2008 October | MHN Blog

Benny Cools His Jets…”Capital Insights with Jack Kern”

"The Accidental Economist" with Jack Kern No Responses »

Oct 102008

With the current press coverage of the $700 billion taxpayer financed bailout firmly taking hold in the minds of most owners and developers, we’re now facing a very unique situation. Typically, in most economies, the Fed takes the lead. With the capacity to move markets, the Fed actually only has two primary responsibilites: set the short term rates most typically affecting interbank transactions and second and most importantly, manage expectations on Wall Street. One of the most disturbing aspects of our current monetary policy now unfolding in a market near you, is that Bernanke has essentially been made ineffective, losing his political capital and the power of the Fed to Henry Paulson, a well known, mostly thoughtful former Wall Streeter. This is the beginning of not only a very dangerous time in monetary policy, but also sets a precedent, not seen since the early days of everyone’s favorite moron president, Herbert Hoover.

The Fed has lost control of the money supply. The primary reason is that Benny’s predecessor, Alan "play it again" Greenspan, (clarinet player, different story for later) helped to create two bubbles, the tech cycle and the housing collapse. After flooding the market with liquidity, the U.S. became the world’s favorite playground for investors globally. The mulitfamily industry was, in fact the beneficiary of a lot of this capital. Now that Benny has lost power, prestige and influence, we’re looking at Paulson as the lead. Consider this for a moment, the Secretary of the Treasury, a political appointee is taking the lead, in an election year, on running the economy. This is not only frightening, but to be blunt, seems like something very close to socialism. My original contention was that any bailout had to be invested in the banks, not in the hands of the treasury cronies who were asleep at the switch and helped get us into this mess. Now we’re seeing the fruits of an uninformed Congress pushing for even more taxpayer funding (Nancy Pelosi asked for another $150 billion) and the next result will not be positive.

In almost every photograph of the triumverate of stupidity, between Paulson, Bush and Bernanke, you see Beranake standing behind someone or off to the side. Coincidence?
As this plays out, we need Benny to get back on the Fed bandwagon and demand that Paulson let go of monetary policy and give it firmly back to the Fed governors. Market liquidity and the credit markets are vastly too critical to our economy to accept anything less.

The Big Picture with Erin Berenton: From ‘For-Keeps’ To ‘For-Rent’

Miscellaneous 3 Responses »

Oct 102008

As the national housing market continues to slow down, a number of condo projects in major cities are being reborn as luxury apartment developments.

Take, for example, Chicago. The overall housing market in Chicago hasn’t suffered the big dips areas like California and Miami have seen.

While the single-family market has tanked in parts of California, and overall U.S. single-family home prices fell a record 16.35 percent in July compared to 2007 levels, according to the Standard & Poor’s/Case-Shiller Home Price Indices, Chicago prices only fell 10 percent.

However, credit is still hard to come by pretty much everywhere in the U.S. As the San Francisco Chronicle reported in mid-September, although mortgage rates had fallen, lenders are still extremely picky about who they’ll issue mortgage loans to.

Even though many Chicago homes have retained their value fairly well during the down cycle, let’s face it: Buying isn’t what it used to be.

As a result, some condo projects that have been in the works for years are now opening their doors as rental properties.

–Downtown decisions: Take, for example, the new 298-unit Burnham Pointe development, located on Clark and Polk in Chicago’s Printer’s Row neighborhood.

Developed by Terrapin Properties, the building features one- and two-bedroom apartments with floor-to-ceiling windows, deluxe kitchens, private balconies and city views.

Burnham Pointe was originally planned as a condo complex. In a January 2006 construction update, Terrapin reported that sales were “75 percent of the way to our goal to begin construction in December 2006.”

However, the project transformed during construction into a high-end apartment building, as the Chicago Reporter noted in early October.

It is now managed by Chicago-based property multifamily management company Jupiter Communities.

–Suburban shifts: And the trend isn’t limited to the city. Just last week in Franklin Park, Ill., JDL Development president James Letchinger announced plans at a committee meeting to transform his condo complex project into a high-end apartment building.

His reason? Low market demand for for-sale units.

Condo Cause and Effect

Repositioning a building into rental units because you anticipate slow sales does pose problems—if your construction loan is due soon after completion because it’s expected that you’ll repay using the millions you garner from closing on unit sales, as The Wall Street Journal points out is often the case, your lender probably isn’t going to want to wait for you to amass the money through monthly rental fees.

And those fees will probably have to be quite high.

The reality is, if a developer poured money into creating a top-notch, luxury building, to turn it into a rental structure, the rents are going to have to be high in order for that developer to make enough over time to recoup the costs. (Rents at Burnham Pointe range as high as $4,857 a month.)

However, if the local market has changed drastically since the project began and it really doesn’t seem like it could sell well, converting to a rental property can save the hassle of having to deal with cancelled contracts if the building truly doesn’t fill up.

