The latest report, just published today by the Shenehon Center for Real Estate is not a significant shocker. Current trends of single family housing supply shortages continue. Herb Tousley, Director of the University of St. Thomas’ Shenehon Center for Real Estate, gave interesting insights this month. Many people have attributed the shortages to simple reasons such as increased demand due to millennials and generation X’ers beginning to settle down which are true, but Mr. Tousley brings up a point seemingly looked over, the recent actions of investment vehicles.
Tony Downs’ reputation precedes him. Having authored An Economic Theory of Democracy at age 27, 23 books and over 500 articles, and being an active economist at the Brookings Institution since 1977, he has seen the rise and fall of the US economy many times over. At the 2011 Minnesota Real Estate Hall of Fame induction ceremony, the University of St. Thomas presented Downs with a Certificate of Professional Distinction. Downs presented the audience with an assortment of colorful jokes and a foreboding economic forecast.
Downs projects another 3-5 years of depressed economic conditions, due to the myriad of issues that he believes stem from Americans’ unwillingness to accept the reality of the economic situation, to make sacrifices, and to encourage realistic solutions from politicians.
“Short run focus is a big weakness in American democracy,” states Downs, who undoubtedly sympathizes with the current situation and believes that “what we really need is a miracle of some kind.”
Downs elaborates, highlighting the factors that have added up to produce the current Great Recession. “Long run federal spending must be greatly reduced,” advocates Downs, but he recognizes that now is not the time to reduce the federal workforce and put more Americans out of a job. Interestingly, Downs notes that the Clinton administration observed the largest increase in American employment of any president, even though taxes were raised on the wealthy twice during those eight years. The economic disparity between classes has become greater with the lowest 20% of workers earning just 3.4% of total income and the highest 20% bringing in one half of the country’s total income. Downs believes it is in part the wealthier Americans’ responsibility to make the country more equitable; otherwise, uprisings will continue to spread, similar to what’s been happening in Greece.
The discrepancy in incomes has resulted in the middle class borrowing too much to consume imported foreign goods, with consumption becoming too large a portion of the overall GDP (consumption had risen to 70% by 2009, a historically high level); this level of consumption was not sustainable and must remain at previous levels for the health of our overall economy.
America should be investing in “production, education, and new energy sources” to protect its future.
To avoid a future financial crisis, Downs recommends breaking up the largest banks to spread the wealth amongst the nation’s 8,195 financial institutions so that none are ever too big to require bailing out. With 80% of US capital held by only 10 banks, history is bound to repeat itself if we do not act to break up financial monopolies.
Click below to read the rest of Downs’ key points, including information about the real estate market…
“My life is lived from the inside out. My principle values, experience and leadership come from the inside, and guide my life on the outside. It’s an inside job. It seems that everyone is wired differently. Some of us want to make a lot of money, while others want to save the world and help people. You CAN do both! Everyone needs to figure it out. Work is a huge part of it. If you find the right work and path, life can be a real joy and blessing.”
Dennis Doyle, Executive Chairman of the Welsh Property Trust, started his career in real estate as an adolescent who spent his summers working construction for his neighbor, George Welsh. During that period, Mr. Doyle’s passion for construction and development grew exponentially, part of the credit, according to Mr. Doyle, belongs to his older brothers who forced him to work harder to keep up. He left real estate briefly to attend college on a football scholarship, with the intention of becoming a coach, however Mr. Doyle soon realized that this was not his true goal, and returned home to continue his career developing and constructing buildings. In 1977, Mr. Doyle and Mr. Welsh (same childhood neighbor) entered into a handshake agreement, that formed the Welsh Companies, and has shaped the last 30 years of Mr. Doyle’s life. Reflecting on this story, and on his subsequent career, Mr. Doyle lamented, “I love being able to put my personal touch on buildings, and am very fortunate to have found my life’s passions and being able to continue working in this field.”
“No one was doing anything, I mean no one was even talking about starting a new project. Sure I was scared, we paid too much for the building during the worst real estate market in my lifetime. However, we needed to play offense, someone had to make the first move, and it was us. That got a lot of attention, and we were able to get the building 90% leased before we started renovation, that’s just unheard of, and it worked to our benefit.”
