Clean Energy for the Southwest

As an Arizonan, I can't help but to push for our state to jump on this opportunity, as it seems like the obvious place to brand itself as the solar energy capital of the country. With our state's budget deficit, we won't likely do what it takes, but I will gladly argue as to why we should. Here's the guest column/letter I just submitted to several of our regional newspapers:

Our country faces a dual crisis of unemployment and severe economic contraction, while at the same time seeking energy independence from foreign countries and mitigating the causes of global warming.

What better place than in the arid and sunny southwest to implement a new program of solar power generation and other clean energy technologies. Such a program is needed on a national level as well as within our state, and we need to act on this immediately.

The construction industry constitutes one of Arizona's largest employment sectors due to high historical growth. With businesses in this sector and related services suffering disproportionately more than others, our state faces a severe economic crisis. Add to that the anticipated declines in tourism, which comprise yet another substantial share of the state's economy, and things start to look even gloomier.

At the same time, Arizona is home to several electronics and semiconductor fabrication plants, with more planned in the near future. Not only are these facilities typically high-energy consumers, they also offer a spring board to bring in more high-tech outfits that can produce green technologies and better employment opportunities for our university graduates. Tucson is the Optics Valley; Phoenix is home to the Silicon Southwest; and several of our secondary markets boast military technology companies as local businesses.

So why not turn Arizona into the Solar State, or the Green Desert State, or something like it. If we don't, New Mexico and California most certainly will take this opportunity. Remember, they are suffering with us and they tend to be more proactive in seeking new businesses. Now is the time, more than ever, for Arizonans to step up and make this happen.

Great Post about John F. Long

An old friend of mine (from middle school, in fact) wrote a great post about a well known Phoenix-area developer who passed away recently. I thought it was not only share-worthy, but I also must react to it. But first, I can't help but to interject with a compliment for that friend, Mitch Glaser: It's funny..... now that I'm obsessed with regional development and the real estate business, I think back to Mitch's presentations to the class about Del Webb, Long, and others; or his gifts of sample community concepts for all the pretty girls (oo-la-la). This was as early as 6th grade!

But here's his post:

http://www.mitchglaser.com/journal/2008/03/john-f-long-rip.html

And my comment:

Great article about Mr. Long. Of course, he always profited from his land giveaways because he had a larger vision in mind, and those critical services played into it. Too bad the Phoenix market couldn't support that type of concept in the past.

But you know.... urban growth boundaries would help curb the hop-scotch developments that lead to forgotten communities at the core.

From what the latest AZ growth explosion has evidenced, it would also mean that city services can keep up and prevent rampant crime and slumification.

In Phoenix's case, it seems like the same old cycle:

Booming growth -> housing bust -> regional recession -> city/state/county budget crises -> decreased services -> slumification -> bottom of cycle -> economic growth period -> increased construction -> new communities -> forgotten old ones -> and the cycle starts all over.....

It goes without saying that Phoenix is far too dependent on the construction business (and related services), but seriously.... growth boundaries would be a great way to reign it in while those bigger problems are addressed.

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At the same time, I can't help but credit my favorite columnist from the AZ Repulsive, John Talton, for his wonderful entry about Long:

http://roguecolumnist.typepad.com/rogue_columnist/2008/02/john-f-long-a-b.html

This is seriously recommended reading, as is Talton's writing about the downtown Phoenix "experiment."

Thank you to Barney Frank

As reported by CPN Online, Rep. Frank is drawing attention to the fact that the TARP aka credit relief act is not working as planned. This is because banks have remained hesitant to lend money, but they are more than happy to go on a buying spree while everything is cheap.

As long as we keep focusing public attention on this issue, the credit market may finally loosen up enough that we can start pushing loans back into CRE development.

Read the article here:

http://www.commercialpropertynews.com/cpn/content_display/finance/lending/e3i664e8c35e1bbbcc09bf3e65060ff0aca

Or, here's the entire text:

Frank: Bailout Funds Need to Be for Lending, Other Uses Violate TARP

Oct 31, 2008
By: Gail Kalinoski, Contributing Editor

Rep. Barney Frank, chairman of the powerful House Financial Services Committee, Friday warned banks getting money from the $700 billion bailout fund that they must use it for lending and only lending. Other uses, such as acquisitions and bonuses, are in “violation” of the Troubled Asset Relief Program, Frank said.

