http://www.forbes.com/finance/forbes/2008/1208/182.html
Leverage and PainA. Gary Shilling 12.08.08, 12:00 AM ET
Painful financial deleveraging has given us an excruciating global recession. It may cause even deeper pain ahead. The slashing of borrowing comes after spectacular buildups in the financial and consumer sectors. The combined debt and equity of U.S. financial institutions went from 10% of gross domestic product in 1973 to 118% at the end of 2007. Over the same period household debt, including mortgages, rose from 45% of GDP to 98%. Is it any surprise that this borrowing binge ended in a credit crisis?
The ending of a credit crisis entails deleveraging, which is to say, the liquidation, repayment or cancelation of debt. This process engenders pain.
Consumers dropped their saving rate from 12% in the early 1980s to zero 20 years later. They did this while persuading themselves that watching a rising stock portfolio or living in an appreciating house was a form of saving. The stock market crash at the turn of the century did not bring them to their senses, because by then the house price boom was under way. Now there's no asset left with which to play the savings fantasy game.
Stocks are not much higher than they were at the 2002 bottom. Houses are en route to what I forecast will be a 37% peak-to-trough falloff. Consumers are tapped out. Their credit cards are maxed out, and home equity lending is dead. Heavy borrowing pushed their equity in autos and other durables from 60% in the early 1990s to 40% today. Their $3 trillion in 401(k) plans at the end of 2007 has taken a beating as stocks have swooned.
So people are shrinking their discretionary outlays on everything from motorcycles to liquor. They're replacing a 25-year borrowing and spending binge with a saving spree. Over the last quarter-century consumer spending grew an average of one-half a percentage point per year faster than aftertax income, adding about a third of a percentage point to GDP growth. For the next decade spending is likely to rise a percentage point slower than income each year.
Consumer spending constitutes 70% of GDP, and the effect of that restraint is multiplied as it ripples through the economy. As a result real GDP growth will drop by a full percentage point from its earlier 3% rate to 2%.
The saving spree will be reinforced by the fact that baby boomers desperately need to save for retirement, while those in their 20s and 30s, typically big spenders as they form households, are much fewer in number. The threat of deflation also depresses consumer spending. People are waiting for lower prices before buying houses, and they'll wait to buy other things, too.
Capital spending will also be subdued, as slowing growth makes for excess capacity. Forget exports as a source of strength. American consumer restraint will slow imports, hurting foreign lands that depend on the U.S. for export growth and depressing their own demand for American products. Hence the clamor these days for government spending as a form of stimulus.
The BRIC quartet (Brazil, Russia, India and China) and other developing countries will sink like bricks as their exports drop and as commodity prices collapse, driven down by both enfeebled global demand and the end of the delusion that commodities are an asset class like stocks and bonds. China doesn't have a big enough middle class of free spenders to offset export weakness there (see my May 19 column, "Chinese Chance"), and the end of the oil boom will slash Middle East economic growth and hobble the petroleum-addled dictators of Venezuela and Russia.
Deleveraging threatens economic growth in many countries that have depended on Western bank generosity. Iceland is bust. Baltic nations, and eastern European ones like Hungary, are in for years of sluggish growth, with homeowners no longer able to borrow cheap money abroad. Argentina, already a pariah to international lenders, is setting an ugly precedent in grabbing its private pension funds to repay its debt.
The demise of securitization and other derivatives and the return to basic banking--lending prudently at profitable interest rates--will reduce credit availability for years and subdue economic growth. Big firms can't float commercial paper; little ones can't get bank loans to meet their payrolls. The accelerating consolidation of financial institutions will eliminate many risk-taking lenders, and entrepreneurs will be inhibited by the scarcity of venture capital money.
So even after the financial crisis and recession end, maybe by 2010, slow economic growth and poor profits are likely to drag on. Don't be in a rush to buy stocks.
A. Gary Shilling is president of A. Gary Shilling & Co., economic consultants and investment advisers.
Wednesday, November 26, 2008
Monday, November 24, 2008
Economic Update
As many of you know NWJ/Signature community was forced to make job cutbacks last week.
Many of the job cuts were in markets where we had more personnel than necessary and we feel that the remaining workforce can more than handle the overflow work.
The cuts were obviously not desired but needed to deal with the impending difficult times we will be dealing with in the coming months of this economic downturn. As I have mentioned in this blog over the past few months the economy is turning significantly worse and there does not seem to be a quick end in sight. We as a company need to band together to deal with these issues. We have made numerous changes at the regional manager levels, stabilization levels and in the corporate offices and anticipate that these changes will leave us much better equipped to weather the rough economic seas ahead of us.
