This article from the Las Vegas Sun peaked my interest because the Vegas hotels are taking a beating right now and are dealing with rising vacancies while more deliveries are scheduled.
Vacant land on the Las Vegas Strip changed hands last week in the first such deal on the famed 4-mile corridor since the recession.
Surprised observers of the $25 million acquisition of 2.15 acres at Harmon Avenue and Las Vegas Boulevard by developer Brett Torino and two undisclosed partners had one key question: how to value Strip property in this — or any — economy?
When business was brisk in Las Vegas, developers and speculators fought over Strip parcels. Casino executives were quoted declaring the land beneath their casinos was worth $20 million per acre. Those estimates inched upward during the boom years, topping out at more than $30 million per acre.
First of all, it’s always tough to value land because the eventual product doesn’t get delivered until some time after the land trades hands. Land is usually accompanied by significant market risk. If you’re a developer buying land at the peak, you have no idea you are buying at the peak and instead you are being asked to price in the little risk that the run-up to the peak has seen. And yet, the likelihood is that the product won’t be delivered for a few years and who knows what the market will look like then.
Buying land in a down market is even more difficult. In Las Vegas it’s difficult to imagine a sane person beginning a new development in the near future. Here’s the pitch for developing on the strip:
It’s going to cost millions to buy the land, even more to develop it, and then we’re going to have the hot place on the strip until someone else comes along and develops something even better. And yet we’re going to have something that aside from brand will be identical to every single other place on the strip, so while our pirates might be more attractive for some people than a topless pool, really it will all be kind of the same. Oh yeah, and every other state in the U.S. has seen people flock to Vegas long enough and they’re going to loosen their own gambling rules enough to create competition that we don’t want in addition to the competition for the international tourists that Macau and other places are going to give us. Oh, but don’t worry, the tourism board is going to keep beating a dead horse with those “What happens in Vegas” commercials (no need to update that campaign).
In any case, the point of this post was not a rant on how screwed Vegas is. The point is that land is valued on a derivative basis. It’s only worth whatever the asset that can be built on it, less the costs of construction and less the risk involved. When Las Vegas vacancies start to look better and the development pipeline settles down a little, the land in the article will be a lot more attractive.
A recent comment on this site from the Deal Junkie Blog. Too funny not to re-post. Money line: I remember it to be garbage back then.
I can’t believe you are putting CoStar in the same league as Loopnet. CoStar is used by institutional investors. Loopnet??? I don’t know what it is like now, because I haven’t checked the site out for over 10 years. But I remember it to be garbage back then.
Anybody that has been in real estate for longer than 10 minutes knows that real estate is full of characters. I think because of the diverse nature of real estate, and the unstructured nature of a lot of real estate companies, characters seem to thrive in real estate more than any other field. A lot of the characters that find success in real estate wouldn’t last in structured corporate America.
A few of my favorite characters:
Guy that can never seem to get his earnest money or deposits into escrow at the right time.
Guy that faxes you 15 illegible pages about the property he owns.
Guy that claims access to a $200 million fund and yet writes offers with $5,000 earnest money deposits.
Guy that has some made-up legal reason why he doesn’t make earnest money deposits.
Guy that tries to re-trade price, isn’t successful, asks for extensions to feasibility period, then tries to re-trade again.
Guy that sends his company brochure with offers.
Guy that spends 20 minutes telling you what a great buyer he is, and then won’t spend 1 minute telling you the price and terms he would offer on the property he’s interested in.
Guy that is somehow in 60 different deals and yet is always broke.
Guy that claims to be extremely motivated, but isn’t.
Guy that thinks his deal is worth more than every other deal in the market, for no reason other than it’s his deal.
Guy that has never met a property he didn’t want to overleverage.
Guy that always needs to have a meeting with Sellers in order to try to sell them on taking a below market offer (these are usually former brokers that think they could sell ice to an Eskimo).
Guy that cites “the holidays” as a general go-to excuse.
Guy that offers to seller-finance the part of the purchase price that is clearly above market. As if to say, “We know this is expensive, but don’t worry, we’ll give you a loan for all of the money you’re throwing away.”
Guy that has his assistant call you and ask if you have time to hold for Mr. So and So. Thereby wasting the exact same amount of your time that he just saved by having his assistant call.
Guy that cites all of the other deals he is working on as a general go-to excuse.
Guy that cites his frequent travel as a general go-to excuse.
Guy that doesn’t understand the words “I’ll get back to you.”
Guy that doesn’t speak English suddenly during key negotiating times, when the inability to speak English somehow suddenly favors him.
