Tuesday, October 5, 2010

Amendment 4

As I write this editorial the November 2nd election is just over 4 weeks away. Amendment 4 aka "Hometown Democracy" is really not about development. If the amendment passes development will still take place and construction of homes and businesses will continue seemingly undeterred. What will grind to a halt are Comprehensive Land Use changes. Some very vocal people claim the problem in Florida is there are too many changes in land use and inappropriate uses of land being approved. It would be wonderful if everyone knew exactly how much land we would need for every conceivable use but the fact is we just cannot see that far into the future.

Amendment 4 is really about taking land use decision making from our elected officials and sharing it with the voters, let's be honest here, campaign managers and public relation firms. Yes I know there are a few people that feel the public is disenfranchised from deciding what is developed near their homes. An election is not a very good way of controlling or deciding what happens in your neighborhood. If you are unhappy with a land use decision by your elected official(s) you can vote them out of office. If you are unhappy with an election result, well you are stuck with it and as far as I can tell there is no way to appeal the election result.

I am in favor of neighborhood meetings where the elected official must attend to hear the concerns of the affected residents and see the reaction to the project outside of a public hearing.
Many times I have witnessed a neighborhood cry foul when any land use change is proposed nearby. I have seen firsthand how neighbors distort the reality of "unintended consequences" if the use is approved. If the amendment is passed regular citizens will lose their voice and effectiveness in shaping a land use change. Instead, a public war will erupt with ads, signs and commercials culminating in a municipal wide popularity contest.

Does that sound like democracy? If you think it is bad having 5-9 elected officials vote on a change near you wait until 150,000 vote to have the landfill in your backyard.

Monday, June 21, 2010

This IS the new normal.

I have seen the future and the future is here. Welcome to uncertainty! In my travels I hear various expert speakers as well as friends and neighbors talk about "when things get back to normal". I have to admit I used to think along these lines too but I have come to the realization that we are living in the new version of what we will look back on as normal. Normal is all about expectations.

When I look back over the last decade I see historically low unemployment, low interest rates and a zooming real estate industry. Was that really what we should expect as normal going forward? There will always be pockets and places with local distinctions that deviate from the majority. What is normal for these isolated places is not what we collectively know as normal.
In the 70's Alaska had the pipeline and jobs were plentiful when most of the lower 48 did not experience such abundance.

The point here is not to sound gloomy and say this is as good as it is going to get. The point is rather to understand there is no point in waiting to be happy. The future is here and we must learn to live with it. While unemployment is higher than I can ever remember there is still opportunity, we just need to keep our eyes open so that we recognize it when it appears. Most everywhere I look real estate is experiencing a price "reset" that will shape the future. An overpriced retail center near where I live was recently sold at a price where it can be rented at rates a start-up business can afford. While the reset for the previous owner was no doubt a terrible experience, the flip side is now there is opportunity to rent the commercial space at affordable rates to sustainable businesses.

In an ideal market system there would be no losers, just winners and future winners. In a balanced market there would be a winner for every loser. In our current market, it appears as though we have multiple losers for every winner. The borrower loses, the lender loses and maybe even the new owner loses if they have not done their homework or are just plain not lucky enough to time the market just right. I get that. And that part is not what we have come to know as normal, but it is the new normal for the next few years. Part of what is so annoying about this time we are living in is the uncertainty of what tomorrow will bring. When you are stuck in a rut at least you know that tomorrow will be pretty much the same as today. What is so scary right now is we don't know if tomorrow will be better or worse than today.

In my business I work very hard to be good at what I do and give the best advice to my clients. I am grateful for the work I have but I will be honest with you, we could do so much more. I like to control my own destiny but in today's environment I have zero control. I cannot make someone want to use our services. The only thing I can control is me. While we are adjusting to this new period of normal, let's all try to keep the important things in mind namely our family and friends. We will all get through this together. Just maybe together we can create a new normal over time that gives us the predictability we crave so much.

