The US Defies the Rating Agencies

August 6th, 2013

Despite the S&P cutting the US credit rating from AAA to AA+, the country’s economy is outpacing the 12 nations that currently have the highest rating. Take a look at the indicators – the dollar is at its strongest since 2008, its GDP is growing faster than developed countries, and its deficit is the lowest since 2008. As a result, S&P has changed their read on the nation’s economy from negative to stable. The change effectively means there is less than a one-third chance of a downgrade in the next two years.  “The markets are telling us that we’re due for an acceleration over the next several quarters,” said Carl Riccadonna, a senior U.S. economist in New York at Deutsche Bank Securities Inc.

The S&P downgrade caused a flight of capital that erased about $6 trillion in value between July 26 and Aug. 12, 2011. Treasury 10-year yields hit the skids at 1.67 percent that September from 2.41 percent on the day of the downgrade.

So what did it? A host of factors, but one component is a reminder never to listen to Op-Ed writers and politicians running for office. When the budget sequestration was first raised – these are the $1.2 trillion in automatic spending cuts that took effect on March 1st– the punditocracy and the blogosphere acted as if the economy would nose dive into a double dip.  After all, if sequestration remains in place, the Pentagon alone will have to trim $50 billion from its budget during 2014 and $500 billion over the next decade. Instead, after four years of budget deficits of more than $1 trillion, spending has been chastened. The government instead has raised tax revenues (mostly due to investors taking profits on investments sooner than they might otherwise have because of fear over a hike in capital gains) and lowered spending meaning the deficit will probably shrink to $378 billion, or 2.1 percent of GDP in 2015, from 7 percent in 2012, according to the CBO.

What all of this has brought back is confidence. Foreign investors and governments are parking their money in dollars again. Its share of global foreign-exchange reserves rose to 62 percent on March 31 from a low of 60 percent in June 2011, according to International Monetary Fund data.

Detroit Goes For Broke

July 29th, 2013

In the largest bankruptcy filing by a city ever, Detroit filed Chapter 9. The effect of bankruptcy could be devastating on the public sector. The man at the center emergency manager for the city, Kevyn Orr, who has since been negotiating with Detroit’s many bondholders and other creditors about restructuring the city’s debt. Those negotiations were at an impasse this week, with the fate of about $11 billion in unsecured debt proving especially contentious. One area that could be adversely affected is pensions for the city’s 21,000 public-sector retirees which could be slashed since the municipal shortfall accounts for about $3.5 billion of the city’s $18 billion in debts. The unions have shot back that pensions are protected by Michigan’s Constitution.

The filing is a new arc in a narrative of decline that has come to symbolize the Rust Belt the and the deindustrialization of America. The facts are striking  – the 5th most populated state in 1950 that now ranks 18th as people have left; unemployment that has doubled since 2000; and an unemployment rate of 16%.

So where do we find some good news? In the private sector. The three major publicly-traded companies based in Detroit — General Motors,  Ally Financial and DTE Energy all  released statements saying there will be no impact on their operations, while venture capitalists say innovation will continue to thrive. Over the last 5 years,  more than $10 billion and some 12,000 jobs have been added by the private sector in Downtown Detroit.

While the effect on the real estate industry has been severe — the metro area  has a 26% office vacancy, 78,000 abandoned buildings and 66,000 vacant lots– the CBD has also seen positive shifts.  According to Newmark Grubb Knight Frank, the Central Business District “has been the dominant submarket in Southeast Michigan with large and small tenants alike migrating downtown”.  The trend began with Blue Cross Blue Shield, DTE Energy and Quicken Loans in 2011 leasing a combined 750,000 square feet. Then in 2012, companies like Title Source, Chrysler, PricewaterhouseCoopers, Metro-West Appraisal Co and Agency 720 leased just under a half million square feet combined.” Acording to Newmark the vacancy rate could hit its lowest level since 2002 by end of year. It’s cold comfort for the city’s municipal workers but it does prove the private sector might show the way out.