“I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the president’s request to respond to the credit crisis by making funds available for increased lending,” Frank said in a statement. “Any use of these funds for any purpose other then lending--for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.--is a violation of the terms of the act.”

Frank said his committee would hold hearings Nov. 12 and Nov. 18 on TARP and the ongoing financial crisis. Lawmakers are concerned that banks receiving payments from the $250 billion put aside for the government to buy preferred shares in banks are not using them for lending to unlock the credit markets, but for other uses including acquisitions, bonuses and dividends. PNC Financial Services of Pittsburgh, which is expected to get $7.7 billion from the program, agreed to acquire National City Corp. on Oct. 24. Rep. Henry Waxman, who chairs the House Oversight and Government Reform Committee, is investigating bonus payments being made by banks that received bailout funds, as is New York State Attorney General Andrew Cuomo.

Lawmakers seem worried that they didn’t attach enough conditions to the bailout funds, other than restrictions on executive compensation, such as so-called “golden parachutes,” and restrictions on increasing dividends and repurchasing stock.

Friday’s Wall Street Journal quoted Sen. Christopher Dodd, chairman of the Senate Banking Committee, as saying, “Maybe if we’d have 13 weeks instead of 13 days we would’ve written that bill with even more detail.”

Nine of the country’s largest banks got the first $125 billion of the TARP money. As reported Oct. 28 by CPN, at least 16 community and regional banks, including PNC Financial Services, are next in line for the rest of the $125 billion. Among the other banks set to get slices of the bailout pie are Capital One Financial, of McLean, Va., expected to receive $3.55 billion; Regions Financial of Birmingham, Ala., and SunTrust Banks of Atlanta, both slated to receive $3.5 billion; and BB&T of Winston-Salem, N.C., expected to get $3.1 billion. Even smaller banks like First Niagara Financial of Lockport, N.Y.,which is scheduled to receive $186 million, are expected to get a capital infusion from TARP.

Meanwhile, Ed Yingling, executive director of the American Bankers Association, said in a letter to Treasury Secretary Henry Paulson that it was unfair to ask thousands of banks to participate “in a program when the impact of the program on those banks is unknown.” Yingling’s letter also raised concerns about the lack of details in the plan. He added that ABA member banks are worried that it falsely looks like they all need a handout. “This is not a program the banking industry sought.”

On the mortgage front, no agreements were reached Friday between the Treasury and Federal Deposit Insurance Corp., which are reportedly trying to come up with a plan to help as many as 3 million struggling homeowners refinance their mortgages. As reported Friday by CPN, officials are considering a plan that could cost between $40 billion and $50 billion, and would lower interest rates for homeowners in danger of foreclosure for up to five years. Under the plan proposed by FDIC Chairman Sheila Bair, the government would agree to absorb half the losses if mortgage companies would lower the payments of some homeowners deemed creditworthy enough to quality for the assistance. A Bloomberg story by Alison Vekshin and Robert Schmidt noted that the White House and Paulson seemed hesitant to approve the plan at this time because of the cost. A Treasury spokeswoman said the administration is continuing to examine ways to reduce foreclosure.

Plans for stopping the flood of foreclosures can’t come soon enough. A new study from First American CoreLogic reported that almost 20 percent of mortgage holders owed more than their homes were worth. Michigan and Nevada were the top two of six states that have almost 60 percent of the homes with negative value, according to the study as reported Friday by Bloomberg’s Dan Levy. If home prices drop another 5 percent, more than 9 million properties will have negative equity, according to the study.

A bright future in commercial real estate.....

Behold, there appears to be a bright silver lining for those planning to use private equity to finance hotel deals and other commercial real estate. And as the banks' buying on wall street slows with another projected drop in the Dow Jones Ind. Avg., and both the prime rate and LIBOR drop, we may even see credit loosen up. Now is the perfect time for my segment! Read more at http://www.globest.com/news/1276_1276/washington/174800-1.html.

As of today, the prime rate dropped to 3.42%, from 3.47%; and the prime rate is at 4.5%, expected to drop with the FED's announcement of the 9th consecutive cut in the FED funds rate, possibly as low as .75% or 1%...... More to come.

