CALIFORNIA’S “BOOM” ABOUT TO GO BUST

CALIFORNIA’S “BOOM” ABOUT TO GO BUST

By Joel Kotkin

As its economy started to recover in 2010, progressives began to hail California as a kind of Scandinavia on the Pacific — a place where liberal programs also produce prosperity. The state’s recovery has won plaudits from such respected figures as The American Prospect’s Harold Meyerson and the New York Times’ Paul Krugman.
Continue reading “CALIFORNIA’S “BOOM” ABOUT TO GO BUST”

SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

SAM ZELL EXPOUNDS ON THE ECONOMY, WARNS OF RECESSION

Sam Zell was recently interviewed on Bloomberg’s “GO” TV.  The beginning of the post are some selected quotes from the interview.  I also provide a link to the full transcript.

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By Mike “Mish” Shedlock

Wednesday morning, Sam Zell, billionaire chairman at Equity Group Investments, spoke with Stephanie Ruhle and David Westin on Bloomberg’s “GO” TV.

Zell discussed a wide variety of topics from the Federal Reserve rate hike, the risk of a near-term recession, real estate, energy, and various foreign investment ideas. The interview was before the Fed announcement.

I put a spotlight on some interesting Zell ideas. Everything below is a selected quote except for two comments by me in braces[].

Twenty-Two Ideas

  1. Economy: High probability that we’re looking at a recession in the next 12 months.
  2. Rate Hike: Interest rate hike is probably 6 or 8 months too late. I think that the economy is closer to falling over than it is to going up.
  3. US Dollar: Devalued currencies make it very difficult for the US to compete internationally.
  4. World Trade:  World trade is slowing. Currencies continue to be manipulated. You’re looking at the beginnings of layoffs in multinational companies. Weakness is going to be pervasive.
  5. Global Deflation: You can’t put aside China. You can’t put aside Europe. If China’s numbers turn out not to be as accurate as we think, China could go into a recession. That’s about as deflationary a scenario as you could possibly come up with. And one that would for sure impact growth and affect Janet Yellen’s decision.
  6. Fed Tools: “Uh” …  [as in the Fed has none]
  7. Asset Prices: Assets will get cheaper.
  8. Cash: With zero interest rates the penalty for holding cash is not very significant.
  9. Stock Market: Nothing cheap. A number of falling knives that have been obfuscated by Amazon and Facebook et cetera. If you take out those stocks, the stock market isn’t doing real well.
  10. Mexico:  Mexico is terrific. I think there’s extraordinary opportunity there.
  11. China: I don’t think China is growing as fast as it reports to be. And I think that the world has a significant deflationary risk coming from a slowdown in China which I think would impact the cost of goods all over the world.
  12. Brazil: Brazil is obviously suffering significantly. On the other hand, as an investor I’m always looking at where nobody else is willing to go. We’re there already and under the right set of circumstances wouldn’t have any problem investing in Brazil today. I just think you can’t lose sight of the fact that this is a country with 180 million people. It’s still growing. It’s self-sufficient in water, oil, food. It’s an extraordinarily badly managed you know entity. But the extraordinary part hasn’t changed. I’m somewhat of an optimist and I think this whole process will be a cleansing process.
  13. Oil: It’s not so much prices as it is specific opportunities. What makes the opportunity is the distress of the situation.
  14. Natural Gas: I’m probably more focused on gas than oil. And it’s, you know, it’s a little bit like real estate. I mean we made a fortune because we bought real estate at a discount to replacement cost. Well we’re buying gas in the ground, gas that’s been drilled. People have spent $10 million a well, we’re buying wells at dramatically less than that. So it’s the same kind of creating a competitive advantage by virtue of your entry price.
  15. Real Estate: It’s very hard not to be a seller. And so we’re in effect fulfilling in some respects our longer term strategy in AQR where we’re liquidating the remaining garden apartments we have.  I’m not a big fan of buying at these cap rates.
  16. Blackstone: Blackstone is just buying brick and mortar. And they’ve been able to raise staggering amounts of money. And they’ve got to put that money to work. That’s something we’ve never wanted to be in a position of having so much capital that it affects our decision-making on an ongoing basis.
  17. Currencies: I’m very concerned about what’s happening in currencies. I think that you know Bretton Woods in 1948 was the allies coming together and saying we can’t recover in the world without growing free trade. We can’t create growing free trade without stable currencies. So let’s make sure we have stable currencies. That worked for a long time. Now we have very unstable currencies. World trade is slowing.
  18. Dodd-Frank: I’ve never known of a single situation in my life where reduction in liquidity was a plus. And effectively Dodd-Frank has dramatically reduced liquidity and that’s a big negative. And that’s something we haven’t dealt with yet.
  19. Politics: The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It’s because you guys are sitting here in New York City and you’re not in Des Moines. And you’re not in Boulder and you’re not all over the country. And you’re not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.
  20. Flat Tax: I think if I were given a straight choice I would be in favor of a simple flat tax.
  21. Government Bonds: I’m not a big lender of money to governments period.
  22. Climate Change: The level of certainty of exactly what is happening has a lack of humility and arrogance to it that scares me. As far as I’m concerned, conventional wisdom is my greatest enemy. And this strikes me as an awful lot of conventional wisdom.

