Trend Czar

That Oh Yeah Moment

It was late June 1984 and I had just gotten the New York Times to do a Sunday Business section feature on my boss, Ben Holloway, the chairman of Equitable Real Estate Group. It was a big deal story -- we had just become a subsidiary of Equitable Life and we were positioning ourselves as the biggest "independent" institutional investment advisor in the real estate industry. We had $30 billion under management and we were trying to expand our pension fund client base.

Anyway the Times sent over a photographer to take Ben's picture. He was an asian fellow, boylike in stature and very soft spoken. You couldn't really tell how old he was, but he was not a boy. We trooped up to the roof of 1285 Avenue of the Americas, Equitable's then headquarters, for one of those skyline shots. The only problem was the 10 foot-high building parapet made it impossible to see the skyline without taking a chance Ben and the photographer would fall off the building. Sometimes photographers would get upset about bonehead pr guys, who didn't scout out shoots adequately, but this guy calmly went to plan B -- a basic head and shoulders picture.

Ben always asked to check out photographers' cameras and we started making small talk. He told us he had just come over to the States from Cambodia. And that he had known a columnist at the Times who had gotten him the photographers job. He then volunteered that a movie was coming out about himself. It would be about the Khmer Rouge atrocities. I said we would have to look out for it.

It was one of those "Oh Yeah" moments.  Oh yeah right a movie about this guy. I said to Ben it must be one of those art house documentaries. Well, a few months later the  movie came out.  It was called "The Killing Fields" and it was nominated for the Best  Picture Oscar. The actor playing the photographer won Best Supporting Actor.

Dith Pran, the photographer, died over the weekend.

            

Atlanta Starts to Act Like a City

After spending as much as a month every year in Atlanta for close to 20 years, earlier this week I made my first trip back since 2004. And the changes are dramatic -- especially the ramped up urbanizing and high-rise apartment development of the Midtown and Buckhead business districts as well as signs of life in the downtown.

Of the rapidly developing, post World War II suburban agglomerations, Denver has been leading the pack in figuring out how to escape a car dependent environment, centering a new hub and spoke light rail system in its downtown and building out its LoDo entertainment district. New development, including multifamily, concentrates around transit stations and the downtown has been reviving.
Atlanta has become one of the most congested far-flung American metros. Now, increasingly empty nesters and career-building singles look to escape commuting hassles by settling in infill locations. Condos and apartments spring up from the northend of downtown through a new "Miracle Mile" in Midtown, at key Marta subway stops along the way to Buckhead, and then along Peachtree Road to the Buckhead Loop at Phipps and Lenox Malls. The skyline starts to fill in with an attractive, dynamic city feel of glass boxes and stone towers along the spine of the interstate and Marta north-south line. In new districts like Atlantic Station people can actually walk to grocery and drug stores, something new and different for most denizens.

The city and private developers also try to figure out how to add more parks and green space, including a green beltway, which would feature mass transit. Downtown also looks at creating a green corridor through an under-utilized concrete canyon near the perennially struggling Underground and there is talk of expanding Piedmont Park. Light rail may go in between Midtown and Downtown to supplement Marta.

In sum, maturing Atlanta starts to act more like a city rather than a subdivision manufacturer.
But for all the good progress, Atlanta gets caught in its enduring hot growth tradition. Given the housing slump and economic downturn, too many condo projects poke up -- anywhere from 3,500 to 7,000 unsold units are in the pipeline or on the market, depending on to whom you listen. And Buckhead office development looks over the top, including several new projects that have just broken ground. Well, some things never change.   

© Miller Ryan LLC 2008   

A hint of optimism

Is this the turn in the downcycle I've been waiting for? Well, I got a note from one of the loudest naysayers I interview every year for Emerging Trends. This gentleman has been warning me since 2004 of the imminent demise of the market -- "amateurs overpaying,"  "people who do not know what they are doing,"  "crazy flipping and  too much leverage."  He said he couldn't buy in the market, but was happy to sell, and he says he seized gains well above his projections even though property NOIs underperformed his proformas. So here's what Mr. Pessimism writes me today:

"All the bad news being constantly communicated (and I see you are firmly seated in the middle of that bandwagon), I finally get to feel optimistic.  As you have heard from me the past several years (and I think you gently chided me for the doom and gloom outlook), the pricing levels had to drop and capital had to act more rationally, and I now see I underestimated by a lot the extent of correction that was needed.  Now that the market is awake and hopefully adults are calling the shots, we should be able to invest and make a decent risk/reward return."

So should I call him Mr. Optimism? He may be a bit ahead of the curve again, considering commercial  real estate hasn't taken its share of hits yet, but Mr. Pessimism's change of heart is a reminder that dawn will come... His note is like that first bird chirp you may hear in the early morning when you're having trouble falling back to sleep after a fitful sleep. You look at the clock and darn, there are several more hours to go before it's time to get up.

© Miller Ryan LLC 2008

Psychic Angst

So do you believe in psychic bad energy?