Wall Street, Bank/Insurance Failures, and our Commercial Real Estate Market

Please note that the article below was sent by a commercial real estate agent who wanted me to see it as opportunity (and thus get him a commission), but I still feel it's spot on.

With the failure of AIG, the real estate industry will realize a giant loss of both insurance money and indirect foreign investment. Debt is already tight, and this event has further reduced the pool of available money for future real estate investments. Available money was already dwindling, with major funds stowing away their cash for opportunities in struggling markets, and I predict that we will see this strategy come to fruition soon. (At the same time, foreign investment may not entirely survive this volatility - another topic for later.)

I'll post a blog entry in the next day or so about the new RTC-like strategy being proposed by Treasury Secretary Paulson, which is directly related to this story. For now, just understand that we will not likely see much new real estate development unless it is in very high-barrier markets.

---------- Forwarded message ----------

September 17, 2008 Written by Mark Heschmeyer Instability in Financial Markets Expected to Spread to Property Markets Commercial Real Estate Industry Sees Trouble on Wall Street Spilling Over to Main Street The extraordinary turmoil and historic events on Wall Street over the past two weeks will ultimately come to settle on commercial real estate on Main Streets across America. That's the consensus of a wide range of industry executives CoStar Group contacted this week. While the people we contacted said the extent of the problem from the flood of events is hard enough to grasp, let alone predict where they will end up, the fear and mood in the market are tangible and the results are clearly evident. SPECIAL REPORT Crisis On Wall Street, Impact On Main Street by CoStar Senior News Editor Mark Heschmeyer SEE RELATED STORIES: · Credit Markets Have Been Devastated · Property Values Going in the Only Direction They Can Right Now: Down · What Impact Will Mounting Wall Street Troubles Have On Property Fundamentals? "This market fear will further tighten the available debt for borrowers, tenants, and small businesses looking to grow," said Mike McMillen, managing director of RCG Ventures in Atlanta. "In addition to the fear this has created, many institutions were holding Freddie, Fannie, Lehman, or AIG paper which will cause a double dose of reality. This will further slow credit availability and will hurt tenants that need capital, reduce the flow of new acquisitions, and lead to a much slower real estate economy. Even though none of us have a crystal ball, it is my assumption that this is not a one- to two-year problem. We expect to feel the real estate "hangover" well into 2010." In two weeks, we have seen the federal government takeover of mortgage giants Fannie Mae and Freddie Mac and insurance giant American International General (AIG). We have seen the collapse into bankruptcy of Lehman Brothers Holdings as the federal government stood by unwilling to bail it out as it had Bear Stearns last spring. We have seen Merrill Lynch shoved into a sale to Bank of America at the federal governments urging. And we have seen buyers around the world coming in to pick apart Lehman Bros. piece by piece at fire sale prices, including its 1 million-square-foot headquarters, data centers and entire North American investment banking unit. We have seen federal regulators start shopping Washington Mutual Inc. And reports were spreading that independent investment bank Morgan Stanley was considering entering into a merger with Wachovia to prevent a similar erosion that befell Lehman and Bears. In short, we have seen the crumbling of Wall Street and its erosion will be felt directly across the New York City commercial real estate market, and indirectly in markets across the country. "To see renowned institutions go over the precipice or vanish into the vapor, are events that most would presume to have been unfathomable," said Lee Meekcoms, president and CEO of Parkridge Capital Group Inc. in Clearwater, FL. "The uncontrolled greed and ingenious mechanisms to create vehicles to trade off risk, were, in the end, way too risky. Leveraging up on enormous amounts of debt and derivatives has resulted in a catastrophe of proportions not seen in the lifetimes of most of us." "The lack of credit for the foreseeable months, as banks build up capital and/or other institutions continue to de-leverage and get back to a safer existence, will be constrictive to dealmaking in the near- to mid-term," Meekcoms said. "This should have a downward pressure on pricing, as there will be owners that really want to exit; the motivated one's will be the deals that get made." "The effect of loans coming due on quality assets that require refinance presents a bit of a puzzle... What are the lenders to do when the loan is due and no re-fi money is around? -- Extending would seem to be wise. Will this also pose a downward pressure? In all events, the need for capital across the spectrum of the economy will be significant," he added. "Moreover, as capital is less available, and as residential real estate values continue to eke (or spiral - depending on the market) downward in value, can the commercial and multifamily market avoid downward adjustments? Anything is possible. Certainly top-tier markets and the best located properties have escaped without being scorched too much, but we are in uncharted waters here." "So, until stability returns to Main Street, the commercial and investment side will likely stay in a tenuous mode," Meekcoms said. "Risk drives rates -- People like predictability. Lack of it unsettles markets. Perhaps Fannie and Freddie's re-emergence, along with the return of other capital, will bring the boat around. ... As the old saying goes, and it was true for some time across the spectrum of realty - "all boats rise on an incoming tide" -- the converse also appears to be true." All of that uncertainty will make its way down the streets of markets across the country. "The next shoe to drop will be regional and community banks. We expect well over a 100 bank failures in the next 12 months," said Jay Rollins, president of JCR Capital in Denver. "We are still in the fourth or fifth inning of this. This is a painful de-leveraging process. There will be more pain to come. Yet, we should not forget the excess that got us here. It was a big party and now there is a big hangover." "I think it is hard for "Main Street" to not be effected by this. The results of the last few days results in real jobs being cut, real dollars being pulled off the table throughout the economy and real fear spreading among everyday Americans." Glen Weinberg with Fairview Commercial Lending in Denver has seen the concern spread well beyond anything he imagined. "My wife teaches sophomores in high-school (math); she does a unit on finance. Every kid came in the room asking about Wall Street, etc," Weinberg said. "It was so profound that she asked if I would come in and explain to her class the current market impacts and what it means. When high-school kids start to think about financial news and are curious on the impact, to me it means that the pain has clearly spilled to main street America." McMillen of RCG Ventures said that the drop in housing values and stock values has the consumer scared and thus Main Street has already been feeling the effect. "We are a consumer driven economy and the consumer is feeling the pain," McMillen said. "Credit cards are maxed out, there is no equity remaining in the average consumer's home (actually negative equity for many due to the over finance second mortgage craze). Jobs are being cut, wages are either flat or decreasing, 401k plans have lost a lot of value, and the media will do nothing but "feed the hysteria" of the bad stories. I think the average consumer is scared and until something significant changes, this will continue. This will be felt in restaurants, retailers, and our service industry. When you hear people in the upper class canceling trips, cooking out vs. going out to dinner, and an overall increase in hesitancy to spend money; you have to believe this is being felt even greater in the towns where the average household income is $60,000 or less." Lon Rubackin, managing partner GFI Retail Group in New York, summed it up best. "Wall Street's problems are the entire country's problems at the moment, you cannot separate them like in the past," Rubackin said. "With the country close to recession or all ready in recession and the liquidly crisis still front and center, the two unfortunately are intertwined."

