Trekking for Answers

Just back from Peru, trekking through stunning and pristine mountain passes on the way to Machu Picchu where you meet masses of visitors swarming the remarkable lost Inca redoubt. Peru has a choice—they can follow Argentina and Chile and protect their stunning back country wilderness in Patagonia or they can let roads replace hiking trails and allow more rainforest intrusions. Already highly desirable and comfortable lodges have been built along one major trekking route, which I traveled. It wouldn’t be hard to turn trails into roads and eventually blacktop, and you hear chain saws hacking into red cedar forests along hillsides. My local guide thinks it’s “regrettably” inevitable that small subsistence farm communities turn into hotel tourist stops, and dusty strips of one-story houses at points along Inca trails transform into souvenir allies and bars. That’s progress right?

In my hiking group were three Australian couples, all wondering “What’s wrong in the States?” And they all had the obvious answer—“you need to spend less and tax more.” Well, duh. Sounds like Simpson Bowles. How long will it take for us to wake up?

More of the same in last week’s jobs numbers—anemic growth, while companies report solid profits. Again, that’s because they can make more using fewer U.S. workers and relying more on technology. It’s not a great prescription for any of the commercial real estate markets, and the reason why vacancies will stay uncomfortably high. Interesting that private hiring is back to pre-2008 crash levels, the shortfall comes in public sector jobs thanks to state and local governments refusing to increase taxes to maintain services—including teachers and, road repair crews, not to mention private contractor hires for all sorts of jobs. You get what you (don’t) pay for.

Building permits are up in New York City—for residential and hotels. Tourists continue to blanket the Apple—the weak dollar helps draw foreigners. Coop prices in the better neighborhoods rise to record highs after never really dropping much as office lags… It’s the gateway market story that applies also to San Francisco, Seattle, Washington DC and a handful of other markets along the global pathways. But everywhere else—it’s just blah or worse.

Investors in open-end core real estate funds, which cluster investments in better properties in better markets, have recorded healthy low double-digit performance in recovering from big losses in 2009 into 2010. But returns are now slowly reverting from the mid-teens toward the mid to high single digit mean. Six, seven, eight percent—that’s what real estate can and will deliver year over year. You can play around with leverage and try market timing, but in the end property markets can’t sustain much more in performance. And given demand trends in the current tenant markets, you should be well satisfied with these returns for the foreseeable future. In the meantime, do you have much faith in the stock market going much higher?

Lenders are understandably tamping down commercial development, but have been eager to bankroll apartments given reversals in the housing markets benefiting multifamily. The big question out there is how long will it be until apartment markets get overbuilt? I’ll give it another two to three years, but any oversupply shouldn’t be too severe. Residential developers and local planners would be wise to work together In creating multifaceted urban environments, incorporating parks and pedestrian accessible retail—even better yet access to transit alternatives to the car. Plunking down another garden apartment where a strip retail center would have been put up ten years ago is not exactly a prescription for viable long-term communities.

Hey if you’re looking for an opportunity you may score in Peru. But I hope the Inca Trail doesn’t turn into the Inca Parkway. I’d suggest getting to Machu Picchu before it does.

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A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.