Archives for posts with tag: Real Estate

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!

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!

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.

Earlier this year I wrote about two articles in the Wall Street Journal that dealt with our world of banking and debt.

Now two more showed up and again reminded me of how our current improving financial times are just part of a never ending cycle. Things get bad, banks do not lend even when they should. Things seem better and banks want to lend and go crazy.

“Shift on NonConforming Mortgages” Wall St. Journal 12/3/13

Banks until recently were very concerned and cautious of who and how they lend money especially on the very mortgages that got them and the whole country in a mess. The article points out that now many banks, and yes, even the ones who were sued by the government and various states for their role in the mortgage crisis (like poor Bank of America), are now starting to make mortgage loans that do not conform to current lending standards. The article states that this might be the old interest-only loan again. Or a loan to someone whose income does not qualify them for the amount borrowed. Or where the bank will not fully document the borrower’s income or assets. To start, bankers claim these loans will only be made to their wealthier, high-end clients.

Well, I assure you this is where it started a decade ago, before we had our mortgage crisis. It starts small and limited. Soon banks, and the infamous mortgage brokers who feed the mortgage industry with new loan applications, will be making most of their loans that are nonconforming or do not meet standards. Last time it ended in a crisis. And we will likely have one in the future as these trends continue.

“Banks Brace for Tighter Regulation” Wall St. Journal 12/4/13

This article deals with the fact that now that the mortgage crisis is over (for this round), the government will finally force banks to limit their overall lending and investments in what we will call collectively “hedging”. In the mortgage crisis, you recall, banks managed to not only make what we called above, nonconforming loans, but they managed to bundle them and sell them multiple times and in parts and pieces to each other and make money doing it. Until they lost money doing it. So the new regulations will restrict how much of this type of trading or investing banks can do.

I have wondered for the last five or six years why these rules were not put in place already. But the banking industry has a very serious lobbying group and are a big source of fund-raising even for Congress people who claim to hate banks. So it has taken forever. It will be watered down.  Bank groups are concerned they will not be competitive with other global banks. And in the end, the new rules will accomplish, sadly, very little. And we will have banks too big to fail, failing again.

A friend in Florida just gave me further evidence to our future reoccurring  financial fate at the hands of banks, mortgages and the housing market. In the last month, he had two real estate people knock on his door and asked if he wanted to sell his condo. He is in a nice area and has an end unit which the brokers claim they have a buyer for.

Real estate agents cold calling. Banks giving out nonstandard loans. And the government unable to meaningfully limit banks and their practices. Have we seen this movie before?

It is just a sign of our financial times. But be care out there in the world of real estate, lending and banking. And in the Business Zoo!