Any time I read an article that covers foreign investment in the U.S., I think of this Simpson’s clip.
For the record, I’m not saying that foreign investment is a bad thing. I just think that some are giddy (like Kent Brockman in the video) over the existence of that foreign capital, with no thought for the long term implications of our markets needing that foreign investment. But the principal of my firm is a Korean born American and many of my clients are either Middle Eastern born U.S. citizens or Asian born U.S. citizens. Many are also syndicating investments to “friends/family” type investors overseas, so I’m extremely comfortable the notion that our markets are attractive to foreign investors.
Globe St. Chief Economist Sam Chandan has a post up today that discusses foreign investment in real estate. He somehow manages to discuss the topic without embedding the Simpson’s clip. From the post:
In a departure from the negative perceptions of Japanese investment in decades past, foreign investors in commercial real estate are finding support in Washington DC. According to the Senate Office of Public Records, the Coalition to Reform the FIRPTA of 1980 spent half a million dollars on lobbying activities in 2009. House Resolution 4539, the Real Estate Revitalization Act of 2010, was introduced on January 27 and subsequently referred to the House Committee on Ways and Means, where it now sits. The proposed act seeks to eliminate the Real Property Holding Corporation provisions of FIRPTA and to treat REIT capital gains and liquidating distributions to foreign investors as ordinary income.
Llenrock Blog has a good post up that gets into a topic that I’ve written about in the past. Government is often the decider of who will be winners and who will be losers. Llenrock uses the question “Is the government a player or a referee?” to illustrate the point. From Llenrock:
“How many of you watched the Super Bowl?” he asked. “What if when the Saints scored a touchdown, the refs decided to put up 6 points for the Colts? What if when the Colts kicked a field goal, the refs decided not to award them any points? What if the refs started making tackles and intercepting passes? Would you bet on that kind of game?” Rhetorically, he followed, “No, you would probably turn the game off after 10 minutes. Why? Because as entertaining as it may be, its a stupid game and impossible to predict the outcome.”
The current real estate market is a great example of government’s ability to dictate outcomes. The government is almost trying to get involved in as many ways as possible. They offer tax credits to homebuyers, directly purchase mortgage backed securities, and require loan modifications. To be fair to government, most of the programs might create “micro winners” but are aimed at having “macro benefits”.
This one’s just for fun (and bragging rights), but I’ve created an NCAA tournament pool group at ESPN.com (see this link) for anybody real estate related that wants to get in and compete with some peers. The winner of the pool will get a beautiful coffee mug like the one below (which I may or may not be able to get autographed by RetailChatr’s Chris Rodriguez – the undisputed champion of speaking truth to real estate related silliness).
There’s a fantastic website that tracks loan delinquency analytics. I’ve never heard of it before, but I’m pretty jealous that I didn’t think of it first. Go check it out right now.
One thing I found to be interesting: construction loan defaults are showing signs of leveling off.
This piece from TrendCzar is interesting to me because long term changes in need for real estate space is, I think, a really compelling discussion. First, from the piece:
But all that is changing. Companies realize they can cut costs and gain efficiencies by letting more of their senior staff work from home. Sure, these businesses retain a headquarters and significant numbers of employees work regularly in corporate offices–but the home officing phenomenon creates flexibility and allows significant reductions in the amount of space companies need to lease. Depending on the enterprise, companies can shed 5%, 10%, up to 25% or more of their space. That all adds up and likely will slow the absorption of vacancy and shadow space as markets come out of the recession.
I think there’s no doubt that centralized office space is becoming less and less important. My thought is that beyond having implications for the value of the underlying office class, it has implications for the values of geographies and regions. I would guess that we’re a couple of years away from the kind of internet/telecom innovations that will make telecommuting only slightly less valuable than being in the office. So what implication does that have for geographies? If you can do the same thing from San Diego that you can do from New York, why wouldn’t you? Or if you hate New York and California, but love Austin, maybe you relocate a part of your business there. I’ve written before that this trend is likely to accelerate the scattering of businesses that don’t rely on geography (note that important distinction – plumbers will not be able to relocate).
When I started this blog I used the term “incremental innovation” as part of the tagline. So here’s a few thoughts that are sort of forward thinking:
A slow but steady decline for the regions/geographies where location has been key. The best example is Wall St. Already the emergence of trading over the internet has made it possible for traders, or groups of traders to locate anywhere they want. Places like New York have flourished primarily because of the entrenched industries located there. When the location of those industries become less important, those places will slowly decline.
The slow but steady flow of wealth to the “everywhere else” type places. The scattering of businesses will take place primarily among the low physical/high intellectual output professions. Wealth is naturally contained in these professions and the wealth will follow the scattering.