A Market’s Worth of Options

We certainly have our fair share of condos for buyers who want them: Demand appears to just now be catching up to supply in many parts of the country.
At the end of 2007, the U.S. had a condo supply large enough for 10 months of demand, which the National Association of Realtors says is the highest level since it began keeping condo records in 1999.
In Fort Lauderdale, Fla. And Miami–where the condo market is so overstocked that Miami-Dade County has a 41-month supply of condos–nearly 10,000 new units are about to go on sale, according to New York-based real-estate-research firm Reis Inc.
It is quite possible that some of those projects—either after sales prove to be slow, or before the units ever hit the market—will be converted into rental properties.

Which makes sense—as the foreclosure rate rises and home loans becomes harder to get because of increased restrictions that require a higher downpayment and nearly flawless credit, the market is going to see an influx of renters who may previously have been buyers.

However, in the current weak economy, that doesn’t mean—as much as everyone loves swimming pools–that they’re all going to opt for a high-cost, luxury apartment.

That could be an issue for developers trying to rent units in buildings they paid a ton to construct.

However, if the building being converted from condos to rentals is not yet complete, the buyer may have a little more leeway with pricing.

In Rockville, Md., the Monterey—a planned 432-unit building—began as a rental, was briefly a condo development and is now returning to its former life as an apartment building.

The previous owner’s decision to turn it into condos hit a snag in 2007 when, after taking at least a $37 million writedown on the property, the owner blame "significant deterioration" in the Washington-area condo market and put the condo plans on hold, according to the Washington Business Journal.

New York-based investment company Angelo, Gordon & Co. bought the property for millions less than the seller paid for it three years ago—which means they’ll be able to offer renters a lower monthly price.

"We’re stepping in to finish what’s unfinished with the renovations [to create] apartments that are condo quality in what we think is a great market," Dana Roffman, an Angelo, Gordon director, told the Business Journal. "In the end, we’re going to have a great value product and, because of our [low purchase price], we’re going to be able to offer a condo-quality product at a rental apartment rate."

It’s interesting that—so far—renters have been eager to snap up fairly expensive units.

But if the economy continues to falter, I wonder: Will more condo projects turn into rentals, and will pricing be based off what developers need to recoup—or what renters want to pay?

What do you think?

The Big Picture with Erin Brereton: Prepare For A Greener, Cleaner American City

Miscellaneous No Responses »

Oct 022008

Last week, sales began at the first green development in New York City’s Murray Hill neighborhood. The 128-unit project, being built by Toll Brothers Inc. and The Kibel Companies, has been designed for LEED certification and features water-saving fixtures, bike storage and reduced parking rates for residents with energy-efficient or hybrid cars.

Construction is expected to be complete in the summer of 2009, by which time New York will be just six years away from its big greenhouse gas emission reduction goal—and likely even more invested in green building.

The Big Apple isn’t alone in its sustainable thinking. Across the U.S., large cities are buying in to building green in a big way. We thought we’d take a look at three green-friendly urban areas to see where they were, where they are—and where they’re headed.

–New York

Where it wants to be: Governor David Paterson’s “15 x 15” plan to reduce energy use by 15 percent from anticipated levels by the year 2015 involves new energy-efficiency programs intended to cut greenhouse gas emissions and other air pollution and encourage green building.

What it’s done: The New York State Energy Research and Development Authority offers a new construction and existing structure Multifamily Performance Program.

Existing multifamily buildings may be eligible for incentives if energy-saving measures are implemented.
For new construction projects, NYSERDA will work with the design team to identify and incorporate energy efficiency options.

And New York recently moved up from sixth to fifth place on the SustainLane list of America’s Most Sustainable Cities. The national survey measures the largest 50 U.S. cities’ ability to maintain healthy air, water, parks and public transit systems and use of green building programs, renewable energy and alternative fuel.

Projects include: Verdesian, the 26-story New York rental building that became the first multi-family, residential high-rise in the U.S. to receive Platinum LEED status.

The future: Governor David Paterson signed legislation this summer to encourage green standards for new home construction and existing home renovation that includes financial incentives for homeowners. The grant amounts will be based the size and type of the residential structure, among other factors. As part of the program, the state will develop qualification procedures for builders and technicians.

–Chicago

Where it wants to be: Mayor Richard M. Daley reportedly wants to make Chicago one of—if not the—greenest city in America.

What it’s done: Chicago helped pioneer the green roof movement—its foliage-topped buildings include City Hall, Millennium Park and the Michigan Avenue Apple Store. And in 2007, Chicago announced the "Chicago Green Homes" program for builders and developers during its Green Building Month.

