Real Estate Trends & Issues -- The Finale

During this Real Estate Trends & Issues graduate course at UTA's downtown campus, we have looked at and discussed a variety of current real estate topics ranging from mezzanine financing to transportation oriented developments.  The course has been fun and interesting and has given me the opportunity to hear a multitude of perspectives.  The general consensus has been that the real estate industry is still facing several challenges and any real recovery will likely take time.  Although it is true that the real estate market has certainly had its share of trouble lately and will undoubtedly be in trouble again due to the cyclical nature of real estate, the worst part of the storm seems to have passed in my opinion.  My general sense is that real estate is poised for an upside driven by the convergence of demand from both the echo-boomers and their parents, the baby-boomers.  In addition, pent up demand for housing is growing, there is less inventory, and there are fewer developments in the pipeline which will likely prompt a steady transition from a buyer's market to a seller's market.  I also think that if we avoid the urge to over-regulate the financial and real estate industries as a reaction to what has occurred and remain true to capitalism here in the US, the recovery will be slow at first and then gradually gain momentum.  I fear there is a natural tendency for citizens in advanced civilisations to gravitate toward more dependence upon their own government which, in the end, discourages industriousness.  This has been modeled in many European countries that lean toward the socialist side of the spectrum.  If America is to remain true to its capitalistic roots, then it must move away from any policies that promote moral hazard and must support free-enterprise as well as a range of businesses - small, medium, and large.  Also, the 'too big to fail' doctrine which prompted the US government to bail out failing businesses must be avoided in the future.  We must find ways to prevent unbridled greed from jeopardizing the overall economy without imposing restrictions that discourage free-markets and the desire by honest and hard-working business men and women to make a profit.  Furthermore, the wealth effect resulting from the tech, stock, and real estate booms over the last decade has been a roller-coaster for many, a reminder that the bust is some times louder than the boom.  For many this decade has been a wash or worse, but if we can learn from our experience, rebuild trust in commerce, and be mindful that we can't, even through securitization, make real estate as liquid as stocks, we may be able to move forward into the the next decade which, I think, holds great promise for the US in spite of the many challenges we face.  At the end of class, I'm reminded of our grandparent's wisdom, "spend less than you make if you want to get ahead."  No matter how advanced we become, this advice will always reign supreme and ignoring it will always lead us down the wrong path.  This will be true for individuals and private and public institutions alike.  Many thanks to Dr. Peterson for navigating the lively discussions.

Gen Y: The Next Wave of Home Buyers

The next wave of home buyers is building momentum and it may be a tsunami-size wave.  But will it be the housing industry's salvation?  Some, like me, are speculating that it will be but only time will tell.  Overall, job growth is important (a key component to a sustainable and robust real estate recovery), but a more important trend is the current generational shift underway whereby echo-boomers are beginning to influence every facet of the US economy from marketing and advertising to real estate.  Their influence has grown steadily as they come of age and begin to consume more and more.  Currently, this group's buying power is estimated to be $200b annually, and this figure will only grow larger over the next decade.  As 80M gen Yers, roughly 25% of the US population, dig deeper and deeper into the workforce many changes will take place.  Standing between them and the corner offices, however, will be their own parents who have maintained a tight reign over corporate America and local, state and national government for decades.  Watching how this unfolds will be interesting as one group, the baby-boomers, seeks to protect what they have while the other group, the echo-boomers, simultaneously seeks to obtain what it wants.