We do need your ideas and help to find other ways to help deal with the impending difficulties that are already wreaking havoc on our resident base and their lives. Remember that Signature Community is a lifestyle brand and as such we must do whatever we can to make our residents lives better. Some times that involves cooking steak dinners or supplying free cable tv or at times it may be providing hot dogs or canned goods to our less fortunate residents or allowing them to do small jobs to help pay the rent.
These are bad times for everyone and we as a company must find ways to help our residents survive it.
Again please share your ideas and thoughts.
Thanks for making it happen.
Nick
Many of the job cuts were in markets where we had more personnel than necessary and we feel that the remaining workforce can more than handle the overflow work.
The cuts were obviously not desired but needed to deal with the impending difficult times we will be dealing with in the coming months of this economic downturn. As I have mentioned in this blog over the past few months the economy is turning significantly worse and there does not seem to be a quick end in sight. We as a company need to band together to deal with these issues. We have made numerous changes at the regional manager levels, stabilization levels and in the corporate offices and anticipate that these changes will leave us much better equipped to weather the rough economic seas ahead of us.
We do need your ideas and help to find other ways to help deal with the impending difficulties that are already wreaking havoc on our resident base and their lives. Remember that Signature Community is a lifestyle brand and as such we must do whatever we can to make our residents lives better. Some times that involves cooking steak dinners or supplying free cable tv or at times it may be providing hot dogs or canned goods to our less fortunate residents or allowing them to do small jobs to help pay the rent.
These are bad times for everyone and we as a company must find ways to help our residents survive it.
Again please share your ideas and thoughts.
Thanks for making it happen.
Nick
Tuesday, November 18, 2008
Apartment Sector Facing Tough Times But Should Weather Storm
Apartment Sector Facing Tough Times But Should Weather Storm
By Dawn Wotapka Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)-
Multifamily investors better brace for a bumpy ride over the next several quarters, thanks to massive job losses that ended the sector's bull run with a thud.
However, those able to withstand the turbulence will benefit from reduced new supply, a decline in home ownership rates and a surge in the key apartment renting age group. For now, mounting unemployment is set to curtail rent increases and edge up vacancy rates, likely depressing net operating income to flat or negative levels next year. The pain could be more pronounced for more upscale operators including Post Properties (PPS) and AvalonBay Communities (AVB), which recently said it was "increasingly cautious" regarding next year's outlook. The hurt is being felt. From September to October, occupancy rates slipped 0.3% and effective rent fell 0.8% in the top 20 markets, according to UBS, with the biggest monthly drops seen in Denver, San Diego and Las Vegas.
"The sector's fundamentals are weakening more quickly than anticipated," research firm Green Street Advisors said. "...While the prospect of negative [net operating income] growth for the sector in '09 seemed unlikely earlier this year, it is a scenario that now appears increasingly likely." That is because unemployment is essential to the sector. Operators count on college graduates getting their first place, new hires relocating, and those promoted upgrading into nicer digs. Post-pink-slip tenants find roommates, move home or find cheaper deals - downgrading from A-level to B-level apartments - scenarios becoming more common as the financial crisis roils the globe. October's unemployment rate hit 6.5% - the highest in years - and could top 8% by the end of next year. The 25-to-34-year-old age group, prime renters, has been particularly hard hit. Layoffs have battered every sector - media, telecom, financial - and apartments haven't been spared. Camden Property Trust (CPT) recently announced the first cuts in its history, with 79 positions shaved from corporate and regional staff and on-site positions. "Heavy job losses are exacting a toll on the sector," Green Street said. "The weak employment picture now appears to be overpowering the favorable rent-to-own dynamics that have been prevalent over the last several years and has cast a dark cloud over the '09 and '10 growth picture." The firm's most recent estimates for apartment REIT revenue growth average 2.7% for 2009 and 2.0% for 2010. But these numbers now "appear too rosy in light of the reality on the ground today and the rapidly deteriorating economic outlook. More likely, '09 revenue growth will be only half that large." Stephen Swett, a Keefe, Bruyette & Woods analyst, says revenue and net operating income growth could turn negative next year, depending on just how weak the economy gets. Richard Anderson, a REIT analyst at BMO Capital Markets, said same-store net operating income growth is likely to be negative for many players. Rent increases should be minimal, as operators work to keep current tenants, and incentives will increase to attract new ones.
