Friday, May 6, 2011

San Diego, Forest Hills, Green Building Consortium

Some of you have written to me asking me, “What’s up with you going back on Linkedin and Facebook?”  Well, in the spirit of full disclosure I’ve back on Linkedin because I found out that there’s a way to shield my contact list (which I had felt was being glommed onto) and second because I’m connecting with people very selectively and will ignore one particular segment of the real estate industry.  Facebook is a different story.  I have no intention on posting anything but will be marketing my new CD called, “Robot Mannequin” this summer and a 14-year old kid told me that “Dude, you have to be on Facebook and Twitter.”  I do have a Twitter account but have never tweeted.  Also, interestingly, a friend of mine in Europe is tweeting things from this column and has more than 100 people following OTR via his tweets!

This week I attended the CRE (Counselors of Real Estate) Mid-Year Meetings in San Diego, CA.  First of all, in the business trips I’ve made into San Diego I had never before been in the Convention Center/Baseball Stadium/Gaslight District.  Wow.  Is it hopping!  As part of the conference I got to go to a Padres/Pirates baseball game and was in the Petco (Where the ‘Healthy’ pets go) stadium for the first time.  While I don’t follow professional sports any longer, I did enjoy being in the ballpark for batting practice (almost caught a ball) and staying through the end of the game, which got exciting in the bottom of the ninth inning.  

In the spirit of OTR committed to be your eyes and ears at events I get to attend, here are some of my take-aways from the CRE events:

  • Economy will remain sluggish until housing gets back on track….in 2015!
  • Blue jeans will cost double what they were last fall-what is the consumers’ ability to deal with this (the cost of goods to the retailer is doubling).
  • Big question over the next three years is what curveballs will come out of Washington?
  • The big unwritten issue is consumer problems qualifying for mortgages.
  • How can we have the best affordability and the lowest home sales of all time?
  • 4.5 delinquent homeowners have little prayer of staying homeowners.
  • “Keep a close eye on government intervention.”
  • Total returns from core real estate remain attractive real returns 5-6%
  • Value-add strategies back on investors radar screen
  • Recaps of high quality properties considered a smart, opportunistic play
  • Consider value-add as core becomes fully priced and opportunities to acquire capital starved assets abound
  • The big concern is prices of core properties being bid up.

  • Residential (Comments from CIO of large apartment REIT)
    • Echo boomers are a key demand driver for apartment rentals
    • 20-34 year olds have a 70% propensity to rent
    • Multi-family construction being held in check
    • “We’re disciplined, well, we’re pretty disciplined in looking at potential acquisitions.”

  • Brazil
    • Economic stability and growth potential is attracting institutional capital, perhaps too much of it.  
    • 30% of the population lives below the poverty line, mainly in Favelas, which are basically shanty towns
    • While a lot of real estate investment dollars have been flowing into Brazil there is still a high level of institutionalized corruption and a robust ‘shadow economy.’  
    • There is one shopping center for every 500,000 residents whereas in the U.S. there is one shopping center for every 3,300 people!  
    • “When you do a development deal in Brazil you have to build in a ‘fudge factor’ because you know you’re going to run into some unexpected problems.  But, you’ll still get great returns so you just build it into the model.”
    • “The ship has sailed in Brazil.  Opportunities in South America are elsewhere.”
  • Latin America
    • Some of the positives in Latin America include:
    • Growing middle class, inflation that is under control, healthy banking systems, political stability (Chile, Columbia, Peru) and a similar culture to the U.S. as the roots of many of these people are in Europe.  
    • However, there are also some mitigating factors:
      • The need for infrastructure, instability in countries such as Argentina, Mexico, Venezuela and Bolivia, a challenging bureaucratic process and lack of transparency all of which necessitate the need for local, in-country partners.  
    • Peru is Latin America’s fastest growing economy and offers tax incentives for foreign direct investors.  
    • “We believe Columbia is the next Brazil.”
  • Guam, yes, Guam
    • “If you’re looking for a slow, relaxed pace, consider Guam.
    • It’s affordable and easy to understand.  
    • The main business now is tourism, especially from Japan with the expectation that Chinese will start traveling to Guam as personal incomes rise there.  A new U.S. Marine base will be a strong catalyst to a growing, but small, economy.
  • China
    • “Now is not a good time to invest in China but it’s a good time for China to invest in the U.S.”  
    • The Chinese economy is in a large way driven by construction but with 65 million, yes, 65, vacant homes will construction continue to support the economy?  
    • “There is a demand for low-end housing and there’s a shift from residential to commercial construction.”
    • “China is missing middle-market retail.”
    • “To do business in China you need a lot of patience,” Bob shared with us.  “The challenge is to look at China, not through the eyes of a politician, but through the eyes of an entrepreneur.  