Figuring out what the gen Y group wants will be a major challenge for all industries, including real estate.  Right now, this group is driving much of the growth in multi-family.  As a result, multi-family has experienced a boom.  But what is the 18-32 year old demographic really looking for.  Determining what they want, of course, is very important and starts with understanding how gen Y differs from gen X and their baby-boom parents.  Some research suggests the following characteristics of gen Y: 

• ethnically diverse
• better educated
• tech savvy
• charitable
• social
• environmentally conscious
• pet friendly
• active

Given these characteristics, residential builders are aiming to adapt their construction to fit
gen Y.  What is this going to look like?  It could mean building communities that have wi-fi hot spots, walkability, mixed-use, smaller floor plans, more open space, amenities that support an active and social lifestyle, high end finishes, and access to outdoor spaces.  In a nutshell, amenities that accommodate a balanced work and play lifestyle will be better suited to gen Y.  Today, this group is driving a boom in multi-family but soon will make the decision to own versus rent.  When they make this decision will depend on many factors.  At that time, the next generation of home buyers, gen Y, will drive the housing recovery.  Meanwhile, the boomers will be downsizing.  The end result will be a rebound in housing even if unemployment remains higher than it has during previous economic expansions.  The rebound will be especially fun for those businesses that are poised to meet the demands of gen Y, the next drivers of our economy.  Until then, real estate growth will be strongest in those areas of the country with the lowest unemployment rates, at least 2% or more below the current national unemployment rate. 

Just like all retailers, builders and developers are taking note of the next wave of home buyers, but appealing to gen Y will not be easy.  In fact, the tendency to guess at what this group deems important or superimpose or overlay one's own ideas about what is important will not work.  Products that are embraced by gen Y will have to genuinely reflect their own tastes and lifestyles, not the tastes and preferences of the preceding generations. This will be as true for real estate as it is for technology products, etc.  Like it or not, the torch has been passed and gen Y will lead the next renaissance in real estate.  In fact, it has already begun!

Searching for the Bottom in Real Estate

Have we hit bottom in the real estate industry?  It's become a common question, and just like the stock market, it is very difficult to time the bottom of the real estate market.  Truth is it feels like we've been bouncing along the bottom for quite awhile now and may continue to do so until more jobs are created.   Maybe bouncing along the bottom is the new trend.  Some indicators suggest that a bottom has been achieved.  For instance, the Case-Schiller index, a good indicator of the housing industry's overall condition, is down on a yearly basis, but it showed an increase in April 2011, the first such increase since July 2010.  Some communities such as Denton, TX are showing signs of strength.  Usually, places that fare better are those that are insulated in some way from the downturn.  Denton has benefited from having several major universities within its city limits.  According to a recent Wall Street Journal article (June 20, 2011), here are some things to look at to determine if your community has reached the bottom or is making a comeback. 

Unemployment -- Jobs are a catalyst for housing and those areas with the lowest unemployment typically have stronger housing markets.  Start by comparing your local unemployment rate to the national average of 9.2%.  If it is more than 2% below the US average, chances are good your housing market is making a comeback.  Denton County, for instance, has an unemployment rate = 7.4%. (WSJ)

Rents -- Places where rents are low favor buyers and make owning a home attractive.  If home prices are less than 15 times annual rents, the market can be construed to favor buyers. 
Denton's price to rent multiple is 11, making it a favorable place to buy versus rent.

Foreclosures -- Obviously, foreclosures are the dagger to any real estate recovery.  A single foreclosure in a neighborhood can have an adverse impact on property values.  Healthier communities have fewer foreclosures.  According to Realty Trac's April 2011 report, one in every 593 units nationwide received a foreclosure filing notice.  That figure is down 9% from May 2011 and down 34% from April 2010. 
Denton Foreclosure Rate = 1.18%  (%age of properties subject to foreclosure filings in 2010).  At the peak of the foreclosure crisis, 2.23% of the properties in the US were subject to foreclosure. (WSJ)

Another factor to be considered is how much property values have declined since their peak.  Most strong housing markets have seen anywhere from 3% to 8.5% declines versus a city like Las Vegas which has experienced as much as a 50% decline in property values.  Typically, the stronger markets are those that did not see the huge run-ups in value.  Timing the bottom of the market is all but impossible and chances are good that some areas in the US will continue to see property values decline.  It seems that the worst part of the storm has passed and many markets such as Denton, TX are showing signs of strength.  Since real estate is local, the recovery rate will vary from area to area.  As a result, many areas have reached a bottom and are waging a comeback.  Other hard-hit areas seem stuck at the bottom while some areas dodged the recession altogether.  Searching for the bottom then is a regional and sub-regional affair.

