Archives for posts with tag: Housing

Marriott, Modular Construction and Circles in Business and Life

May 17, 2017 //
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USA Today had an article about the world’s largest hotel company, Marriott, using factory produced modular construction to build up to 50  of their hundreds of new hotels this year.  The guest room and/or the bathrooms are produced in a factory on a production line and then transported to the prepared construction site where they are erected by cranes. The plumbing, electrical and finish work then occurs. The theory is that this method of construction can reduce the time it takes to build a new hotel by several months. Thus, the hotel opens sooner and can make a higher return for its owners.

Is this new, you might ask? No, like most things in this world it is not new. In my book, The Business Zoo, I tell a similar story that occurred forty years ago. My old company, Donn, signed a deal to build one of the first modular hotels for the world’s largest hotel company, Holiday Inn. Our U.S. government even got involved to promote low cost housing  through the new department of Housing and Urban Development which was headed by a George Romney, father of, you guessed it, Mitt. The belief was that factory produced,  modular construction would revolutionize and change conventional, on-site construction forever.

What happened to this bold experiment those many years ago? It did not turn out so great. The timetable took just as long as conventional construction. The idea of just hooking these up on the site was a disaster with a lot of additional work required. And my old firm, Donn, lost several million dollars when that was a lot of money in general and specifically for a small, private business. The big company, Holiday Inn, did end up with a nice hotel, but having learned a few lessons, stayed away from modular construction. Modular construction never totally disappeared but it certainly did not replace or change the way hotels or apartments were built.

Will this new attempt be more successful? I am not sure. Construction  is one of our most localized industries. Local zoning and building codes vary by community and can offset some of the anticipated factory produced savings.  Construction is one of those businesses that are still highly unionized which can also impact costs and building codes.

What I do find fascinating is how sometimes business, like other things in life, goes around in a circle. Modular hotel construction in the 1970’s repeats four decades later. Sometimes the patterns and the results are similar and sometimes things change. The space shuttles of the 70’s now are replaced with Elon Musk’s rockets aiming for Mars but we really have not gone very far in space in all that time.

The famous writer George Santayana said, “those who do not learn from history are doomed to repeat it.”  Mark Twain said, “history doesn’t repeat itself but it does rhyme”.

I say,  there are a lot of Circles in both business and life so be careful out there!

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Cranes, Apartments and Millennials

April 22, 2017 //
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The Wall Street Journal recently reported that my city of Chicago has the most tower construction cranes (56) in use anywhere in North America. This was a result of a survey by the Crane Index (Yes, there is such a thing. If there is a Duck Dynasty why not this!). But what is also interesting is that over half of those Chicago construction cranes are building residential apartments and specifically luxury residential apartments.

And just who are these luxury rental units aimed at? Millennials, of course. This trendy group of young adults, aged 18 to 34, have the lowest percentage of home ownership of any generation since these types of records have been kept. Why is that? Experts comment that the reasons include the high cost of homes, tighter credit rules and the fact that many Millennials still live at home. But an overriding reason seems to be that Millennials do not view owning a house as a required or good, social or financial investment. So they rent.

And what kind of luxuries do these luxury rentals offer Millennials? One of the newest places is called Wolf Point and is on the Chicago river. On the 46th top floor, is a sky deck and lounge, an outdoor kitchen, a fire pit, sauna and steam room, outdoor tv and a state of the art fitness center. On the main floor is a large pool, a river front lounge and gallery, golf simulator in the club room, a business center, a dog run and spa, and a bike room with a wash area and a workshop! I know what you are thinking 1. Why is he writing so much about this? (I will get to that) and 2. Where can I sign up!! Well there is a catch or two. Because the building offers you so much wonderful stuff there are trade offs. A one bedroom is 678 sq. ft. with two small closets and very small rooms and goes for $2,555/ month. But you won’t be spending any time in your small apartment, you will be having fun somewhere else in the wonderful building!

One of our friends is involved in the financing of these new high-end apartment buildings. He told me that those in his industry are getting increasingly worried. What if the Millennials decide to get married and have kids and move to the suburbs like earlier generations? Older, downsizing seniors will not find much about these units appealing since their favorite couch and king size bed will probably not fit. The result is a lot of empty luxury apartments!

So why did I write this blog? First, I find Millennials fascinating. There are more of them than my Boomer Generation and they are the future of our country, not us. Second, figuring out long lasting trends in critical areas such as housing is very important to our economy. But is this a true long term trend or just a short term passing fancy? Third, for those who know me and my background in construction, you know what comes next. Every time we have a boom in any type of construction-schools, offices, apartments- it is followed with a long bust. And because construction, building materials and related furnishings are such a large part of our economy it really worries me that Chicago has all those cranes right now because I know the sky will be free of them in a couple years as the construction cycle swings,  the economy slows and the stock market drops.

And lastly, my Boomer group owned homes well before age 30. If the Millennials do not start with a first home soon they will never get to the point in life where they will want a second home. Then what happens to all the weekend second homes in Michigan, Indiana and Wisconsin? And what about all the seasonal, second homes in Florida, Arizona and Vegas? The result is again a lot of empty and unsold second homes. Again bad for the economy.

