Land Has No Value

Sorry I have not been posting much. The end of the quarter is coming up quick and numerous deadlines are hitting me all at once.

At the NAIOP conference I went to in Long Beach this week a member of the crowd asked about land values.

It was not pretty.

Land is a 4 letter word, and from what I have been seeing and hearing is that land has no value right now.

It may have investment value if you are a speculator.

It may have utility value, if you want to grow something on it.

It may have sentimental value, but in the Inland Empire, right now, land does not have actual, "I am going to pay for this" value.

The reason is, many of the buildings that have sold over the past three months, on a per square foot basis, were sold below what it would cost to build a new building.

Below replacement value. Ouch. This means that land might actually have a negative value, if the following equation holds true.

Building Cost = Building + Land

This is a pretty simplified formula, but basically the cost of a building will include construction cost and the land cost.

If the building is less than the building cost, then land is negative.

Another thing that was discussed at the conference had to do with what things are worth, and that is appraisals.

I do not envy these guys, everyone wants to know but the data is not there. They are under a lot of scrutinity and lawsuits, since people tend to blame them for inflating the value of the real estate.

CBRE Investment Paper

Back from a week long vacation. Second quarter market reports on their way.

In the meantime, I thought this was pretty interesting

CBRE prez

Egyptian Pharaohs: The Worlds First Keynesian's?

I am interested in the intersection of economics, history and beer. Especially beer.

Beer was a very important beverage to the ancient Egyptians. When humans shifted from hunting and gathering to farming, they saved surplus grain, which was fermented into beer. Farmers would grow barley which would be later be stored in a communal storage area. Priests would record the amounts on cuneiform tablets.

When the Nile river flooded, these farmers would be out of work, since their fields would be underwater. The Pharaohs, having a large, unemployed populace that still needed to be fed would need a way to put these people to work and distribute the surplus foodgrains.

National Geographic:

Graffiti indicates that at least some of these workers took pride in their work, calling their teams "Friends of Khufu," "Drunkards of Menkaure," and so on—names indicating allegiances to pharaohs.
An estimated 20,000 to 30,000 workers built the Pyramids at Giza over 80 years. Much of the work probably happened while the River Nile was flooded.

Cuneiform from 3000 bc records the beer rations given to workers in Mesopotamia.

The earliest tablets were written inscriptions that represent the work of administrators recording the allocation of rations, the most important ration in terms of frequency being the inscription for beer, an upright jar with a pointed base.

Workers were paid in beer, and work on the pyramids occurred when the Nile river flooded as it allowed the large limestone blocks to be easily transported as well as a time of high unemployment.

In a peculiar way, the pyramids were one of the first public works programs, allowing the government to step in to stabalize the economy. Workers were not slaves as is commonly believed but out of work farmers on the government dole. Thousands of clay tablets document worker wages which were paid in beer and bread.

“Fermentation and civilization are inseparable.” - John Ciardi (1916-1986)

CBRE Shores Up Their Position

Bizjournals:

Paulson & Co., a hedge fund that was part of the group that bought the banking operations of IndyMac, is buying $100 million worth of shares in CB Richard Ellis Group Inc.
Los Angeles' CBRE also announced other initiatives to raise capital:

The sale of $50 million in shares from time to time to the public

An offering of $400 million in senior notes due 2017

The company intends to use the net proceeds from the Paulson direct placement and the public offering for general corporate purposes, which may include the repayment or repurchase of some of its debt.

It plans to use the proceeds from the notes sale to repay or repurchase debt.
The company also issued guidance for its second quarter, anticipating earnings per share between zero and 7 cents a share, excluding one-time items. CBRE said that the "forecast is highly preliminary," due to a "difficult and uncertain market environment."

CBRE (NYSE: CBG) is the world's largest commercial real estate firm.