Does Kicking the Can Work?

Kicking the can down the road has become a trend in residential and commercial real estate but the trend may be hurting more than it's helping.  It seems that many have been slow to acknowledge the full extent of the long-term consequences of the unrestrained lending practices which occurred from 2001 to 2006.  Now, it seems that many believe that burying their heads in the sand until the mess blows over is a reasonable strategy.  The sad truth is there is not much relief in sight for the US economy and many of the banks are still overburdened with non-performing real estate loans.  The picture is not much brighter on the residential side either.  Many more residential properties purchased with ARMs are due to reset in 2011 and 2012.  Is there any benefit to kicking the can further down the road?  In a recent Tierra Grande article, Dr. Dotzour, an economist with the Texas Real Estate Center at Texas A&M, explains why there is not much benefit at all.  Here is what Dr. Dotzour has to say with regard to "kicking the can" aka as "extend and pretend":

Clearly, these are not normal times. Many maturing loans

are being extended rather than foreclosed on. This postpones the day of

reckoning when the owner loses the property and the lender incurs the loan loss.

This phenomenon is called “extend and pretend.”  

The lender extends the loan and pretends it is still performing.

Banks are weighed down with loans like this. Wall Street

has sold billions of dollars of these loans to investors all over

the world. Why don’t the banks and other lenders foreclose on

these properties and let the market clear? Why don’t they sell

them to new owners that can fix up the properties and find

tenants for them? The answer is that after the massive losses incurred by banks

from failed residential mortgages, they are not sufficiently

capitalized to immediately recognize the additional losses they

have in their commercial real estate loans. After closing more

than 315 banks in the past three years, the FDIC Deposit

Insurance Fund (DIF) is $8 billion in the red. The

FDIC indicates it could take 17 years to rebuild

the DIF to desired levels.  Federal policies initiated in the past two

years suggest extend and pretend could be in place for many years to come.

Rather than take the losses immediately, policy makers have decided to

amortize these losses over a number of years.

Wow -- enough said.  It seems that waiting, hoping, and praying for happier days is fine as long as you're not looking for them through rose colored glasses.  Although there have been small signs the economy is truly improving, there are many, if not more, signs which suggest the economic recovery is sputtering.  For instance, lagging home sales have continued to weigh down home builder profits.  According to WSJ, Lennar, one of the nation's largest builders, reported that fiscal second quarter profit fell 65%.  In addition, Fed chairman Bernanke publicly stated this week that he is at a loss as to how to explain the sagging economy's lackluster performance.  Could it be partly because "extend and pretend" or "kicking the can" is not a viable solution and that without a housing recovery the broader economy will merely continue to limp along?  The straightforward answer is yes and with unemployment lingering around 9% and commodity prices on the rise, it is hard to see how kicking the can further down the road is going to accomplish much.  Yes, things are better in Texas but plenty of can kicking has taken place here just like in other parts of the country.  Maybe it's time to get real about the economic state of affairs which starts by stopping the pretense that things are better than they are.  Here are a few suggestions:

• lock in the capital gains tax rate for a defined period of time
• release trapped real estate assets into the marketplace
• create tax incentives for investors who purchase distressed assets
• discontinue governmental policies that encourage moral hazard
• resist the temptation to over-regulate the lending industry
• US government should become a lender of last resort for small business
• discontinue the practice of bailing out businesses that are deemed to big too fail

We must find strategic ways of promoting a healthy real estate market whereby banks can foreclose on properties, sell them at a discount, and take the loss, allowing new investor/owners to then lease the space at lower market rates.  A similar clearing process needs to take place in the residential sector as well.  Until we stop acting like ostriches in America, we'll never run like gazelles.  Addressing these very real and core problems will allow us to move further down the road without kicking the can!

