Third quarter earnings coming in above expectations, financial's still up from January levels. Some investment banks with all time high earnings but what is going on with real estate? The problem is that real estate doesn't work like other industries. As a matter of fact it is somewhat counter cyclical to the earnings growth cycles of corporate America. As growth accelerates real estate becomes more in demand and since the supply curve for real estate takes years to adjust (concept to construction completion is typically 5 yrs or more) there is always a lag in supply which creates profits in commercial real estate. Problem is that when the economy changes and demand drop quickly but supply reacts very slowly (look out your window I bet you still see cranes moving out there).
On top of this supply demand misalignment that will last many years to come. Real estate also has the problem of the inflated market due to external circumstances that started deflating quickly last year and will likely remain in deflation mode until all the mess is cleared up between bankers and developers. In the past 5 years the availability of capital has been a tremendous booster to property values. Essentially every real estate owner had a willing buyer for his real estate (a lender) that was paying great prices and had no negative tax implications. Example - developer owns apartment building with $100,000 of rent and lender would underwrite this to $65,000 in annual net income divide that by a 6 cap rate produces a value of $1.08M which the lender would give 80% of as a non-recourse loan netting $866,000 tax free. The alternative for an owner was to sell to someone paying a little less than what the bank valued the property for but after tax consequences the net to the owner was less on a sale then on a refinance. So what did every developer do? They financed as many dollars as they could from the property and looked at it as if they had sold the property. So in essence all the capital available through investment banks as securitzed lending created an artificial supply of buyers. When my company was trying to buy properties the past few years are biggest competition was not other buyers it was lenders knocking on doors and providing more net funds to an owner than we as a buyer were offering.
Well as everyone knows that demand disappeared very quickly in 08 and real estate values are reflecting that now and will be for some time to come. As I hope my example illustrates the economy as it sits right now has no real effect on real estate values and won't for years to come. So how does a real estate company survive in a market like this? Fortunately real estate unlike the stock market is not repriced every day so unless there is a major need for a valuation ( refinance or sale ) today's value doesn't matter much and the key is performance. As a real estate operator today's value is created in running the property as profitably as possible. At Signature Community we have had a single focus mindset on doing just that. Running apartment properties to maximize their operating cash flows. And the results are showing with properties running at higher occupancies than competing properties and working under a lower cost structure than the competition we maximize value in '09 and beyond.
Until Wall Street or China or some other provider of liquidity creates a new source of demand for real estate we will be stuck with lower property values so the only way to survive in 2010 let alone strive is to keep operations strong and profitable.
Thanks for making it happen at Signature.
Nick
Monday, October 26, 2009
Wednesday, October 21, 2009
Here is a very scary graph.
http://tipstrategies.com/archive/geography-of-jobs/
Nickolas W Jekogian
www.NWJCompanies.com
917 763 3500
Monday, October 19, 2009
Blindsided
On Wednesday evening last week the largest retailer in the world (Walmart) took a direct shot at the core of the largest Internet retailer in the world (Amazon) by drastically reducing prices on the top 200 books sold. The price reduction was a crazy 50% off obviously a loss leader move for Walmart. In press releases Walmart and Amazon have both stated that they will not be undersold in this category and will beat the competitors price which by Friday meant lowering prices by pennies and I think now books that once sold for $20 - $30 are now on sale for $8.99. Great for the consumer right? Maybe or maybe not.
Someone is definitely going to lose this fight and most likely it will be Amazon because they don't have the deep pockets that Walmart does (Walmart can probably give books away for free and still have no significant impact on its balance sheet). This fight is most likely not about books but more about another area of business that Amazon has started in (food, electronics, toys) so the results are likely to be a truce at some point and Amazon quietly backing out of an area that Walmart wants to dominate. This move obviously is not good for the consumers who will ultimately see less competition and higher prices.
