in small doses, helped by a visit or two to the smile-inducing Bellagio fountain (Frank Sinatra is always in fine form). Observers have yellow flagged all the development activity for several years now, especially for condos and foreclosure activity has hit the local single family market big time.  Nevertheless the city resembles an Abu Dhabi-US. I've never seen such a concentration of cranes and development sites anywhere, from one end of the Strip to the other -- mega hotel-condo-casino complexes, condo-styled resorts, hotel expansions, and a big new mall push out of the ground. Trucks and concrete mixers line up at vast project sites, around the clock, racing to completion, as bleary-eyed touristas traipse back and forth along Las Vegas Boulevard, pondering their next roll-of-the-dice.

The development companies like to point out that glitzy-themed expansions and new destinations have "always" drawn more business (gamblers) into the desert metro from around the world. They claim no worry about enough future demand. But the intensity of current development appears over-the-top and existing infrastructure strains with current volumes. Sidewalks are already too congested at peak evening hours and cab drivers complain about gridlock around the prime hotel district.

And then there is the water issue. Lake Mead sinks below half its total capacity as arid Western states compete for the precious Colorado River resource that everyone has taken for granted. Las Vegas actually needs to lower intake pipes into the reservoir and institutes stricter water use and landscaping policies. The city hopes it doesn't turn into a poster child for the Mountain West -- where rapid population growth, limited water, recurrent droughts, and global warming consequences could spell long term trouble.

With any luck, they'll never need to turn off the Bellagio fountain (at least the water is re-cycled). But Sin City excess may soon hit outsized limits with or without climate worries. You can't count on luck or an endless hot hand. People revisit those truths every day and night in Las Vegas.

Is Las Vegas a big gamble or a sure thing? What's your bet?

© Miller Ryan LLC 2007

Blame subprime while you can

The subprime housing mess gets all the headlines... for now. We all know the unfortunate story -- some predatory and not so predatory residential lenders made highly questionable loans to people who didn't understand the terms or economics and can't keep up with payments since home values stopped skyrocketing. Cheap debt fueled the process and everyone gorged on fee volumes -- brokers, appraisers, bankers, securitizers, and rating agencies. Some high profile CEOs get the boot in the wake of large writedowns. But come on, we all know over-the-top borrowing and blind lending occurred to some degree through the entire real estate marketplace and in fact extended across the spectrum of finance markets.

For starters, easy money and fee-for-all lending also went up the food chain to many "more sophisticated" (more affuent) residential borrowers who took out large home equity loans to finance spending sprees or home additions. And how many of your friends traded up, buying new homes or second homes with jumbo mortgages, taking on more debt service and chancing adjustable rates? That new beach house on the water may not look like such a great buy anymore.

And who thinks the commercial property market can escape the looming hangover from recent vintage loan bacchanalia with its own version of loosey goosey underwriting, resembling subprime without the predatory aspects? Up until the summer, commercial lenders were serving up a feast of interest only, covenant light terms, employed superficial due diligence, swallowed polly-anna proformas and cozied up to weak credit. More than a few recent investments submerge under negative leverage with dimming prospects for meeting overly optimistic revenue projections. Unless the economy shifts into higher gear, some of these questionable loans could sour quickly.

For now, everyone conveniently can lay the blame on subprime... for now.

Can commercial property markets escape their share of defaults and foreclosures given recent licentious lending practises? What do you think?

© Miller Ryan LLC 2007

New York begins to shudder

New York City has elevated to singular rank above and beyond other U.S. real estate markets, acheiving status with London, Tokyo and Hong Kong on a global scale. It's the ultimate 24-hour city and world financial capital, drawing brainpower elites and monied moguls from far and wide. The trickle down effect of Wall Street wealth creation has fueled unprecedented increases in commercial rents and coop/condo prices. The market has boasted the healthiest occupancy rates across all property categories in the country, and helped create an aura, boosting investor appetites for real estate in other markets.

But New York appears to have topped out. Mayor Bloomberg, no stranger to Wall Street and the vagaries of financial markets, has called for municipal budget cuts, girding for trouble ahead. The credit crunch begins to take its toll on the city mainstay financial companies, who take writedowns and fear their transaction volumes will be compromised next year by tighter credit standards and possible recession. Wall Street barons can be ruthless when it comes to protecting their own bonus payouts — the hatchets are out. Layoffs start to add up quietly — a few hundred here and a few hundred there. It started in mortgage related businesses, but seems to be spreading in a move to more general belt-tightening. Advertising, media, accounting and other support businesses may need to follow suit. Condo markets may soon start to feel the pinch unless offshore buyers (buoyed by the weak dollar) can pick up the slack. The $150 plus per square foot office rent peaks look increasingly unsustainable.

New York won't collapse — its 24-hour characteristics and global gateway status provide ample cushion. But brokers, boutique owners, and restaurateurs should start to get nervous — trickle down may trickle off for a while. And New York's shudders will dampen real estate prospects nationwide. Market aura works two ways.

Am I too gloom and doom or will Wall Street troubles start to impact real estate soon? Comment. See below.