October 2009


Busy week so far!  We got the newsletter out yesterday and have been in a lot of meetings with owners and asset managers of distressed assets.  But, we still manage to make time to peruse the cyber-universe and bring you the best of the web for our industry.  This week’s theme?  Well, I am in a Halloween mood, so let’s dress up and be Contrarian!

1. Limits of Transit – this is an intriguing study on the costs of transit.  I love the light rail systems in Denver and Dallas, but we need to be careful as we encourage and implement transit strategies around the country.  This article should make you think.

2. Self-Jiving Nation – if you were lulled into a sense of complacency that the economy is turning around and that the GDP numbers released yesterday were “great news,” this article is a bucket of ice-cold water to pour over your head.

3. Bloodhound Blog – what if we haven’t found the bottom of the housing market?  What if Fed policy has artificially inflated pricing by as much as 5%?  Read this analysis and find out.

4. Unsustainable – the Altos Research folks take a stern look at the Case-Schiller numbers recently released. Ouch.

5. Stanford Entrepreneur – OK, there’s only so much bad news I can take too…here’s a great useful link that features pod casts from leading lecturers at Stanford’s Entrepreneurship Center.  Tired of listening to your daughter’s Jonas Brothers tunes over and over? Replace them with a quality podcast from this site!

Well, the storms are moving in so the brats may have to be cooked in some dark ale and broiled for a little char…Happy Halloween!


This morning’s Tennessean is reporting that Terrazzo, an uber-high-end-condo development in the Gulch is going to auction off some of their units.  Of the 117 units in this LEED certified building, only 13 units have sold since March.  Reading the article, and then scanning through the comments, I am reminded of how litigious a society we have become.  The general theme in the comments is that the developer should be pursued!  Off with their heads!

This is just plain silly.  The developer is the one who took all the risk up front.  Now we can argue whether it was excessive risk – they were late to the game, their construction was slow, there were a lot of units already coming into downtown and the Gulch etc. etc.  But, it was the developer who took the risk of putting these units on the ground and they had enough contracts in pre-sales to secure construction financing…here we can get into another round of “coulda shoulda woulda” on whether the bank should have made the loan, but it doesn’t matter.

Now, sillier is the young woman sited in the article for having “three mortgages.”  On what planet do you live?  And thanks, Mom, for outing your daughter’s insane appetite for risk…now get back on the plane and return to the Baccarat table in Vegas.  Yet, Nashville, like so many other markets was infiltrated with stupid money at the height of the “it will never end” craze in 2007.  Remember when a certain Gulch development sold out in 48 hours!! Oh, right, few of those people closed on their units because they had so little down…but that’s another story.

Folks, auctioning is a very legitimate and fair way to get the building’s pricing adjusted to the market. It has been used all over the country, and I expect we will see more of it.  The developer was apparently unwilling to experiment with lowering their prices on their own to find where the market would start to move for their product.  It isn’t rocket science – take a couple of units and push the prices down till you have a buyer.  At that point, you will know whether it is worth lowering all the other units or not.  Well, I was not at the conference table where this decision was made, but again, this is one way to work your way out of the debt.

The losers are the current owners that paid full freight, especially if they had thoughts about trying to sell anytime soon.  These auctioned prices will establish the “new normal” for pricing in the building and it may be well below their current basis.  Nevertheless, getting the building occupied and getting their Homeowner’s Association up and running will be a net positive in the long run.  You need to get the lights on in the building – dark buildings at night scare people and the development will get a negative reputation.

We are looking at this situation across the board with distressed assets.  The banks have been kicking the can down the road with loan extensions at an interest only rate, but they are now feeling the heat.  The developers’ interest reserves have been burned through and their balance sheets are getting wobbly.  Lord knows I hate being pessimistic, but I suspect we are going to be seeing this type of maneuver more and more until we get the supply and demand back into equilibrium.

What will be interesting to see is how many people really do show up at the auction prepared to buy.  If the auction is ill-attended, that would signal a far more ominous sign – Americans are so concerned about the economy that they are not willing to even turn out for a good deal.  Let us pray that does not happen.


If the rain will go away, we should have some good grilling weather this weekend!  Here are some thought provoking links to share around the barbecue:

1. Structure – this is an interesting site to peruse.  This link takes you straight to an article about building the tallest (nine story) stick frame building.  If we could get that technology down, imagine what it will do to overall cost!

2. Spain’s Green Jobs – this is a link to a PDF of a study about the effect on employment that Spain’s push to be “all things green” has had.  Before you drink anymore of the environmentalist Koolaid that says we are going to create a green employment nirvana, you’d better have a look.

3. Off the Edge Humor – we all need a laugh – especially these days.  This simple blog offers up a daily dose of good cheer!

4. Notes from a Hospital Bed – “Traction Man” is a British journalist who is in traction for several months in a UK hospital – he shares images of his food and other thoughts about living with socialized medicine.  I confess, as a foodie, I am astounded at how bad this slop looks and obviously tastes!

5. Yugoslavian Greenbrier – If you’ve ever been to the Greenbrier resort in West Virginia, I hope you have had the privilege of touring the nuclear bunker that was built there for our bureaucracy. Guess the Yugoslavians had the same idea.  I wonder what’s going to happen in a couple of hundred years as more of these old shelters are found – what will they think?

Enjoy the weekend!