So that's what I heard there. But a good friend, who is a senior real estate strategist for a global real estate investment management firm and currently based in Hong Kong,  wrote this to me just this morning:

The economic environment couldn't be more different from the US in the region outside of Japan. I heard a comment on Wednesday (from a well known European economist who currently works for a US global bank) that all the previous recoveries from recession in the US had been led by new house building. This recovery is clearly not going to have that engine.
Don't believe all you read about vacant dwellings in China. There are a lot but no one knows how many. But most are held deliberately vacant as part of a rational investment strategy. Rental income is very low and the difficulties that tenants can cause make it more sensible to keep the place empty. As Chinese savers have few alternatives, buying residential property continues to be attractive. The Beijing city government is now making purchases more difficult by requiring buyers to show a 5 year tax payment record in the city before being able to buy and some other cities restrict multiple ownership. There is still quite a bit of demand out there. Moreover, there are a lot of different cities and it is dangerous to generalize. The dynamics of the coastal centers, e.g. around Shanghai vs. the inland e.g. Chengdu and Chongqing, are very different. And there are cultural reasons for continued demand, men won't get a wife unless they are a home owner, and the effects of the one child policy gives women extra bargaining power!

Very interesting stuff. 

From RCA’s European Capital Trends report released this week:
·       European transaction volumes showed strong improvement through the first quarter of 2011 (Q1’11), with sales of €31.8b marking a 40% year-over-year (yoy) increase and providing for a sixth consecutive quarterly improvement. Increasing volume has not translated into similar gains in prices, as yields have remained relatively stable for the past four quarters.
·       Overall the increase in European activity was slightly greater than the global market, which grew 23% yoy, significantly boosted by strong Americas growth of 75% while being restrained by a slower Asia Pac increase of only 9%. Notably, robust core and struggling peripheral markets are further reflected in investment trends dominating the European marketplace.

Scott Muldavin and I sat together on the flight back from San Diego and talked the entire time.  Many of you know Scott as the highly passionate guy behind the “Green Building Finance Consortium.”  Scott speaks around the world and has published a ‘heavy’ textbook of sorts which can be downloaded from this site.   The Green Building Finance Consortium (GBFC) is a research and education initiative founded and led by Scott to enable better financially based sustainable property decision-making. The Consortium is financed independent of green building product or professional organizations, relying on funding from The Muldavin Company Inc. and Consortium Members. Members are leading real estate companies, governments, non-governmental organizations and industry trade associations including BOMA International, the Mortgage Bankers Association, the Pension Real Estate Association, the National Association of Realtors, and the Urban Land Institute.  For the sake of our children’s children’s children we, as an industry, need to take this stuff much more seriously.

An article in the NY Times yesterday reported that landmark status has been denied to the West Side Tennis Club.  While you may not recognize that name, those of you who either grew up in New York or are tennis players/fans will recognize the location:  Forest Hills, New York.  The courts were the sites of the U.S. Open Tennis Championship for 62 years.  The 15,000 seat center court stadium was also the venue for some historic music:  Simon & Garfunkel (who are from Forest Hills, The Rolling Stones, Elvis Costello, Peter Gabriel, Talking Heads, John Denver, Joni Mitchell, The Who, Bob Dylan (playing one of his early ‘electric’ sets) and, yes, The Beatles.  I grew up in Forest Hills but never saw any of these shows.  Quel dommage!  My aunt Bea and late uncle Len, the chief automotive engineer for Mobil and later a consultant to Nissan, played tennis into their 80’s and attended many matches at the West Side Tennis Club.  I remember they used to bring me souvenirs from time to time:  grass stained white tennis balls that had been used in the matches.  I managed to sneak into the grounds for a number of matches on the field courts, outside the stadium.  On one such occasion, when I was about 12, I had a photo taken with Poncho Gonzalez, the original 100 mph server (with a wooden racquet!) but that photo has been lost for many years.  In those days, before the mega-dollars turned most sports into big business, if there was a questionable call made by a line judge or chair umpire, the player benefiting from that bad call would simply throw the next point away, showing the officials that they had made a terrible call.  Imagine that happening today?  I was recently in Forest Hills for the first time in quite a while when I attended the funeral of my boyhood best friend.  The buildings haven’t changed much over all these years but the uses have.  A religious group now owns the Trylon Theatre; Hollywood Lanes, where we used to go early on Saturday mornings is gone as is Tri-Bowl on 63rd Drive.  Amazingly, the Little League fields on Fleet Street have survived the mid-rise apartment building jungle that has been built up around it.  The baseball field at Forest Hills High School is named after the player that broke the color barrier in the major leagues, Jackie Robinson.  I didn’t get a chance to see if the Pizza Den was still there.  It was a long time ago but they were great days.

On the road....

May 9-10: Cleveland, OH (Going to see the red-hot Indians play on the 10th)

May 12-14: North Palm Beach, FL for the annual meeting of the Homer Hoyt Fellows

May 16-17: New York

June 1-2: New York to moderate a panel at IMN's Opportunity and Private Funds Forum

June 6-10: London to moderate a panel at the PERE Forum-Europe

June 15-17:  Santa Barbara, CA to attend Opal’s Investment Trends Summit

July 12-13:  Beverly Hills, CA to attend the NMS Roundtable (Endowments & Foundations)

 Photo:  Mother and baby giraffe at the San Diego Zoo.  The father is 17-feet tall and weighs 2.200 lbs!

These are my views and not that of my employer

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