Look for the emergence of places that offer a lot of intellectual capital for a low price. University towns throughout the country will become more important because of the availability of intellectual capital at a reasonably cheap price.
Following on these thoughts I will offer a bet that will be impossible for anybody to collect, but that I think is an interesting proposition. Office space in general will be cheaper in 10 years than it is today (inflation adjusted). The high rent metropolitan areas will be less high rent in 10 years than they are today across most real estate types. The interesting thing is that the importance of location for the values of these classes of assets and locations will have been supplanted by the importance of tech. BUT, the underlying tech that enables these changes will also be considerably cheaper in 10 years.
One of the GlobeSt affiliated blogs is called Practical Counsel, written by Seyfarth Shaw LLP partner Maura O’Connor. Today there’s a great post up regarding loan purchases. From the post:
What we’re seeing now. We’re seeing generally an uptick in distressed note purchases and sales. However, there are fewer of these sales than one might expect. It appears that regulators who in other CRE downturns might have pushed lenders to sell notes to maintain their liquidity, are instead allowing them to wait longer or go through foreclosures and other enforcement actions instead of doing faster note sales. Many lenders think they can get a better return by enforcing the notes themselves, through foreclosure, then selling the real property collateral. Further, there seem to be a lot of would-be investors in distressed notes relative to the number of distressed notes on the market, so there seems to be a fairly stiff competition to buy these notes — and many investors seem to be buying them at prices that do not take into consideration the potential costs and likelihood of enforcing these loans through foreclosure, or even despite a borrower bankruptcy; so it is unclear if many of these deals are actually healthy for the buyers.
BINGO! Go read the rest of the post, but that paragraph boils things down pretty well. Lots of buyers looking for bargains. Lots of banks staying in the deal until it reaches REO status. And maybe, just maybe, some buyers not realizing exactly what they are getting into with note purchases.
Rule #2 is that if the Buyer is trying to oversell you on their capabilities to do deals, run. There are a number of behaviors that fit into this rule. If the Buyer sends their company brochure with offers, run. If the Buyer spends the first 20 minutes of your conversation telling you a story about why they are able to pay more than other Buyers, run. If the Buyer gives you a lot of back story that you don’t need to know about, run.
There’s generally one item on a Buyer’s resume that matters. They should be able to tell you what they’ve bought recently. If they haven’t bought anything recently, they should be able to tell you the last thing they bought and why it’s been awhile since they bought anything. For instance, if the Buyer acquired 10 deals in 2006, but didn’t buy anything in 2007-2009 because they didn’t see anything that made sense, I’m not going to hold that against them. Their word that they are jumping back into the market will suffice.
But here’s a behavior that I see from time to time and is a huge red flag. The Buyer hasn’t acquired anything recently, but has some story about access to a fund. They have a company brochure that might look nice, but in reality probably cost a couple of hundred dollars to have designed and printed. The story is too good to be true, and the cost to design the brochure is irrelevant when the offers they need to be submitting need to be in the millions.
Maybe you’re talking to someone and your antenna goes up because it seems like they’re trying to “overconvince” you of their capabilities as a Buyer (maybe they’re telling a story about their experience, maybe it’s a story about how they got access to a fund). Whether you’re the Seller of the property, or a Broker representing the property, you’re wondering what all of the convincing is for. Then the kicker comes. They send an offer with a company brochure attached, a proposed earnest money deposit of $5,000, a purchase price that seems too good to be true, and 180 days of due diligence time. The only question in your mind is whether you should actually light the offer on fire and watch it burn, or create a fake Wikipedia entry for “Total Waste of Time” and post the offer as an image on that page.
I’ve seen several reports of recoveries in imports leading to increased strength in the industrial space market. In reality imports are fairly important for the entire economy. The graph below from Calculated Risk shows a fairly steady rebound in imports. I’ve annotated the graph to show that imports are now at Q2 2006 levels.
I’m shooting from the hip here, but I suspect that industrial vacancies are probably highly correlated to the dropoff in imports (along with some fluff for overbuilding). So getting back to 2008 import levels is probably pretty important for the recovery of the industrial property sector, and it’s important that it takes place without further deliveries impacting the supply/demand balance. The interesting thing is that the recovery in imports is on a pretty aggressive trendline that matches the dropoff in imports that occurred at the end of 2008.
Lately I’ve been thinking about some shorthand rules for being able to figure out whether you’re going to be able to complete a transaction. These are almost warning signs that if they pop up during the negotiation of a deal, I can make an internal bet with myself as to whether or not the deal [...]
This item has been picked up by a few people already (RetailChatr and @Maggiacomo) but I saw another side to the story that I thought was worth exploring.
The Cliffs Notes version of the story is that a broker that represented Landlord #1 tried to keep a tenant of Landlord #1’s from relocating to a new [...]