China Still Shopping

June 19th, 2013

Ever wonder who is buying the new Lamborghini Veneno? That’s the  $3.9 million car. Or the $43,000 Brioni Vanquish II men’s suit? Or the $30 cup of coffee made from Kopi Luwak beans? Despite the recession the luxury good markets continues to thrive. The US gilded class leads the world in luxury goods purchases with $74.6 billion in retail therapy. Japan is number2, then Italy, and France. The surprise is China which, after a giddy four years, has seen its high-end market go into a tailspin.

After double-digit growth from 2007 to 2011, luxury goods have fallen out of favor. Some say it’s been precipitated by a series of political scandals which cast a disapproving eye on ostentation. According to the Economist, “Sales of shark fin, the key ingredient of a soup served at fancy dinners, are down by around 70% year-on-year. Imports of bottles of Bordeaux costing more than $800 have collapsed.” And which country is taking up the slack? The United States, where luxury spending collapsed after the 2008 financial crisis but roared back to pre-crisis levels by 2012. Last year, the world’s No.1 and No.3 luxury groups LVMH and PPR saw higher growth rates in the United States than in China for the first time in years.

While many are sounding the fire bell for China, others see this as merely proof that retailers will have to go beyond Beijing and Shanghai to develop new markets. In 2002, 40 percent of China’s relatively small urban middle class lived in the four Tier-one cities: Beijing, Shanghai, Guangzhou, and Shenzhen. By 2022, the share of those megacities will probably fall to about 16 percent . If retailers can read the Chinese tea leaves and expand into the next tiers (cities like Jiaohe and Wuwei), they should be able to tap the new wealth. Bain & Company estimates that luxury sales in greater China (which includes Taiwan, Hong Kong and Macau) will grow by 6-8% this year, to exceed $35 billion, making it number two only to America. Then, there’s the whole issue of retail tourism, which has made Chinese consumers the most intrepid as they chase merch across the globe. Last year mainland Chinese took 83m foreign trips, up 18.4% on 2011 and the Chinese are the single biggest nationality represented among luxury-goods buyers. According to McKinsey, by 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland.

S&P Gives US a Thumbs UP

June 12th, 2013

The S&P has upped the US.  It has raised the outlook for US debt from “negative” to “stable” which some take as an indication that we are unlikely to see a ratings slide like the one in 2011 that took us from AAA to AA+ anytime soon. The agency cited a lower federal deficit, the willingness of the Fed to stimulate the economy some more, and a slightly improved political climate as reasons. S&P also estimates, citing Congressional Budget Office data, that federal debt held by the public will stabilize at 84 percent of GDP in the near future. Congressional Budget Office projected the U.S. deficit will shrink to $642 billion this year, from over $1 trillion the past four years. Much of this, of course can be attribute to the tax increases, along with the sequestration cuts that kicked in March 1.

One of the ironies of the credit downgrade is that it also abraded a little of Standard & Poor’s brand. According to Treasury officials, the firm made an error in estimating discretionary spending levels at $2 trillion higher than what the Congressional Budget Office estimated. After being alerted, S&P lowered its calculations by $2 trillion but pressed ahead with the downgrade which irked many in the Treasury department.

The question is, does it mean anything? Many maintain that S&P’s downgrade two years ago had no consequences for U.S. interest rates, the stock market or the value of the dollar. Taking a look at the real estate industry, we see the foreign investment in the US actually increased with the first half of 2013 posting $7.97 billion, a 25% jump over 2012– evidence that global capital still believes in the US as a safe haven for their money. According to the OECD, the US economy will grow 1.9% this year and 2.8% in 2014.

Big Data to the Rescue

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.

Home Prices Spike But Is It Real?

