The Falbey Report

I attended and participated in the ULI Fall Meeting in Washington, D.C. last week. It was the usual track meet environment - too many activities going on from dawn to late into the evening for 4 or 5 days with a great deal of concurrency and overlapping.  Much of my time was spent in my Product Council activities, District Council activities, and presenting or moderating sessions, but I did get to attend some of the most interesting sessions. Here, in bullet point fashion, are the take-home comments that resonated with me.

From Certainty in Uncertain Times

What is certain?

·        Demographics

·        Trends (urban infill)

·        Green

·        Differentiation and disparity - not everyone wants the same thing

·        Economy – will improve, but slowly

Demographics

·        Housing starts currently are at ¼ what’s needed for expected population growth

·        Gen Y is 30% unemployed, in debt, ambivalent about owning versus renting (will rent for years to come), urban oriented, will move a lot

·        Immigration is 50% what it has been, but immigrants and their descendants will drive 82% of the population growth

·        Homeownership will settle at 62-64%; the rest will rent

·        Much housing will be urban infill which will put upward pressure on prices

·        Going forward, emphasis will be on smaller, affordable, compact housing

Green

·        870,000 sf are being LEED certified everyday despite the recession

·        Gen Y is environmentally sensitive and aware

From Council Day: Taxation:

·        NPV with a discount rate of 10% indicates you should accelerate planned 2011 sales into 2010

·        Sell securities in 2010 and buy them back in 2011

·        When buying distressed debt, get the lender to write it down before you buy it or you may recognize ordinary gain

From Global Capital Markets:

·        Never forget: real estate is a yield instrument (not sticks and bricks)

·        Emerging countries are riding high on $86 oil, but Western nations are floundering under unsustainable debt

·        China has $700 billion to invest in stabilized real estate assets;

o   Looking for long-term value, not quick profits

o   But very risk-sensitive and carefully analytical

·        If the USA pushes China to revalue the Yuan, they may stop buying our treasuries, which would push up interest rates

·        Consensus is interest rates could go anywhere – who knows in this environment?

o   So, if rates go up, today’s 4.5% (on quality core assets) is an argument against delevering

o   The market currently expects quantitative easing (QE), but fears the consequences because QE is treating the symptoms and not the disease

o   What is needed is not QE; it’s:

§  real jobs (not road-paving)

§  spending cuts and the reduction in the spread of government centralized power

·        Corporate bonds are safer and have a better return than treasuries

·        Today’s low interest rates are propping up property prices

·        Today, a fair return on core assets with 50% equity is about 8%

·        Global gateway cities are where the current action is:

o   The market is very narrow and very deep

o   Foreigners are bullish on the long-term USA economic growth prospects

§  They are used to low yields (i.e., a 5 cap)

o   The Euro is stronger than the dollar because the EU doesn’t print money to solve financial crises

·        Difficult to find equity for construction because return is 3 years away (when stabilization is reached)

·        Lower unemployment rates would encourage investment because of the expected effect n the economy

·        Hedge funds have a better model than Wall Street because they don’t pay preferred returns (“prefs”), so they collect 20% from the first dollar of return

·        Higher risk mezzanine debt returns are being compressed

·        Real estate taxes are going up, so expenses will increase and NOI will go down, negatively affecting cap rates and values

·        Banks are lending today only on core assets with strong cash flow

·        Moratoriums on foreclosures because of bad documents could result in all mortgages being decertified for foreclosure action, not just the ones with bad documentation. This would be a disaster because it means no one has to pay mortgage payments and lenders cannot do anything about it.

There is more to follow in a subsequent posting.

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