50 car pileup in Cajon Pass

La Times

Up to 50 cars in pileup on I-15 in Cajon Pass

Heavy fog is being blamed for a multi-car pileup on Interstate 15 in the Cajon Pass that could involve as many as 50 vehicles, including two big rigs, authorities said this morning. The California Highway Patrol shut down all northbound lanes of Interstate 15 just south of Oak Hill Road after 7:30 a.m. when two semi-trucks collided, causing a chain reaction of wrecks. The site is about 11 miles south of Hesperia in San Bernardino County.

AMB Property Corporation(R) Releases Research Report on Global Trade and Industrial Real Estate Demand

SAN FRANCISCO, June 5 /PRNewswire-FirstCall/ -- AMB Property Corporation(R) (NYSE: AMB), a leading global owner, operator and developer of industrial real estate, today released a research report titled, "The Long-Term Prospects for Global Trade and Industrial Real Estate Demand: An analysis of a trade-based investment strategy in the midst of global economic crisis."

The report examines the impact of global trade on industrial real estate demand; the long-term relationship between trade and gross domestic product (GDP); insight into the evolution of trade; as well as the major trends that are expected to considerably influence the supply chain and warehousing needs of the future.

"Our analysis indicates that, while the global economy is in the midst of a recession, the fundamental drivers of industrial real estate demand remain intact. The recent declines in global trade volumes and the net absorption of industrial real estate--factors that are more aligned than ever--represent a temporary pause in a strong, longstanding secular trend. Today's interconnected, highly-efficient supply chains are not reversing in any meaningful way, and, on the margin, there are early signs that trade volumes may be stabilizing," said David C. Twist, AMB's vice president, Research.

Summary of Findings
-- Variations in trade account for 80 percent of the historical variation in industrial real estate demand.

-- Growth in trade volume is highly correlated with GDP (U.S. and global) and trade growth as a multiple of the GDP growth rate has more than doubled over the last 50 years. In the past decade, trade's multiplier on GDP expanded to 3.5, and as a result, nominal changes in GDP growth result in significant changes in trade growth. Global expectations for GDP in 2009 imply trade should fall by approximately 10 percent, a view consistent with that of industry experts.

-- There are four significant factors that have contributed to the recent declines in trade: inflation fluctuations; financing availability; supply chain responsiveness; and miscounting of final products.

-- Despite the current economic and financial downturn, structural support for the trade-to-GDP and trade-to-industrial-real-estate demand relationship remains intact. The global shift of labor, productivity and capital over many decades has created complex but efficient supply chains. A fundamental shift back to domestic production is not feasible as it would take decades and require much added cost to implement.

-- Consensus estimates for 2010 GDP growth in the U.S. and globally are currently at about 2.0 percent. This level of growth is consistent with about 500 million square feet of industrial real estate demand globally, and the beginning of a healthy recovery.

A copy of AMB's research report on the long-term prospects for global trade and industrial real estate demand, as well as other reports, can be downloaded from the company's website at www.amb.com/global_capabilities/research.html.

Efficient Market Theory: Still not a fan.

Interesting article from Tyler Cowen, one of the bloggers I regularly follow.
In this article he talks about the work of Fischer Black and the wisdom of crowds.

The line of reasoning goes like this: People choose their level of risk, higher risk will justify higher reward. It is assumed that things will not go bad all at once, the law of large numbers will mean that some sectors of the economy, or some regions of the world will do better and some will do worse. Mistakes will occur but they will balance each other out if the portfolio is diversified enough. This assumption is false if all the elements are correlated with each other.

A big pool of loans can be riskier than a single loan. The risk appetite of investors can be habituated such that people get used to risk and are unaware of the possibility of loss.

Risks were intensified because of leverage. Leverage was needed to keep "profits" in line with what everyone else was doing.

Investors systematically overestimated how much they could trust the judgment of other investors. Investment banks overestimated how much they could trust the judgment of other investment banks. Purchasers of mortgage-backed securities overestimated how much they could trust the judgment of both the market and the rating agencies as to the securities’ values.