May 6th, 2013

Economists tell us that the reason the US is doing better than Europe is because of two things: our equity markets and our housing sector.  And now comes the news that housing is posting its best numbers since 2006.  The widely followed Case-Shiller indexes showed the price of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006. Single family starts are expected to rise to 700,000 new homes (from 535,000 in 2012) and to 1 million in 2015.

All of this activity is, of course, being driven by all-cash investors looking for high returns (the Blackstone Group is reputedly spending $100 million a week buying homes). And homebuyers eager to lock in at record low interest rates who have very little to choose from. The reasons for short supply aren’t however related to the health of the market but because of the obverse. Home prices are still 29% to 30% off their mid-2006 peaks and monthly foreclosures are more than double what they were before the recession. Clearly, underwater homeowners and people who’ve seen some part of their equity vanish simply don’t want to take a loss so they’re waiting it out. As a result, we’re building more.

As housing price gains 23% per year in Phoenix; 17.6% in Las Vegas, and 16.5% in Atlanta, let us think carefully before we go on a building spree. We still have 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million. It is important that we temper the current exuberance with a view to not flooding the market with excess inventory. The housing sector is critical to our recovery for two large reasons – the wealth effect which bolsters consumer spending and the fact that small to medium-sized businesses rely on home equity lines of credit to underwrite their businesses. True recovery can only happen with housing.

IMF Says Less Austerity, More Spending

April 22nd, 2013

For those who have stressed the need for austerity and deficit reduction, who think that fiscal cliffs and sequestration are a good corrective to reckless spending, it may be helpful to consider what the IMF is saying. Lowering the outlook for U.S. growth to 1.9% from 2%, IMF Economic Counselor Olivier Blanchard called the U.S. spending cuts, known as the sequester, “the wrong way to proceed.” The U.S., he said, should impose less belt-tightening now, when the economy is still gaining its footing, and more in the future.

Take a look at Europe where the 17 countries using the euro currency remain in recession. Many are cutting spending sharply and raising taxes to slash mountainous debt, but the austerity strategies are stifling growth. The UK is expected to grow 0.7% this year and by 1.5% in 2014 and that’s better than France or Germany. During a recent trip to Europe, U.S. Treasury Secretary Jacob Lew urged officials there to put more near-term emphasis on government spending to stimulate growth, as the U.S. did with its $800 billion stimulus from 2009 to 2011.

The IMF says next year will be better:  3% growth as the effects of the federal cutbacks fade and a housing rebound continues to bolster a strengthening private sector.

The IMF had been calling the global recovery “two-speed,” with emerging markets growing strongly and advanced economies weaker.  Now, it says, it’s a three-speed recovery, with a growing divide between a strengthening U.S. and a still floundering Eurozone.

Charles Krawitz on The Banking Comeback

April 8th, 2013

Charles Krawitz Instagram Image 2013On the latest episode of The Alter Group Podcast on Real Estate, Charles Krawitz used his 25 years of experience in financing of thousands of transactions, and the sale of highly distressed loans and REO assets to give us an inside look at the recovery of the banking sector.  Banks now hold 49% of all commercial real estate debt and mortgage originations for the sector spiked 24% last year.

According to Charles, larger and regional banks which were saddled with distressed assets after 2007 have worked through their backlog of delinquent loans and are winding down the special assets groups tasked with dealing with problem notes and REO assets. Now, banks are once again seeing prospects in multifamily, medical office and grocery-anchored retail.

He spells out the trends of lending with banks doing full-recourse 75% loan-to-values but with shorter terms – interim or bridge loans rolling into a 3-5 year mini-perm. On the other hand life insurance companies, which are doing more originations than before the recession, are doing 3-20 year loans with 60% LTVs. Conduits which topped $40 billion in 2012, are doing 10 year loans (albeit with  a preference for institutional-grade assets, higher-credit borrowers, significant equity).

Beyond lending from their balance sheets, banks are also procuring capital on behalf of their clients from sources such as the GSA, life insurance and the CMBS. According to Charles, being a third-party solutions provider to clients is one of the new frontiers for regional and larger banks.