Guy that consistently submits below market offers, consistently misses out on the deal, and then tells you why the other buyers are dumb… as if you can do anything about it.
Guy that says derogatory things about other buyers’ behavior, and then does those exact same things. Example: Those other buyers will probably just tie it up and re-trade it. (Followed by that guy just tying the deal up and re-trading it.)
I’m sure some readers of this blog have some favorite characters. Feel free to post them in the comments.
A reader had an interesting comment on my post about social media, which I will re-post in its entirety for the purposes of having a real discussion on the topic:
John - interesting take on CRE-Advice.com. Allow me to give another as a member of that site. CRE-Advice.com is not for you and I in the sense that we get Social Media. We understand the value of a blog, what a tweet is, etc. What CRE-Advice does is generate a around 800,000 unique visits a month, and I have the opportunity to get in front of those visitors. It allows those of us who subscribe to pool our resources to maximize our value on video production, pay per click advertising, etc. It has gotten me on the first page of Google among other things. CRE is an industry lagging behind in regards to Social Media, and while you view this as lowering the bar, I view this as an attempt to drag along those who are lagging behind. Do not assume that all that is written on that site is ghost-written, though your thought that it draws into question the authenticity of the content is something I will need to consider.realtor.co
I don’t want to get into flaming CRE Advice, because I think they are really just trying to present a solution and I think that’s a good thing. But 95% of practitioners out there have no sense of what they should be doing in social media, so I think it’s an important discussion to have. So rather than consider just the case of CRE Advice, let me give some more general thoughts:
Nothing good happens behind the “pay wall” (in social media anyway). Sites that are available for payment create a problem on the web. Pay walls limit the widespread adoption of web services, which limit their reach and therefore their effectiveness. The web primarily works on network effects. Every user of Facebook increases the value of the service for every other user. Placing your content on a “for pay” site is going to limit its reach because the actual site will be limited in its reach.
Subscription services create a problem with your online presence in that you do not control the future of your web identity. To make a CRE analogy, imagine that you sign a 12 month lease on a retail space and then you pay for $100,000 in tenant improvements. What are the value of those tenant improvements after your lease expires? Similarly, you have no control over the future cost of a web service and if you are investing time and energy in developing an online presence, you are essentially beholden to whatever the proprietor of the site does with it in the future (including shut it down). If I create content on the web, I should either be in control of its future, or I should have reasonable confidence in the proprietor of the site that my online presence will be safe.
Social media activities are cumulative in nature, so the value of your work increases over time. I still get noticeable amounts of traffic from posts I wrote last spring. But what if I wrote those posts on a site that I did not have reasonable control over? Or let’s say I wrote them on a pay site and then cancelled my subscription? Would I benefit from the cumulative effects of those posts?
In the end, content is king. The value of any site will be based on the content it features. There aren’t really any ways around this fact. So if you are going to have a real online presence, it will be because you are generating real content (even if that’s 140 characters at a time).
Pay per click is one potential way around the problem, but it can get expensive and there is no need to have a social presence in order to benefit from pay per click. For instance, if you are trying to reach people searching google for the keywords “Chicago office broker” it doesn’t necessarily help to have that person directed towards your blog post about the office market. They’re ready to do something so it probably makes more sense to direct them to your corporate website page that says something simple like “Joe Smith, CBRE, $3 million in office transactions in 2009” along with contact information. That’s really the best way to avoid confusing the potential prospect and get ROI on your PPC budget. Sometimes simplicity works best.
To illustrate my point above about the importance of taking anything that requires networks effects out from behind the pay wall, consider the below graph that shows traffic for Loopnet and Costar. (Loopnet is the green line, Costar is the blue line).
An MLS functions primarily on its network effects. Loopnet realizes this and makes the cost of subscribing for the premium version very low, and also offers a free version. Costar on the other hand requires payment for its data services, as well as its Showcase property listing product. But the problem with the Showcase product is that it suffers from Costar’s reputation for being high cost. Costar data services are very good, but expensive, and as a result there is low participation for the services that would benefit from network effects (like the Showcase product).
So if you are pursuing a web strategy that benefits from network effects, reduce the cost of participation as much as you possibly can. The difference is similar to having your advertisement on a billboard next to the freeway, or having your ad on a sign at the end of a cul de sac. People need to see it, and in order for people to see it, it needs to be accessible to an many as possible.
The idea that massive levels of reserves are a guarantor of economic stability is, in other words, based on a profound misunderstanding both of history and of the nature of reserves. Reserves of course are not useless as an enhancer of financial stability, but their use is for very specific forms of instability. Having large amounts of reserves relative to external claims protects countries from external debt crises and from currency crises.
