Clay & Company » A Texas Commercial Real Estate Blog

Warren Buffett’s live appearance on CNBC’s Squawk Box yesterday generated some headlines as he said single-family houses are a bargain right now. See below for an excerpt from the show. What do you think?

BECKY QUICK, co-host: Do you still think that this is a great time to be buying stocks?

WARREN BUFFETT: Well, stocks are businesses and the question is you have to invest in something. If you get your money in your wallet, it’s invested. It’s just invested at zero. And, unfortunately, if you got your money in a bank these days, it’s invested at zero. Or if you have it in Treasury bills, it’s invested at zero. I’ve got a section in the report where I say that if held over a long period of time, there’s no question in my mind that equities generally, a diversified group of leading companies, is going to outperform, in my view, dramatically, paper money or nonproductive assets such as gold. That’s no forecast for the next three months or six months or a year, but it— I think it’s obvious that owning really first-rate productive businesses— and there’s hundreds of them— you just— you know, you get a compound over time. They either pay the money out to you, they reinvest it, they buy in shares so that your ownership interest goes up. So equities are still cheap relative to any other asset class.

BECKY: But they’re not…

BUFFETT: I would say the single-family homes are cheap now, too.

BECKY: You would?

BUFFETT: Yeah, single-family homes— but if I had a way of buying a couple hundred thousand single-family homes and had a way of managing— the management is enormous— is really the problem because they’re one by one. They’re not like apartment houses. So— but I would load up on them and I would— I would take mortgages out at very, very low rates. But if anybody is thinking about buying a home— five years ago they couldn’t buy them fast enough because they thought they were going to go up, and now they don’t buy them because they think they’re going to go down. And interest are far lower. It’s a way, in effect, to short the dollar because you can— you can take a 30-year mortgage and if it turns out your interest rate’s too high, next week you refinance lower. And if it turns out it’s too low, the other guy’s stuck with it for 30 years. So it’s a very attractive asset class now.

BECKY: If you are a young individual investor at home and you have your choice between buying your first home or investing in stocks, where would you tell someone is the better bet?

BUFFETT: Well, if I thought I was going to live— if I knew where I was going to want to live the next five or 10 years I would— I would buy a home and I’d finance it with a 30-year mortgage, and it’s a terrific deal. And if I— literally, if I was an investor that was a handy type, which I’m not, and I could buy a couple of them at distressed prices and find renters, I think that’s— and again take a 30-year mortgage, it’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now. But I think equities are very attractive compared to anything else.
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BECKY: Warren, we touched on this in the last hour, but just the idea, you bring up that the stock market has doubled over the last three years when we’ve been sitting here and again, there are many people who now worry that the best and easiest gains are over. You said yourself in the last hour that it’s not springtime anymore.

BUFFETT: No.

BECKY: Does that change what people — the way that people should be looking at the stock market as a potential investment?

BUFFETT: They should be looking at the funds they’re going to save. I mean, that’s the — those are the only funds you save that you invest with, and figure out what’s the best thing to do with them. And they can buy farmland, they can buy apartment houses, they can buy duplexes, they can buy businesses, they can buy businesses through stocks, they can buy rare stamps, they can buy gold or they can stick it in money market accounts and all. They’ve always got all those options. And I’ve written a section in the annual report why I think that businesses are the best option. Now the nice thing about businesses is in this country is you can buy into all the best businesses in the United States, virtually. You can buy a piece of them and you don’t have to buy, you know, if you don’t understand company XYZ, you can buy company ABC. And naturally, it would be like — nicer to buy them at the prices of three years ago.

BECKY: Mm-hmm.

BUFFETT: But you know, they are attractive relative to other assets. That doesn’t mean they’re going to go up, but I will guarantee you that over a 20 or 30 year period, they’re going to perform very well. And as I mentioned a little earlier, actually single family houses bought on a distressed basis now and financed over a long term at these interest rates may be the best investment of all. I mean, if I knew anything about real estate and I just was working with a relatively small amount of money and I was seeing distressed houses around me that I could rent out, I would buy them and put on an 80 — a 4 percent mortgage for 30 years and you know, I — three or four or five years, I’d probably sell it at a very substantial profit relative to my equity.

Full transcript here.

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Via the Alamo City Beat

Some more good news regarding the local housing market — San Antonio is one of only two cities in the U.S. to see home values rise since 2007.

The other city to accomplish this — another Texas metro — is Houston.

These findings are part of the latest residential price index (RPI) put out by Oxford, Miss.-based real estate information technology company FNC Inc.

The RPI is based on information regarding home sales — including public records and real-time appraisals of properties and neighborhoods.

The peak of the housing market, notes FNC, dates back to 2007 — “that golden era when loan originations were at an all-time high,” its report states.

And as of Nov. 30, 2011, only San Antonio and Houston had seen improvement since that golden era — reporting home price increases of 2.7 percent and 4.8 percent, respectively, according to the FNC analysis.

Looking at home prices as of Dec. 31, 2011, the Houston numbers were up 1.7 percent, compared to home prices reported at the end of December in 2010.

