This is a continuation of another post about a presentation by Hugh Kelly, PhD, a renowned professor at NYU and the 2014 Chair of the prestigious Counselors of Real Estate organization. I always enjoy Hugh because he’s got a great sense of humor, so he can take a dry topic and twist it into something with substance and wit. This year was no exception with his presentation entitled, “Yo! We got Issues?”
This presentation invited audience participation and since I have always been known for being a teacher’s pet, my commentary will be interspersed throughout. So, here we go on the top 5 issues facing commercial real estate according to the Counselors of Real Estate.
#5 – Infrastructure
“Invincible Ignorance” was Hugh’s slide on this one. The American Society of Civil Engineers gave the U.S. a D+ on infrastructure. Almost 1/3 of the U.S. population lives on one of our coasts. How are we going to deal with these issues – not just from natural disasters like hurricanes, earthquakes and the like, but bridge collapses that have occurred over the past several years? The Miami audience participation was interesting because we have mixed results here. Our water and sewer system is abysmal and Miami Beach is slowing sinking on one hand. Then we have the Port of Miami tunnel and deep dredge projects coupled with extensive highway work on the 836/826 exchange. That only names a few of the projects. My take: Miami ranks a bit better than a D+, perhaps a C-.
#4 – Are You Talking to Me? Generational Conflicts
“Language, Truth and Intergenerational Logic” was Hugh’s slide. By 2030 (a mere 16 years from now), Millennials will outnumber Boomers by 22 million. Currently we have 21.6 million Millennials (36%) living with their parents. 17% of adults between the ages of 25 and 31 still live at home with their parents.
This led to a general discussion on generational stresses and unresolved conflicts. These stresses/conflicts include the entitlement debate, jobs, debt for young adults, and housing to name a few. Is this generational conflict any different from earlier generation gaps? We also discussed the teen-age generation, “Generation Z”, and their differences from the other generations.
All of this feeds into how the various generations work, live and play – all of which impact commercial real estate.
#3 Déjà vu All Over Again?
Apparently there are quite a few people out there that are suffering from “bubble-phobia”, a free-floating anxiety that we will be going right back into hard times. On this topic, Hugh recommended the book, Short History of Financial Euphoria. Then Hugh dug into some numbers to allay those phobics in the audience.
According to Hugh, the cap rates in 2013 are approaching those of 2006 levels. The apartment and hotels per unit price is already higher than 2007 with office and retail sectors approaching prior peaks. In 2013, the stock market went up 27% for the Dow and 38% for Nasdaq. Housing prices once again, according to Case-Shiller index, increased double digits (13.6%). Real Capital Analytics show the commercial property price indices up 13.9% year over year.
Just as the bubble phobics reached for their Xanax, Hugh offered up sensible advice. His advice is that typical for this portion of the cycle: watch your debt/leverage. Have discipline and structure. Pick sound assets that fit your criteria (in other words, stick to what you know). He did acknowledge that in this cycle, we have had the lowest amount of additions to inventory for some product types. We need these additions in order to replace obsolete product. But he has no worry on that front because of developers DNA which translates to Developers Need Action.
#2 – Reliance on Institutionalization
In other words, we cannot continue to rely and “Eds and Meds” to be our growth drivers. Education and Medical organizations have been the most steeply rising employment cluster for the past seven decades. The Brookings Institute believes that this is an anchor for economic growth because these two (eds and meds) cause spin-off jobs. Other economists are saying that this growth needs to flatten.
In Florida, we have also been dependent on construction and tourism in addition to the eds and meds. This past week I have heard several people spouting the statistic that one job is created for every 85 tourists. I’ll refrain from the debate on the wages of those tourism jobs. I do agree that many cities rely on this institutionalization for economic growth. Some are dependent on energy, others on technology, others are “eds and meds” devotees.
Miami is a small tenant market for the most part. I was going to quantify it to office, but as I thought about it, that trend crosses all lines – retail, office and industrial. We are a city of entrepreneurs and regional offices with very, very few headquarters based here. That is both our salvation and our weakness. During 2008 – 2010, many corporations closed up their Miami offices. Some moved the employees back to the headquarters or had them telecommute…or laid them off. Many entrepreneurs gave up their office and worked out of their house until things improved. So, Hugh, we here in Miami don’t have to worry too much on this one.
#1 – Going to Extremes – Losing Ground in the Second Gilded Age
Currently, according to Hugh, 35% of consumer spending is by the top 5% of households. In 2000, it was 20%. The top 20% of households account for 67% (2/3) of personal consumption and consumer spending. In 2000, the top 20% of households accounted for 50% of consumer spending.
Let’s keep politics out of this for the moment because now we are talking about income inequality. I have heard both sides of this debate including a recent conference hosted by the Job Creators Network that featured former Gov. Jeb Bush and current Gov. Rick Scott as keynote speakers. Let’s get back to Hugh’s argument.
Hugh said that both Alan Greenspan and Paul Krugman see income inequality as a threat to a democratic society. Hugh joked that they never agree on anything, so this must mean something. He went on to quote statistics, provided by the CIA, that the U.S. ranks behind Cameroon and the Philippines in income equality and just barely ahead of Uruguay and Bulgaria. New York, Miami, Los Angeles, Houston and San Francisco lead the country in income inequality. Minneapolis, Kansas City, Salt Lake City, Seattle and Portland are the lowest ranked cities in income inequality.
He went on to recognize that income mobility is a key factor to consider on this issue. We are fortunate because Miami ranks among the top 3 cities for good opportunities for income mobility (New York and San Francisco are the other two). Miami has a 1 in 14 chance to improve as compared to Altanta, Charlotte, Cincinnati and Milwaukee who all have a 1 in 25 chance.
Hugh closed with the thought, “Real Estate is more than a physical and financial asset”. Very true. Thank you, Hugh, for another lively presentation that leaves me still thinking about it.