The law of large numbers makes intuitive sense. Don't put all your eggs in one basket. However, don't leverage your egg 40 to 1, purchase a small slice of many different egg baskets, and buy insurance against the possibility of these baskets being ruined.

Mark Twain put it best: put all your eggs in one basket, and WATCH THAT BASKET. Do not trust other people to watch the basket for you.

Or, just wait for a basket bailout.

12th Annual Inland Empire Market Trends - Appraisal Institute

Yesterday was a red letter day. I delivered a brief speech on the East Inland Empire that I have been working on for the past week. Prior to this, my only real speaking experience has been in 10th grade drama, so I was pretty nervous.

But the appraisers at the event were very friendly, and I think only a couple of them dozed off during my presentation.

I was not sure what to expect. Erik Hernandez at Lee & Associates went before I did with the topic being the West Inland Empire industrial market. These two markets are similar, and the big picture trends effecting them both are nearly the same.

So I decided to take a step back and give my view of the "really big picture", talking about supply chain dynamics, import volume and consumption trends. My report is available here.

I think I may have overdid it. I think most of the audience was there for information on financing, landlord and tenant issues and residential information.

I think if I was to do it again next year, I could improve and make it more relevant. One of the biggest mistakes you can make is to not understand your audience and I think I was a little off the mark.

A few people came up to me afterwords, interested in my port regression. This part I really enjoyed; other proxies for port volume, the Baltic Dry Index, shipping rates etc.

Appraisers are smart numbers oriented people, so the fit with research is natural.

Here are links to some of the other presentations:

Apartment Market: Very good info in there on loan standards and why nobody is building anything right now.

Hotel Market: I actually work with Brandon, he works upstairs at the downtown office. Research is downstairs, so we don't interact a whole lot. Which is a shame, because we do a lot of the same things. Such as create market reports. Basically, economy is in right now, and anything with luxury or resort in the name is getting hammered, especially as companies cut back on "excessive" spending. PKF is predicting a hotel recovery in 2010.

West Inland Empire: I am not sure if Erik's presentation was actually long, or I just perceived it as long since I was nervously waiting to go next. He covered quite a bit, but what was new to me were the "opportunity funds", the mountains of money that are waiting for the bottom to occur. The retail investment presentation also talked about this issue, so when prices start to go back up, they might go up much, much quicker than rational people would expect. This is because everyone jumps into the pool at the same time, another feast, setting up for another famine.
We have also been seeing the "blend and extend" where landlords cut existing rent on tenants for the commitment of extending their lease term. I thought his "blend and pretend" strategy was humorous as well, where the landlord tries to keep the tenant in the building by employing all sorts of rental engineering.

Retail investment More info on financing and insight into the distressed asset portion of the retail equation.

Retail leasing: This has a lot of tie in with the industrial space in Southern California. Fewer retailers means fewer industrial warehouses. Discounters are dominating as consumers cut back consumption.

I again want to thank my gracious hosts in giving me the opportunity to work on my public speaking skills. I met many great appraisers who I will be adding, hopefully, to the comparable network I am trying to strengthen here in Southern California.

The Sunshine Issue

Bad news is much like any other consumable good: increased consumption brings with it diminishing marginal returns. People are inoculated against it, their tolerance has been built up. Ever greater doses of despair are needed, to the point where moderately bad news has begun to be interpreted as good news.



Please prepare yourself, for what I am about to discuss is not the "things are getting worse at a slower rate" kind of good news that I have touted in the past, not some bad news with more flavoring, but rather a healthy dose of mediocre news that would be hard for the casual observer to call "bad" in any sense of the word.



First, I direct you to an article by LM:

Some recent examples of a potential turnaround are:
Lst week’s news from the Commerce Department that durable goods orders were up 1.9 percent in April at $161.5 billion;


A ecent analysis from freight transportation consultancy FTR Associates indicating that the worst of the recession is over, estimating that GDP growth will rise 2.7 percent in 2010 although “the road to recovery is likely to be difficult”

A report from the Conference Board indicating its Consumer Confidence index
was up for the third straight month in May.