The quotation above does a superb job in summing up the career, strategy, and philosophy of Boyd Stofer, president and CEO of the Marquette Real Estate Group. Over the past 32 years, Mr. Stofer has helped United Properties (Now part of the Marquette Group) grow into one of the most successful and profitable real estate development companies in the country. Attending a lecture from Mr. Stofer is somewhat like listening to a Harvard (one of his Ivy degrees) Economics professor give a semesters worth of lectures fast forwarded to a speed that condenses the information into one hour. During his talk it appeared as if he continued to talk as he inhaled, and didn’t miss a beat or misstate a figure as he outlined the micro and macro forces that are effecting the national commercial real estate market. His charisma stems directly from his incredible intelligence and ability to conceptualize and connect the vast set of variables that made up the contents of his talk, ending with the weaving of details to present the Marquette Group’s current standing and plans for the future. It’s no wonder that the Pohlad Family entrusts Mr. Stofer with a significant share of their fortune, as very few individuals can impart their razor sharp intellect and cunning in such a succinct and complete manor. It is highly unlikely that anyone in the room (full of real estate professionals, academics, and students) walked out questioning Mr. Stofer’s understanding of the real estate market, actually, it highly unlikely that anyone who meets him ever has doubtful thoughts.
Mr. Stofer’s educational credentials mimics his career as nothing short of top tier. In 1971 he graduated from the Cornell School of Engineering, and followed it up with an MBA with Honors from Harvard. Immediately following his MBA program, Mr. Stofer was hired by Hines Interests, a national real estate development group based in Houston. After three years in Houston Mr. Stofer left and came to Minneapolis to join United Properties, then owned by the Hamm family. Since his hire, Mr. Stofer has led the companies development initiatives, and has amassed an amazing portfolio of work. In 1996 he was named president and CEO, since that time Mr. Stofer has grown and merged United Properties into what is now the Marquette Group. Today, the combined entities of the Marquette group employ over 1,000 people, has assets around $750M and services more than $40B worth of real estate loans. The current operational structure of the Marquette Group is the culmination of Mr. Stofer’s vision for a vertically integrated property firm that is unique in the services that it can provide. The vast array of real estate products that Marquette Group is far from novel, in fact it is probably the firms best financial hedge, in that the organization is prepared and capable of earning revenues in any market and any economic climate.
The current political theater in the United State regarding the federal deficit, taxes, the budget (etc.) is one of the most important debates taking place right now and the outcomes from forthcoming legislation will have far reaching implications for the country playing a major role in defining who we are as a nation. Unfortunately, the only thing that lawmakers can agree on is that their is a tremendous problem, and a lack of action will have devastating effects on the US economy. Furthermore, many of the proposals and news stories that emerge from the medias coverage of this topic is little more than political gamesmanship, and insults the intelligence of the electorate by turning a complex subject into a handful of talking points, which use misleading statistics, irrelevant information, and worst of all, fear mongering to appease the most extreme groups on both sides. By moving further away from the middle, which statistically and practically represents the average attitudes of Americans, politicians are jeopardizing the economic future of the US.
That said, when a news story is reported on the subject regarding a well reasoned and genuinely honest effort to ease some of the financial burden our government is facing, any educated and reasonable American must put their personal politics aside and objectively assess the merits of the proposed plan. In the April 5th edition of Finance & Commerce, Mark Anderson reports on a recent Minnesota State Senate bill that would phase out the state tax on commercial property. Currently, Minnesota is ranked 43rd by the Tax Foundation, a public policy think tank, on it’s overall business tax climate. This is a critical problem for the states economy, since 31.38% ($7.48B) of the states tax revenue comes from business taxes. Furthermore, Minnesota businesses are hiring new employees at a slower rate (.6%) than the national average. Attracting businesses to the state, who will hire Minnesotans and increase the states tax revenue is a priority that fortunately rises above politics and is one of the major goals of the current legislative session. The bill passed 37-26, representing a straight party line vote with Republicans voting for and Democrats against. The plan would reduce the statewide commercial property tax burden by $115M for 2012 and over the course of the next 10 year completely phase out the tax that will bring in an estimated $775M for the state this year (a conservative forward estimate, with 2.5% inflation and 2% economic growth for the state, would put the 2022 tax revenue loss at $1.204B).