What happens to Barnes and Noble, local independent books stores and even writers for that matter. Its going to be a very tough holiday season for book stores while their online competitors (Walmart is only offering this pricing on line) are selling at half what the local stores price is. Some stores will close others will just suffer through it. Barnes and Noble stock price has fallen 15% since last weeks announcement. Writers will likely be paid less advances because the long term margins are being reduced. Amazing the industry changing implications a decision by a few individuals in Arkansas has on the world.
At Signature Community we dealt with this on Sept 15, 2008. When the financials markets went into a tailspin and credit markets froze our industry came to a screeching halt. Deals stopped happening and everything went on hold for more than a year now. The general operating dynamics of our properties really hasn't changed much but the perceived value of our properties has diminished subst antially. Without financing real estate deals don't happen. Or if they do, they are substantially reduced in price. We are dealing with this as an industry and more importantantly as an operating company for the past year and probably for the foreseeable future. We were blindsided just like the book industry.
At Signature Community we have made profitable operations our number one focus. In the Summer we pushed our occupancy rates substantially higher then our competitors and in the fall of 2009 we have beed focused as a company on bringing our property level expense down by 5% which will put us substantially ahead of our competitors. We have garnered hundreds of ideas on cost cutting and efficiency gains at ideas@asignaturecommunity.com. (Please share your ideas today!)
Our industry was blindsided. However, as a company, we are taking advantage of this game changing scenario to make our business better and even grown our brand through acquisitions under a very different financial model.
There are two kinds of companies out there, the ones that stay down after being blindsided and the ones that grow because of it. Signature Community is in the later category and will be growing from the blindside impact.
Thanks for making it happen at Signature Community.
Nick
Someone is definitely going to lose this fight and most likely it will be Amazon because they don't have the deep pockets that Walmart does (Walmart can probably give books away for free and still have no significant impact on its balance sheet). This fight is most likely not about books but more about another area of business that Amazon has started in (food, electronics, toys) so the results are likely to be a truce at some point and Amazon quietly backing out of an area that Walmart wants to dominate. This move obviously is not good for the consumers who will ultimately see less competition and higher prices.
What happens to Barnes and Noble, local independent books stores and even writers for that matter. Its going to be a very tough holiday season for book stores while their online competitors (Walmart is only offering this pricing on line) are selling at half what the local stores price is. Some stores will close others will just suffer through it. Barnes and Noble stock price has fallen 15% since last weeks announcement. Writers will likely be paid less advances because the long term margins are being reduced. Amazing the industry changing implications a decision by a few individuals in Arkansas has on the world.
At Signature Community we dealt with this on Sept 15, 2008. When the financials markets went into a tailspin and credit markets froze our industry came to a screeching halt. Deals stopped happening and everything went on hold for more than a year now. The general operating dynamics of our properties really hasn't changed much but the perceived value of our properties has diminished subst antially. Without financing real estate deals don't happen. Or if they do, they are substantially reduced in price. We are dealing with this as an industry and more importantantly as an operating company for the past year and probably for the foreseeable future. We were blindsided just like the book industry.
At Signature Community we have made profitable operations our number one focus. In the Summer we pushed our occupancy rates substantially higher then our competitors and in the fall of 2009 we have beed focused as a company on bringing our property level expense down by 5% which will put us substantially ahead of our competitors. We have garnered hundreds of ideas on cost cutting and efficiency gains at ideas@asignaturecommunity.com. (Please share your ideas today!)
Our industry was blindsided. However, as a company, we are taking advantage of this game changing scenario to make our business better and even grown our brand through acquisitions under a very different financial model.
There are two kinds of companies out there, the ones that stay down after being blindsided and the ones that grow because of it. Signature Community is in the later category and will be growing from the blindside impact.
Thanks for making it happen at Signature Community.
Nick
Thursday, October 15, 2009
Riding in the rain
As most of you know I am an ironman level triathlete. This means that in my free time usually before 7am I swim a mile, bike a few hours or run 10 miles. I have dedicated a substantial amount of my free time over the past few years to these endourence events and feel that they help me in running my business. The following is one lesson I have learned in Ironman that equates to success in business or life.
