On Self-Cannibalization in Real Estate

I'm sure this view will draw the ire of many professional contacts, and I would mostly understand.... We are driven by the market and too often lack the power to make huge changes in "the way things are done."  But I also hope that you recognize the flaws in how things have been done in recent years -- and not just from an economic perspective, although perhaps reevaluating our typical investment strategies/perspectives could go a long way in making things better.  I'm speaking of course about the community impact of real estate, since these two components of our world are inextricably linked.

What happens when the economic life of an investment has expired?  What is one's responsibility to the community with regard to the grayish area of perceptions of blight, value, impact, etc.?  And finally, how does an all too typical 3-5, or even 10-year investment timeline impact the likelihood that we leave blight in our wake while moving on to create "greatness" or other "enhancements" and "community amenities?"  Is there a better investment strategy that also accomplishes more in the way of making our world better?  Thankfully, there are many leaders in the real estate, planning, and economic development communities finally asking these questions and applying the scientific method to our varied theories of how things ought to be done.  I plan to focus on these elements going forward, hopefully blogging more frequently than I have in the past with some thought provoking issues and their proposed solutions.

For now, I offer my follow-up comments on an article that appeared recently in the local newspaper, The Arizona Republic.  This article was posted by local business leaders seeking to take back greater control of Phoenix and frustrated that the retail landscape here is mostly undesirable to small businesses for one reason or another -- mostly due to not offering the kind of main street connectedness that they seek within the market, and yet local businesses should be the key to an economic recovery.  So without further ado:

If you've been in any area of Phoenix for a considerable amount of time, just reflect on how that area has evolved over its first two decades (or the last two if it's an older part of town). What too many in our real estate industry readily accept as a cyclical market is really just wasteful self-cannibalism in many cases.

Having grown up in South Tempe, I often think about all the office space and retail that was built on the edges of Awhatukee. Back in the 90s, this was one of the hot spots to be in the Phoenix area, but then the market "shifted." The reason for the shift? Ambitious new plans for Chandler Mall and the 101 corridor. The same thing has happened again and again throughout Phoenix, and we end up with dilapidated shells of buildings that serve little value unless, miraculously, the surrounding neighborhood gets "revitalized."

The failure of this formula is that our community often treats housing exactly the same way -- get into the neighborhood while it's new, sell high, and move on to the next booming area..... How's this working for us today? Is it maybe time for a change in how we treat our surrounding community and overall environment? I think so.

This issue has been on my mind quite a bit lately.  In fact, as I type this, I await the final word on a controversial zoning hearing for a downtown permit application to demolish an older Phoenix hotel.  One of my acquaintances appeared in this news story about the case and he has blogged extensively about it.  I too have engaged in many quite similar debates about prematurely laying older buildings to waste, or overbuilding a particular area in one way or another with little regard for the surrounding land uses, infrastructure, and/or community needs and wants.


As we throw around such massive amounts of money in the development industry, I feel that it's perhaps important to remember what it should mean to "invest."  We're dealing with a rather illiquid investment instrument here, after all.  So why not try to reap the greatest possible long-term rewards by directly serving the community and always gaining buy in from the local residents who will inevitably become customers, strategic partners, and even co-investors in a project?  I know several successful developers already employing this kind of strategy to their projects, but think the industry as a whole has a long way yet to go.

What Will Future Generations Contribute to Our Economic Development

The Kaiser Foundation recently published a not-so-surprising report about increased media consumption among 8-18 year old kids.  The KFF survey, as you probably expected, demonstrated that overall media consumption has risen significantly in this age group.  However, it's equally important to note that TV viewing remained fairly stable, as did book reading.  So while others reprint the study's findings and emphasize deterioration in grades among heavy media users, I'd like to go ahead with the alternative hypothesis that "The kids are alright" -- a line more or less straight from "Talkin' bout my [dad's] generation."