“Tax cuts do help job creation, but the revenue we’re losing would lead to job losses, too. It means layoffs of state and local government workers, and it hurts a number of things that support jobs. Revenue lost in the first two years of the phase-out, for instance, is nearly equivalent to cutbacks proposed in subsidies for sliding-fee child-care programs. That probably means child care businesses will close, but it also means that many workers won’t find affordable child care.”
Despite the bill clearing the Senate, the prevailing viewpoint at the capitol is that Governor Dayton will veto the legislation, and demand more concessions from the Republicans. However, Governor Dayton has surprised many conservatives and the business community by taking a pro-business stance on several major issues early in his term. At this point it is unknown how Mr. Dayton will respond to the legislation, but he is certainly interested in finding ways to improve the states economy, create jobs, and reduce the deficit. By focusing on these issues, and working with the legislators in office, Governor Dayton will doing his constituency a great favor.
To read the entire article click on this link
A collection of the most important stories this week that are making headlines in the real estate industry
From the Chicago Tribune | Home improvement sales rebound- Lowe’s, the nations second largest home improvement retailer, is reporting a 15% increase in seasonal hiring, a sign that the home improvement business is stabilizing ahead of the greater real estate industry. This appears to be another strange aftereffect of the real estate crisis, with the article attributing the increase in home improvements to existing home owners opting to fix up their old homes, as opposed to buying a new home. Overall 1Q 2011 spending is expected to increase 9.1% to $125.1 billion.
From Calculated Risk | CoreLogic- House prices declined 2.7% in February, prices now 4.1% below 2009 lows- The bottom of the slide in housing prices is still being determined, as the most recent numbers from CoreLogic paint a dreary picture for potential home sellers. Overall, the mean selling price of homes across the country continues to plummet, with a decline of 6.7% in February 2011 compared to February 2010. However, as this blog and many other real estate analysts are pointing out, the news isn’t as grim when the market is properly quantified. Currently the percentage of distressed homes being sold is significantly higher than market averages, causing an overall decline in the mean home prices across the country. According to Mark Fleming, chief economist with CoreLogic.
“When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets. Price declines are increasingly isolated to the distressed segment of thee market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared.”
CoreLogic has adjusted figures (which exclude the sale of distressed properties) showing a decline of .1% over the same period, which continues a trend towards stabilization and hopefully indicates positive gains in home owners equity moving forward. to read the entire report click here.
From the Star Tribune | Almost half of all March closed home sales in the Twin Cities were foreclosures- Relating to the previous article, the Star Tribune reports that 43% of home sales in March were distressed properties. This sent the median home price into a nosedive, dropping 15% to $140,000, however excluding distressed properties, the picture is a little brighter. Looking at previous March sales, without including 2010 (the new home owner tax credit created unusual demand), sales in March 2011 were up 6% and 15% for 2009 and 2008 respectively.
From the Wall Street Journal | Malls face surge in vacancies- From a record low vacancy rate of 5.1% in 2005 to todays less rosy 9.1%, mall owners are facing increased pressure due to the changing shopping behavior of Americans, as well a loss of customers in the exurbs of America’s largest cities. One segment that appears to be regaining traction is the upscale mall industry, that has reduced its nationwide vacancy to 7%, although this is still above what is considered healthy in the sector. As technology and connectivity spreads to more individuals, retailers will be forced to ask serious questions about their business models, and the need for massive retail space in as many locations as possible.
“So, what is the plan for Block E?”
A simple question that was definitely on every attendee’s mind at the most recent Real Estate Executive Insight Series. However, the answer isn’t so simple, and if it were not for Bob Lux’s (principal at Alatus LLC) charisma, intelligence, and experience in leading major, press-worthy development projects the answer might not have been as well received. As any gifted public figure would, Mr. Lux skirted the question, but in his sidestep, alluded to several important things concerning the future of Block E, as well as the kind of person Mr. Lux is. Before his answer can be assessed properly, it is important to understand Mr. Lux’s history, professional accomplishments, and his philosophy on development (and life).