It's been quite a memorable last 10 days in New York -- Kristen and client #9 started it off and then the crane came crashing down just as JP Morgan Chase and the government were lowering the boom on  Bear Stearns.  We've heard about all condo troubles in Miami, Vegas, and Southern California. Well, this crane accident could be symbolic for what's happening to some of these Manhattan high-rise residential projects. Yes, New York has the benefit of foreign buyers taking advantage of the weak dollar, but the number of high-end apartment buildings going up around town is just off the charts. And now the Wall Street outlook sours dramatically. If I'm a developer pouring concrete on the 24th floor of my sliver development in the East 50s, I'm already getting anxious before the frigging crane keels over.

Some of these buildings are pretty ridiculous -- asking multi-millions for views looking out from floor-to-ceiling windows across narrow streets smack dab into other buildings in second and third class neighborhoods. You've got to be from out of town to be interested in some of these locations especially at the pricetags.

Some more on the Manhattan office market from my mailbox (a note from an old boss): He writes: (Besides the Wall Street travail) "you also have all the big law firms laying off tons of lawyers connected to CMBS and sub prime so that component is shrinking. There are also a lot of companies committed to new space that are now trying to get out of the lease or will be on secondary market.  You are on to something.  There is going to be an increase in vacancy and drop in rents.  I do not think it will be that dramatic -- 5% drop in occupancy and 10% to 20% in rent per square foot."

Long term holders will weather any storm just fine. It's the guys who bought in the last two years at those near basement cap rates and their bankers who financed 90% or more of the deals who can't be feeling too swell.

© Miller Ryan LLC 2008

Bleeding Bear

Last Wednesday evening, I was chatting with an investment banker neighbor about the financial markets travail. He wondered aloud about the future of Bear Stearns: "What's the point, what are they offering that their stronger competitors can do much better?" He said he didn't see them surviving. And he mentioned some other high profile names that he thought weren't too secure either.

In fact, by Friday Bear was on life support and only because of an unprecedented Fed move to shore up some of their bad securities, akin to hooking up a feeding tube and respirator to someone without insurance to pay at the emergency room. And in fact Bear's days are numbered with Sunday's announcement of a JP Morgan takeover. Jamie Dimon, a proven M&A surgeon, will take the parts and people that may add some value and amputate the rest.   

And so what happens to that massive Bear headquarters on Madison Avenue near Grand Central? A more than nice building -- it's triple mint. It will fill back up with that great location. Maybe JPM will move into it and leave some of its nearby digs. But here we go, the looming Wall Street debacle starts to impact the stalwart Manhattan office market. The Street starts to slim down and reconfigure and that only means rising vacancy rates in America's most important office center. And how's that hedge fund guy you know doing in his $100 per square foot space?

Bear's problems and the Fed's reaction only reinforces notions of the dire state of the financial markets and in particular the companies which got caught up in transaction mania, using other people's money and lots of cheap debt. The worst thing Bernanke, Paulson and Bush can do is show any signs of panic.  So they act their parts and say we'll get through it. And yes we will. But the trajectory of talk and action is noticeably less confident and more seat of the pants -- like trying to figure out what buttons to push when the plane starts to spin -- oh yeah the $600 checks are coming soon, help's on the way.

And so it goes. Wall Street will need many fewer people to do many fewer deals for a while. The days of making money out of thin air are over. Sure there will be plenty of opportunity to buy up assets that have lost a lot of value. Just look at Bear. But it translates into fewer warm seats and more empty cubicles.

© Miller Ryan LLC 2008

 

 

Don't believe it

There's the old chestnut that I hear repeated often these days, the one about how it's times like these when you can make a lot of good investments. We should have our eyes pealed for all the bargains that will appear with falling prices. My financial advisor threw the line at me yesterday just after he showed me how much I'd lost  in the past two months -- it was no small sum and I'm nearly 40% in cash.  "Hey, it's a good time to invest right now, " he told me. Yeah, and about a month ago he thought it was a good time to invest in financials, and he put a chunk of my change in a financial index fund. On that score, I guess it's even a better time to invest in financials right now. And by the looks of it maybe better yet in a few weeks.

That's the problem with the old chestnut. In a sinking market trying to find bottom with the economy shot, it's a lousy time to start shopping and that's why smart investors have so much powder dry right now. They're waiting. On the risk reward side, especially after a big drop, aren't you better off getting back in a little late than getting back in too early?

The stock market had a big day yesterday, but the commercial real estate markets have yet to suffer any serious decline. It's much too early to gauge the ultimate fallout. And if you hear somebody selling you the line about it's a great time to be looking for opportunities, I'll bet you it's a broker, someone who has something to sell you, or a big investor who wants to make himself feel better.      

I told my guy not to touch my cash for a while.

© Miller Ryan LLC 2008

Blame the credit crunch

As we sink into the muck of what looks like a bad recession, the financial structuring geniuses and government leaders who enabled them keep doing a neat tap dance. They conveniently continue to blame a subprime-induced credit crunch for all this impending travail.  Yes, financial gridlock has been caused by all those poor people who really couldn't afford homes in the first place and who shouldn't have taken out those subprime mortgages. Yes, it was poor people, striving for something beyond their limited means, who precipitated all those problems with highly leveraged bonds, backed by those bad subprime loans. And now, everyone is scared to invest in anything.   