The one thing I have learned and I think the most appropriate for todays economic environment is that an ironman is a long race (2.4 mile swim, 112 bike ride, 26.2 mile run) taking anywhere from 10 to 17 hours to complete. During that long day you will be faced with all kinds of challenges both expected and unexpected, kicked in the face by other swimmers, flat tires, rain, etc. The key to surviving an Ironman is not giving up. It really is that simple.
Business is really the same way. Everyday we are thrown new challenges; unemployment, credit freeze, loan calls, lenders taken over by feds, etc, etc. What makes a company sucessfull in these times is the persistence to keep going. Hit a problem, find a solution, implement, if it doesn't work try another.
When you are running the marathon section of an Ironman you are very tired, incorherent and in a lot of pain. The only thing that keeps you going is small goals. Sometime the most courage you can build up is the ability to get to the next aid station or even the light post 100 feet in front of you. You make that agreement with yourself that you will keep running till you make it there. You make it and then you focus on the next milestone. You do this for 4 hours striaght and somehow you get to the finish line. If you start thinking about the finish line too soon you will not make it. The feat is just too hard to comprehend in that state of mind and pain.
In business today I see the same things. There are so many macro problems with this country, the economy, and the real estate market that if we focus on them we are never going to get to the finish line. So we focus on the milestones (goals) we can visualize and reach quickly ( 90 days out). We set aggressive yet reachable quarterly goals and repeat them to ourselves (the organization) every moment possible. In an Ironman I can often be heard shouting at myself; "Make it to the light post. You can make it happen!" The organization is no different than a delussional runner at mile 135 in an Ironman. It needs to be heard over and over what the goal is and that it can make it.
At Signature Community we are thinking like Ironman competitors. We know we can't control the weather but we can make goals and make it to them. We then set reachable goals the next quarter and accomplish them. Our interim goal us continue this process until we are out of this economic mess. The long term goal of growing our brand will come in time when the opportuties are right but the short and interim goals we are hitting now will set us up well for these growth opportunities that are going to be available.
Thanks for making it happen at Signature Community.
-Nick
The one thing I have learned and I think the most appropriate for todays economic environment is that an ironman is a long race (2.4 mile swim, 112 bike ride, 26.2 mile run) taking anywhere from 10 to 17 hours to complete. During that long day you will be faced with all kinds of challenges both expected and unexpected, kicked in the face by other swimmers, flat tires, rain, etc. The key to surviving an Ironman is not giving up. It really is that simple.
Business is really the same way. Everyday we are thrown new challenges; unemployment, credit freeze, loan calls, lenders taken over by feds, etc, etc. What makes a company sucessfull in these times is the persistence to keep going. Hit a problem, find a solution, implement, if it doesn't work try another.
When you are running the marathon section of an Ironman you are very tired, incorherent and in a lot of pain. The only thing that keeps you going is small goals. Sometime the most courage you can build up is the ability to get to the next aid station or even the light post 100 feet in front of you. You make that agreement with yourself that you will keep running till you make it there. You make it and then you focus on the next milestone. You do this for 4 hours striaght and somehow you get to the finish line. If you start thinking about the finish line too soon you will not make it. The feat is just too hard to comprehend in that state of mind and pain.
In business today I see the same things. There are so many macro problems with this country, the economy, and the real estate market that if we focus on them we are never going to get to the finish line. So we focus on the milestones (goals) we can visualize and reach quickly ( 90 days out). We set aggressive yet reachable quarterly goals and repeat them to ourselves (the organization) every moment possible. In an Ironman I can often be heard shouting at myself; "Make it to the light post. You can make it happen!" The organization is no different than a delussional runner at mile 135 in an Ironman. It needs to be heard over and over what the goal is and that it can make it.