Mr. Lux grew up in a Long Prairie, a small community in central Minnesota, a town that most likely does not have a building higher than the many crop silos that dot the agrarian landscape. Like many young men from small towns, Mr. Lux left home in search of success and the experience that can only be found in the “big city”. After earning his degree in Business Administration from the University of Minnesota, Mr. Lux returned to Long Prairie with the intention of starting a home building business in the area. He purchased a lumber yard with his father and began building farmers homesteads in the immediate area. Although this was quite different than the projects he would eventually oversee, Mr. Lux quickly learned the importance of adding value to differentiate his product, otherwise it would simply be a commodity.
After a short time at home the urge to return to city life became to great to resist, and once again, Mr. Lux left Long Prairie for the Twin Cities. His first employer, The Dominium Group, was developing high-density suburban real estate, which faced major issues surrounding obtaining approval from the community and local government for the rezoning of land for this use. Suburban homeowners are very protective of their communities, and the amount of space that each homesite has was a reflection of the owners desire for privacy and quiet living. Mr. Lux’s first assignment was in Eagan, MN, where he faced opposition form the mayor as well as landowners surrounding the proposed site. To change the attitudes of the landowners surrounding the site, who were a critical stakeholder in the success of the project, Mr. Lux used a mixture of logic, emotional appeal, and financial acumen to reach out to each of the parties and work with them to develop a compromised plan that met the needs of everyone. In the end this project was approved, and through it, Mr. Lux learned one of the key lessons that has helped him throughout his career. During the lecture, he repeatedly cited the ability to listen to, and connect with people as the most important skill he has, and the main reason why projects fail or succeed.
The short history of the building currently occupying the 600 block of Hennepin, know commonly as Block E, in downtown Minneapolis is a staggeringly accurate metaphor paralleling the last decade of the greater real estate market. According to Minneapolis St. Paul Business Journal, the original cost of developing the site in 2001 (less the $36.25 million spent on the Graves Hotel which did not change ownership) was $105.75 million. When Alatus Development purchased the development in July, 2010 they paid a paltry $14 million, or roughly 13.23% of the original price. At the risk free rate of return (based on the 10 year T-bill which average 4.42% over the period) the investment in Block E would be worth $162.973 million, resulting in a savings of $148.973 million for Alatus in todays value. This investment appears to be a no brainer, but it is not without risk. Since opening, Block E has lost most of the anchor businesses that originally signed leases in the space including: Borders Books, Game Works, The Hard Rock Cafe, Applebees, and Hooters. The space which Game Works and Borders occupied is still vacant, presenting Alatus and Bob Lux, the lead developer on the project, with significant challenges in their attempt to turn the site into a successful retail operation. That said, the final price tag for the site was too attractive to pass on.
One significant factor that helped persuade Mr. Lux to move forward with the deal is the 550 heated underground parking spaces beneath Block E, at $25,455 per spot is inline with other parking structures around the city. Looking at the deal from this perspective, Alatus paid market rate for the parking, and got a deal sweetener that is quite impressive, approximately 213,000 sq/ft of retail space. Pricing it the other way, at $66 sq/ft, the retail space was purchased at a price that is almost inconceivable given Block E’s location at the heart of the downtown district and within walking distance of Target Field, The Target Center, and many of Minneapolis’s theaters and restaurants. Despite the obvious advantages in location, the previous owners at Block E have had serious difficulty maintaining profitable levels of business. Trying to figure out what to do with this space will certainly keep Mr. Lux up at night, until a solution that provides long term tenants can be derived.
Enjoy this list of articles and resources to ensure that you are up to date on the stories that are making headlines in the real estate industry
From Calculated Risk | Census 2010 Housing and Occupancy Data- The Census Bureau has released occupancy data from the 2010 census for 42 of the 50 states. This information is useful to gauge the extent of vacancies on a national and state level, and provide a trove of information for time series analysis. The article has an xls file of the data, as well as links to the Census website for more research. Finance and Commerce has a follow up to this story, in which they report exclusively on the vacancy and occupancy rates in the Minnesota market.
From Project Syndicate | Bubble Spotting- An interesting article by Robert Schiller (cofounder of the Case-Schiller index) who shares his predictions of the next equity bubble, even though he points out several times in the article that predicting such events are nearly impossible. Despite this, he outlines several well reasoned arguments and points out some interesting correlations in market behavior.