How is this relevant to us?  Well, for the same reason that other business-related media sources are discussing this topic: The kids are our future and they've got plenty of disposable income, family spending influence, and time on their hands (not to mention their potential future lifetime purchasing behavior, which is quite valuable to businesses catering to teens).  Duh!  Like, seriously, it's so lame I had to even point that out.  But then it's also important to me because, as you can quite clearly see in my last sentence, I am now part of the adult ruling class -- inept at capturing an even remotely passable tone of today's teen language -- and frankly, somewhat frightened about our lack of connection with teens today.  As I work with fellow community leaders an real estate professionals in my own neighborhood, it's become clear that we had better work with the kids who are often vandalizing private property and potentially threatening our local businesses, or else see our community deteriorate in the future.  To better work with them, of course, we need to better understand them and relinquish some of our perceived control (which is mostly futile anyway, in my opinion) -- in other words, genuinely try to collaborate.  This begins with learning to appreciate their worldview and how it may be different or similar to ours.

Furthermore, let's look at the ways they develop that worldview, via media consumption patterns and application to other aspects of their lives.

In our post-information age, we often like to think we've somehow progressed beyond the simple need to produce and present information as a means to advance our collective knowledge and innovation base -- yet this remains a critical focus in much of our lives.  The mere availability of information in a disorganized and uncontrolled environment arguably remains one of our biggest hurdles to effectively utilize media to enhance knowledge on a widespread basis. (Yes, media companies do indeed organize information, but typically as a sole means to meet their demand feedback loop, which often contributes to bias and closed-mindedness).

If increased media consumption is indeed acting more as a distraction or mindless escape to our youth (and their parents), then maybe we ought to focus more on enriching it to promote intellectual curiosity.  Why should a teen's grades begin to fail because he/she spends more time taking in media presentations?  I can't fathom why, twenty years into the information revolution, we haven't found a way to make learning more stimulating -- unless we have and we just don't realize it (see, for instance, the current dialog about how we are already using the all-new iPad and its promise for mobile computing).

The three questions we need to ask are:

1.  Are we evaluating the wrong measures of learning, by failing to account for positive aspects of increased media consumption;

2.  What ever happened to our once strong cultural respect for the venerable fourth estate (great post about financial coverage here) and the ongoing value of creativity expressed through contemporary art or, better yet, direct observations about pop culture; and

3.  Why are we highlighting the perils of media consumption, rather than focusing on opportunities present in this finding?  We should be taking notes on the popularity of interactive and multi-platform media in the commercial space, typically developed to either enrich private sponsors' marketing opportunities (i.e. click-throughs, surveys, etc.) or to enhance the value of an entertainment franchise (i.e. Star Wars, Lost, Avatar, Nine Inch Nails, and others using ARGs or similar).  What's wrong with using these examples to promote better parallel learning mechanisms?  (And yes, I know that some are doing this, but why not en masse?)

Just as when I was a student in the 80s/90s being told to beware outdated maps in the library, or assertions about scientific findings that were since disproved, kids today should be encouraged to forge their own learning paths to some extent.  From the top-down perspective, we could use closed captioning or voice-/ video-enhanced text at an early age to help with language acquisition.  This could then be paired with a bottom-up approach that enables students to seek ways in which they can explore related media (for fun or learning) or perhaps contribute their own interpretations through wikis and discussion boards.  Meanwhile, this could better train teens to seek contextual clues to the often dreaded classic literature, history, humanities, or boring science lessons -- which in turn better promotes the notion of democratized and engaged learning.

I'm a little disappointed that the study emphasizes the fact that parental media rationing is key to getting kids back on track.  Instead, what if parents and teachers did a better job of engaging with their kids in more enriched media consumption?  As a kid who grew up on the tail-end of gen X, I see the same perception wall that hindered communication about media consumption in the 80s, where it was too often viewed as a purely recreational activity in one's leisure time that crept into more productive activities.  This attitude contributed to a popular uproar over Ronald Reagan's observation that video games should be used to develop the skills necessary to our military -- how long did that view take to institutionalize, 20 years?  Or my parents' early lack of understanding about my music consumption habits, which helped create a passion that I leveraged into more critical interpretation of media -- I still benefit from this as an adult.  And would you really complain that a future environmental biologist or investment banker is glued to Discovery Channel or CNBC as a teenager?  What better time has there been to learn from available media, and at the same time teach kids to analyze and understand the source.