Friday, May 28, 2010

Happy Memorial Day

And they who for their country die shall fill an honored grave, for glory lights the soldier's tomb, and beauty weeps the brave. ~Joseph Drake

On Memorial Day we salute all those who have given their lives in defense of this nation. Without their sacrifices we would not be free to ask questions, to challenge our political leaders and to take an active role in our system of government. To them we owe an unrepayable debt

Monday, April 19, 2010

A Clash of Cliches - "The Rules Have Changed", but "This Time It's Different"

Have you heard the saying "The Rules Have Changed" when discussing real estate development and investment? Have you heard what got us in to this mess of a recession is the thinking "This Time It's Different"? While the words are different, from my point of view, they really are saying the same thing. Both sayings are always true when taken out of context of the situation being referenced. It is true - the rules have changed in terms of development if you are talking about financing and investment expectations. It is also true that it is different "this" time in the context of the "last time" we have done anything. Every time I kiss my wife it is different.

Ahh, but the fundamentals really have not changed, just our perception of them. True, it is much harder to get a loan today, so that much has changed...since 2005. The pendulum had swung so far to the easy side of getting a loan that it had to swing in the other direction for a while. That does not mean there has been some cataclysmic change that will forever wipe out lending on commercial real estate and development loans. What it does mean is once banking capital has normalized, in terms of the ratio of deposits to performing loans, lending will return. More cash will be needed from borrowers. Shorter terms will prevail for a while. Rates will most certainly be higher. These changes are merely going to be a return to the norm and not a significant departure from standard lending practices 10-15 years ago.

Also true is there is little need for new commercial development for next few years. Vacancy rates in many parts of America are approaching or exceeding 20%. The retail and office vacancy trend will continue until job growth returns. There will always be special circumstances requiring new development (before vacancies are lower) and that is no reason to get excited when a new building or project goes up in your area. This is still America and we like new things.

What has not changed, in a meaningful way, is people. Specifically, investors have not changed as they still want to make money with their capital. There is not much of an appetite for a real estate investment that will yield less than 8% these days. If an investor can get a 10% return on the investment with some degree of continuity then they will generally take the risk of owning a property. Ten years ago, the rule of thumb for non-institutional investors was a target cap rate of 10%. From a 2005 buyer's perspective the world must look like it is crashing all around them with rental rates down and vacancies increasing especially when you consider a 2005 buyer was willing to live with a 6% cap rate. In real terms a cash buyer in 2005 has watched their investment decrease in value by at least half while at the same time had their cash flow also cut in half. For these people, the rules have most definitely changed! What is different this time is they are now broke.

As baby boomers and insurance companies need to put money to "work" and create a predictable cash flow, real estate investment and subsequently development of real estate will come back to sustainable levels. Land will be developed, buildings will be erected and investors will look for yield. The rules really have not changed and it really is not different this time when looking back over the last 50 years. I have a final cliche for you, the more things change the more they remain the same. That my friends, you can bank on.

Tuesday, November 10, 2009

Honoring our Veterans

Thank you for your service to our country. We join the rest of the nation on Veterans Day, November 11, in remembering the sacrifices of America's 25 million veterans and expressing our appreciation for your service. We thank you for our freedom.

Monday, November 2, 2009

12-step program for banks

Check out this link before you read my blog below http://www.msnbc.msn.com/id/29619236/ns/business-us_business/

Do you have a friend or family member that has had trouble with addiction? Have you heard about "12-Step" programs to get "clean" so to speak?

I have this friend, for the purposes of this article, I will call "Bank" and his problem/addiction if you will is credit. "Bank" has had a tough road for the past 6-7 years. First he was living it up on cheap credit, then he became a dealer and started to consume massive amounts of even cheaper credit. When he ran out of credit he did what any addict does and found other people help fund his problem. In "Bank's" case, it was clear, those funding his problem were not concerned about too much of a good thing. It was kind of funny to watch. "Bank" would go out, lend some money, get a huge fee and a nice buzz as well. "Bank" never failed to find money to lend, as long as there was a fee to be made. "Bank" thought the party was going to go on forever.