Great, but neither Chanos, nor even the most pessimistic Sino-analyst, has ever said that these are the kinds of risks China faces today, any more than they were the risks faced by the US in the late 1920s or Japan in the late 1980s. The risks that China faces today (and the US in the late 1920s and Japan in the late 1980s) is of excessive domestic liquidity having fueled asset and capacity bubbles, the latter requiring the uninterrupted ability of foreign countries to absorb via large and growing trade deficits. These risks include an explosion in domestic government debt directly and contingently through the banking system.
These are, very typically, the kinds of risks that threaten rapidly developing large economies, unlike the external debt and currency risks that typically threaten small economies. And reserves are almost totally useless in protecting these economies from the risks they face (and, no, no, no, reserves cannot be used to recapitalize the banks – only domestic government borrowing or direct or hidden taxes on the household sector can be used to recapitalize the banks).
In fact, it was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit.
They are saying that the new economy is the semi-attached freelance economy. If that is the case, brokers have a leg up over everyone else when it comes to knowing how things work. Brokers are all essentially freelancers.
There has been a lot of coverage devoted to the seemingly new trend of having no secure and reliable jobs available. But this is interesting to me first because I am in real estate and there is nothing secure or reliable about my job (except what I make of it), but also because it seems like everybody always wants more freedom at work. Freedom is available with tradeoffs.
I’ll be interested to see how this economy continues to evolve and whether we continue to progress as a freelance economy. If so, it does seem like brokers that have been living this way for years will have something valuable to teach the rest of the world.
Anybody that stops by this blog from time to time knows that I am prone to meta blogging (or blogging about blogging). Constructive critics might ask who the audience is for meta blog posts, aside from other bloggers. My girlfriend is one of those constructive critics. She gave me a hard enough time about meta blogging that I decided to give it a rest for awhile. However, a few things that I saw this week inspired this (triumphant?) return to meta blogging.
NYU Real estate grad student and blogger Joe Stampone has a post up today listing 10 real estate blogs to follow in 2010. Some might question Joe’s lack of ambition here, surely it would have made for a catchier title if he had profiled the top 2,010 real estate blogs to follow in 2010 (now that’s a blog post!)…OK, I’m obviously kidding here. Go check out Joe’s list of blogs to follow. I found a few that I wasn’t aware of, but will be sure to check out from now on.
In Joe’s list he is nice enough to mention this site and also mentions that I update almost daily. Joe gets to a point that almost anyone that has a profession-related blog has to deal with, which is time. How do you balance time to blog against the rest of the things you have to do in a day? Who even has time to update everyday? It’s a good question and I’ll have to come back to it later.
I saw something else this week that prompted this meta blog post. There is a website called www.cre-advice.com that is essentially a large community blog/social site for commercial real estate. Based on what I know, it lowers the bar for CRE pros to have an online blog/social media presence on a site that is dedicated to the CRE space. From the site:
CRE-Advice.com membership is a paid subscription service offered by invitation or application only. Because less than one-half of one percent of commercial real estate advisors will qualify for membership, visitors can rest assured that only the best commercial real estate professionals are represented on this site.
The service is likely geared towards people who would be intimidated at the prospect of starting their own site. I suspect in the near term there is a real need for the niche that CRE Advice is trying to fill. Perhaps the most interesting part of the CRE-Advice site is that for a fee they are willing to ghost-write blog posts for you (actually they even offer to send tweets for you). Nice. I can’t say there aren’t times that I would like to be able to say “Give me 600 words on the bid/ask gap and have it to me in the morning.” But obviously, the service is not geared toward people like me. (As an aside, what level of irony is it that teachers in schools tell you that you can’t have other people do your homework for you because it wouldn’t fly in the real world?).
Some might be asking themselves when I’m going to get to the point. OK, here it is. I actually think that professionals that are seeking results through social media need to ask themselves a few questions.
Is social media worthwhile? If it is, it’s worth doing on your own and without the aid of a ghostwriter.
Should people who find you through social media have an expectation that you actually wrote the blog post with your name on it? Isn’t blogging essentially putting your knowledge out into the world and letting readers judge whether you know what you’re talking about or not? But what if you don’t actually have the knowledge attributed to you in the blog post that has been ghost written for you? CRE Advice says in the membership application that “only the best commercial real estate professionals are represented on this site”. But the obvious problem is that there is no guarantee there is anything authentic about the content on the site. [Update: this did not occur to me when I was originally writing this post, but I think the potential incidence of ghost written blogs on a site like CRE Advice undermines the value for the people who have paid for subscriptions. If I join the site and am writing real content, do I want the authenticity of that content questioned because other people on the site are using ghost writers?]
