Author Archive

Big Data to the Rescue

Thursday, May 16th, 2013

We’ve all been inundated with talk about the era of Big Data. But these last few weeks, we felt its impact in dramatic fashion. Just hours after the explosions at the April 15 Boston Marathon, the FBI had amassed10 terabytes of data that four days later led them to the two suspects. Big Data is all about aggregating data sets into big-data algorithms that can see patterns and in the case of Boston, the data was cell phone tower call logs, text messages, social media data, photographs and video surveillance footage to quickly pinpoint the suspects.  Think about how long the investigation might have taken without the crowd-sourced information which had ordinary people sending the authorities thousands of pictures and videos.

In our industry, we recognize the era of Big Data because it’s had a huge impact on real estate. Christian Belady of Microsoft projects that annual global spending on data center construction will increase to $78 billion by 2020 with the US representing about $18 billion of that total. Looking ahead, the demand for data centers is secure. It’s being driven by the trend towards backing up data in the proverbial cloud, the growth of online shopping (it grew 14% between 2011 and 2012 to $42.3b in sales), the advent of electronic health records,  and all the time we spend posting, pinging, tweeting and liking on social media. McKinsey & Company predicts a 40 percent growth annually in the data being generated. Some datasets within the federal government are measured in petabytes, each of which is one million gigabytes or 1,000 terabytes. Among companies of more than 1,000 employees in 15 out of the economy’s 17 sectors, the average amount of data is a surreal 235 terabytes. That’s right — each of these companies has more info than the Library of Congress.

Data Demand

It’s estimated that the amount of global data will reach 40 zettabytes (ZB) by 2020 (that’s over 40 billion terabytes), an amount that exceeds previous forecasts by 5 ZBs. That represents a 50-fold growth from the beginning of 2010 and that number is probably a lowball.

So, why all this data? Because companies are hoarding it. Like hanging on to clothes that don’t fit, most of America’s premier companies are starting to do essentially the same thing with data. The reason? They recognize the opportunity cost of not collecting data. Often times, the chance to get data only happens once–when it occurs. This is true whether it’s from video surveillance, pictures from a cell phone, people browsing their on-line store, GPS tracking information coming from a car, recording tweets or information collected through scientific research.  So, if you don’t yet know what to do with all that data, put it in storage. Today, less than 1% of the world’s data is analyzed.

Data In the Distance

Looking ahead, we see no signs of abatement in the demand for data centers.

In 2012, we saw the institutions, REITs and private investors flocking to the asset class because of the long term leases, substantial tenant investment, and tenant credit profiles. As companies look to cut costs and lighten their balance sheets, we will also sale-leasebacks which will allow them to deploy their capital in their digital infrastructure rather than bricks and mortar.

The LIBOR Problem

Tuesday, July 17th, 2012

People who don’t follow the capital markets on a continuing basis might be forgiven for thinking that LIBOR was the name of a fitness instructor from Norway. But no, it’s actually what a lot of people in the business world, including those of us in real estate, look to benchmark the interest rates that we pay for loans. LIBOR, or the London InterBank Offered Rate, is the rate that 18 international banks charge to lend each other money. It affects consumer debt, corporate debt and about $10 trillion in mortgage loans.  When you’re structuring a loan, for example, the originator may assign a rate of 2% over LIBOR. So, when the news broke that a group of banks was under investigation for rigging the rate, it sent shockwaves across both sides of the Atlantic and much of the financial world. On Monday, Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier, both of Barclays, Britain’s second-largest bank,  resigned over the scandal. Barclays agreed to pay a $450 million fine. In testimony to Parliament last week, Diamond apologized and said 14 Barclays traders were involved.

The scandal implies that thousands of loans may have been made on the basis of rates that we artificially inflated. One fear is that it may deepen the housing crisis. The rate-fixing scandal may have caused people to lose their homes to foreclosure, according to London’s Daily News. Moreover, many people have mortgages linked to LIBOR and fluctuations in its rate can affect the size of their monthly home loan repayments. The U.K. Serious Fraud Office joins the U.S. Department of Justice in criminally investigating how derivatives traders and rate submitters colluded to rig interbank offered rates. The U.K. Financial Services Authority is seeking civil penalties against banks.

The reaction stateside has been mixed: While condemning the malfeasance of some traders, Forbes says the scandal shouldn’t be quite the cause celebre it’s become.  “The allegation is that the traders within the bank would try and get those who reported rates to the BBA, and thus influenced Libor, to report false rates so that their trading books would benefit. This is clearly wrong, unethical, immoral and we’ll find out soon enough whether it is in fact criminal. What it isn’t though is a huge thing for the wider economy. Firstly, such manipulations would have been up or down depending upon where the specific book was on any one day: it did not lead to continual over or under statement of Libor. Secondly, the amounts by which it was moved, if it ever was, were pretty small, one of two basis points at most is the generally accepted number.”

Maybe the biggest question going forward is whether LIBOR will survive or whether a global benchmark built on manipulable opinions might be replaced by one based on actual reported trades.

Stay tuned.