To hear Charles Krawitz on the Banking Bounceback, listen to the latest episode of the AlterNow Podcasts.

Would You Give Away Half of Everything?

February 25th, 2013

You’ve heard about  Warren Buffett and Bill Gates trying to get their fellow billionaires to give away half their money to charity? Well, now their challenge is resonating outside the United States. Twelve new magnates have joined the Buffett-Gates “Giving Pledge” bringing the total to 102.

Who are they? Richard Branson, the Virgin Airlines eccentric; David Sainsbury, the super market tycoon; Hasso Plattner, German founder of SAP, the software giant; Victor Pinchuk, a Ukrainian ; Vladimir Potanin, a nickel mining magnate. There are two Africans now on the list —  Mo Ibrahim, a mobile phone billionaire who previously spoinsored  a cash prize for retired African leaders who did a good job in office; and Patrice Motsepe, a South African mining boss.Joining them is one Malaysian, Tan Chee Yioun, and one Indian, Azim Premji, a technology tycoon. According to Forbes, there were 1223 billionaires on the planet in 2012. Surprisingly, Buffett and Gates could find no takers in some of the world’s fastest growing economies – Mexico, Brazil or China.

What about giving overall? No question — the recession has put a hot on giving. According to The Chronicle of Philanthropy, the top 50 donors committed a total of $7.4-billion to charity in 2012. The median gift was $49.6-million, down significantly from 2007’s high of $74.7-million.Most of the money went to big, elite institutions. Seventy-two percent of the dollars pledged supported higher education, arts and culture, hospitals, and private foundations. One encouraging sign is that younger billionaires are joining the ranks of the world’s most munificent people: Among the five top philanthropists last year, three were couples under 40. The youngest was Mark Zuckerberg, the Facebook co-founder, who is 28, and his 27-year-old wife, Priscilla Chan.

Obama Inaugurated

January 23rd, 2013

President Obama was inaugurated for his second term — the 44th president — a day after he took his oath on the constitutionally required date at the White House.  The crowd was smaller, the weather throughout most of the nation was biting cold, and the message was hope chilled with the experience and weariness of a drawn-out recession.  Out of the lofty rhetoric and perfunctory promises, we looked for themes that point to the tenor of an Obama second term.

The President started his speech with a historical framing of the event (“The patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few, or the rule of a mob. They gave to us a republic, a government of, and by, and for the people”) before weaving in the architecture of the Obama doctrine – of government activism, of infrastructure improvement, his belief in the transformative power of education and an enlarged notion of citizenship.

It is interesting to compare Obama’s tone with the addresses of his predecessors: President Reagan declared an end to the era of big government and President Clinton signaled a move into a new century. Using phrases like “our generation’s task” Obama pronounced  “a decade of war” as “now ending”.  Much of the latter half of the speech used the Obama language of renewal to posit a third way, between FDR and Reagan,  of individualism and collectivism.  “Seize it together”, “the broad shoulders of a rising middle class”, were followed by raising the promise of a little girl rising out of poverty with the help of a social safety net. This signaled a new level of inclusiveness for an inaugural address (“ We do not believe that in this country freedom is reserved for the lucky or happiness for the few” ) with reference to “our gay brothers and sisters”.  Most memorably, he referred to “Seneca Falls and Selma and Stonewall,” a threading of social movements that drew the gay community, women and African Americans into a common civil rights narrative.

The President remains an extraordinary orator, his voice rising and dipping in pitch and volume, the meter of his delivery tightening and then relaxing throughout the speech.  No matter what side of the political spectrum one finds oneself, there is no question that the occasion of the American inauguration remains significant in human history. We are second only to England in terms of the number of consecutive peaceful transitions of power. This remains a supreme achievement at a time when the right to vote remains contested in so much of the world. Inaugural day  is a nod to the legacy of our union and a pledge to the  future.