So this just looks to me like the saga continues between kids and their parents, who "just don't understand," as stated by one of my dad's favorite actors, Will Smith.  Hey, wait a minute, I thought he was one of us....

Latest Phoenix Home Sales Data -- March 2010

I can't help but be a nuisance when it comes to this kind of information: http://bit.ly/cU7dcm.  But seriously, the story could have been better reported.  And just in case the paper deletes my comment, here it is:

...Rather than seeing a detailed report that breaks out different price ranges, is it safe to assume the following:

Foreclosures are continuing to occur across the board with single-family homes and multifamily. This in turn disproportionately affects multifamily units, which almost always lag single-family homes in the greater Phoenix market. Add to this the fact that excess inventories are finally coming to market in the multifamily sector and it's a double whammy for condos/townhouses.

Meanwhile, stability in the employment market is bringing buyers back to the table, while at the same time having the unintended consequence of more short sales or strategic walk-away activity. Since the fringes of town already saw prices drop so significantly last year, they are now starting to stabilize. Thus, price volatility is going down in the burbs, but still not increasing like more established neighborhoods, as people simultaneously become more selective in terms of location. Thus, we can now all breathe a sigh of relief that the housing crisis is over, totally ignoring the fact that it's an asymmetrical "recovery."

And finally, how about the biggest elephant in the room, which is the federal tax incentive set to expire in April/June, combined with the end of the Fed's mortgage purchase program. It seems that there are plenty of reasons to lock in those purchases and mortgage rates now, rather than a few months from now, which means we'll probably see the same positive numbers for a couple of months. But what do 3Q and 4Q 2010 hold in store for us? I wouldn't be willing to bet on it.

Not at all factually based, but the article left us to guess what was going on...... How did I do? And if you really appreciate my perspective, then by all means, I invite you to check out my blog -- where I somewhat casually try to cover this kind of information: http://bit.ly/9YQJoe.

US Retail Property Gouged by Record Vacancies - CNBC

US Retail Property Gouged by Record Vacancies - CNBC

E&Y Says Distressed Acquisitions to Pick Up in 2011, Not 2010

I couldn't have said it better myself, although I will admit that in the last year and a half I thought that we would see an uptick in distressed buying by 3Q of 2010.

An important note on this activity is that, to date, many deals are still happening off-market and debt is slowly trickling back into play -- at least that's been my observation.  What are you seeing for the market?  Will transactions rise to any significant level in 2010, or are investors still waiting?  My guess is that it depends on the market, where truly undervalued deals in locations with high barriers to entry are already transacting again.  But 2011 fits my estimate of increased buying in speculatively developed suburban markets that are finally seeing their fundamentals stabilize.

Here's the Globe Street article:

Home Ownership and Community Wealth

Felix Salmon wrote an excellent post on Reuters today, regarding the rationale for a sustained bear market in housing and common public misgivings about home ownership:

http://bit.ly/buWCHt -- That's what I'm talking about, except to say that an increased rate of home ownership is detrimental to the economy, per se.  It all depends on how you prioritize different economic factors.  If you value productivity above all else, then a more mobile workforce is certainly better in our economy -- but this doesn't seem to matter nearly as much to most communities as it does to the ones where business is centered.

I'd also like to add that for many people, the anchoring effect of ownership is comforting when, in fact, we are taking ownership of our property rather than merely paying endless debt.   One question that I would add to the research is how many people realistically plan/want to stay where they are.  Not only can ownership help provide financial security for the individual home owner, but it can create stability in the regional market.  The latter effect is negated when people choose to move every 5-7 years, but perhaps that trend will also abate in the near future.  Thoughts?

Krugman, Palin, and the Real America

In Paul Krugman's recent post to his NY Times blog, he decided to take Sarah Palin's bait and react to her disparaging remark about the eastern U.S.  Following is my response, which I hate to admit serves to explain much of the Tea Party sentiment being embraced in the west.  Where I diverge from the Tea Partiers, however, is that I propose a different response (not to mention a very different outlook on most issues).