What's the big deal in retail? It's small.

In Ian Ritter's recent Counter Culture column, he raises the question of the new grocery experience moving toward a model more like Trader Joe's and Fresh and Easy. This is especially endearing because, as a college student, my team proposed a very similar concept for Whole Foods (now being pursued in Tempe, AZ). It's great to know we were ahead of the curve.

Below is my very AZ-influenced response to Ian (different from a NYC or SF perspective, I'm sure), copied from his blog at http://globestcounterculture.wordpress.com/2008/09/12/the-smaller-the-better/

Small can be successful because of the way we now treat information and use it for planning purposes. More complex networks of smaller outlets can become workable for the consumer because that consumer can more easily pre-shop and make the most of a quick trip to the grocery store.

Since most daily purchases are driven by either an impulse or a few basic needs, why waste the time trying to navigate through a larger retail space with more bottle-necked checkout lines and less convenient parking. Anymore, a trip to a large shopping center is becoming a much more significant experience in terms of time and energy, yet the consumer benefit isn't as easily improved in tandem.

We should have learned as one-stop department stores and individually located cosmetic/clothing stores replaced malls, so too will smaller targeted shop spaces with easy access replace the mega strip malls. From an urban planning perspective, this bodes well for the neighborhood village concept prevailing in sprawling communities we never thought possible. From an economic perspective, it potentially means a more competitive market environment as smaller more nimble companies can grab scarce space as easily as the behemoths of the world, and their suppliers will need to negotiate differently in turn.

But most importantly, from the consumer perspective, this means that our daily transactions became even easier and less tiring than they have been. Our culture tends to value efficient transactions, so why shouldn't the real estate market adapt accordingly?