Las Vegas Market Special:
In a Real Estate Live TV programme broadcast on October 1st, 2008. J.C. Melvin talks to multifamily specialist Gary Banner about the current market environment in Las Vegas Multifamily Real Estate. Click on the above link and look for multifamily with Gary Banner.
Thursday, October 2, 2008
Monday, June 30, 2008
A Siren Call ... things are about to get much worse!
Las Vegas Business Press - June 25, 2008
Recently, I was invited to be a Guest Columnist for the Las Vegas Business Press regarding my speciality as a Commercial Apartment Broker. Entitled "A Siren Call ... things are about to get much worse!"
I hope you enjoy.
Recently, I was invited to be a Guest Columnist for the Las Vegas Business Press regarding my speciality as a Commercial Apartment Broker. Entitled "A Siren Call ... things are about to get much worse!"
I hope you enjoy.
Monday, June 2, 2008
Paul Krugman on Embedded Inflation
From the Conscience of a Liberal blog: Embedded vs. non-embedded inflation.
This is an excellent explanation of how price increases spread through an economy.
This is an excellent explanation of how price increases spread through an economy.
Sunday, May 25, 2008
Skeptical CPI Index vs. "Real" Estate Values
PIMCO's Bill Gross makes an outstanding argument --U.S. CPI Index is understating inflation!
If you haven't heard, Crude Oil futures are on a run-away train headed for a "Super Pike" in price chart formation. Crude Oil Futures even after adjusted for inflation are higher than they were during 1970's Oil embargo. Friday's NYMEX close for the sweet crude hit $129.07/bbl with Boone Picken's (the legenday Guru Oil Trader) predicting crude at $150/bbl before the end of the 2008. I believe just about everyone can feel the effects of higher fuel costs and how inflation is starting to spread into everything we purchase. Higher fuels, foods, metal prices are reacting to the increase costs of production due to higher energy costs. So, as investors we have to take our heads out of the Canadian Oil Sands and consider the effects of energy inflation and what that means for our investments in real estate particularly in low cap rate markets like Las Vegas, Nevada.
First, you must realize that this inflationary cycle will rhyme with those of the past, but will be very different at the same time. You can and will have deflation in some assets while inflation in others which will confuse most investors about their investment allocations. Currently, we have deflation in residential real estate but inflation in commodities like corn, wheat and gold. Both are hard assets and when you listen to comments from CNBC commentators and analyst suggesting to buy hard assets, you might think...well my real estate is a hard asset...it's an inflation hedge...so I'm fine. This is could be a deadly misinterpetation ...for the following reasons.
The Cause....Inflationary Pressures are Growing Fast!
In the June 2008 outlook written by Bill Gross of PIMCO he clearly states an important hypothesis on how the U.S. consumer price index (CPI) is understated, and how the global inflation rate for most of the world is now 7 percent and how our government has manipulated our index to the benefit of themselves and corporations on Wall Street.
(Readers FYI: Bill is being critical of the Federal Reserve and Washington's economic policies ; Emerging economies were partly to blame for America's housing and credit bubble (the Minsky Credit Cycle). As China and Gulf oil exporters purchased American Treasury bonds in order to hold down their own currencies so that they could continue to import to the USA, this demand pushed down U.S. Treasury yields and helped to fuel the housing bubble with negative real interest rates).
"But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation".
Bill's point is very clear, Bond Yields and Cap Rates are too low for the amount of inflation risks investors are taking due to the government's understatement of the headline inflation. A readjustment is about to occur in our economy and with devastating consequences...many investors will blame our government just like homeowners are blaming their lenders for their dismisses. A readjustment in inflation expectations means a readjustment in asset prices...here's another quote from Bill's June report!
"A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate".
WOW! -- a downward adjustment of 10% in commercial real estate -- 5% in treasury bill/bonds can you imagine the devastation and havoc that would spread throughout the real estate industry -- the national economy? Bill Gross' opinions of headline inflation (CPI) is actually closer to the global 7% rate and he is not alone in his thinking. An article was written in the Wall Street Journal by David Ranson, head of research at H.C. Wainwright & Co. Economics titled "Inflation May Be Worse Than We Think." He too believes the "headline" consumer price index should be viewed with skepticism. The root of the confusion is the fact that the prices consumers actually pay change far more quickly than the CPI. His article goes on to claim, historically, CPI inflation is more closely related to prior changes in the price of gold than most people realize.
If you haven't heard, Crude Oil futures are on a run-away train headed for a "Super Pike" in price chart formation. Crude Oil Futures even after adjusted for inflation are higher than they were during 1970's Oil embargo. Friday's NYMEX close for the sweet crude hit $129.07/bbl with Boone Picken's (the legenday Guru Oil Trader) predicting crude at $150/bbl before the end of the 2008. I believe just about everyone can feel the effects of higher fuel costs and how inflation is starting to spread into everything we purchase. Higher fuels, foods, metal prices are reacting to the increase costs of production due to higher energy costs. So, as investors we have to take our heads out of the Canadian Oil Sands and consider the effects of energy inflation and what that means for our investments in real estate particularly in low cap rate markets like Las Vegas, Nevada.