What are the costs of social media versus other lead generation channels, and what provides the highest ROI? This website costs me $10/year in domain name fees and $5/month in hosting fees. I set it up with a boilerplate template from wordpress. My time is simply time that I am not sending my thoughts to clients in emails and instead put them on the web. So it costs me virtually nothing. But not all professionals are going to have the same low costs. Some people don’t like to write. Let’s say for the sake of argument that there is a blogging/social media service that costs CRE pros $3000 annually and you had to pay $250 per blog post for one post per month. And let’s say that you need to figure out whether that $6000 is going to provide the same ROI as your other lead generation activities. I can send 12,000 pieces of mail for $6k. If I have a 5% response rate, that’s 600 incoming phone calls. I can tell you that I haven’t gotten 600 incoming phone calls from this site.
If you can’t tell, I’m not entirely crazy about the idea of ghostwritten blog posts becoming a part of the social media fabric. I think the lure of social media and its attractiveness is the amount of access it offers you to the writer. I also don’t think that professionals are well served by paying for these services. I’m not worried on any level because I think “for pay” social media sites are a patchwork solution that will only exist in the period between now and when social media becomes widely adopted. I certainly don’t begrudge the people who run these sites, as they are simply providing a solution that the market needs in the interim. But I also think that these sites are short term opportunities/solutions. For instance, if LinkedIn were to offer a real API, the web would be flooded with high quality custom made professional/social media solutions that would fill the gap that these sites are currently seeking to fill. The LinkedIn professional ecosystem would likely blow competing sites, like CRE Advice and their competitors, out of the water.
Yesterday Howard Lindzon posted a nice interview with Paul Kedrosky in which Kedrosky said get long CRE. I’m still really interested to understand those who are long CRE, or any of the CRE ETFs. Kedrosky’s argument was essentially that the dropoff in loan quality in CRE isn’t as dramatic as it is in residential real estate and that there are some things you can do to smooth out the impact of the large numbers of non-performing loans in the market. This is counter-intuitive to me, though I am admittedly not the expert on where the publicly traded companies are in terms of recognizing current market in their valuations.
I would think if anything, companies typically try to prolong the day of reckoning and hide the pain as much as they can so that they don’t have to admit to their shareholders that they screwed up. That’s a behavioral trend that is pretty much universal. Screw up, deny, deny, deny, then admit things are bad and have been so for a long time and this is old news (see public homebuilders). So betting that either the public real estate companies have been upfront in their filings, or that the market doesn’t believe them and is discounting them sufficiently to cover the difference. It strikes me that for a lot of REIT inventory, there isn’t any there there. Meaning that when you pull out the debt, there isn’t any value. So what’s a company worth when their assets are equal to their liabilities? Even if the portfolio is currently cash flowing, that’s not guaranteed to go on forever. Eventually loans come due.
At the end of 2009, 4.9 percent of all pools of these loans - called commercial mortgage-backed securities - were delinquent. That’s a fivefold increase over the year before, Moody’s Investors Service said in a mid-January special report.
The rating agency’s “delinquency tracker” found that at year’s end, more than 8 percent of the bonds for apartment-complex mortgages and more than 9 percent of the bonds for hotel mortgages were delinquent.
With occupancy rates plunging, several high-profile defaults on pools of hotel loans underscored the risks. These include, according to Moody’s, pools that contained the Four Seasons Resort and Club outside Dallas, the Westin O’Hare near Chicago’s airport and Holiday Inns in Louisville, Ky.
Even New York City isn’t immune. In one of the biggest commercial real-estate deals yet to unravel, an investor group said Monday (Jan. 25) that it had defaulted on the debt used to finance its $5.4 billion purchase in 2006 of the huge Peter Cooper and Stuyvesant Town apartment complex in Manhattan. The 11,000-unit, 56-building property is now valued at less than half its purchase price.
One of the themes that I get back to regularly on this site is the difficult choice that vulture markets present. The Cliff’s Notes version of my thesis is that investors get excited for the vulture market as the market begins its first descent. By the time the market bottoms out, investors are [...]
I’m really proud of that headline. In fact, while you’re sitting here trying to read the post, I’m sitting here wondering if I should submit this post to an academic journal that might publish it simply based on the title of the post. OK, enough clowning.