From The Wall Street Journal | Discounts Expected in Spring Market– A nationwide drop in housing sales and median home prices is not great news for the real estate market. However, looking at a more positive repercussion of this trend is enticing potential buyers off the fence with low borrowing rates, and prices that match the market realistic valuation of the property.
From Minneapolis Area Association of Realtors | Weekly Market Activity Report- Get the latest numbers on the twin cities housing market, as well as trends and analysis from MAAR.
From Finance and Commerce | Troubled Assets ‘Still Quite Plentiful’ in CRE Market- Finance and Commerce reports on the high volume of CRE inventory classified as distressed debt. Although there are many challenges for buyers and sellers in this market, there is also tremendous upside, due to the deep discounts available. With the right strategy, and enough equity to qualify for bank financing, investors have a huge opportunity to earn strong returns in the market.
From The New York Times | More Borrowers Are Opting for Adjustable-Rate Mortgages- Pinpointed as one of the major causes of the record breaking number of foreclosures over the past three years, ARM’s have been shunned and avoided by recent home buyers. However, this trend is reversing, as banks are beginning to offer more conservative ARM’s that do not include any of the gimmicks that enticed unqualified buyers to borrow too much money. The shift towards marketing ARM’s as a prime investment option for high credit borrowers is a positive sign that lenders and buyers appear to have learned some lessons from the last crisis.
“Never waste a crisis, they all have opportunity.”
It is a common occurrence during difficult times, and there is something very human about perceiving the current situation and lamenting that it is the worst or most extreme crisis in history. Although most of the time this can be chalked up to theatrics or over reaction after hearing Mr. Andy Deckas, President of Founders Properties,
speak about what happened in commercial real estate (CRE) over the past seven years, one can only hope that he is correct in his analysis that, at least for CRE, the market is moving forward and recovering from the difficulties of the last few years. Mr. Deckas gave a superb analysis of the root causes of CRE bubble, using a combination of personal narrative and hard data to support his claim, while being very specific in the way he defined the crisis in the context of the greater economy, and the world in general. His labeling of the fluctuations in CRE market, as the worst in history, based on the criteria of loss of equity, disruption of the industry, and systemic implications on the greater economy quantifies his claim, and despite the pitfalls of making such sweeping assertions, seems to be reasonable. Despite Mr. Deckas’s sober analysis of the recent state of the CRE market, his presentation had a positive tone that included optimism about current opportunities, as well as providing a recap of his fascinating career in the industry.
Resume | Mr. Deckas’s credentials as a commercial investor date back to beginning of the industry, when financial professionals were just realizing the value of securitizing CRE. Mr. Deckas earned his BA from Northwestern University, and planned on continuing his education by earning an MBA until he received an offer that he could not refuse. A personal connection encouraged Mr. Deckas to contact Tom Crawley, who was an executive at Heitman Financial. Mr. Crawley’s pitch was simple, come work for me, and in two years I promise you will learn more than you ever could about CRE in academia. Mr. Deckas agreed, and part of his initial responsibilities included working on raising the capital needed to construct the Mall of America. After nine years moving up through the ranks at Heitman, Mr. Deckas left the firm and moved to OPUS, which at the time was one of the nations largest real estate developers. His first role at OPUS was creating and growing OPUS financing operation. At OPUS, Mr. Deckas moved the focus of there customer targeting from institutional investors, which were flush with capital but also with a highly bureaucratic structure that impeded flexibility, to high net worth, private equity. It was here that Mr. Deckas found an untapped niche of the market, linking investors eager to increase returns, with securities that offered high upside, with (at the time) minimal risk. Mr. Deckas’s final move brought him to Founders Properties, were he serves as the President of Operations.
The resume that Mr. Deckas possesses, especially the quick ascension to the c-suite in every firm he worked for, provides credibility for his opinions and the analysis of the situation on a macro level. Raising capital for funds in the $100M-$200M dollar range places Mr. Deckas in a unique echelon of individuals who were present in the board rooms and at the job sites of developments that represented the center of the looming decline of the industry