As for San Antonio, on a year-to-year basis, home prices were flat — which is still not bad considering that many U.S. cities continue to report price declines.

Indeed, the national numbers are less encouraging. FNC reports that home prices were down 3.5 percent at year-end 2011, compared to home prices reported at the end of December in 2010.

The underlying factor behind the price decline — the distressed market.

Distressed homes, FNC reports, continue to make up a large part of the country’s residential sales. Given that these properties usually go at very deep discounts, this market has succeeded in putting downward pressure on underlying property values for the larger housing sector.

OFFICE-WAREHOUSE: Athena Gun Club of Houston has purchased a 53,770-square-foot office-warehouse at 10814 Old Katy Road on the Katy Freeway feeder road east of Brittmore. Tim Clay with Clay & Co. represented the seller, Katy Freeway Associates. (Houston Chronicle, 2/27/2012 and Real Estate Bisnow, 2/22/2012)

APARTMENTS: STYN has purchased a 53,599-square-foot apartment complex at 909 Birnham Woods in Pasadena. Amy Silvey with Clay & Co. represented the seller, Worldnet Telecom Services. (Houston Chronicle, 1/14/2012 and Real Estate Bisnow, 1/17/2012)

LAND: Emerson Process Management Valve Automation has purchased 6.8 acres at North Eldridge Parkway and Crossridge Drive. Phillip Arnett with Paine/Wetzel Associates represented the buyer. Tim Clay and Amy Silvey with Clay & Co. represented the seller, Clay Venture Fund #3. (Houston Chronicle, 12/24/2011)

LAND: Stripes has purchased 2.7 acres at North Gessner and Philippine. Clay & Co. represented the seller, Gessner/Philippine 2.72. Gulf Coast Commercial Group and Wile Interests assisted in the transaction. (Houston Chronicle, 12/24/2011)

If portfolio managers and brokers hope to compete in the changing corporate real estate landscape, they need to understand how companies are preparing for tomorrow’s office.

So, what does tomorrow’s office look like?

Recent studies suggest that we are advancing toward a smaller but smarter office that is more compact and collaborative and increasingly mobile.

Many companies originally sought out more efficient office space as a way to save money and resources during tough economic times and found through studying their occupancy needs, they had excess space that could be shed or used more efficiently. However, the continual evolution of technology and changing demographics will allow smaller, more efficient, and collaborative office space to become the norm.

The Building Owners and Managers Association (BOMA) Foundation and the Georgetown University School of Continuing Studies and its Masters of Professional Studies in Real Estate Program brought together the best and brightest minds in real estate on November 10 for their second annual Thought Leader Symposium, 2025: A Vision for Commercial Real Estate.

The panel of experts said to remain competitive, the existing stock of commercial real estate must be reconfigured to keep pace with a mobile, Internet-connected workforce; ongoing changes in technology, and to support the way companies are structuring their staffs to foster more collaboration and efficiency.

Martha A. O’Mara, PhD, CRE, managing director of Corporate Portfolio Analytics, whose firm advises large companies and organizations that collectively occupy 500 million square feet, said increased density in office buildings is here to stay, and she foresees radical changes in the workspace environment.

According to Teknion’s recent Workplace of the Future study, 46 percent of companies surveyed currently employ cloud computing — which allows employees to access company data from any computer. Another study by Cisco found that three out of five workers say they don’t need to be in the office to be productive anymore. With a laptop, tablet, smartphone, or some combination of those devices, many office employees can work anywhere they can get online.

This also means that time spent in the office is often dedicated to meetings and other face-to-face activities rather than sitting at a desk.

With technology supporting an increasingly mobile workforce, “people are not going to want to come in to a workplace unless it is an exciting environment,” said O’Mara. “The ideal situation may be where you go into the office two or three days per week and work remotely the other days, which reduces our carbon footprint by 20% – 40% and has a huge impact on improved quality of life.” It also makes people more productive when they do come into the office, she said.

O’Mara points out that changing demographics will also contribute largely to this new office structure. By 2025, about half of the baby boomers will be out of the workplace, she noted.

The average age of employees at Goldman Sachs headquarters in Manhattan is 32, said James B. King, AIA, principal of AREA Advisor LLC King. “Half the people working there are millenials.”

The working habits of millenials, or Generation Y, and office needs are radically different from what the industry is used to providing. Perkins & Will Principal Joan Blumenfeld noted that Gen-Xers and Millenials are more comfortable blending work and home life than their baby boomer parents.

According to Patricia Lynn, CCIM, principal of consulting firm Lynnk, the millenials, are using three distinct places: the traditional corporate HQ about 30% of the time, the home office another 30% of the time, leaving a giant opportunity in what Lynn called “the third place – a kind of Starbucks on steroids. She says new working spaces will not be based on lease occupancy but instead will be based on membership – anywhere from $150-$425 a slot – where the millenials stop to connect, collaborate and create.

Blumenfeld also noted a distinction in workplace trends among different types of firms.