And then there is the solution, if we only can get  liquidity back and get investors to start buying stocks again, and the bull market resumes, and we can start doing lots of deals with more cheap debt (thank you Fed for low interest rates), and make lots of fees from doing all those transactions, everything will be great again.  It's the credit crunch, darn it the credit crunch.

It should only be so.

I guess we blame the credit crunch for all the inflated home values at all price points which are now collapsing just about everywhere, not a cheap debt induced buying binge where bankers let anything go in return for fat fees at every turn. We can blame the credit crunch for $105 per barrel oil, the precipitous fall of the dollar, and rising inflation. We can blame the credit crunch for our having no choice but to fill the coffers of Middle East governments, who in various ways back the people we are fighting against in Iraq. We can blame the credit crunch for the abysmal savings rate in this country. We can blame the credit crunch for our over-the-top government deficits which make us the world's biggest debtor nation, which pays hundreds of billions of dollars annually in debt service to our economic competitors, while our vaunted consumer nation charge cards itself into insolvency buying these countries' exports. And we blame the credit crunch for not regulating our bankers so they lend up a storm and seemingly securitize away all risk without anyone knowing exactly what's backing all these bonds.

Yep, it's the credit crunch. And getting back liquidity, doing more deals, and making more fees will pay our debts, cure our oil addiction, and get our financial house in order. Don't think so.

© Miller Ryan LLC 2008

Worse and worse

It's been a tough day -- jobs numbers are worse than anticipated. Now the President's top economic advisor says the first quarter will show negative growth. Yesterday we learned that home equity is under 50% of value for the first time since World War II and financial companies continue to hit the skids. Did you notice the Fed's beige book reports commercial real estate indicators are weak and to expect impending fallout in rents and occupancies?

Look. Batten down the hatches. When the government economic cheerleaders sound too realistic you know things are getting really bad.

Hey. I'll be positive when there is reason to be.

© Miller Ryan LLC 2008

Ohio Shouldn't Matter

Ohio decided the last presidential election and at the very least it's delayed a decision on the Democratic nominee this year.  The economy and NAFTA were apparently the big issues for primary voters in this slowly dying manufacturing state, who get hammered by realities of global market competition.

The candidates can pander all they want about helping people find new jobs in Ohio and other places in the old industrial rustland. But it ain't going to happen.  Industry doesn't want to move to these cold places which are pockmarked by brownfields left from relic factories and plants. Most of all they want to avoid union rights states. So if they stay in the higher cost U.S. at all they'll locate facilities in places like Mobile, Alabama. That's where Northrop Grumman will be building new super fuel tankers for the military -- right smack dab in the middle of a right to work state which happens to have a much more temperate climate than Youngstown. The Pentagon just made that decision last week.

As for dissing NAFTA, the candidates are all hot air. I was at a private Obama fundraiser two weeks ago where Austan Goolsbee, an Obama economic advisor, told us the same thing he told the Canadian diplomat in Chicago, which caused a big flap over the weekend. Goolsbee said that Obama would seek minor amendments to NAFTA, trying to put American workers on a more level playing field regarding safety and environmental issues.  Obama, he said, may shade some statements in certain states for political advantage, but essentially he is a free trader. Hillary doesn't want to abrogate NAFTA either and neither does McCain.

Not that trashing the treaty would help Ohio. That's one state that will continue to lose electoral votes as its population steadily ages and ebbs. And then it won't  matter so much how people there vote in national elections.  It's too bad, but  that's what's happening.

By the way, anybody investing in the Buckeye state?

© Miller Ryan LLC 2008 

 

Get ready

Bagels now cost a dollar a piece in New York -- one dollar for a bagel! And we all know about gasoline prices. Well everyone knows apparently, but the President. That $4 a gallon barrier is just made for breaking. It took a while, but those high energy prices impact everything we buy -- since our country imports more and more, and in any case ships stuff we purchase a long way -- using more energy.

In short, consumers are getting hit hard and that's why the economy is sinking since we are all about consumption. It's been pounded in to us that it is better to spend and support the economy than save. And 70% of our economy has been consumer based, since we do not produce as much as we once did, and have become a net importer country. Until the housing slide, rising home prices and the refinancing wave fueled massive spending. But as we know -- that's over. And now inflation has kicked into gear, hammering all of us on the basics -- bagels (food). And how's your heating bill been this winter?

Wallet tightening is underway and next the jobs picture will start to deteriorate. Businesses are backing off on hiring and have started to tighten spending. Every day the newspapers report about corporate losses and layoffs. And a jobs downturn will not help the desperate housing market or the outlook for credit market loosening.   

My pals who manage real estate funds tell me their returns are holding up. They see cap rates rising, but rents have increased in some places. Commercial real estate markets typically are last to feel the pain in recessions -- when stores go out of business and office leases don't get renewed. That won't happen immediately.  Let's watch the hotel front where pain registers sooner.

Get ready! Here it comes.

© Miller Ryan LLC 2008