CREW Miami 2012 Economic Outlook and Forecast

Presented by Hugh Kelly – clinical associate professor of Real Estate, NYU Schack Institute of Real Estate

Four Seasons Miami – Jan 17th, 2012

CREW-Miami Presentation 2012

Title:  “Managing in an uncertain future” or “Change comes in many flavors but you don’t always get to pick”

Hugh started with a pop quiz: 

  • What type of cycle were we in?  Most answered Severe
  • What concerns do we have? Europe, Iran, Gridlock in DC.  These are called Event Risks
  • What opportunities do we see?  Brazil and South America, Construction.

He stated that 1:7 adults (25-37) still lived at home.  Pent up demand for housing?  Very few CREW members had kids living at home in that age range.

FORECAST for 2012 – Same as 2011 with public sector causing most of the drag.  (you can stop reading now)

The remainder of the presentation was a lot like a box of chocolates.  Pick and mix!  Very little specific Miami data and a lot of National data from Blue Chip Economists.

Then he came out with a real crowd pleaser by stating that Miami was one of the “worst run cities in America” followed closely by “Hialeah” based upon a report by 247wallstreet http://247wallst.com/2012/01/05/best-and-worst-run-cities-in-america/

Capital is flowing back into real estate. Cap Rates 450-500bps ove 10 year T (350 bps for Apts).

Supply pipeline is lean with little new construction.

According to Real Capital Analytics (www.RCAnalytics.com), $2.5 Billion equity into real estate in 2011 out of $170 Billion in US. 

Product Mill Rank %
Office $590 18 1.3
Apartments $299 36 0.7
Retail $735 10 2
Industrial $265 27 1
Hotels $627 6 3.6

The Big Picture, Dec 2011 RCAnalytics

Miami is a 24 Hour City which is quite an accomplishment.

Hugh broke the presentation into 5 areas called the 5 Flavors of Change:

  1. Cycles
  2. Trends
  3. Maturation
  4. Change of State
  5. Disruption

1.  Cycle:  A periodic shift about an equilibrium.  However, this is not helpful when describing our current market due to the exogenous shock. 

2.  Trends:  It is more useful to look at the preceding quarters.  We have had 10 consecutive quarters of +ve GDP growth which is a good sign. However, continued external factors (Eurozone, Downgrading of US Rating) will continue to make predicting the future tough.  Economists predict 2.1-2.3% Growth in 2012 and 2.5-2.7% Growth in 2013.

Corporations holding onto their profits, Institutional Funds holding onto $1.8 Trillion in non-productive money, Banks not lending all because of uncertainty in the market.

Unemployment Rate down to 7% by the end of 2013 according to optimistic economists.

10 Year T to fall to 2.2-2.6% range and not break 3% until mid 2013.

SIFI – Systemically Important Financial Institution (Too big to Fail):  Hugh cited a NY based SIFI that had the FDIC sitting in the Head offices.  Sign of more failures to come?

3.  Maturation:  Not sure where this fit in

4.  Disruption:  These are the exogenous shocks – OPEC oil shock of the 1970s, Hurricane Andrew etc.

Need for structural change – “Should we allow markets to correct themselves” or “should we subscribe to Keynesian Theory of Government Intervention”? – Hugh did not answer his question.

Complexity Theory – The study of Complex Systems.  Not sure where he was going with this other than to say that we cannot comprehend what may result but he hopes it is good.

US fell in love with growth and put too much trust in untested financial engineering.  Risk was not adequately priced into the system.

Sigmoid Curve.  You cannot grow forever.  http://www.dumblittleman.com/2008/10/lesson-of-sigmoid-curve.html

5.  Change of State:  Discussed the three states of water (Ice – Solid, Water – Fluid, Steam – Gas) as a comparison to the real estate market.  I assume that we are in the thawing out stage at present.

Hugh needs to years of incremental change to determine if the equilibrium models have enough data to show improvement.

HUGH’s HOPE

He concluded his discussion with a thought experiment

How do you see Miami in 2022?

  • Is it different from today? How?
  • How is it different demographically
  • How is it different Economically?
  • How is it different Ecologically?
  • As a community?
  • As a real estate market?

Complexity can yield a beautiful result.  Fractals…….

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