There was another article in the paper over the weekend about how more mutual fund investors are wising up and moving away from stock picker managers to index funds, because the majority of pickers don't beat the index while charging significantly higher fees for their questionable value add, further eating into returns.
The stock market, meanwhile, seems to be living off the fumes of low interest rates, but now Wall Street firms have all-too predictably resurrected the infamous CDO bond leverage model for investors who crave higher yields. Yeah we know—they're better constructed and safer this time.
Unemployment just ticked up, but consumer confidence has advanced seemingly because of wealth created in the recent stock market run-up and the improved housing market. Then recognize that about 50% of Americans don't own any stocks and many of the housing transactions have been all cash purchasers and involve speculator institutional investors, not the average I-need-a-mortgage (and a big one since my effective wages haven't increased for more than a decade) American home-buyer wannabe.
And then you look at the quality of new jobs created in the latest unemployment report—there were a lot of hotel and restaurant workers. Well, it's encouraging that more people are going on vacations and eating out, but maids and waiters are not going to be buying homes any time soon, and the big lodging chains continue to figure out ways to reduce labor costs—like the Hilton in New York eliminating room service.
You cheer up over reports like the one on PBS Friday night about more manufacturing jobs coming back to forlorn states like Ohio thanks to cheap energy costs from new domestic drilling technologies (fracking and shale oil). But then the fancy new plant, featured in the show, produces stacks of aluminum cans around the clock in a factory the size of several football fields, but employs only a total of 90 workers for all its shifts. These employees mostly monitor and adjust computer screens and trouble shoot equipment, which does all the work. And many of these new age manufacturing workers, who need technology skills, get paid less in salary and benefits than union assembly line toilers once did.
On the commercial real estate side, have you noticed how more product is coming on market from investors, mostly private equity funds, already looking to cash out of deals they made early in recovery? The focus of course is in the 24-hour cities and gateway markets where the deal making continues to concentrate. They're achieving good pricing too as the buyers, often other institutions, swallow hard to get into these premium markets.
And then what will the sellers do with gains? Many of the big private equity managers with the brand names, who are churning their portfolios now, have a ton of money to put out from new commitments and they will reflexively encourage their limited partners to re-up. Investors have begun to back away from popular apartments. High Street retail has gotten awfully pricey. Do you trade one Manhattan office for another to keep money moving around and keep earning fees?
Haven't I seen this movie before?
What investment manager or general partner tells their investors “it's time to take a breather” or “it's not a good time to put out money” or “let's just hold onto this fully leased property and be satisfied with a nice income return”? That's how they see their immediate profits decline along with their near-term compensation. No, you've got to keep looking for the next deal and keep the trading going.
Can I sell you a CDO?
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Jonathan D. Miller
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.