In another glimpse of positive news, the Institute of Supply Manufacturing (ISM) reported today that its monthly PMI (formerly known as the Purchasing Managers Index) hit 42.8 percent in May, ahead of March’s 40.1 percent. A PMI reading of 50 or better represents economic growth, but the index has been trending down for the past 16 months. December’s PMI was at a low of 32.9 and has gone up gradually every month since then.

Here is some more good news on the financial front. This is from the Cleveland Federal Reserve:

The probability of recession predicted by the yield curve is very low and may seem strange in the midst of recent financial news. But one consequence of the financial environment has been a flight to quality, which lowers Treasury yields. Furthermore, both the federal funds target rate and the discount rate have remained low, which tends to result in a steep yield curve. Remember also that the forecast is for where the economy will be in a year, not where it is now. However, consider that in the spring of 2007, the yield curve was predicting a 40 percent chance of a recession in 2008, something that looked out of step with other forecasters at the time.

The yield curve is the ratio of short term interest rates to long term rates. An inverted yield curve is when short interest rates are higher than long term rates, meaning that short term money is "riskier" than long term money. Long term rates are higher for a reason, there is more risk involved and you are being paid to tie up your money for so long. When short term rates are higher than long term rates, this means that people need money, and they need it now in the short term. This usually indicates a recession in about a year as the cost of capital works its way through the economy.

I remember my professor at UNLV talking about this. He joked that we should all get good paying jobs now before the recession really started. This was in 2006 when the inversion happened and few of us at that time knew what the hell this guy was talking about.

Grubb & Ellis Company Reports 2009 First Quarter Results

Yahoo:

Grubb & Ellis Company (NYSE: GBE - News),a leading real estate services and investment firm, today reported revenue of $118.3 million for the first quarter of 2009, compared with first quarter 2008 revenue of $150.4 million. The net loss attributable to the company was $41.5 million, or $0.65 per share, for the first quarter of 2009, compared with a net loss attributable to the company of $6.3 million, or $0.10 per share, in the same period a year ago.

2009 Highlights

Amended the company's senior secured credit facility.

Recruiting momentum continues, with 18 senior-level brokers joining the company in the first quarter, raising to nearly 60 the number of top brokerage sales professionals who have joined in the past nine months.

Company ranks as No. 1 public non-traded sponsor REIT based on equity investment sales for the months of February, March and April, with Grubb & Ellis Healthcare REIT surpassing the $1 billion mark in equity raised in April.

Awarded 26 new property and facilities management assignments during first quarter totaling 16 million square feet of property.

New cost reduction initiatives result in $5 million annualized savings.

Cumulative 2008 and 2009 restructuring and cost reduction actions through March 31, 2009, total $25 million in estimated annualized savings.

Grubb & Ellis has been heavy on the recruiting, with two senior levels guys here in Los Angeles joining. Revenue is down because sales are down. Having a good property management team is steady income, not great money like brokerage, but small amounts of steady income are important.

Cost reduction measures, we know what those look like.

Probably the most significant thing is the credit amendment, since it allows G&E to stay in business:

The amendment, entered into on May 20, 2009 and effective as of May 18, 2009, modifies the amount, terms, length and certain other provisions of the facility, and imposes various conditions on the company. These conditions, as well as other material provisions of the amended credit facility, are described in the company’s Annual Report on Form 10K that will be filed later in the day with the Securities and Exchange Commission. Under the new structure, the $67.3 million maximum aggregate credit facility includes a $29.3 million revolving line of credit and a $38
million term loan.

The facility will remain in effect until March 31, 2010, and may be extended until January 5, 2011 under certain conditions, subject to early termination in certain
circumstances.