Note to readers: We just sold our second home in Florida and not to a Millennial!

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The Housing Pendulum Swings Again!

February 3, 2015 //
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One of my favorite bosses, Tony, always said that most things in the world swing back and forth like a pendulum. In society and in business, we see this all the time. This is easy to see in commodities like corn or soybeans. We go from a shortage and high prices one year to everyone planting these same crops with a market glut and low prices resulting the next year. We love the free and easy flow of information on the Internet till we want to restrict it because it can invade our privacy or use our information for someone else’s commercial gain. Prices, regulations, even emotions, often swing like a pendulum.

With the start of a New Year and our economy generally improving, I wanted to talk about the Housing Pendulum which usually swings on a decade long cycle. I know you are thinking, wait a minute, we are barely out of our worst housing, construction downturn since the Great Depression! We can’t be getting into trouble again with Housing! Let’s look at a couple things going on right now.

Housing Prices. We were just in Naples, FL. for a visit. Remember in the early 2000s when resort and second home places like Florida, Las Vegas, and Arizona had prices jump 10-20% a year. And then they fell 50% or more a couple years later. In our downtown Naples area, the same condos went from under $1 million to $1.6 million. Then they fell to under $1 million after the 2007 Housing Bubble and stayed there for a few years. Now these condos that sold two years ago for $1.1 million and last year for $1.3 million are going for $1.5 million. And there is a growing shortage of inventory to buy. The City of Naples just issued the most tear down permits in its history as the old, small, outdated cottages are being replaced with new, trendier ones twice as big that fill up every inch of the lot or of two or three lots. The pricing on the new ones begin around $2 million. Is this just true of fancy resorts and second home places, you may be thinking?

My wife and I just listed and sold our downtown Chicago condo in ONE DAY and for the FULL price! Go figure. This is still less likely outside of retirement resorts but it is happening for the first time again.

Government Assistance to Housing.  A recent Wall Street Journal article talked about how the two government agencies that buy mortgages, Freddie Mac and Fannie Mae, just issued new, relaxed mortgage standards. They will now allow as little as a 3% downpayment on a mortgage especially from low income people who have trouble coming up with a larger downpayment. These are the same two agencies that were partially blamed for the last housing crisis, for helping to bundle and sell high risk mortgages. And the same two agencies, that some in Congress and government suggested, should be disbanded. It is wonderful to want to help people struggling to buy a house and especially a first house. But the last time around, this group that struggled to buy a house with little of their own money, were the ones that defaulted or walked away from their mortgages. And it will happen again. And our government is helping.

So to some it may seem too early to worry about the Housing market tanking again. But to this old, long time building material guy, it seems like the Housing Pendulum is starting its swing. The last time it almost bankrupted Wall Street and our overall economy. Consider yourself warned!

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The Housing Problem

June 1, 2014 //
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The stock market is hitting new heights so far in 2014. Unemployment is not great, but at 6.3% it is the lowest since 2008 . The economy should be doing well. But Housing and the vast amount of building products and household goods it pulls along are not doing so well. The news media is just starting to talk about all this, but they are not sure what is wrong with Housing.

At first, some thought it was the terrible weather throughout much of the nation this past several months. But now its warmer, (watch out Al Gore for that climate change) and Housing, especially new Housing, is still slow. Some people say that interest rates on mortgages are up and that that is the issue. Although mortgage rates are up from the bottom they are still quite low by historic standards at just over 4% for a 30 year loan. One article about Warren Buffet’s real estate brokerage firm, mentioned that the lack of first time buyers, who usually make up over 40% of buyers but is now under 30%, is the issue. Bingo!

Having been around construction and building materials for way too long, that is the real problem. But to me it is not a Housing problem. It is a major issue with the economy problem. And I will try to explain why.

In endless conversations with my friends in Florida or Chicago, one theme keeps coming up. These are people who are either at the peak or end of their working careers and who brought their first home, like me, in their early 20’s. The reoccurring theme is that my/this generation is still substantially supporting their children and/or grandchildren. I do not mean a cell phone bill or even medical insurance. I mean monthly or quarterly or annual large chucks of cash to keep their children afloat. If friends have three or more children, one or two are still on their “payroll”. It is very rare that one of my friends is not helping at least one child survive. So even if these parents help with a nice down payment on a first time house, how are these young people going to afford it? The average price of a new house today is back to the pre housing crisis level of close to $300,000! Even with a big downpayment, how can young people who are struggling as it is, buy and maintain a house?

Young people now graduate college or with advanced degrees with $50,000 or more of student loans that they must start paying on immediately. This is about the same amount most of my group owed on their first home mortgage!

What value does this generation get for their college and advanced degrees? Often not enough salary to pay back their student loans and live, let alone try to buy that first house.

And if these young people are having trouble buying a first home, how will they ever be able to buy up all the retirement and second homes that are owned by my generation in Florida, Arizona or Vegas?

It is a major problem, but it is not a Housing problem. I believe it is a major long term problem for our economy that our so-called leaders in Washington are ignoring like everything else that is unpleasant. So, hopefully, the media will correctly identify the real Housing problem, and soon, so that it starts getting the attention that it so desperately needs.

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