Cursed By Knowing The Numbers

What did I learn at ULI last week? 

Economy should hold up until after the election--limited demand growth in 2009-2010

Interest rates are 50bps higher than they should be to work off the excess liquidity injected into the system in 2002-2004 via lower interest rates.  Inflation in asset prices, and continued moderate inflation in the service sector

The echo boomers will soon be looking for homes--but a different type of housing stock will be needed.  Think Friends instead of Leave it to Beaver.  Urban, green, hip, with modern moves.

We don't have enough of this product to meet demand.

My favorite talk was by Prof Peter Linneman at the Wharton School of Business:

"the deflationary threat [of 2003-04] was not economy-wide, but rather limited to goods prices and rents, both of which were falling due to substantial excess supply...The low interest rates pumped money into the economy...service sector inflation rose by 100bps in less than a year...Realizing its error too late, the Fed pushed the short term rate higher...to sop up the excess liquidity.  The good news is that inflation is moderating..."

Professor Linneman went on to say that 60% of inflation comes from the service sector--and that the fed funds rate should revert to the current rate of inflation--250bps, plus a risk premium demanded by the investor, traditionally around 200 bps--around 4.5%.  He foresees a drop in the short term rate back to 4.5% by year end. 

...where they are not supposed to be are three things that drive owners crazy.

Speaking of squeaks, There is a great article in today's NYTT about the importance of acoustically conditioning a home.  Overkill is my approach during construction.  It is much more cost effective to deploy more rock, more insulation and acoustically isolate drain lines at this time than to try and fix it later.

The cost to do a reasonably good soundproofing job adds anywhere from $3 to $20PSF, but the qualitative difference is well worth it.

My secrets?

• Sheetrock/resilient channel/QuietRock is by far the most effective material to acoustically condition a space.
• Steel studs lessen the mass of a wall, making this an option for interior framing.
• Acoustiblok is a mass loaded vinyl product that is installed over the framing and behind the sheetrock.  Installer error is an issue here, make sure; one, the installer knows what they are doing, and two, you inspect the penetrations (outlets, switches, recessed lighting) before surfaces are rocked.
• Windows are a big source of flanking noise, make sure you, or your builder or architect, understands the STC characteristics when evaluating your window options.

And when I really need a room to be quiet, I call Charlie.

Dr. Peter Linneman, once again--

"...if real estate pricing is on average correct, relative to alternative returns, it probably means that 50% of real estate is over-priced, and 50% is under-priced.  The question is: 'Into which half does your portfolio fall?'"

Alternative returns are roughly equal to BBB bonds, or 6.25 to 7.0%.  Real estate returns have two components--annual appreciation of ~2.5%, and 3.75 to 4.5% in current cash flow.  This implies a cap rate of 6% plus or minus 150bps.  This means you either put no leverage on a deal [current NNN assets] or high leverage if you feel confident you have an attractive pop in value at exit [hedgies working with OPM].

...again, taken from Professor Peter Linneman's talk at my ULI multi-family council meeting last week.

Every year, the US needs about 2 million new homes.  1.3 million to house the 3 million new people who call the US home, 100,000 second homes for these people, and roughly 600,000 homes to replace demolished or obsolete housing stock.

Against this demand, our housing industry produces anywhere from 1.4 million to 2.4 million homes.

Today, there are about 600,000 homes held in inventory--about a six month supply.  Builders hold 300,000 nationwide, the other 300,000 are being held by investors/speculators.  The surplus of 300,000 should work itself out--either by sale, or by investors handing the keys back to the bank--by 2008.

Some markets are so supply constrained, so in demand, that recovery is upon us.  To wit:

or a failure to plan and develop?

The numbers show that it is a bad idea to continue this current use.  How bad?

The numbers?

• 768 cells
• 301,200 SF
• $1100PSF cost.

Approximately $15 million has been spent to plan and cost out this project.

The asset is 432 acres of southern exposure waterfront in one of the most beautiful spots in the world.  See the problem here?   The site is worth $400 Million with a transit village use permitted on it[.pdf].  A comparable site in Susanville, Chowchilla, or the like would be $2 to $5 million.  Construction costs would be 15 to 20% lower in these locations.

I hope that this present position by the Department of Corrections is merely a bargaining position--from a land use and community development perspective it makes no sense.  The State Auditor slammed it [.pdf] for improperly looking at alternatives--partially because state law requires death row to be at San Quentin.

The jobs created by this project will not benefit Marin residents, it costs more to build in Marin than perhaps anywhere else in the state, the operating costs will be higher, and there is no benefit to the state to being here.  Other than they already "own" the site.  Wait a minute--don't we--the tax paying citizens of California--own this site?  Is this the smartest move to make with our asset?

This site could anchor mass transit for the North Bay.

The planners at the county have thrown in the towel. Here was their vision plan for the site [.pdf]. From the Marin Countywide Plan 2007 Update:

However, it is the clear intent of the State of California to continue and expand the use of the San Quentin site as a State Prison for the foreseeable future. Therefore, the Vision Plan is no longer under consideration for inclusion in the Countywide Plan and is not discussed in this EIR.

To the rescue come our legislators. Senate Bill 228, decommissioning San Quentin, was introduced in February.  Our Senator Migden signed on.  It will likely be considered a "two year bill" due to the court ordered receivership currently running prison improvements.

The $336.5 million was not requested in the May revised spending plan.  Assemblyman Huffman was told that Schwarzenegger will ask for the money in a supplemental request.

...take a minute and express gratitude for all of our young people (~135,000) who are making a difference half a world away.  The sacrifice is great, and we can only hope that it makes a difference. 

National service, service to a cause greater than yourself, has long been an American virtue, and we have an entire generation that is walking the talk in Iraq, Afghanistan, and too many other places to iterate.

All make some sacrifice, some make the ultimate sacrifice.

Pat Tillman would have been a decorated veteran, a Ranger alumnus, and finally home from Iraq and Afghanistan, back in the bosom of his family.  Instead his fate is a story in microcosm of how our nation went wrong, and how the real truth may never be known.

A true American tragedy--our best and brightest giving their lives in hot and dusty places far, far away--and we at home never seem to learn the lesson. 

Pat was one of over three thousand Americans who made the ultimate sacrifice in the last five years so that the rest of us can sleep safely. Theirs is a violent profession--they do it by choice--not because they are not smart enough to avoid being sent there.  That is Pat's brother Kevin on the right, now a Ranger alum and civilian once again, who reminds us of the legacy of his brother--a true American hero.

What is the lesson here? My takeaway is to pay homage to the sacrifice that men like Pat and their families pay by;

• one, leaving things better than we found them--each and every day--at home, on the job, and in the world and
• two, only put these heroes in harm's way when it is absolutely needed.
  

There is too much other stuff in this world that needs to be fixed to detail these heroes to fix something irrelevant.  And when tragedies like this happen, tell the truth, so we all can learn from it.

HOO-ah?