The second annual Innovative Real Estate Strategies conference in Orlando on March 4-5 produced a widespread consensus that many sectors of the U.S. real estate market were at or near the bottom in terms of price levels. Although speakers indicated they believe a sustainable recovery in the broader U.S. economy is under way, attendees were more divided on whether that rebound would include real estate.
Speaking at the opening general session, Jeff Saut, chief market strategist at Raymond James, and Brad McMillan, chief investment officer at Commonwealth Financial Network, offered upbeat views on the overall U.S. economy. For his part, Saut voiced considerable optimism about the economy and the markets. McMillan, who had considered a double-dip recession quite likely last fall, said he had changed his views as economic data improved in recent months.
With much of the real estate market still troubled or soft, Kevin Gannon, managing director at Robert A. Stanger & Co., addressed the subject of the top 10 questions to ask when investing. He urged advisors to look at the experience of the management team and whether they had been through the cycle. Is their theme easy to understand and is their track record demonstrable? Gannon asked.
Are the distribution levels appropriate for the assets they are buying? The problem of dipping into capital to pay dividends remains a persistent one, so Gannon urged advisors to ask, "How soon after breaking escrow do you plan to cover the dividend?" REIT companies should be able to mathematically "prove" they can cover and sustain distributions.
Desirable investments should be able to deploy their capital efficiently, Gannon noted. One way to measure this is to find out how much capital was deployed in the quarter in which it was raised.
Griffin Capital CEO David Rupert, who serves as an advisor to Cornell University's endowment, followed Gannon with a discussion of the widely touted model of endowment investing. Rupert explained that endowments, with their long time horizons, can take risks and even make mistakes.
Cornell terminated the giant real estate private equity firm Colony Capital several years ago after it invested in several disastrous developments, including the enormous Meadowlands Xanadu mall in northern New Jersey. But today, as the economy is coming back, Rupert said, Griffin likes distressed real estate on a selective basis. His advice to advisors was to evaluate real estate as "blocks, not stocks," or properties, not securities.
Peter Ricchiuti, professor of finance and associate dean at the Freeman School of Business at Tulane University, offered luncheon attendees a perspective on the equity market, which had climbed about 100% from its low nearly three years before on March 9, 2009. That's not the only indicator rebounding off a 2009 bottom.
As a professor, Ricchiuti noted that the hiring environment for the graduating class in 2009 was the worst he'd ever seen. In contrast, the number of graduates finding jobs in May 2011 was the "best in five years." Still, three-quarters of Americans believe we are still mired in a recession.
Debt reduction will inevitably emerge as a dominant theme for the remainder of the decade and it will require a combination of higher taxes and federal budget cuts, as well as entitlement adjustments. Higher tax revenues from a rebounding economy could also help narrow the gap, Ricchiuti said. "If your family uses the word 'summer' as a verb, you'll pay higher taxes," he joked.
Oil prices are likely to remain stubbornly high, but even here Ricchiuti saw a silver lining. "At $100 a barrel, it's a Goldilocks scenario," he observed. "Companies will drill and the search for alternatives" becomes economically feasible.
A student of the stock market, Ricchiuti indulged in some financial myth busting, including the idea that high unemployment is bad for stock prices. Since 1948, equities have performed twice as well when U.S. unemployment is over 6.6%.
Many different real estate sectors are selling below their replacement cost, but that doesn't mean they won't remain bargains. Speaking on a panel examining this subject during the conference's second day, Commonwealth's McMillan identified problems and opportunities in various sectors.
For example, office buildings have recovered to 2007 levels and employment is recovering while construction remains low, constricting supply. But in many markets, office rents reflect the sector's relative strength, McMillan explained. That's a sharp contrast compared to retail properties, where the business remains "at nowhere near 2007 levels." However, the weak state of retail real estate may be creating opportunities for financial appreciation.
Steve Forbes, editor-in-chief of Forbes magazine, began the luncheon keynote talk the second day with the sobering subject of Iran's development of a nuclear weapon. Financial advisors should avoid panicking in the likely event that Israel attacks Iran's nuclear facilities, Forbes told attendees. Forbes made it clear he thinks an Israeli strike will come sooner rather than later.
Israel may not have reached a final decision but they "know the window is closing," Forbes said, adding that it is a matter "of months, not years." He also predicted the Israeli government wouldn't trust its security to the United States, remarking that when Israel commenced the Six-Day War in 1967, it notified President Lyndon Johnson's administration after its planes were already in the air.
"This could get ugly very quickly," Forbes told advisors. Even if the U.S. doesn't want to get involved, it will have little choice when the Iranians start trying to shut down the Strait of Hormuz.
Turning to the U.S. economy, Forbes said we should experience a respectable, if still subpar, year in 2012. But after the depth of the downturn in 2008 and 2009, 3% GDP growth is nothing to get excited about.
Indeed, Forbes maintained the economy should be expanding at a high-single-digit rate now. He blamed the Obama administration's policies for the weak recovery and said that the expiration of the Bush tax cuts, coupled with the tax increases embedded in ObamaCare, would slow the recovery late in the year. If Obama is re-elected, the U.S. economy will look like "Europe on a good day, like a baseball team batting .240," good enough to win a few games and start vacation in October.
However frustrated Republicans may be with their presidential candidates, Forbes predicted they will regain the White House and control both houses of Congress. "Americans don't want another four years [of this]," he said.