What's Hot in Hospitality -- Extremely Pesonalized Service

The old king of real estate adages about location, location, location might need to share the throne with a new real estate adage about service, service, service.  Just like real estate in general, the hospitality industry has undergone and is undergoing some radical changes.  One of these changes involves personalizing the hotel experience for each of its customers.  There are many ways in which the hotel industry can personalize the customer's experience.  Many are already attempting to do just that by offering more personal selection such as the type of pillow a customer may want.  Many hotels are going much farther by personalizing the experience even more.  New technologies are paving the way for improved customer experience.  In my line of business, like in the hospitality industry, it is very difficult to differentiate your service from the competition.  Doing so requires that you take your service over the top.  To thrive, the hospitality industry needs to apply the 80/20 principle.  In this respect, it becomes easy to see how 20% of what you do will generate 80% of the results you seek.  What is that 20% that matters to customers in the hospitality industry?  The hotels that are figuring this out are winning the race.  Identifying the 20% that matters to customers is difficult, of course, because the 20% is a moving target.  Each customer has a different set of 20% expectations.  That's why it's so important for hotel management to train their staff to prearrange the experience.  It should go something like this:

Hotel customer service rep (not front desk person) calls customer one week before his scheduled arrival and asks the following questions:

Have you stayed at _____________ before?  We want to be the first to welcome you to...  Is this trip for business or pleasure?  Oh, I see.  What time do you plan on arriving? Customer repsonse.   _____________ will be working the desk that evening and she will be happy to check you in.


What type of pillow do you like -- soft or firm?  Customer response.  Okay, we'll have that type of pillow waiting for you?


What type of non-alcoholic beverage would you like in the room upon your arrival?  Customer response.  Okay, we'll have that in your room.  Just let us know during check-in if you need help with bags and mention a bucket of ice and we'll have that delivered to your room as well.


Also, did you know we have a free complimentary breakfast which includes ____________, __________, ____________________.  We encourage you to take advantage between _____________ and ___________________.  Customer response....


Then you could explain what else is available for the customer such as shuttle service to and from the airport, work-out facilities, and pool amenities.  Then you could close by asking if there is any special need or service that you can help with such as directions or pressing services.

This is the kind of personalization that will put the customer's experience over the top.  Of course, it's important for hotels to offer amenities such as wi-fi and in-room movies but it's about much more than the amenities.  The trend toward more amenities can not become a substitute for superior service and personal interaction.  It's about the overall experience.  Hotels that are the best at personalizing a traveler's experience will be the ones whose revenue soars when the economy recovers.  The 80/20 principle, if applied properly, could revolutionize the hospitality industry.  Find out the 20% that matters for each client and focus on delivering.  It all starts with a courtesy call from a live person (not automated email) before the guest arrives, during his or her stay, and then after departure.  Extreme service is what creates customer loyalty -- the wi-fi and free breakfast are simply icing on the cake -- great service takes it over the top.

The Confluence of the Political Parties in America

Republican Party Candidate

Crucial differences exist between the two political parties, Republican and Democrat, that dominate the political landscape in America.  The trend, however, has been for these two entrenched parties to become more alike than they are different.  Of course, there are and always will be groups of people who operate at one end of the spectrum or the other, but overall the trend has been for these two parties to congregate closer to the center, making the differences between the political parties less obvious.  The two-party system in America has dominated politics since its founding in 1776.  Recently, new movements have emerged such as the Tea Party and the Independent party.  According to a recent Wall Street article, Americans are becoming less enthusiastic about existing political parties and they have been losing market share for four decades.  In 1970, 49% of respondents chose Democrat and 31% called themselves Republican.  Today, 35% say Democrat and 28% say Republican.  The only real growth has occurred among voters who decline affiliation, with independents increasing from 20% to 28%.  In my opinion, this trend could continue well into the future.  To date, the impact of the Tea Party candidates and Independent candidates has been minimal but as both major political parties disregard public opinion, the rise of the independent movement will continue.