It was a fascinating 2-hour interview. I stripped off the intro, the rest appears below. It’s well worth a read.

For the full transcript go here.

 

ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER

ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER

alarm-clock-public-domain-460x306By Michael Snyder

Economic activity is slowing down all over the planet, and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008.  Yesterday, I explained that the economies of Japan, Brazil, Canada and Russia are all in recession.  Today, I am mainly going to focus on the United States.  We are seeing so many things happen right now that we have not seen since 2008 and 2009.  In so many ways, it is almost as if we are watching an eerie replay of what happened the last time around, and yet most of the “experts” still appear to be oblivious to what is going on.  If you were to make up a checklist of all of the things that you would expect to see just before a major stock market crash, virtually all of them are happening right now.  The following are 11 critical indicators that are absolutely screaming that the global economic crisis is getting deeper… Continue reading “ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER”

GOLDMAN SACHS CHIEF ECONOMISTS EXPECT 100 BASIS POINT INCREASE IN FED RATE HIKES IN 2016

A piece from Goldman Sachs economists Zach Pandl and Jan Hatzius: – Federal Reserve looks likely to begin raising short-term interest rates in December – Based on our economic forecasts, we currently expect the FOMC to raise the funds rate by 100bp next year:

  • Federal Reserve looks likely to begin raising short-term interest rates in December
  • Based on our economic forecasts, we currently expect the FOMC to raise the funds rate by 100bp next year
  • One hike per quarter
  • We see the risks to this forecasts as skewed to the downside at the moment

For economic growth in 2016:

  • US economy likely to be driven by domestic demand … in particular consumer spending
  • Forecast GDP will increase by 2.25% Q4/Q4 next year
  • Narrow and broad measures of unemployment have fallen significantly

Source: Goldman Sachs chief economist expects 100bp of Fed rate hikes in coming year

Based on this forecast by major economists, how do you see it affecting the real estate market?  Significantly?  Slightly?  Not at all?

Quiet U.S. Ports Spark Slowdown Fears – WSJ

America’s busiest ports reported a decline in imports during the key peak shipping season for the first time in at least a decade, sparking fears of a broader economic slowdown in the U.S.

The question is, what does a slowdown in economic activity mean to the economy in general, and real estate in particular?

 

Source: Quiet U.S. Ports Spark Slowdown Fears – WSJ

RENTS PUSH RETAILERS TO FRINGE LOCATIONS 

Retail tenants are moving out into fringe-street locations–locations that are parallel or perpendicular to a high street–to avoid rising rents.

LOS ANGELES—Retail tenants are moving out into fringe-street locations—locations that are parallel or perpendicular to a high street—to avoid rising rents. According to a new report from JLL, which GlobeSt.com has seen exclusively, high-street rents have increased as much as 100% in some markets. It is a trend that happens often in peak market conditions when rents begin to crest, and the fact that it is starting to happen now, indicates that we are at or approaching the peak of the cycle.

“Our business is as cyclical as it gets,” Jason Charms of JLL, tells GlobeSt.com. “When rents start to crest and break through levels of previous ‘peaks’ in the cycle, retailers are going to look at areas that can give them a bit more bang for their buck. There’s always going to be a trade off between sales volume and occupancy cost. For example, if the marketing exposure of being on a Rodeo Dr. isn’t important, the lower occupancy cost of being on Brighton Way may well offset the drop in sales.”