First, you must realize that this inflationary cycle will rhyme with those of the past, but will be very different at the same time. You can and will have deflation in some assets while inflation in others which will confuse most investors about their investment allocations. Currently, we have deflation in residential real estate but inflation in commodities like corn, wheat and gold. Both are hard assets and when you listen to comments from CNBC commentators and analyst suggesting to buy hard assets, you might think...well my real estate is a hard asset...it's an inflation hedge...so I'm fine. This is could be a deadly misinterpetation ...for the following reasons.
The Cause....Inflationary Pressures are Growing Fast!
In the June 2008 outlook written by Bill Gross of PIMCO he clearly states an important hypothesis on how the U.S. consumer price index (CPI) is understated, and how the global inflation rate for most of the world is now 7 percent and how our government has manipulated our index to the benefit of themselves and corporations on Wall Street.
(Readers FYI: Bill is being critical of the Federal Reserve and Washington's economic policies ; Emerging economies were partly to blame for America's housing and credit bubble (the Minsky Credit Cycle). As China and Gulf oil exporters purchased American Treasury bonds in order to hold down their own currencies so that they could continue to import to the USA, this demand pushed down U.S. Treasury yields and helped to fuel the housing bubble with negative real interest rates).
"But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation".
Bill's point is very clear, Bond Yields and Cap Rates are too low for the amount of inflation risks investors are taking due to the government's understatement of the headline inflation. A readjustment is about to occur in our economy and with devastating consequences...many investors will blame our government just like homeowners are blaming their lenders for their dismisses. A readjustment in inflation expectations means a readjustment in asset prices...here's another quote from Bill's June report!
"A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate".
WOW! -- a downward adjustment of 10% in commercial real estate -- 5% in treasury bill/bonds can you imagine the devastation and havoc that would spread throughout the real estate industry -- the national economy? Bill Gross' opinions of headline inflation (CPI) is actually closer to the global 7% rate and he is not alone in his thinking. An article was written in the Wall Street Journal by David Ranson, head of research at H.C. Wainwright & Co. Economics titled "Inflation May Be Worse Than We Think." He too believes the "headline" consumer price index should be viewed with skepticism. The root of the confusion is the fact that the prices consumers actually pay change far more quickly than the CPI. His article goes on to claim, historically, CPI inflation is more closely related to prior changes in the price of gold than most people realize.
"There is a remarkable parallel between annual CPI Inflation and the cumulative change in the price of gold measured from eight years before".
This statement is worth its weight in gold...pardon the pun, but it gives an excellent formula for forecasting future inflation (or, correct inflation for us gold-bugs). Here's David Ranson's formula and calculations:
225% appreciation in gold ('2000-'2008)/80=2.8% + 3% = 5.8% Inflation
This formula above is the rule of thumb used by Ranson to estimate CPI Inflation at any given time: Divide the percentage change in the gold price from eight years in the past by 80, and add three. In the last eight years the price of gold has risen 225%. The rule therefore comes out with an answer that puts inflation a lot closer to 6% than 4% currently quoted. This makes perfect since as the U.S. Dollar has depreciated nearly 30% versus its competitors since the late 90's.
The Effect....Higher Treasury Yields and Cap Rates!
Can you imagine the consequences if investors some day woke up and realized that their compensation for risks were too low?. That the U.S. Government had understated the real rate of inflation? As everyone rushes to the exits...you would have simultaneous bouts of inflation and deflation in real estate. Lenders would adjust mortgage rates abruptly -- Spreads to them would nearly double and entry cap rates would need to increase immediately in order to regain positive leverage in real property values. Here are more possibilities...I bet you can think of others:
- Exporting countries would stop buying U.S. Treasuries increasing yeilds
- Gold prices begin to spike towards $2,500 per oz.
- Increased demand for real estate with short-term leases (Apartments!)
- Slacking demand for real estate with fresh long-term leases (Industrial, Retail)
- Increased demand for real estate with expiring long-term leases
- Difficulties in refinancing as values fall
- The drop in consumer spending would deepen (hurting Retail further)
- The return of creative financing as traditional sources become scarce
I'm sure your imagination can go on and on, or your memory of the early 1980's will flash before your eyes and you have to say...what is this real estate really worth?
Technical Analysis for Real Estate
Technical analysis is no longer just for Stocks and Commodities trading. The S&P/Case-Shiller Home Price Index was created by Robert Shiller of Project Syndicate blogging fame. Not only can you create your own custom index of real estate prices both regionally and nationally, but also chart where housing prices were historically.
For example, the most recent report, released in spring 2008, in home-buying time, says that prices in Las Vegas are down 20.76 percent back to their June 2004 pricing levels. So, if you are looking for real estate timing indicators, visit http://www.macromarkets.com/.
