http://www.azcentral.com/php-bin/clicktrack/email.php/8624274
That's the link to a story my friend Danny sent me, regarding the W Hotel in Scottsdale. While I think that this specific project was one of the good ones (and the building itself was quite well executed), it is illustrative of the problems we created in the past several years.
How much higher could the market possibly go? That's the question that many developers forgot to ask themselves, along with the whole question of underwriting based on assets with declining values, such as speculative real estate holdings.
Scottsdale and Paradise Valley were adding luxury and upscale hotels (or new renovations) like crazy, while at the same time nearby cities like Tempe and Phoenix were beginning to do the same. Part of what made Scottsdale so attractive in the recent past was its exclusive claim to luxury. But that benefit was obviously eroding as the competition for that segment was growing, as was supply, and the demand grew at a slightly slower rate.
Overall, this would appear safe to most investors until the real estate bubble is taken into account. The entire Phoenix market is disproportionately dependent on real estate, and especially all that new "wealth" in Scottsdale. To the developer in this environment, it's a double-edged sword: upward pressure on land costs and development costs, followed by a burst bubble at the end of the day; which impacts the ability to sell condos, prove net worth (on other real estate assets), and generate the expected cash flows on the hotel and restaurant(s).
This story will likely play out many more times in the near future, and in generally similar cases. And in the end, the winners will be those who either buy buildings like this one, at a huge discount, or those who build similarly strategic projects at a substantial discount. We all know who the losers will be--those who stayed speculative too long (who deserve no sympathy) and those who had solid projects that fell victim to a bad market, like this one. I just hope that the Triyar group will survive to move forward on some of their other great local projects when the market returns, and the rest of the development community learned how to better use debt in their businesses.
Thursday, February 26, 2009
Tuesday, February 24, 2009
National Report: Bank Failures Accelerating
This is certainly a rare viewpoint in most of the news lately. But I think it deserves some attention. After all, are we sure that we're out of the housing mess yet? And then what happens if the lagging commercial real estate market's short-term loans can't get refinanced in the next year or two?
National Report: Bank Failures Accelerating
Tuesday, February 24, 2009
By Brian K. Miller
OAKLAND, CA-The failures, now totaling 40, have grown in size and frequency such that an additional 82 banks are now expected to fail over the next six months regardless of government support.
The entire article may be viewed at http://www.globest.com/news/1353_1353/sanfrancisco/177067-1.html
Copyright © 2008 ALM Properties, Inc. All rights reserved. Reproduction in whole or in part without permission is prohibited.
Friday, February 20, 2009
Does the Government Need to Intervene?
Subtitled: A capitalist real estate lover's humble lament and plea
This is a little off-topic, but I'm a big picture person and feel that the big picture is particularly important in this case. What happens in the global and national economy will affect any developer wanting to work on new projects, and that includes us. So here goes.....
Income redistribution, mortgage bailouts, bank nationalization. These are a few of the loaded terms floating around in today's market commentary and raising eyebrows among investors. But before we react with such outrage that capitalism is on the brinks of failure, maybe we should go back to the fundamentals of social theory to ask whether "Capitalism" (with a big, egotistical, capital C) has earned its own demise.
Many of our recent business and governmental leaders have forgotten why we as a society protect capitalists' ability to build and keep wealth. It's because capitalists are essential in a free market, and a free market is the most efficient way that we can all prosper together. That's it. We moved into denser cities, installed governments/militaries, and did whatever we could to promote our security and wealth--but almost always in general accord with Maslow's hierarchy of needs.
We also created markets and empowered our federal government to provide the invisible hand needed to keep them fair and functioning. A functioning market, after all, is open to everyone; it has a life that we all breath into it, and it needs to remain healthy in order to survive. Yet most market leaders in recent years were acting like they could take the market into a world of excess that we would enjoy forever, as if they were at an all-you-can eat steak buffet with a hooker, a carton of cigarettes, bag of sugar, stick of butter, and a syringe full of heroin. Then our date turned around and asked for a referral fee in exchange for all the pleasure. And we paid. As high as we were, we felt obligated to pay dearly and come back for more.
The market got fat--really fat-- and it felt good. The smart investors made plenty of money along with some dumb ones, even though they too are now suffering (most are, anyway). Most even made enough to deal with the pain. But the problem is that the people who didn't make enough to ease the pain of a truly wicked hangover are now pissed that we have to deal with it. Plus, there's a general sense of moral outrage over the ability of a select few to profit from the rest of society without regard for its wellbeing. What's worse is that we continue to pay without even having the luxury of a complete diagnosis and treatment plan (let's go back to the buffet and imagine that the hooker gave us STDs, the rich food caused heart problems, and the smoking gave us cancer--plus we'll probably go through heroin withdrawal to boot).