In Los Angeles, retail tenants in Santa Monica and Beverly Hills, where high street rents have skyrocketed, are looking for fringe spots where retail sales better justify rents. “We are starting to see retailers consider “fringe” areas due to purely economic reasons. Smart retailers are constantly on the lookout for the new, upcoming areas, in part due to price,” says Charms. “It’s becoming quite difficult to make money at some of the rent numbers we are beginning to see. The larger corporations can write off the occupancy cost as a marketing/advertising expense but the smaller companies don’t have that luxury.”

Charms is currently marketing a space at 420 North Camden, a fringe location of Rodeo Drive, near the Golden Triangle. Retail tenants who fall into this category—someone who is concerned about or can’t afford the high rents on Rodeo Dr. but want the prestige of the area and the traffic that overflows from Rodeo Dr., would be the perfect fit for the location, says Charms, who has been advising his retail clients to find these spots as a solution to the rental increases.

Outside of fringe street locations, Charms says that retailers don’t have many options for avoiding high rents. “The easy answer here is to talk ‘online presence this, digital sales that,’ but we are seeing strong data show that consumers still enjoy a full retail experience,” he says. “Downsizing their retail footprint is always an option. It says more about the overall economy than anything else.”

Savvy retailers are finding multiple ways to adapt at this point in the cycle. In addition to leasing fringe locations, some retailers are also leasing multiple spaces within a single dense urban submarket to control the path of travel and gain more market share.

 

 

 

 

Source: Rents Push Retailers to the Fringe – Daily News Article – GlobeSt.com

Continuation of Pessimism Not Warranted

By Natalie Dolce
GlobeSt.com

LOS ANGELES—With the amount of money the government was putting into the economy, it was inevitable that things would recover. We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded. That is according to Hessam Nadji, SVP and chief strategy officer of Marcus & Millichap.

Nadji joined moderator Michael Desiato, moderator and VP and group publisher of ALM’s Real Estate Media Group, and other industry leaders at the recent RealShare Los Angeles event here on Tuesday. According to Nadji, “the notion that the US economy was out of the game is always wrong. We do find a way to come back.”

Having said that, Nadji says the growth rate isn’t anything to write home about. “But this moderate level of growth is here to stay.”

 

Panelists on the industry leaders panel say the moderate level of growth in the economy is here to stay.

 

Panelist Marc Jacobs, managing director of Oaktree Capital Management, agreed, noting that the real estate market is on solid footing, at least in the near term. But there are early signs of caution out there, he warned. “It may not be real estate in general, but it might be corporate America that is loading up on cheap debt and will struggle to pay that debt back,” he said. “What will happen once the Fed starts pulling back?”

According to Eric Paulsen, CEO at Auction.com, property values are still below their peaks, so there are still opportunities there. “An improving transactional market is always a better market. We willcontinue to see more and more sales with moderate improvement in the coming year.”

On the apartment side, according to Nadji, if you look at the recovery, “you are on the money about the apartment recovery being the only one for a long time.” But what’s interesting, he said, are to look at the fundamentals. “We should be seeing a slow down, but we aren’t really seeing that. The math still works for the most part but the big question mark is exit cap rates.”

 

We have regained 8 million jobs added since the bottom of the recession and the continuation of the pessimism and uncertainty isn’t really grounded, said Nadji (right) with Xceligent’s Doug Curry (left) and Oaktree’s Mark Jacobs.

 

There are some overbuilding on the high-end apartment side, warned panelist Mark Jacobs, managing director of Oaktree Capital Management.

“You will still see rent growth on the apartment side,” added Paulsen, but you are seeing more on the retail and office side, he said. Investors are chasing yields, with a lot of money chasing fewer assets. So what do they do? They go to a different market, he said. “One of the reasons you are seeing a bigger movement in secondary is the availability of information out there among other things.”

One of the companies with that information is Xceligent. Panelist Doug Curry, CEO of the company, said that his company is trying to bring a different level of transparency to the market with data collection.

The biggest laggard in this recovery has been office, according to Nadji, because of the excess space that was never put back on the market, and companies are now growing into that space. But that is the place to now invest, he said. “The demographics in job creation look strong… It is the year of the office market. The turning point is there. You will see the office market come back fast from this point forward.”    [emphasis added]   

Paulsen agreed that office is the place to go right now, but what’s important to consider, he said, is what the product will look like. “You are going to have to cater to a different demographic.”