For example, the most recent report, released in spring 2008, in home-buying time, says that prices in Las Vegas are down 20.76 percent back to their June 2004 pricing levels. So, if you are looking for real estate timing indicators, visit http://www.macromarkets.com/.
The above chart was created from a free down loadable excel file from macromarkets.com. Here I used, Los Angeles as the S&P/Case-Shiller Index and San Diego, Las Vegas and Phoenix for tier markets. This is an excellent tool to review the past real estate cycle and their correlations.
Saturday, March 15, 2008
Value-Add Visionaries
In this month's edition of Commercial Investment Real Estate magazine published by the CCIM Institute. An article entitled Value-Add Visionaries , (Mar.Apr.08.pages 30-33), describes the approaches Brokers like myself take in the Value-Add Multi-Housing market.
My expertise lye's in identifying multifamily projects in strategic infill locations that are close to the Las Vegas Strip, Downtown Las Vegas or suburban-infill. These properties are usually Class B/C in nature and are ideal for acquisition rehabs or tear downs potential for higher density development. The goals for my clients is to "Value-Add" and this article describes one of my transactions, a 10-story project named "Cambridge Towers" that is just 1/2 mile from the Las Vegas Strip.
My expertise lye's in identifying multifamily projects in strategic infill locations that are close to the Las Vegas Strip, Downtown Las Vegas or suburban-infill. These properties are usually Class B/C in nature and are ideal for acquisition rehabs or tear downs potential for higher density development. The goals for my clients is to "Value-Add" and this article describes one of my transactions, a 10-story project named "Cambridge Towers" that is just 1/2 mile from the Las Vegas Strip.
Friday, March 14, 2008
Apartments no option for Homebuilders
This topic appeared on Lanser on Real Estate Blog
Great topic discussing the current state of affairs and the Homebuilders Index with NAHB. Here's my comments on their blog:
Gary Banner Says:
March 14, 2008 at 10:38am
One must realize their are important facts to consider regarding Multifamily Investment and Development. That is the ability to recognize the differences between “Short-term Technical Trends” and “Long-Term Fundamentals.” Today’s Builders and Developers have learned to time the market much better than their predecessors.
The Builders Index is reflecting current market conditions…Recessions leads to Job Losses…Job Losses leads to Rent Concessions and competition for renters (who can still pay on time) heats up! And its a Two-Sided Coin as Inflation is rising today and so are the costs of operating apartments…mcuh like corporations on Wall Street…a possible margin squeeze.
Today, heavy density areas of apartments in Las Veas, NV are now giving rent concessions in order to compete…this in essence is lowering rents…or “Effective Occupancy Levels” where the Rent Roll may say 95% occupancy but when a review of a trailing 12-months actually shows 85% due to turnover.
In Market Analysis, this is defined as “Short-Term Technical Trends” and is immediately reflected in underwriting for construction financing. Try getting construction financing at 80%LTV…very difficult…more like 75%-65% today.
Yes, the long-term “Fundamentals” reflects Echo-Boomers heading to household formations in excess of 75 Million. But, without Job formations these same prospects will delay moving out of their parents homes. And Yes, those who lose their homes to foreclosure will have to rent…but vacant houses are competing with Class-A apartments in price…especially here in Las Vegas.
Great topic discussing the current state of affairs and the Homebuilders Index with NAHB. Here's my comments on their blog:
"One of the reasons for the relative rental gloom is that incentives and concessions are beginning to hurt rents, NAHB said. The part of the index that tracks rents plummeted to 47.5 in the fourth quarter of 2007 from 61.3 in the last three months of 2006."
Gary Banner Says:
March 14, 2008 at 10:38am
One must realize their are important facts to consider regarding Multifamily Investment and Development. That is the ability to recognize the differences between “Short-term Technical Trends” and “Long-Term Fundamentals.” Today’s Builders and Developers have learned to time the market much better than their predecessors.
The Builders Index is reflecting current market conditions…Recessions leads to Job Losses…Job Losses leads to Rent Concessions and competition for renters (who can still pay on time) heats up! And its a Two-Sided Coin as Inflation is rising today and so are the costs of operating apartments…mcuh like corporations on Wall Street…a possible margin squeeze.
Today, heavy density areas of apartments in Las Veas, NV are now giving rent concessions in order to compete…this in essence is lowering rents…or “Effective Occupancy Levels” where the Rent Roll may say 95% occupancy but when a review of a trailing 12-months actually shows 85% due to turnover.
In Market Analysis, this is defined as “Short-Term Technical Trends” and is immediately reflected in underwriting for construction financing. Try getting construction financing at 80%LTV…very difficult…more like 75%-65% today.
Yes, the long-term “Fundamentals” reflects Echo-Boomers heading to household formations in excess of 75 Million. But, without Job formations these same prospects will delay moving out of their parents homes. And Yes, those who lose their homes to foreclosure will have to rent…but vacant houses are competing with Class-A apartments in price…especially here in Las Vegas.
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