Democratic Party Candidate

Is the political duopoly in trouble?  Although the Republican and Democratic parties benefit from what social psychologist define as existence bias, their fate may not be as iron-clad as once thought.  WSJ cited the well-known duopoly of AT&T and MCI.  MCI became history's largest bankruptcy in 2003 and AT&T is struggling to maintain market share against companies such as Verizon.  They also reference Kodak, once thought to be infallible, having an amazing 96% share of the US market for film.  Enter Fujifilm and another duopoly was created.  This duopoly would not last.  Kodak's share price tumbled from $60 in 2000 to below $4 by 2011.  The digital revolution changed this duopoly forever.  Could the same fate await one of the political parties?  It's unlikely given their level of entrenchment and their ability to tap a constant revenue stream. 

___________ Party Candidate?

However, political backlash, increased transparency, and advancements in technology are revolutionizing the political process and may lead the way to a  3rd and possibly even a 4th political party in decades to come as evidenced by the rise of the Tea Party and the growing fascination with independent party candidates.  The impact of all this on real estate is difficult to gauge, but it's easy to surmise that the changing political landscape will dramatically impact much of the real estate industry.  The political process and its outcomes always play an important role in shaping the real estate industry.  There's no two ways about it!

Will Made In The US Rescue the American Economy and Real Estate

Is it a global brand?

Right now, the US economy has very little traction and appears to be headed in the wrong direction.  Although a minor recovery has occurred, many leading economic indicators show the economy is losing steam again.  With a European debt crisis looming and continued instability in the Middle East, the light at the end of the tunnel is growing dimmer and dimmer.  The leadership seems to have no good answer and the Federal Reserve has used up its arsenal with little to show for it.  Economic progress is waning, consumer spending is lackluster, unemployment remains stubbornly high, wages are stagnant, small businesses are still struggling, the US debt is out of control, housing is in a protracted slump, and the gap between the rich and the poor is continuing to widen.  Overall, the outlook is pretty dismal for the American economy.  So where can the average person find hope for a better future.  The best hope might be to acknowledge that the idea of a pure service based economy in America as perpetuated by top leaders is fraught with problems and premature by several decades.  America's best hope may lie in exporting quality manufactured goods to emerging economies.  One interesting tidbit from an article I read for this class talked about how many Chinese consumers, for instance, see the Made in USA logo as a good thing.  Herein may lie the answer - job creation through a resurgence in American manufacturing.

America needs jobs desperately and it needs jobs that pay better than minimum wage.  Wal-Mart and other retail jobs are not the answer.  The answer lies in manufacturing jobs and construction jobs.  Let's ramp up and start exporting high quality American goods to consumers around the globe.  Couple a resurgence in American manufacturing with real US support for small business and the economy might take flight.  Give more perks and money to large business in the US and watch while they continue to sock it away and continue to pay out large bonuses to top leaders without increasing hiring or salaries for the average worker.

May 2011: US - 9.1%; TX - 8.0%

If unemployment is the problem, manufacturing might be the solution.  The focus for now must be on job creation and then on long-term issues such as health care and debt reduction.  Debt reduction and health care are long-term issues with solutions but they are not the priority. The #1 priority - in fact, the only legitimate priority - is job creation.  Let's find ways to encourage and incentivize businesses that manufacture goods to fill the empty industrial space around the country and make Made in the USA the next big trend.  The first step is to answer these questions: What goods does America already manufacture on a competitive basis?  What other goods could America create on a competitive basis?  Some example of products might include: wind turbines, nuclear reactors, high quality fashion goods, solar panels, high tech merchandise, semi-conductors, medical instruments and devices, airplanes, electric cars, basic commodities, locomotive engines, data storage devices, and everyday goods such as high quality shoes and furniture

Whatever happens next in our economy, it's time to think big, forget the status quo, and envision an economy that is a healthy blend of manufacturing and service sector jobs.  This will provide options for a broad spectrum of workers and options are a good thing.  There is reason to be hopeful but there is also serious cause for alarm. Nothing will come easy in the US again.  If we want growth, we will have to work for it and earn it.  We can't wait around on the government to provide the answer, and the government must partner with the American people and American business to make positive things happen in our economy.   One such positive would be a resurgence in American industrial manufacturing.