There are very few graphs that have abrupt shifts upward or downward that indicate anything particularly good.  Now, if this were a graph of my net worth (even change the scale to thousands) , I would be a happy camper and would probably be spending a lot more time sea kayaking in some remote places instead of hunkering down for another rainy, chilly day in Nashville.  Any rate – shelve that dream and take a look at this:


In an earlier post, I shared the same chart a few months ago, before the Rocky Mountain peaks got added at the top.  But what is distressing is that this thing has started a steep upward trajectory again.  This means that the Fed is pumping more money into the system.  If we were truly seeing “green shoots,”  signaling an economic recovery, the curve would be slacking off.

What they are doing is propping up the mortgage markets by buying more mortgage backed securities – from the Fed’s Open Market Policy Report we learn:

“To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.”

So, the housing market crash, which got us into trouble is umm, being re-inflated?  Certainly the $8,000 credit, which is set to expire at the end of next month is helping out, but this is bat-poo crazy stuff.  People are being incented to buy homes because they are getting a great mortgage rate?  Meanwhile we are expanding the money supply to stratospheric levels to cover this?

I guess this is all part of the “new normal,” but the Fed is exposing itself to becoming a bit player on the sidelines with no gas left when the next shoe of commercial real estate starts to drop.  From the folks I am talking to, the interest reserves are about gone on the development projects and the developers, especially those that did one more deal for fees, are down to less than six months in the bank.  Dammit folks, I am a developer and am by nature and trade an exuberant optimist, but this stuff is truly frightening.  The only way out is massive inflation or crippling tax increases…I don’t like either option.

An alternative is to change the mindset in Washington from compassion to reality.  Not everyone can afford a house – period.  It’s a nice dream to save and aim for, but not everyone can do it.  Nor should they.  A robust rental option is a fine alternative to ownership.  But we have created a whacky tax incentive that encourages home ownership and coupled it with politically expedient programs to encourage those less fortunate to take the ownership plunge and now we are keeping interest rates artificially low to perpetuate the myth.  It’s time to get back to a government more interested in following sound governing principles and less interested in paying off voter blocs.

A recent report issued by CBRE Econometric Advisors had this interesting chart showing the distribution of distressed assets by property type:

getbinary.aspxAccording to their research, most of these assets are concentrated in the “CANVFLAZ” markets (California, Nevada, Florida, Arizona).  They are also reporting a sharp up-tick in the hotel and “development” sector – the latter being construction loans outstanding.  Retail remains a very large sector, and is anticipated to grow – common sense: if you have between 10-17% unemployment and that number is anticipated to stay constant through 2010, you are not going to have a consumer driven recovery anytime soon.  My guess is the “Development” category will grow too as owners burn through their interest reserve and cannot get restructured due to battered balance sheets.

Don’t know where the next Sam “Grave Dancer” Zell will come from, but some opportunities should start to emerge in the next couple of quarters.  Sense I get from my conversations with lenders and owners is the banks have been willing to extend loans out – probably in the hope that some form of Resolution Trust Corporation relief might emerge – but their patience is wearing thin and they know the sponsors are running out of gas.  Private capital is still sitting largely on the sidelines too – partially due to the sense that there’s more downward pressure on pricing coming to bear and no one likes to “catch the falling knife.”  Partly too, though, from the people I have been talking to, out of fear that the combination of massive Federal debt ($1.4 trillion deficit this year alone!!), so called health care reform legislation and cap and trade legislation will inevitably lead to higher taxation.  It’s not a comforting picture at this juncture.


The air is getting a little chillier – might need to wear some fleece when you retrieve those succulent sausages off the Weber this weekend, but to help get you there, here are the offerings of links for the week:

1. Wall Stats – this site offers an innovative way of looking at complex information.  Be sure to study their “Death and Taxes” poster…you won’t care about cholesterol content after that!

2. Evernote – this is a neat application that I use a lot.  It syncs with your Blackberry or I-phone, and it is a place for clippings from articles you’ve read, bookmarks, etc.  They recently upgraded the platform to make it even easier to file and find various notes.

3. Read it Later – while we are on the subject of cool applications, Read it Later allows you to bookmark an article and, as the title suggests, read it later.  You can access your account from any computer or a smart phone, so it’s great when you are traveling and you want to get caught up on your reading.

4. Solar Decathlon – With all the focus on solar power – why not have a race to see which team could build the most energy efficient house that uses solar power?  OK, let’s do that!  Department of Energy is doing it – check it out.

5. E-Book – release your inner Wordsworth and write an e-book!  Here marketing guru, Seth Goodin tells you how.

OK, I’m stuffed with all this good information, hope you enjoy it.  Have a great weekend!

Red Herring has an interview with Bob Ackerman, the Director of Allegis Capital and its not a good report:

America’s innovation engine may be stalling at the hands of lawmakers. For some venture firms, that’s led to the pursuit of greener pastures in India and China. But that’s taking a toll on the United States’ once-robust job creation machine fueled by startups and fronted by entrepreneurs. Some international investors have gone even so far as to say, ‘The best is over for the U.S.,’ Mr. Ackerman says. “If that’s the perception, we have our work cut out for us.”

Would someone please tell the Solons in Washington D.C. to read articles like this – the law of unintended consequences is running rampant from K Street to Pennsylvania Avenue and it is killing jobs and opportunity in our country.

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