As I write this editorial the November 2nd election is just over 4 weeks away. Amendment 4 aka "Hometown Democracy" is really not about development. If the amendment passes development will still take place and construction of homes and businesses will continue seemingly undeterred. What will grind to a halt are Comprehensive Land Use changes. Some very vocal people claim the problem in Florida is there are too many changes in land use and inappropriate uses of land being approved. It would be wonderful if everyone knew exactly how much land we would need for every conceivable use but the fact is we just cannot see that far into the future.
Amendment 4 is really about taking land use decision making from our elected officials and sharing it with the voters, let's be honest here, campaign managers and public relation firms. Yes I know there are a few people that feel the public is disenfranchised from deciding what is developed near their homes. An election is not a very good way of controlling or deciding what happens in your neighborhood. If you are unhappy with a land use decision by your elected official(s) you can vote them out of office. If you are unhappy with an election result, well you are stuck with it and as far as I can tell there is no way to appeal the election result.
I am in favor of neighborhood meetings where the elected official must attend to hear the concerns of the affected residents and see the reaction to the project outside of a public hearing.
Many times I have witnessed a neighborhood cry foul when any land use change is proposed nearby. I have seen firsthand how neighbors distort the reality of "unintended consequences" if the use is approved. If the amendment is passed regular citizens will lose their voice and effectiveness in shaping a land use change. Instead, a public war will erupt with ads, signs and commercials culminating in a municipal wide popularity contest.
Does that sound like democracy? If you think it is bad having 5-9 elected officials vote on a change near you wait until 150,000 vote to have the landfill in your backyard.
I have seen the future and the future is here. Welcome to uncertainty! In my travels I hear various expert speakers as well as friends and neighbors talk about "when things get back to normal". I have to admit I used to think along these lines too but I have come to the realization that we are living in the new version of what we will look back on as normal. Normal is all about expectations.
When I look back over the last decade I see historically low unemployment, low interest rates and a zooming real estate industry. Was that really what we should expect as normal going forward? There will always be pockets and places with local distinctions that deviate from the majority. What is normal for these isolated places is not what we collectively know as normal.
In the 70's Alaska had the pipeline and jobs were plentiful when most of the lower 48 did not experience such abundance.
The point here is not to sound gloomy and say this is as good as it is going to get. The point is rather to understand there is no point in waiting to be happy. The future is here and we must learn to live with it. While unemployment is higher than I can ever remember there is still opportunity, we just need to keep our eyes open so that we recognize it when it appears. Most everywhere I look real estate is experiencing a price "reset" that will shape the future. An overpriced retail center near where I live was recently sold at a price where it can be rented at rates a start-up business can afford. While the reset for the previous owner was no doubt a terrible experience, the flip side is now there is opportunity to rent the commercial space at affordable rates to sustainable businesses.
In an ideal market system there would be no losers, just winners and future winners. In a balanced market there would be a winner for every loser. In our current market, it appears as though we have multiple losers for every winner. The borrower loses, the lender loses and maybe even the new owner loses if they have not done their homework or are just plain not lucky enough to time the market just right. I get that. And that part is not what we have come to know as normal, but it is the new normal for the next few years. Part of what is so annoying about this time we are living in is the uncertainty of what tomorrow will bring. When you are stuck in a rut at least you know that tomorrow will be pretty much the same as today. What is so scary right now is we don't know if tomorrow will be better or worse than today.
In my business I work very hard to be good at what I do and give the best advice to my clients. I am grateful for the work I have but I will be honest with you, we could do so much more. I like to control my own destiny but in today's environment I have zero control. I cannot make someone want to use our services. The only thing I can control is me. While we are adjusting to this new period of normal, let's all try to keep the important things in mind namely our family and friends. We will all get through this together. Just maybe together we can create a new normal over time that gives us the predictability we crave so much.
And they who for their country die shall fill an honored grave, for glory lights the soldier's tomb, and beauty weeps the brave. ~Joseph Drake
On Memorial Day we salute all those who have given their lives in defense of this nation. Without their sacrifices we would not be free to ask questions, to challenge our political leaders and to take an active role in our system of government. To them we owe an unrepayable debt
Have you heard the saying "The Rules Have Changed" when discussing real estate development and investment? Have you heard what got us in to this mess of a recession is the thinking "This Time It's Different"? While the words are different, from my point of view, they really are saying the same thing. Both sayings are always true when taken out of context of the situation being referenced. It is true - the rules have changed in terms of development if you are talking about financing and investment expectations. It is also true that it is different "this" time in the context of the "last time" we have done anything. Every time I kiss my wife it is different.
Ahh, but the fundamentals really have not changed, just our perception of them. True, it is much harder to get a loan today, so that much has changed...since 2005. The pendulum had swung so far to the easy side of getting a loan that it had to swing in the other direction for a while. That does not mean there has been some cataclysmic change that will forever wipe out lending on commercial real estate and development loans. What it does mean is once banking capital has normalized, in terms of the ratio of deposits to performing loans, lending will return. More cash will be needed from borrowers. Shorter terms will prevail for a while. Rates will most certainly be higher. These changes are merely going to be a return to the norm and not a significant departure from standard lending practices 10-15 years ago.
Also true is there is little need for new commercial development for next few years. Vacancy rates in many parts of America are approaching or exceeding 20%. The retail and office vacancy trend will continue until job growth returns. There will always be special circumstances requiring new development (before vacancies are lower) and that is no reason to get excited when a new building or project goes up in your area. This is still America and we like new things.
What has not changed, in a meaningful way, is people. Specifically, investors have not changed as they still want to make money with their capital. There is not much of an appetite for a real estate investment that will yield less than 8% these days. If an investor can get a 10% return on the investment with some degree of continuity then they will generally take the risk of owning a property. Ten years ago, the rule of thumb for non-institutional investors was a target cap rate of 10%. From a 2005 buyer's perspective the world must look like it is crashing all around them with rental rates down and vacancies increasing especially when you consider a 2005 buyer was willing to live with a 6% cap rate. In real terms a cash buyer in 2005 has watched their investment decrease in value by at least half while at the same time had their cash flow also cut in half. For these people, the rules have most definitely changed! What is different this time is they are now broke.
As baby boomers and insurance companies need to put money to "work" and create a predictable cash flow, real estate investment and subsequently development of real estate will come back to sustainable levels. Land will be developed, buildings will be erected and investors will look for yield. The rules really have not changed and it really is not different this time when looking back over the last 50 years. I have a final cliche for you, the more things change the more they remain the same. That my friends, you can bank on.
Thank you for your service to our country. We join the rest of the nation on Veterans Day, November 11, in remembering the sacrifices of America's 25 million veterans and expressing our appreciation for your service. We thank you for our freedom.
More Recent Articles