Of course, few expect vacancy rates to dip below 90% anytime soon. "On the margin, vacancy will get worse, but the reality is they could just cut prices to fill units," Anderson said. Until recently, apartments were a star performer in REIT world, buoyed by access to financing via Fannie Mae (FNM) and Freddie Mac (FRE), both now under government control, but the capital remains. Back in August, the sector's year-to-date return topped 20%.
Times have changed. As of Wednesday, the apartment sector was down nearly 20% month-to-date, and more than 41% quarter-to-date, according to the National Association of Real Estate Investment Trusts. That is compared with 23% and 47% for the overall sector. Such reversals don't have industry watchers too concerned. Restricted construction lending has slowed new starts to a trickle nationwide. Issued permits have fallen by more than half since June, so little competition is in the pipeline.
In September, an annualized seasonally adjusted 233,000 construction permits were issued for five or more units, down from 489,000 in June, said BMO's Anderson. But not all permitted apartments are actually built, and that number is likely to fall further, he added.
"The actual start relative to permits is going to be significantly lower than it normally is," Anderson said. "You can say very clearly that new starts are going to decline drastically." Meanwhile, as the single-family market downturn deteriorates - prices are crumbling with mortgages increasingly hard to obtain - fewer tenants are fleeing to buy houses, something Mid-America Apartment Communities (MAA) noted in its most recent conference call. Camden Property Trust, meanwhile, highlighted the baby boom "echo" that is producing "many more" 18- to 24-year olds than the previous cycle. These younger renters are eschewing sprawling McMansions, favoring a mobile lifestyle that lets them live, work and shop in the same areas.
"When job growth returns, there will be significant pent up demand," said Richard Campo, Camden Property's chairman and chief executive officer, said in a recent earnings call. "We believe that there will be a shortage of multi-family units beginning in late 2010 and through 2013." Such optimism is enough to keep some investors in the pay-by-the-month game. Jay Leupp, whose Grubb & Ellis AGA Realty Income Fund has nearly 15% of its holdings in the sector, said: "We like apartments." -By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary:
http://www.djnewsplus.com/al?rnd=1bP0hrf3cEF8XItNaEuUZQ%3D%3D. You can use this link on the day this article is published and the following day.
By Dawn Wotapka Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)-
Multifamily investors better brace for a bumpy ride over the next several quarters, thanks to massive job losses that ended the sector's bull run with a thud.
However, those able to withstand the turbulence will benefit from reduced new supply, a decline in home ownership rates and a surge in the key apartment renting age group. For now, mounting unemployment is set to curtail rent increases and edge up vacancy rates, likely depressing net operating income to flat or negative levels next year. The pain could be more pronounced for more upscale operators including Post Properties (PPS) and AvalonBay Communities (AVB), which recently said it was "increasingly cautious" regarding next year's outlook. The hurt is being felt. From September to October, occupancy rates slipped 0.3% and effective rent fell 0.8% in the top 20 markets, according to UBS, with the biggest monthly drops seen in Denver, San Diego and Las Vegas.
"The sector's fundamentals are weakening more quickly than anticipated," research firm Green Street Advisors said. "...While the prospect of negative [net operating income] growth for the sector in '09 seemed unlikely earlier this year, it is a scenario that now appears increasingly likely." That is because unemployment is essential to the sector. Operators count on college graduates getting their first place, new hires relocating, and those promoted upgrading into nicer digs. Post-pink-slip tenants find roommates, move home or find cheaper deals - downgrading from A-level to B-level apartments - scenarios becoming more common as the financial crisis roils the globe. October's unemployment rate hit 6.5% - the highest in years - and could top 8% by the end of next year. The 25-to-34-year-old age group, prime renters, has been particularly hard hit. Layoffs have battered every sector - media, telecom, financial - and apartments haven't been spared. Camden Property Trust (CPT) recently announced the first cuts in its history, with 79 positions shaved from corporate and regional staff and on-site positions. "Heavy job losses are exacting a toll on the sector," Green Street said. "The weak employment picture now appears to be overpowering the favorable rent-to-own dynamics that have been prevalent over the last several years and has cast a dark cloud over the '09 and '10 growth picture." The firm's most recent estimates for apartment REIT revenue growth average 2.7% for 2009 and 2.0% for 2010. But these numbers now "appear too rosy in light of the reality on the ground today and the rapidly deteriorating economic outlook. More likely, '09 revenue growth will be only half that large." Stephen Swett, a Keefe, Bruyette & Woods analyst, says revenue and net operating income growth could turn negative next year, depending on just how weak the economy gets. Richard Anderson, a REIT analyst at BMO Capital Markets, said same-store net operating income growth is likely to be negative for many players. Rent increases should be minimal, as operators work to keep current tenants, and incentives will increase to attract new ones.
