While jobs are being added in the US, the participation rate and U6 remain very weak. More important, wages continue to barely rise. The economic stats from other the US and the rest of the world continue to disappoint. Family income remains weak and still behind pre recession levels inflation adjusted. In short, consumers remain in better, but not good shape. This is unlikely to change until Obama is out of office and the new president can undo regulations, lower taxes and get the economy going again. Mainly if we have relief from excessive regulation things would start to move.
Now the EPA wants to add cost to power production, and to raise the cost of development. The definition of wetlands is now to include almost every puddle. HUD wants to take over zoning from local jurisdictions. Just think how these two things together are going to raise your costs to develop in many locations if not reversed. Banks continue to be saddled with more and more very costly regs which serve no useful purpose other than to employ armies of compliance people who are all looking for something to find to justify their existence.
There remain millions of homeowners underwater who should have been foreclosed out were it not for the administration and misdirected courts intervening. Back in the early nineties, the RTC moved in, cleaned up the mess quickly and onward and up we went. Several PE firms got underway with these transactions and the market was alive. The overhang of garbage remains inside bank portfolios in Europe in huge numbers, and it is one reason many Eurozone banks are still weak if one looks under the hood.
Whether the Fed does minimally raise rates in September, which is still questionable, it will not really matter a lot. The market has already discounted that, and so the impact will not be meaningful. Rates will remain very low for quite awhile. GDP will continue to putter along. Rents will remain high for most people and will eventually become unaffordable in some markets. Then there will be over building as developer think those rents will last or continue up, and then rents will ease back.
As investors we continue to see developers drinking the new Kool Aid and bidding up land to unrealistic levels. With construction costs rising, and land costs moving much higher, returns are becoming harder to achieve to justify some deals. If you assume at exit in 4-5 years, rates might be up by 200-300 basis points, and cap rates following, then it is becoming harder to make deals pencil.
When you combine rising rates, higher construction costs, much higher land costs, a continued weak economy, and no growth in family income, it needs a strong going in return to justify doing the deal, on the assumption the returns targeted may not be achieved as time passes.
Then all we need is a real black swan event , and it all could go upside down. Just be sure of the numbers now as there is no room for errors
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
