SIOR Austin Highlights
Spring World Conference
“Leverage works until it doesn’t,” said Michael Litt during his Saturday keynote at the shiny new Fairmont Hotel in Austin to the 400+ remaining SIOR attendees at the society’s Spring World Conference. While Litt said that in reference to the 1998 collapse of hedge fund Long Term Capital Management, he might as well have used that as the title for his speech.
Litt was a masterful storyteller, even describing how the sinking of an 1857 San Francisco-to-New York bound ship, the S.S. Central America steamship, led to the 1858 credit crunch in the U.S. that ultimately pushed Southern agrarian interests to compete with Northern industrials for capital and helped fuel the Civil War. The ship was laden with $2 million dollars (in 1857 dollars) in gold from the California Gold Rush as well as about 400 passengers traveling to New York. The gold was intended for the New York and when it did not arrive it caused the failure of several New York banks and was a direct factor in what historians call the Panic of 1857. The ship sank off the coast of South Carolina.
That was the analogy Litt used to describe what happened after New Century Financial Corp.’s April 2007 bankruptcy reorganization. The Irvine, CA-based company had been the largest U.S. independent provider of home loans to people with poor credit histories before collapsing amid rising subprime delinquencies and defaults. It was later called “the poster child for subprime mortgages.”
An entire market that was collateralized by homes would sink, metaphorically speaking, as deeply as the S.S. Central America did to the Atlantic Ocean’s floor some 7,000 feet below the surface.
The chain of events that followed, of course, was the failure of Bear Stearns, Countrywide, Lehman Brothers, the banking crisis and Great Recession of 2008-2010. And if this sounds like the story in the book by Michael Lewis, The Big Short – which later became a movie of the same name starring Steve Carell, Christian Bale, Brad Pitt and Ryan Gosling, it’s because it is that story.
Litt’s hedge fund at the time, FrontPoint Partners, made an unusual move (2008) by betting against the U.S. housing market and put $1.3 billion in investors’ money into credit default swaps. They shorted the subprime mortgage market, in other words. The idea behind the bet belonged to one of Litt’s partners, Steven Eisman (played by Carell in the movie). That investment paid off handsomely with a 489% return – on $1.3 billion! Litt’s description of the field trip, as it was depicted in the movie, was very similar to actual events.
Getting back to current, Litt does not see a recession coming though when one does, he thinks it will be mild (one-two quarters) and create buying opportunities in certain asset classes. For real estate, he likes secondary markets and some of his current firm’s money has recently gone into Milwaukee, because he likes what’s going on with the revitalization of its downtown as well as the fact that Wisconsin has the highest amount of manufacturing employees in the U.S. He has also invested in Detroit – where he advises you have to be surgical in terms of buying Detroit commercial real estate. “Only New York and Miami may be overbuilt, but Nashville isn’t, Seattle isn’t,” he said. Litt thinks that at some point in this cycle the 10-year bond will approach 5% (its recent 52-week range is 2.016-2.962%) which in effect will push prime interest rates to 4.35 to 4.5%.
The 2.5 days of keynote, breakout and networking sessions were moderated by SIOR Global President Del Markward (above). Markward told a fine story himself, of when he moved to Austin out of high school in Pennsylvania to play in the winter baseball leagues. The center fielder was a promising big leaguer who found work in the nascent circuit board assembly business. By the time he was 24 and with investor money, he bought a former chicken processing facility and started his own company, ultimately helping a then University of Texas, Austin undergrad start a computer business. That UT youngster was Michael Dell. Del tried to get Dell to the Austin conference but the latter’s schedule was conflicted.
Attendees also heard from recently hired and new SIOR Global CEO Jim Hirt (below). It was Hirt’s first conference in the U.S. since getting the job last winter, though he did represent SIOR, along with Del Markward, at the MIPIN conference in March at Cannes, France.