Of course, few expect vacancy rates to dip below 90% anytime soon. "On the margin, vacancy will get worse, but the reality is they could just cut prices to fill units," Anderson said. Until recently, apartments were a star performer in REIT world, buoyed by access to financing via Fannie Mae (FNM) and Freddie Mac (FRE), both now under government control, but the capital remains. Back in August, the sector's year-to-date return topped 20%.
Times have changed. As of Wednesday, the apartment sector was down nearly 20% month-to-date, and more than 41% quarter-to-date, according to the National Association of Real Estate Investment Trusts. That is compared with 23% and 47% for the overall sector. Such reversals don't have industry watchers too concerned. Restricted construction lending has slowed new starts to a trickle nationwide. Issued permits have fallen by more than half since June, so little competition is in the pipeline.
In September, an annualized seasonally adjusted 233,000 construction permits were issued for five or more units, down from 489,000 in June, said BMO's Anderson. But not all permitted apartments are actually built, and that number is likely to fall further, he added.
"The actual start relative to permits is going to be significantly lower than it normally is," Anderson said. "You can say very clearly that new starts are going to decline drastically." Meanwhile, as the single-family market downturn deteriorates - prices are crumbling with mortgages increasingly hard to obtain - fewer tenants are fleeing to buy houses, something Mid-America Apartment Communities (MAA) noted in its most recent conference call. Camden Property Trust, meanwhile, highlighted the baby boom "echo" that is producing "many more" 18- to 24-year olds than the previous cycle. These younger renters are eschewing sprawling McMansions, favoring a mobile lifestyle that lets them live, work and shop in the same areas.
"When job growth returns, there will be significant pent up demand," said Richard Campo, Camden Property's chairman and chief executive officer, said in a recent earnings call. "We believe that there will be a shortage of multi-family units beginning in late 2010 and through 2013." Such optimism is enough to keep some investors in the pay-by-the-month game. Jay Leupp, whose Grubb & Ellis AGA Realty Income Fund has nearly 15% of its holdings in the sector, said: "We like apartments." -By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary:
http://www.djnewsplus.com/al?rnd=1bP0hrf3cEF8XItNaEuUZQ%3D%3D. You can use this link on the day this article is published and the following day.
Monday, November 17, 2008
The Economy in 2009
A new President will be taking office in January. President Elect Obama faces economic troubles not see since FDR took office. His first task will be to create jobs. And create them fast. We need a"New Deal" for the 21st century. If jobs are not created in short order, then the high unemployment that President Bush will be leaving him with (my guess is 8-9% when January's numbers are announced) will grow at a historic rate and is likely to leave this country and possibly the world economy in a depression.
People just don't seem to understand how bad the economy is. Look at it this way. For the past 5 years, if you eliminate the "perceived"gains in home real estate values, then the US population made no increase in earnings. But US spending was substantially up. How is that possible? It was through the invention of home equity loans and easy credit. How many of you know people who's lifestyles we refinanced through the rising equity in their homes. This phenomena created almost all the jobs in our economy over the past few years(auto workers, retail workers, home builders, etc) was all driven by this "Perceived" rise of housing values. The short term problem is that all this housing mania was a bubble that has now burst. Real estate prices are almost to the levels that they belong (historic averages, relative to rents, etc). That is the short term problem that $700 Billion is being pumped into the lenders to help fix. But let's talk about the long term problem.
What happens next year or the following year for that matter. Since the US economy was really only growing with increased real estate values what happens when we don't have that option. How are people going to buy things? Think again to your friends that bought everything on home equity loans how are they going to pay for vacations this year?
Realize, I am not just talking about people making $30k year or $50k year I know people making $1MM year that were still using their home equity to furnish their lifestyle. This problem spans the entire US economy and has very long term effects on the US economy. It is very likely that Obama is dealing with this problem in the 2012 election.
So what does this mean for you, me and the company. First we better get use to slow economic growth. The age of fast growth and affluence is gone for now. Second, we better make sure that we are seen as an affordable alternative to high priced brands. Third, think before you spend whether it is for personal expenditures or for the company. We need to see if there is a less expensive option. Watch your budget.Its going to be a long difficult four years and everyone needs to plan accordingly. We can weather this storm together, but it will take smart decision making and careful attention to the bottom line.
