Landmark Links May 4th – No Margin for Error

Lead Story….  Sam Zell was his typically blunt self earlier this week when he spoke at the NYU’s Schack Institute of Real Estate’s REIT Symposium.  I found his comments about warehouse and industrial distribution space to be particularly interesting:

“My guess is that it’s getting too exciting. We’re building too much industrial space … We’ve got a lot of people owning a lot of industrial space today, and I’m not sure there are enough tenants.”

Being that our office is located in Orange County, CA we are pretty close to the epicenter of prime distribution markets in the US.  Due to it’s proximity to the Ports of LA and Long Beach, the Western Inland Empire industrial sub-market is widely considered to be the strongest in the US if not the world.  Over the past few years, market dynamics have remained incredibly strong and vacancy in that market is in the very low single digits.  Every major retailer and logistics operator has jumped in with both feet.  Land that would have sold at $15/sf just a few short years ago is now valued at close to $30/sf.  Yes, rents have increased as well but with land and construction costs soaring, the yields on new class A product have begun to resemble Treasury bonds in certain cases.

The markets closer to the coast are in a similar situation, albeit for different reasons.  For years, industrial buildings in Orange County and much of LA County that went on the market were purchased by residential developers, demolished and re-developed as apartments or for sale homes.  The buildings that weren’t bought by residential developers typically either sold to owner-users or 1031 exchange buyers.  As a result, there has been very little new product built in these markets.  With supply dwindling but demand remaining stubbornly high, prices have pushed through the roof.  We are starting to see select cases where the previously inconceivable scenario of industrial developers outbidding residential developers has become a reality.

This recent industrial market activity in California runs more than a bit counter to Sam Zell’s statement above.  it certainly doesn’t seem as though Southern California is  experiencing the overbuilt condition that he referenced above considering the dwindling supply and almost non-existent vacancy in the market today.  However, we seem to have reached a point where the market is priced to perfection and any upward movement in vacancy or downward movement in rents will be exacerbated by the incredibly tight underwriting required to make a Southern California industrial development pencil in the current environment.  Well-located class-A industrial property appears to have entered the phase where no yield is too low from an investor/developer standpoint and the asset class is largely viewed as safe money – taking the baton that multi-family has held for several years.

It seems to me that this is the point of the market cycle that should warrant the most caution since underwriting assumptions are now aggressive to the point that they are getting difficult to achieve, even under the best conditions.  But here’s the rub: much like what we are seeing in the residential market, it’s very difficult to have a market correction without excess supply.  The prime industrial markets in California have sub 2% – in some cases sub 1% vacancy.  In addition, the coastal markets have been losing square footage – for example, Orange County has lost around 7 million square feet of industrial space in the past 15 years – rather than getting overbuilt.  It’s easy to look at astronomical prices and thin returns and assume that the market is topping out.  It’s considerably more challenging to figure out what will cause supply to increase to the point where it causes prices to peak.  In closing, I don’t doubt Mr Zell when he says that there are markets where distribution space is getting overbuilt but Southern California is not one of them.


End of an Era: Over the past decade, Americans have enjoyed the rare trifecta of soaring stocks, cheap loans and low inflation.  However, that appears to be coming to an end.

Unsustainable: California’s pension crisis is bad and only getting worse as municipalities cut back on services to cover shortfalls yet CalPERS continues to forecast an absurd 7% per annum return.  If this is what things look like seven years into a recovery, I can’t wait to see what the next recession will bring.

Stay Calm: Although the yield curve is flattening, it’s probably not yet time to worry about an actual inversionSee Also: Why bigger deficits don’t always mean disaster.

Tale of the Tape: Federal Reserve officials worry that the economy is too good yet workers still feel left behind.

Crystal Ball: Perhaps the best way to spot the next financial crisis is to look at who was spared by the last one.  Under this theory, Australia, Canada and other countries who benefited from the lowest global interest rates in history, without first suffering the economic meltdown that led the US and Europe to take emergency action could be in for some challenging times.


Back to the Future: How falling retail rents coupled with rising online advertising and shipping rates could lead to a resurgence in brick and mortar retail.

Shocking: That WeWork bond offering that I trashed last week is already trading down to 95 cents on the dollar.

Changing their Stripes: The new tax law has REITs that are trading at a substantial discount to NAV pondering the previously unthinkable – converting to C Corps.


On The Ledger: SoFi’s former CEO has raised $50MM and lined up with two global banks to launch a home equity loan startup backed by blockchain technology that promises to streamline approvals and property information.

Infuriating: A 67 year old woman in New York got an ill 85-year old man to adopt her on his death bed so that she could inherit his succession rights to a $1,500/month rent controlled apartment that is locked in at $100/month.  She now rents it out to guests for $50/night on AirBnB.  This is yet another example of why rent control always fails to meet its stated objective

Gaining Traction: Loans backed by single family homes newly-constructed with the intent to rent are starting to gain traction in the securitization market.


Cash Crop: How dysfunctional federal banking laws governing with marijuana business restarted a conversation about public banking in America that can appeal to both conservatives and liberals alike.

Burn Rate: Tesla doesn’t burn fossil fuels but it sure does have a knack for burning through cashSee Also: Experts say Tesla has repeated car industry mistakes from the 1980s.

Scrubbed: Youtube is trying to fix the mess that it made by allowing its algorithms to promote propaganda, dangerous hoaxes and videos of tasered rats.  However, that same promotion of questionable material also made it a massive financial success.

Chart of the Day

The trailing twelve month average of median new home sale prices in the United States reached a new high in March 2018, where preliminary data puts that figure at $326,217.

At the same time, the value of the typical new home sale price in the U.S. is 5.57 times as much as the typical household income, which also represents a new record.

Source: Political Calculations


Called It: Peppa Pig, a cute British children’s show that my kids love has been scrubbed from Chinese video sharing platforms for being “a subversive symbol of the counterculture“.  The elaboration of the ban from The Global Times, a state-run newspaper, is pure comedic gold:

People who upload videos of Peppa Pig tattoos and merchandise and make Peppa-related jokes “run counter to the mainstream value and are usually poorly educated with no stable job”, . “They are unruly slackers roaming around and the antithesis of the young generation the [Communist] party tries to cultivate.”

Winged Rats: Federal judges ruled that a homeless man can sue the city of Los Angeles for euthanizing 18 of his “pet” pigeons because California.

Playing the Field: Facebook is releasing its own version of Tinder.  If this isn’t called F&ckbook, then Facebook is officially dead to me.

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