The futurist at the conference was Dr. Parag Khanna, who’s most recent book (2016) is Connectography: Mapping the Future of Global Civilization. He gave the audience a presentation of that book, with its underlying premise that global transportation, energy and communications infrastructure and the supply chains they facilitate, particularly among megacities, are forging a global network civilization with complex power dynamics.
Khanna described a world – by 2040, dominated by 50 megacities, with 80 percent of the world’s population living in them. He showed maps of some of the early (existing) megacities, such as Hong Kong/Singapore and that region of Southeast Asia. Not everything in that world will be large, however, as there will be hyper-local community resource centers – imagine the eye of a hurricane, from which everything is connected – from food sources to all manner of jobs, the internet or a future iteration of it.
On population, Khanna said earlier forecasters that predicted the world would grow to 15 billion were wrong (it’s currently about 7.3 billion) and that it would peak around 10 million in 2040 and then begin to decline. He said that geography in the U.S. would be defined by eight natural economic areas – the Pacific Coast, the Interior West, the Bread Basket, the Great Lakes, Gulf Coast, Southeast, Mid-Atlantic and Northeast. He said that we need a better understanding of the “wholesomeness” of Canada, the U.S. and Mexico because by 2050 the three countries will have created a “North America Union” that will be one of the world’s biggest economies (still, but more integrated) with a population of about 600 million, up from its current combined 490 million.
Stewart Title’s Chief Economist Dr. Ted Jones reported that wages increased 2.72 percent last year and that the job market is getting even tighter; in January of this year 220,000 Americans applied for unemployment insurance, the lowest for one month in 45 years. He said that 9 out of 10 of the fastest growing U.S. states are west of the Mississippi, with Georgia as the exception. The areas with the greatest concentration of growth will be state capitals, college towns and tech centers. If there is a threat of recession, one could look at the country’s most current quarterly GDP, in which 1.96% of our growth came from leisure and hospitality sectors with the rest – 1.5%, from all other categories. Leisure and hospitality businesses are the most at-risk in downturns. Jones (pictured below) also said a recession could be fueled concurrently by the collapse of Snap, Tesla, Bitcoin and New York’s internet industries. We might have asked why he singled out the Big Apple, vs. San Francisco/Silicon Valley and Seattle, but didn’t. Sorry.
The other economist in Austin was College State resident and former Chief Economist of the Real Estate Center at Texas A&M Dr. Mark Dotzour (pictured below). He went through the various market cycles to arrive at the conclusion that we are still in a late-stage recovery but may be entering the peak of the market. He reported that as of April this year, the U.S. economy had expanded for 106 consecutive months – tied with February 1961 to December 1969 as the second longest expansion ever yet with months to go to catch the greatest economic expansion in the U.S. – the 120 months from March 1991 to March 2001.
He said yields have gone flat on commercial property investing in many U.S. markets and could remain so for the next 2-3 years (0 to 2%). Dotzour’s biggest concerns to our economy are wage inflation because he, like others, believe we have reached full employment. Other threats are the potential of a civil war in Iraq and Saudi Arabia and the ballooning federal budget deficit.
Closing speaker Brian Forde, who for more than a decade has been at the nexus of technology, entrepreneurship and public policy, gave a presentation on blockchain. He is currently the director of digital currency at the MIT Media Lab.
He made a complicated subject seemingly understandable, saying that digital currency is essentially a transparent ledger and when someone says blockchain, think about debits and credits. The blockchain, he said, describes who owns what and that it is meant for people, not companies, where “decentralized trust can be established.” He compared the current struggles to establishing legitimacy with digital currency to the development of the public internet in the 1980s and 1990s, when protocols had to be established before widespread adoption could be utilized.
Forde (pictured below) made the case for a digital currency market with two telling examples. Last year there was $14 billion in physical theft worldwide and $24 billion in identity theft. Blockchain can allegedly reduce those crimes substantially. Ford also pointed out that our healthcare system could really benefit by an open and inter-operable system of healthcare records. That is something probably all of us have thought about at one time or another, sitting in a doctor’s office and filling in a form on a clipboard with most of the data previously recorded on another clipboard in another doctor’s office, or two.