Thanks for Making it Happen!
Nick
People just don't seem to understand how bad the economy is. Look at it this way. For the past 5 years, if you eliminate the "perceived"gains in home real estate values, then the US population made no increase in earnings. But US spending was substantially up. How is that possible? It was through the invention of home equity loans and easy credit. How many of you know people who's lifestyles we refinanced through the rising equity in their homes. This phenomena created almost all the jobs in our economy over the past few years(auto workers, retail workers, home builders, etc) was all driven by this "Perceived" rise of housing values. The short term problem is that all this housing mania was a bubble that has now burst. Real estate prices are almost to the levels that they belong (historic averages, relative to rents, etc). That is the short term problem that $700 Billion is being pumped into the lenders to help fix. But let's talk about the long term problem.
What happens next year or the following year for that matter. Since the US economy was really only growing with increased real estate values what happens when we don't have that option. How are people going to buy things? Think again to your friends that bought everything on home equity loans how are they going to pay for vacations this year?
Realize, I am not just talking about people making $30k year or $50k year I know people making $1MM year that were still using their home equity to furnish their lifestyle. This problem spans the entire US economy and has very long term effects on the US economy. It is very likely that Obama is dealing with this problem in the 2012 election.
So what does this mean for you, me and the company. First we better get use to slow economic growth. The age of fast growth and affluence is gone for now. Second, we better make sure that we are seen as an affordable alternative to high priced brands. Third, think before you spend whether it is for personal expenditures or for the company. We need to see if there is a less expensive option. Watch your budget.Its going to be a long difficult four years and everyone needs to plan accordingly. We can weather this storm together, but it will take smart decision making and careful attention to the bottom line.
Thanks for Making it Happen!
Nick
Monday, November 3, 2008
Positive Encouragement to get over the Finish Line
Lately, the mood in New York has been bleak. But this Sunday was different. This Sunday was the NY City Marathon. Every year this proves to be an inspirational and engaging event for millions. This year was no different.
On Sunday morning, I jumped on a bus and rode to the farthest reaches of the city in preparation of my fifth running of the NYC marathon. With little training and some nagging recent injuries, I wasn't at all prepared for this undertaking. But I did know, that somehow, I would survive. Mainly because I knew the incredible energy created by the positive spirit of the 2 Million spectators would carry me and 40,000 other runners over the finish line.
I was speaking with another CEO after the race and the one thought we both had was how much easier our jobs would be if the positive attitude expressed to us from strangers along the sides of the road race was available to us in our business lives. Imagine how things would flow if residents, co workers, supervisors, spouses, and significant others where cheering for us everyday telling us "You can do it", "You got it" "Almost there", "Looking good!" "You're the Man!","You go girl!" "Make it happen!", "Great job".
My challenge to you is to make our organization like a marathon cheering session. Help your residents, co-workers, anyone you meet accomplish their goals of the day by just giving a few extra words of encouragement. Use the words above or add some of your own. But make it positive and Wow them.
In economic times like these, when we can't open the paper or watch the news without seeing more negative news, we need more positive motivation.
For this weeks Wow awards please be ready to discuss the positive encouragement you gave and received this week.
Thanks for Making It Happen!
On Sunday morning, I jumped on a bus and rode to the farthest reaches of the city in preparation of my fifth running of the NYC marathon. With little training and some nagging recent injuries, I wasn't at all prepared for this undertaking. But I did know, that somehow, I would survive. Mainly because I knew the incredible energy created by the positive spirit of the 2 Million spectators would carry me and 40,000 other runners over the finish line.
I was speaking with another CEO after the race and the one thought we both had was how much easier our jobs would be if the positive attitude expressed to us from strangers along the sides of the road race was available to us in our business lives. Imagine how things would flow if residents, co workers, supervisors, spouses, and significant others where cheering for us everyday telling us "You can do it", "You got it" "Almost there", "Looking good!" "You're the Man!","You go girl!" "Make it happen!", "Great job".
My challenge to you is to make our organization like a marathon cheering session. Help your residents, co-workers, anyone you meet accomplish their goals of the day by just giving a few extra words of encouragement. Use the words above or add some of your own. But make it positive and Wow them.
In economic times like these, when we can't open the paper or watch the news without seeing more negative news, we need more positive motivation.
For this weeks Wow awards please be ready to discuss the positive encouragement you gave and received this week.
Thanks for Making It Happen!
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