Arizona Ponders Sale/Leaseback of Some State Buildings to Cover $3.4 Billion Deficit

Tuesday, December 15th, 2009

Arizona looking to do sale/leasebacks on some state buildings to raise fast cash.  The cash-strapped State of Arizona may sell the identical House and Senate buildings where legislative business has been conducted for 50 years. A total of 32 properties within the Capitol complex, valued in excess of $1 billion, may be sold and leased for several years prior to assuming ownership again.  Investors would benefit from long-term lease payments from a stable tenant.  According to projections, the sale/leaseback arrangement would infuse as much as $735 million into the state’s coffers.  The plan, which has bipartisan support, isn’t popular with Arizona’s taxpayers, who once owned the buildings free and clear.

Although Governor Jan Brewer vetoed a sale/leaseback proposal during the summer, the provision is expected to return as a solution to the state’s $3.4 billion deficit.  The list of properties targeted for possible sale and leaseback encompasses buildings that provide necessary government services.  Included are the House and Senate buildings, the Phoenix and Tucson headquarters of the Arizona Department of Public Safety, the State Hospital, state fairgrounds and several prisons.  The properties were selected based on their appeal to potential investors.

“We’ve mortgaged the legislative halls,” said Representative Steve Yarbrough.  “That just tells you how extraordinary the times are.  To me, it’s something we’re going to have to do no matter how much we find it undesirable.”

The 1900 State Capitol building, now a museum, is not up for sale.

Las Vegas Underwater

Monday, June 1st, 2009

Las Vegas may be in the middle of a desert, but right now it’s underwater.  Fully two-thirds of the once fast-growing city’s housing stock is underwater,  meaning that the owners owe more on their mortgages vegasthan the home is worth.

According to www.zillow.com, borrowers who are underwater totaled 20.4 million at the end of the first quarter of this year, compared with 16.3 million at the end of last year.  This represents 21.9 percent of all homeowners.

The irony in these numbers is that falling prices are making homes more affordable for first-time buyers who previously were shut out of the housing market.  At the same time, the decline in home prices compounds problems for owners who get into financial trouble by making it harder for them to refinance and take advantage of the current low interest rates.

“What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks of communities where home prices have fallen,” noted Stan Humphries, a Zillow.com vice president.

Zillow.com reports that the nation’s top 10 underwater cities are:

  • Las Vegas, NV                    67.2 percent
  • Stockton, CA                       51.1 percent
  • Modesto, CA                       50.8 percent
  • Reno, NV                             48.5 percent
  • Vallejo Fairfield, CA       46.5 percent
  • Merced, CA                         44.4 percent
  • Port St. Lucie, FL              43.5 percent
  • Riverside, CA                     42.8 percent
  • Phoenix, AZ                        41.7 percent
  • Orlando, FL                         41.7 percent

Obama’s Housing Plan Seeks to Help Homeowners in Trouble

Monday, March 2nd, 2009

Residential, Financing

Nine million homeowners can breathe a preliminary sigh of relief.  They may get to keep their homes now that President Obama has unveiled his ambitious – and larger than expected — $75 billion mortgage relief plan.  At the same time, the Treasury Department will double the size of its support of Fannie Mae and Freddie Mac.  The government, which seized the mortgage finance companies last fall, will absorb up to $200 billion in losses at each company.

The massive Homeowner Stability Initiative is intended to help the five million borrowers who are said to be “under water” to refinance their home loans.  Additionally, it provides incentive payments to mortgage lenders to assist as many as four million families who are either already in or on the verge of foreclosure.

Obama chose the Phoenix area as the venue for his announcement because it has been hit hard by foreclosures.  He believes that putting a halt to foreclosures is key to turning around the economy.  The plan is sound and proof that Geithner can deliver specifics and bold initiatives when he needs to. bittinger_sinking_house1

It will be interesting to see if the President gets the bipartisan support that he wants from Congress to pass this vital legislation.  Obama, who likes to strike a fine balance between hope and skepticism, describes himself as an eternal optimist – though anything but a “sap”.  The Democratic majority in the House is comfortable enough that this legislation will ease through that chamber.  When the bill moves to the Senate, however, Obama may once again need to twist a few Republican arms to avoid a filibuster.

Construction-Loan Delinquencies on the Rise

Monday, June 30th, 2008

The surge in the construction-loan delinquency rate – both residential and commercial – suggests that lenders will remain reluctant to make loans for new construction.

Developers usually finance projects through short-term construction loans.  Once the project has stabilized, the developer seeks long-term debt.  With the current economic downturn, developers are finding it difficult to obtain capital.  This is compounded by a lack of liquidity in the mortgage market.  As a result, projects are worth less than they were a year or two ago.  Lenders also are more stringent in their underwriting standards, preferring highly stabilized projects with significant pre-leasing.

Short-term, the outlook is negative, as maturing loans may have problems refinancing if liquidity is non-existent.

The silver lining is that seasoned developers with strong lending relationships and leased portfolios are better positioned to develop product on an “as-needed-and-warranted” basis.