Friday, November 5, 2010

A New Wall of Capital?

First, just a snipet from RCA's Capital Trends Report published yesterday.  As I travel around, what RCA is reporting is clearly exactly what is happening in the market.  The new "Wall of Capital" is certainly at the 'core' of the matter and while many institutional investors feel that by taking the 'road most travelled' they are taking a safe path through the real estate jungle, it remains to be seen if their hunches play out.  However, one thing which cannot be minimized:  cash flow is a good thing.

"Of the many trends fueling the commercial real estate market’s current momentum, the explosive growth in sales of higher-priced properties offers one of the clearest expressions of investors’ rising confidence and appetite for selective risk-taking. Year-to-date transaction volume for properties priced at $25 million and higher has soared 126% compared with the same period last year, handily surpassing the broader market’s already-impressive year-to-date gains. In the lowest price tier, for properties transacting between $2.5 and $5.0 million, activity was generally more stable through the downturn but has been lackluster in the extent of its recovery."

A few weeks ago I wrote something that prompted a friend who's been reading this blog for a number of years to write to me.  Thanks for sharing this, Bob. You certainly have gotten me thinking about a bunch of stuff.

The economic malaise in Japan and the United States was prevalent at ULI.  In fact, the new issue of Emerging Trends says we have entered the “Age of Less”.  It’s a good follow on to a NYT article that termed this the “Period of Austerity.”   One researcher noted that the attitudes (at the end of recession) were very similar and very dark.  He pointed out that it’s always this way after downturns and that has certainly been the case for the five or six I’ve waded through. 

On the other hand, and what gives me pause, is the article in Time magazine by Fareed Zakaria, “How to Restore the American Dream.”  Read it closely and note how global competition has hollowed out the working class manufacturing jobs (leaving only low paying service sector).  You can also find evidence that we may lose the immigration war (not our Mexican border war; this is the fight to attract educated immigrants).  You will see the downside to productivity gains and quarterly earnings.  Finally, you will read that even our better paying jobs can be exported (did you know a few schools in Chicago are paying teachers in India to tutor schoolchildren via the Internet? It’s cheaper than hiring someone locally). 

It seemed in the 80s that the only blue-collar jobs you could not shipped overseas were working class construction jobs.  Unfortunately, politicians effectively exported even those jobs by allowing unbridled illegal immigration from Mexico, South America and Europe.  All of this leads me to believe we are in for a period of major adjustment as the borderless global market engulfs us and we de-lever our Federal, State and Municipal budgets.

I don’t think the answer is high-speed railroads (there may be a few corridors but I assure you that there is no reason to travel at high speed between Chicago and St. Louis) or more expensive-education.  Really, how many college graduates can we accommodate and how can these kids afford it – the President suggested we forgive college debts paid on time for 20 years.  It’s hard to believe that this Lake Woebegone attitude, where everyone can be above average, is the solution. 

Frankly, it sounds like my grandchildren’s school, where even the losers get trophies.

Recently we had some student's from Baylor University in our office.  They were hosted by my colleague (and Baylor alum) Russ Bates who set up a case-study type day.  Russ asked me to talk with the students about careers in real estate.  When I discovered that this group was not really focused on real estate I decided not to either.  So I asked them what it was that they thought I could tell them that would be valuable.  I suggested just a few things which I believe are good to remember no matter whether you go into real estate or not:  (1)  Keep your nose clean.  It's a very small world. (2) Do an internship (and also work for) only a reputable company.  (3)  Nurture and respect your network.  Don't send out blast emails and don't be in contact just when you need something from them.  (4)  Remember that the people you meet when you're young will be growing up with you in your industry and one day you will all find yourselves as senior people.  Cherish this evolution. 

Last week I was poking around movies on cable and found "The Great Buck Henry" with John Malkovich. While watching it I had a sneaking suspicion which was only confirmed as the end credits were rolling: the movie was based on the life of the mentalist, The Amazing Kreskin. My mother used to own a travel agency. Kreskin was one of her best clients. At that time, in addition to being a regular on Johnny Carson (who always got a real kick out of him) and doing club dates, Kreskin had his own TV show which was taped weekly in Toronto. He tried to limit the number of nights away from home so he flew to Toronto very early on the morning of the taping. I was playing in a band full time (six nights a week) and to pick up some extra money I became Kreskin's 'driver.' Many night's I'd just stay up after playing a gig and pick him up at his home at around 5am. One day, we're driving to the airport (he lived in Essex County, NJ) but usually flew from one of the NY airports. So he's asleep and we're just passing LaGuardia Airport on the way to JFK. He wakes up and asks me where we are. "We just passed LGA."  He says, "I think I'm flying from LGA. Let me check my ticket." Sure enough, he was right and as I'm making a U-turn he says, "See, I told you I was a mentalist." But, on another trip, when I asked him if he would perform one of his things on me he said he didn't do it on family members or friends. Anyway, that's my Amazing Kreskin story. He's a very nice guy.

Photo:  Chicago, IL

On the road....
Dec. 6 & 7: Frankfurt am Main where I'll be moderating a panel at the PERE Forum-Europe
Dec. 8: Mainhattan to attend the INREV investor platform and committee meetings (I'm on their membership committee)
Dec. 16-21:  The Big Apple
Dec. 20:  New York:  Tentative:  The Second Not-Really-Annual Institutional Real Estate World Buy Your Own Drink Holiday Get Together.  I will keep you posted.
Feb. 1-3: Dana Point, CA to attend IREI's VIP Conference

These are my views and not that of my employer.

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