While I can't declare hatred against any region, I think that people in most of the western states should indeed take greater ownership of their states' economies and resources, rather than continuing to operate through the old guard on Wall Street.  Here's why I think we should become a little feistier and provincial out in Palin's "Real America:" We need to wean ourselves off of our absentee landlords.

So rather than snapping back at Palin for her crude lashing, I hope I can convince you to consider that our present economic situation (and commensurate rise in so-called populism) has several parallels to the outcomes of past eras marked by significant growth in the western U.S. -- most notably in the late 1800s (see "People's Party").

As a resident of Arizona, it's tough to ignore how the housing bubble was essentially the greatest transfer of wealth in my lifetime here -- in the end, most benefiting the bankers who facilitated the mortgage transactions, and with the most heinous acts (or lack thereof, i.e. oversight) occurring behind the scenes in our nation's banking capital far away from here.  From about 2003-2006, many homeowners foolishly bought into and helped contribute to the rapidly escalating housing bubble, thus trapping themselves into an unreasonable personal debt situation without any contingency plans for when the market abated or crashed (and now even being convinced by the banks that walking away from their overpriced mortgages is immoral, despite having legal protections to do so).  We generally acted like pawns who were convinced to ignore common sense and our own self interest, while charlatans took payments for services rendered and then turned around to the broker dealer community to unload much of the underlying investments on "qualified investors."  In this sense, there were two primary demographic groups most impacted: the young adults who traditionally enter the housing market at whatever time in life society deems them as having "arrived;" and then their grandparents who once had a nice nest egg in their pension plans or advisor-assisted/controlled accounts, until they or their fund administrators were convinced to invest in MBS assets.

[Note: The foreclosure crisis will likely continue, according to this article: http://bit.ly/cs1Lof]

Then there's the commercial real estate sector, where many developers ran into their own bubbles, whether in retail, hospitality, office space, or some sort of commercial mixed-use concept.  Ultimately, rental rates skyrocketed to a point that small local businesses could no longer afford to expand (or else, they too ended up biting off more than they could chew), regional banks collapsed (or at least some of those remaining after the S&L crisis did), and national retail chains pulled back on their expansion plans before getting into too much trouble -- thus helping to accelerate the decline of speculatively developed small retail projects, which were a favorite of smaller regional development companies.

Now that the market has crashed and it has become a buyer's/renter's market again, debt and capital investment sources are scarce and employment opportunities have systematically declined in Arizona (yes, thanks largely to a non-diversified economy and uneducated workforce).  The often overlooked entrepreneurs who start up little sandwich shops or dry cleaners can no longer borrow against their homes as was the norm, and accomplished professionals of the baby boom generation who might venture out on their own lack the resources and market opportunities to justify the risk.

[Note: This article provides industry-specific numbers for job loss: http://huff.to/9UTP2n]

So we now have an entire population that feels victimized and powerless.  Worse yet, most people paying attention will observe that, without drastic changes to business as usual, the ones most likely to get in on the ground floor of an economic recovery are again the established elite.  This means that some form of social unrest should have been highly anticipated (as called for by Ravi Batra in The New Golden Age).

[Note: McCain doesn't appear genuinely interested in helping his constituents, and he's beginning to attract greater attention from national press for his lack of sincerity: http://bit.ly/aWNnZ6]

While I can't vouch for 100% accuracy of the above analysis, I will say that watching the scenario unfold in historically independent yet transient and growing Arizona is very interesting.  My affluent and educated gen X/Y cohorts see entrepreneurial opportunities all around them, while others view the world through a lens of outrage and seek a place to direct it.  But our best bet is for the two sides to agree on the most pragmatic and proactive idea, which fundamentally boils down to "hey, let's avoid this sort of calamity in the future."

This means investing in a sustainable local economy by supporting local businesses over national chains, thus helping prove the concept and push more money through our local economies.  It means balancing our state/municipal budgets while still investing in long-term growth and education programs to ensure an educated workforce and future economic opportunities. It means economic diversification, better planning, value engineering, etc.

It's a lot of hard work to fix what's broken; Palin's approach seems so much easier.