Saturday, April 29, 2006

Gas Prices
OK, gas prices are not generally the topic of this blog, but how can one resist. Gas prices are a function of supply and demand. Politicians getting all worked up are a little late to the game - the time to set an energy policy was when oil was at $25 a barrel not $75. The talk of the President and Vice President being pawns to the oil industry is disingenuous, too. Whether it's true or not, $3.00 gas is going to hurt this President's popularity, and the way things are going will hurt Republicans at the polls. That will end that friendship in a hurry.

Oil companies need to view themselves as energy companies and develop alternative fuels; car makers need to develop non-oil-based cars; and consumers need to demand better mileage, performance and alternative-fuel cars. Oh, and drive less. I am one to talk with my Ford Expedition, but at least I drove my smaller and more fuel-efficient Explorer this weekend.
I checked out some properties in Bakersfield recently. My interest was not directed by a real estate firm, although the properties I saw, if they were for sale would be excellent is purchased correctly. The first property is the hotel where I stay when in Bakersfield. It is a Homewood Suite, a limited-service hotel that is part of the Hilton group of hotels. The manager of the hotel said that Homewood is mostly a midwestern and eastern chain and is now expanding into California. It caters to business and the college is just north of the property. Interestingly, it is also in an area of significant medical offices, in particular cosmetic surgery. I guess cosmetic surgery is is more cost effective in Bakersfield than over the hill in LA. This hotel is mostly full during the week and was even sold out one night when I tried to book a room.

The second is probably the premier neighborhood shopping center in Bakersfield. It is the Marketplace center in west Bakersfield. Located on Ming Avenue, it is near some of the most affluent sub-divisions in Bakersfield. It is just south of the college. Its anchors are Von's, Starbucks, Talbot's, Rite-Aid and an Edward's Cinemas and other national and local retailers. It is 299,000 square feet and 100% leased. It was developed by Castle & Cooke, which is part of Dole, the pineapple company. It was recently sold to Donahue Schriber, an Orange County owner and manager of institutional shopping centers. It was sold for $280 per square foot, a healthy price. Don't even want to think about a TIC acquisition and markup.

Thursday, April 27, 2006

Serpent on the Rock
Just finished this book. I did not read it when it came out ten years ago, probably because I was not into the topic as it seemed so 1980s and direct investments had given away to stocks, low fees, indexing and the internet and its endless investment possibilities. Fatigue from reviewing all the fallen deals and helping brokers and their clients, I am sure, also played a part.

The reemergence of real estate through TIC investments and non-traded REITs makes this book relevant once again. The frenzy for oil and gas programs is also high. The over-the-top antics of some sponsors at the recently completed TICA conference brought to mind the excesses of the 1980s hey-day. The rumor was that one sponsor had a hospitality suite running the entire length of the three-day conference and had flown to the conference on his own jet. It is always investor money paying for these antics, if true.

One difference, made clear in Serpent, is that the big broker/dealers and their management are not behind the TIC rush. (At least someone's memory is long.) There was a noticeable lack of major broker/dealer representation at the TICA conference. I only saw one representative and this person was trying to be as inconspicuous as possible. This is largely a rep and small broker/dealer driven market.

Rate Worries

The interest rate on the ten-year Treasury is now over 5%. This should make certain TIC transactions interesting, in particular apartment deals. Cap rates are not rising with interest rates and the spread between cap rates and mortgage rates is therefore narrowing. Apartments which have historically have had the lowest cap rates will feel the narrowing of spreads first. I have already posted about negative leverage (mortgage rates higher than the cap rate) on particular apartment transaction. The exception may now become the norm. Watch the projections. Growth rates of 4% annually or more look good on paper and erase the negative leverage quickly, but not convinced their based on reality.