One day, "Bank" got a call from one of his suppliers of the cheap credit. After years of providing money without asking too many questions, the suppliers started to notice they were not being paid back. Eventually "Bank" started to notice even he was not getting paid back on the cheap credit he sold. This was not good, for if "Bank" could not use his cheap credit he would lose his fees, maybe even his job. Sniff. Instead of "Bank" realizing he has a problem, he wants to pretend one does not exist. "Bank" is so addicted to large fees and cheap credit he does whatever he can to put his problem off to another day far, far in the future.

What "Bank" needs is a 12-Step Program. There are three things to know about addiction; the treatment is not fast, the treatment is not easy and the cure begins with an admission that you have a problem and your life is unmanageable. American banks are in trouble. The banks lent more than a ton of money on projects, investments and pure speculation. The problem now is that the bank's problem is our problem. Since banks do not want to admit there is a problem, troubled loans stay on the books. The longer these loans stay on the books the less money there is to loan. A side effect of these troubled loans is that the assets remain on the books at inflated valuations.

Here is an example to illustrate the problem: There is a 4,000 sf office condominium where a bank lent almost $600,000 and the owner defaulted. The bank took about a year to foreclose by dragging their feet and today they are trying to sell the asset for $400,000. At first blush that sounds pretty good, only 66% of the original loan amount. The trouble is the condo is in such disrepair and there is so much competing newer space on the market that the value is probably closer to $80,000. The "funny" thing is the bank probably could have sold the asset for $200,000 when it first started the foreclosure. But due to the bank's own delay it is worth only about a third of that today... and tomorrow does not look any better. The longer the bank holds on to this property it will continue to decline into dis-repair and there will be even more space on the market tomorrow. The inaction by this bank and many other banks is hurting commercial property owners. Sure it would hurt the values of all commercial property if the banks had a huge liquidation sale but then the healing process could begin.

By pretending there is not a problem and not admitting first, there is a problem and second their books have become unmanageable, the cure, the rehabilitation cannot begin. The FDIC said a few months ago they wanted the banks to stop playing "Delay and Pray" with their loans and assets. What the banks need is for the FDIC to require all banks to acknowledge say 20% of their troubled loans each year for the next 5 years. Otherwise we risk going the way of Japan where banks made loans that became troubled loans and instead of facing the music they held the loans at face value and have continued to pretend for the last 20 years that values will eventually catch up with the loans and everything will be okay. By not admitting they had a problem Japan's banks have dragged down their economy for two decades with still no cure in sight. What we need is for banks to admit there is a problem, take action to make their books manageable and liquidate the assets so we can all get on with our lives.

Wednesday, August 19, 2009

Florida Development News has a new home on the web

I was talking with my assistant on Monday and she had some very good news for me. The new website (www.FloridaDevelopmentNews.com) we informally launched two weeks ago had 40 unique hits last week and the average time spent on the site was over 20 minutes per visitor. I have to say, I am aiming for much larger numbers in the future but for right now I am pleased as punch thank you very much.

We plan to formally launch the website next week and many more "unique visitors" I hope will find the site and value the content. The newsletter is not doing to shabby either with over 200 subscribers added in the last month. If you would like to subscribe, email editor@FloridaDevelopmentNews.com and put subscribe in the subject line.

I am working with a new group of authors/writers for our next publishing date on October 1st. I have to say the topics and depth of knowledge of the writers is truly outstanding and I think readers will be very pleased. As always, we are also on the hunt for new ideas both for the website and newsletter. Topic ideas from our readers are also valued and sought. The new site has every article published in the newsletter and links to development specific articles in papers around Florida and the New York Times. We also have an article originally published in an Urban Land Institute magazine on the future trends of the development industry. There is a link on the front page and I encourage you to check it out.