The moral of the story: Since financial markets have become so complex and inaccessible to most, yet maintained such a profound influence on all other economic activities in our society, people have a right to be frustrated. Most of us have lost control of our financial futures due to a lack of savvy and misplacement of trust. As long as we lack control, we get confused, scared, and we brace for our inevitable fight or flight stimulus. And most people will choose the latter, which is to flee or hide until the storm blows over.
But there is another way to regain control, and it's found in the Constitution's guarantee that the government remain of, for, and by the people. We can demand, through our government, that the rich give back something to the poor and middle class; even if redistribution of wealth is a terribly unpopular idea for a proudly capitalistic society. Alternately, we can take away the dangerous toys that the rich utilized to get the best of everyone else to prevent it from happening again in the same way. Or we could do both. Or we can go in a completely different direction and later change our collective mind. Flexibility is one of many beautiful traits of democracy, and I hope that people rediscover their democratic empowerment as a safe haven in uncertain times.
So before we act completely outraged that our pro-market government would consider adopting socialistic policies, perhaps we should first consider why it would do so and how it affects us all. I remain firmly planted in the idea that my business activities should serve to meet market demands and make the world a better place. So if socializing certain aspects of our economy will restore confidence and make the market move with more fluidity again, then yes, I can accept that--after all, the economy has broken and someone must step in to fix it. To whoever that is, please just don't take away my ability to be a capitalist, for I know no other way.
This is a little off-topic, but I'm a big picture person and feel that the big picture is particularly important in this case. What happens in the global and national economy will affect any developer wanting to work on new projects, and that includes us. So here goes.....
Income redistribution, mortgage bailouts, bank nationalization. These are a few of the loaded terms floating around in today's market commentary and raising eyebrows among investors. But before we react with such outrage that capitalism is on the brinks of failure, maybe we should go back to the fundamentals of social theory to ask whether "Capitalism" (with a big, egotistical, capital C) has earned its own demise.
Many of our recent business and governmental leaders have forgotten why we as a society protect capitalists' ability to build and keep wealth. It's because capitalists are essential in a free market, and a free market is the most efficient way that we can all prosper together. That's it. We moved into denser cities, installed governments/militaries, and did whatever we could to promote our security and wealth--but almost always in general accord with Maslow's hierarchy of needs.
We also created markets and empowered our federal government to provide the invisible hand needed to keep them fair and functioning. A functioning market, after all, is open to everyone; it has a life that we all breath into it, and it needs to remain healthy in order to survive. Yet most market leaders in recent years were acting like they could take the market into a world of excess that we would enjoy forever, as if they were at an all-you-can eat steak buffet with a hooker, a carton of cigarettes, bag of sugar, stick of butter, and a syringe full of heroin. Then our date turned around and asked for a referral fee in exchange for all the pleasure. And we paid. As high as we were, we felt obligated to pay dearly and come back for more.
The market got fat--really fat-- and it felt good. The smart investors made plenty of money along with some dumb ones, even though they too are now suffering (most are, anyway). Most even made enough to deal with the pain. But the problem is that the people who didn't make enough to ease the pain of a truly wicked hangover are now pissed that we have to deal with it. Plus, there's a general sense of moral outrage over the ability of a select few to profit from the rest of society without regard for its wellbeing. What's worse is that we continue to pay without even having the luxury of a complete diagnosis and treatment plan (let's go back to the buffet and imagine that the hooker gave us STDs, the rich food caused heart problems, and the smoking gave us cancer--plus we'll probably go through heroin withdrawal to boot).
The moral of the story: Since financial markets have become so complex and inaccessible to most, yet maintained such a profound influence on all other economic activities in our society, people have a right to be frustrated. Most of us have lost control of our financial futures due to a lack of savvy and misplacement of trust. As long as we lack control, we get confused, scared, and we brace for our inevitable fight or flight stimulus. And most people will choose the latter, which is to flee or hide until the storm blows over.
But there is another way to regain control, and it's found in the Constitution's guarantee that the government remain of, for, and by the people. We can demand, through our government, that the rich give back something to the poor and middle class; even if redistribution of wealth is a terribly unpopular idea for a proudly capitalistic society. Alternately, we can take away the dangerous toys that the rich utilized to get the best of everyone else to prevent it from happening again in the same way. Or we could do both. Or we can go in a completely different direction and later change our collective mind. Flexibility is one of many beautiful traits of democracy, and I hope that people rediscover their democratic empowerment as a safe haven in uncertain times.
So before we act completely outraged that our pro-market government would consider adopting socialistic policies, perhaps we should first consider why it would do so and how it affects us all. I remain firmly planted in the idea that my business activities should serve to meet market demands and make the world a better place. So if socializing certain aspects of our economy will restore confidence and make the market move with more fluidity again, then yes, I can accept that--after all, the economy has broken and someone must step in to fix it. To whoever that is, please just don't take away my ability to be a capitalist, for I know no other way.
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