At Signature Community we are thinking like Ironman competitors. We know we can't control the weather but we can make goals and make it to them. We then set reachable goals the next quarter and accomplish them. Our interim goal us continue this process until we are out of this economic mess. The long term goal of growing our brand will come in time when the opportuties are right but the short and interim goals we are hitting now will set us up well for these growth opportunities that are going to be available.
Thanks for making it happen at Signature Community.
-Nick
Monday, October 5, 2009
Ideas
The potential of the average person is like a huge ocean
unsailed, a new continent unexplored, a world of possibilities waiting to
be released and channeled toward some great good. - Brian Tracy
As leaders our job is to take all the great potential bottled up in our organization, its social network, business network and other great ideas both in and out of the industry and deploy them in a manner that is both economically and politically feasible. As your leader, it is what I have spent most of my adult life trying to master.
How do we gather the great ideas of the organization? Most companies don't even have a process to hear the ideas of their people. Second how do you act on those ideas when everyone has a different idea of where the ship should be going? That's where the art of leadership comes in.
"You can't direct the wind, but you can adjust your sails." - German proverb
In today's economy, the leaders job is not to guess the next change of the wind (predict and prepare), the leader’s job is to create an agile organization that can react to "the winds of change" with the speed of an agile sailing team. A system that promotes team involvement and idea sharing so that the ideas created by people on the front line can be implement quickly at all levels. Any sailor will tell, you can't stay ahead of the wind, but if your team reacts quickly enough to the changing winds you will win the race.
At Signature Community, we set out to create systems in our organization that allow us to work quickly in a changing environment and react to the changing "winds". Our latest advancement in that process is ideas@asigaturecommunity.com. This is our brainstorming site that allows everyone in the organization to share their ideas to help us "Thrive in 2010". The ideas we have seen so far have been amazing. Ideas that could never be thought of in the corporate office in NY. Keep them coming!
We have even opened up our ideas@assignaturecommunity.com idea exchange to our vendors and residents for their ideas on how to make our communities a better place to live and work.
In times where we really have no idea what the immediate future holds it is good to know that we have great people helping us trim our sails to deal with these turbulent times.
Thanks everyone for making it happen at Signature Community and please share your ideas at ideas@asignaturecommunity.com.
Nick
unsailed, a new continent unexplored, a world of possibilities waiting to
be released and channeled toward some great good. - Brian Tracy
As leaders our job is to take all the great potential bottled up in our organization, its social network, business network and other great ideas both in and out of the industry and deploy them in a manner that is both economically and politically feasible. As your leader, it is what I have spent most of my adult life trying to master.
How do we gather the great ideas of the organization? Most companies don't even have a process to hear the ideas of their people. Second how do you act on those ideas when everyone has a different idea of where the ship should be going? That's where the art of leadership comes in.
"You can't direct the wind, but you can adjust your sails." - German proverb
In today's economy, the leaders job is not to guess the next change of the wind (predict and prepare), the leader’s job is to create an agile organization that can react to "the winds of change" with the speed of an agile sailing team. A system that promotes team involvement and idea sharing so that the ideas created by people on the front line can be implement quickly at all levels. Any sailor will tell, you can't stay ahead of the wind, but if your team reacts quickly enough to the changing winds you will win the race.
At Signature Community, we set out to create systems in our organization that allow us to work quickly in a changing environment and react to the changing "winds". Our latest advancement in that process is ideas@asigaturecommunity.com. This is our brainstorming site that allows everyone in the organization to share their ideas to help us "Thrive in 2010". The ideas we have seen so far have been amazing. Ideas that could never be thought of in the corporate office in NY. Keep them coming!
We have even opened up our ideas@assignaturecommunity.com idea exchange to our vendors and residents for their ideas on how to make our communities a better place to live and work.
In times where we really have no idea what the immediate future holds it is good to know that we have great people helping us trim our sails to deal with these turbulent times.
Thanks everyone for making it happen at Signature Community and please share your ideas at ideas@asignaturecommunity.com.
Nick
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