The Green Homes program gives points to builders and developers who are constructing new residential units or renovating existing units in the Chicago area for using sustainable techniques and materials.
Green Homes includes a bonus for builders: Any projects submitted to the program—which is mandatory for any builders or developers using city financing or land—may qualify for an expedited green permit process.

And the Chicago Department of Environment award a Green Homes Certificate with a 1-, 2-, or 3-star rating to builders at the project’s completion based on how many points they earned.
Projects include: Emerald Chicago, an eco-friendly condo building in Chicago’s West Loop neighborhood that includes green touches like bamboo flooring, energy-efficient windows and low-VOC paint. As of March, the project was 80 percent sold.

The future: Chicago is now focusing on buildings and greenhouse gas. In mid-September, Daley announced a plan to cut greenhouse gases to three-fourths of 1990 levels by 2020 and to one-fifth of 1990 levels by 2050.

The plan involves making buildings more energy efficient; finding clean, renewable energy sources; and reducing industrial pollution.

–San Francisco

Where it wants to be: The city’s Resource Efficient Building (Green Building) Task Force has been working to make San Francisco greener for years. Which includes reducing greenhouse gas emissions: From 1990 to 2005, San Francisco reduced greenhouse gas emissions by 5 percent. It plans to reduce emissions by 20 percent by 2012.

What it’s done: San Francisco multifamily developers and builders can get rebates for energy efficiency via the California Multifamily New Homes (CMFNH) program, sponsored by Pacific Gas & Electric, which encourages energy-efficient design in multifamily housing by giving design help and cash incentives.
The program offers financial and design incentives for new construction multifamily developments that include the chance to qualify for additional funding, appliance incentives and design assistance that includes payback analysis for cost-effective energy saving measures.

Projects include: Arterra, which contains apartments and townhomes and was designed to be San Francisco’s first LEED™-certified* green high-rise community.

The future: San Francisco is carving out space as one of the greenest cities around. Starting in November, part of the San Francisco Building Code will require new buildings to meet green building standards—such as water-efficient landscaping—that were developed by the Green Building Task Force.

It’s clear green building is a priority for many U.S. cities.

Green building offers a number of advantages—long-term energy reduction and savings; a lower environmental impact; even trendiness—but not all builders and developers are on board. The up-front costs can be higher, and citywide mandates can necessitate project redesigns or other issues.
Is green building an admirable goal we should be working toward—or something cities should leave up to the individual developer or builder on private projects? What do you think?

“Capital Insights” with Jack Kern

"The Accidental Economist" with Jack Kern No Responses »

Oct 012008

A $700 Billion Mistake?

Some of the smartest guys I know, economists, CEOs and even housing advocates from sectors usually ignored in the mainstream media are all starting to come to a conclusion that I think may be prescient. The federally managed $700 billion, tax payer financed proposal should fail in Congress. While there is a likelihood it will pass, the more conventional, non-hysterical wisdom is this:

The president is not understanding our present economic situation and is getting bad advice from the Council of Economic Advisors and even worse advice from Benny Bernanke. The ability of the new funding to absorb rogue investments, against a backdrop of warrants and promises from the companies getting the lifeline will do nothing to stimulate housing markets, add jobs or in any way resolve the current credit crisis. The media has overblown the current situation to such a degree that people are taking time during the workday to whipsaw their representatives and senators between a yes vote and no vote, turning the ritual into daily tracking polls for every legislative district. There are a wide variety of reasons why the bail out is a bad idea, but rather than taking space here, let’s look at a good idea instead.

Recapitalize the banks. If the capital were used to finance the bank’s holding of debt instruments, then there would be ample opportunity for them to conduct business as usual, put the additional liquidity and access to the Fed funds windows to work and gradually improve the economy. In so doing, these things would ring true.

The CMBS that have been reviled are turning to be, well, not so worthless after all.
The CLOs and CDOs have been, to some degree, vindicated by the slowdown in their default rates.
Foreign investors, particularly our trading partners would have renewed confidence in our banking system.

The real loss of opportunity for the American people is that our banks have lost their credibility. Letting the Congress waste tax dollars buying uncontrolled assets won’t restore what the world view is for our financial institutions. Only giving the banks and the system the ability to recover can do that.

So far, there is vastly more wishful thinking on the part of the Congress, members being more concerned about being re-elected to the world’s dumbest governing body, than doing the right thing and moving forward on trusting the free market system to resolve the problems. In the past week, we’ve lost more wealth and confidence, than the $700 billion is worth. It’s time to do the right thing, not trust the government, and instead give the banks the capital necessary to move forward.

I don’t think anyone would argue that Congress is fundamentally corrupt, with special interest groups and lobbies running the show. Ever tried to call your Congressman? If you didn’t contribute a million bucks, you’re not getting a call back. Try it sometime. Now, unfortunately you’ll have 700 billion reasons to do so.

See you on the bread line.