
Last week I had an opportunity to attend a talk by Dr. Steven Ott, John Crosland Professor of Real Estate at the University of North Carolina at Charlotte. He spoke of residential real estate values on the national scene. A slide that he took great pride in was showing that Charlotte was the best of the 20 cities followed in Case-Shiller with the lowest decline in median sales home price being approximately 5% whereas other parts of the country namely the far west and Florida the decline had been much steeper. He felt that Charlotte having declined the least of the 20 markets tracked was a good sign. I disagree.
As a young boy growing up, all fads and innovations started in California and moved east. The example I like to use most is that of the hula hoop. I think the housing debacle is very much a west to east trend.
Last weekend in the Charlotte Observer there was a full page spread on the peak in housing prices and most of the peak prices including two very familiar zips which are 28210 and 28277 were in 2008; good news or bad?
The bunker mentality pervades. I remember the first time I heard this term was in December, 2007 when I was attending an event at the Westin and Ken Thompson was at the podium. He declared that it was nice to be able to come out of the bunker to be with the group at lunch. I think the local consumer certainly shares this mentality now and each quarter will show declines in consumer spending.
I think housing prices in Charlotte will decline 25% off their highs and I think vacation homes particularly on the South Carolina coast will decline 40 to 50% off their highs.
The remarks made by Ben Bernanke at the New York Economics Club yesterday were covered in the paper and he reported that the Federal Reserve is now indicating that unemployment could go to 9% and not return to the 5% level until 2012. Unfortunately, I think this high number is low.
What tea leaves were the Carolina Panthers reading to cut their staff by 20? We don’t know what percent of total employment that is, but it seems to me that it is another example of the lack of confidence in what is ahead.
The pink slips from financial institutions have started to be seen and are being dealt out at a rapidly escalating pace.
I believe we will get the picture of what is truly happening around the first of May and the visible example will be the Wachovia Championship; an event I view as having been one where all boats rise. Unfortunately, this year I worry that it could be almost a wake in comparison to the pride and excitement that it has brought to the community in the past.
Interestingly, taking Dr. Ott’s residential values scenario, I think one could prove the opposite in terms of commercial properties. Two retail examples in our back yard will give examples of a realized increase and a potential that was not followed through on. In February 2004, a 130,000 square foot grocery anchored neighborhood center in Ballantyne sold at what I believe was the highest square foot sale of this type of center in the region. It then sold again with no change in rent roll two years later in February, 2006 at a 50% premium. In 2005, a small four acre specialty center with no anchor, but with numerous food outlets was completed and the owner was offered a 100% premium over his total costs shortly after completion. I believe the sale was never consummated because the owner felt the numbers did not hit his target.
Since early 2005, any commercial property in the seven figure or above range never came to market with a price, but was offered effectively at auction with many potential buyers lining up to buy and 2003/2004 prices were up 50 to 60% before investors got the credit meltdown.
Right now there is essentially no money for commercial real estate and this year $400 billion in loans come due with a trillion needing to roll over in the next three months, which is a big problem.
There are no buyers, there have been no distress sales, no land sales and there is no market, but we will see activity and it won’t be pretty.
The consumer has stopped spending, his home price will trend downward rapidly and his equities and 401(k) are down 40%.
This has never been seen before in any of our lifetimes.
2/19/09