Month: November 2008

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The View from Space — Part 2

More pearls from Ken Rosen and the other big brains who addressed UC Berkeley’s  Annual Real Estate and Economics Symposium on Monday:

•    What to Invest In Now: Rosen and several other commentators say that REITS (publicly traded companies that invest in investment-grade real estate) are cheap relative to their underlying assets.  Some are trading at around 50% of the replacement value of the assets they hold and are paying a dividend of around 10%.  The best sector of the real estate market right now is the apartment rental market.  (Makes sense, since a lot less people can afford to buy homes.) So look for REITS that own big apartment complexes in decent market areas (see below).   Do your homework:  be sure that they have good management teams and don’t have too much short-term debt because refinancing anything is going to be tough for a while. Hedge your bets.  (Easier said than done for us mortals down here on planet earth.)  Rosen has parked his cash in short term Treasuries.  Obviously he’s worried.  We should probably be too.

•    Where to Invest: “Global gateway”, “quality of life,” “new tech.”  These are the buzzwords that describe cities that should weather the recession relatively well.   Seattle, San Francisco, Boston, and Colorado were all mentioned.   An exception is New York, which is ground zero (again) for the meltdown in the financial sector.  Washington DC is poised for a big expansion as government programs expand to address the current crisis.  San Diego is showing signs of improvement.  Places like Detroit “have no reason to exist.”

•    When will things improve? Be careful over the next year.  Watch for lower LIBOR (London Interbank Offered Rates) as an indication of banks’ willingness to lend again.  Also look for a reduction in market volatility.  Here’s a link to today’s Bloomberg for a really instructive piece on the significance of LIBOR.

•    One of the other key speakers at the conference was Leslie Appleton Young, Chief Economist of the the California Association of Realtors (CAR).  Sure, you can dismiss CAR as a spin outfit for the industry, but you can’t argue with the data they collect.  Another post will cover Ms. A-Y’s analysis of California and the Bay Area.

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The view from space — Part 1

Ken Rosen is a smart guy.  He’s the co-chair of the Fisher Center of Real Estate and Urban Economics at the Haas School of Business at UC Berkeley and the investment advisor of choice to some of the biggest players in real estate, from banks to insurance companies to REITS.

Once or twice a year I spend the day in a windowless hotel conference room listening to Ken and some of the biggest heads in the real estate biz  expounding on the state of real estate. These guys (and they are mostly guys) look at real estate through the lens of global macro-economics and international finance.  Want to know where interest rates are going?  They study yield curves on T-Bills and monetary policy in the capitals of Europe.  This is “the view from space.”

There’s a lot of information that I can’t actually put to use:  I don’t really need to know whether the smart money is investing in CMBS’s (commercial mortgage backed securities) because folks like you and I can’t buy them anyway.  But I always come away from these conferences with a better sense of the “big picture,”  of where real estate is headed in the broader context of the national and global economy.

Right now, the picture ain’t pretty.  Here are some highlights from Rosen’s economic wrap-up.  More to follow in other posts:

  • Recession or Depression? Rosen puts the chances of a deep recession at 70%, a moderate one at 25%, and a full-blown 1929-style depression at 5%.  This was echoed by many speakers.  The major global governments, including China, are throwing so much money into the system that a depression seems unlikely — but it’s still a possibility.
  • The credit crunch: Inter-bank interest rates are coming down, which means that bank confidence is improving.  Easing credit should follow.
  • San Francisco should weather the storm reasonably well because of its diversified “global gateway” economy and the fact that it hasn’t been overbuilt.  Not so, the East Bay.
  • The dollar should continue to improve because, believe it or not, the US economy is doing well relative to the rest of the world.

What to invest in?  More anon.