Large-scale financial services, consultants and other professional services firms place increasing value on supporting their employees outside the office to encourage more client-facing time. On the other hand, technology firms and other creative process-focused companies are seeking to make their workspaces more accommodating. They want to keep employees interacting together in the same environment.

As such, companies are changing their corporate environments is by combining the work environment with elements of a home environment preferred by new generations of workers, as opposed to baby boomers who prefer to keep the two separate. Companies are altering their workspace design to incorporate more open floor plans and “common areas” with extensive seating and collaboration areas, while providing employees the technology to connect from anywhere.

It’s important to keep these trends in mind when investing in and managing buildings. Can you reinvent your space for a tenant with these changing needs?

“If the last 15 years are any indication of the pace of change in our industry, the next 15 will be phenomenal,” said BOMA Foundation Chair Marilyn Wilbarger. “Our thought leaders are going to give us a lot to think about in terms of how we should strategize to ensure that our future buildings are places where people want to work.”

Please note the author started this piece from her home office where she works on Wednesdays and finished it from her shared office space (pictured) on Thursday.

Sources
Will We Need Any More Office Space?
Resizing or Right-Sizing?
Tomorrow’s Office Worker and Their Spaces

From Investopedia.com

Young adults often face financial challenges due to burdensome student loans, relatively low-paying junior-level positions and a lack of budgetingexperience. While twenty-somethings know they are supposed to be saving for retirement, the golden years seem unimportant and a long way off compared to the consumer purchases that could be made now. For many young adults, it seems easier to put off any investing decisions until their financial situation becomes, at least theoretically, more stable. Twenty-somethings, however, are actually in a prime position to enter the investing world, even with college debt and low salaries.

Time

While money may be tight, young adults have a time advantage. There is a reason that compounding – the ability to grow an investment by reinvesting the earnings – was referred to by Albert Einstein as “the eighth wonder of the world.” The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time. A single $10,000 investment at age 20 would grow to over $70,000 by the time the investor was 60 years old (based on a 5% interest rate). That same $10,000 investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate in the future.

Take on More Risk

An investor’s age influences the amount of risk he or she can withstand. Young people, with years of earning ahead of them, can afford to take on more risk in their investment activities. While individuals reaching retirement years may gravitate towards low-risk or risk-free investments, such as bonds and certificates of deposit (CDs), young adults can build more aggressive portfolios that are subject to more volatility, and that stand to produce larger gains. (For more information, check out A Simplified Approach To Calculating Volatility.)

Learn by Doing

Young investors have the flexibility and time to study investing and to learn from both successes and failures. Since investing has a fairly lengthy learning curve, young adults are at an advantage because they have years to study the markets, and to refine their investing strategies. As with the increased risk that can be absorbed by younger investors, so too can they overcome investing mistakes, because they have the time needed to recover.

Tech Savvy

The younger generation is a tech savvy one, able to study, research and apply online investing tools and techniques. Online trading platforms provide countless opportunities for both fundamental and technical analysis, as do chat rooms and financial and educational web sites. Technology, including online opportunities, social media and apps, can all contribute to a young investor’s knowledge base, experience, confidence and, ultimately, expertise. (To learn more, read Technical Analysis.)

Human Capital

Human capital, from an individual’s perspective, can be thought of as the present value of all future wages. Since the ability to earn wages is fundamental to investing and saving for retirement, investing in oneself – by earning a degree, receiving on-the-job training or learning advanced skills – is a valuable investment that can have strong returns. Young adults often have many opportunities to increase their ability to earn higher future wages, and taking advantage of these opportunities can be considered one of the many forms of investing.

The Bottom Line

Saving for retirement is not the only reason to make well-planned investments. Many investments, such as those made in dividend stocks, can provide an income stream throughout the life of the investment. Twenty-somethings have certain advantages over those who wait to begin investing, including time, the ability to weather increased risk and opportunities to increase future wages. (For additional reading, see Why Dividends Matter.)

More info on investing

And Houston lands #1 by a healthy margin. More than 100,000 new jobs were created in Houston since the recession, making it the most prosperous city in the country according to a recent Business Journals study.

On Numbers used preliminary U.S. Bureau of Labor Statistics data to estimate 2011 private-sector employment levels for all 100 markets. Those estimates were then compared against the official figures for 2006, the last full year before the recession’s onset. Houston was the most prosperous metro over that five-year span with 4 of the top 5 in Texas.

1. Houston (+109,700 jobs)
2. New Orleans (+39,400)
3. Austin (+37,900)
4. Dallas-Fort Worth (+36,000)
5. San Antonio (+25,200)

Source

By Howard Berends for CCIM
For commercial property owners, energy budgeting is an involved and, in some cases, difficult project. Multifamily properties in particular are difficult to budget for as there are no nationwide programs to assist owners and facility managers.

But budgeting for energy is imperative. According to the Institute of Real Estate Management 2010 Income & Expense Survey, total utility expenses account for approximately 25 percent of all multifamily operating expenses, trailing only payroll and taxes and insurance.

Energy costs may constantly fluctuate, but owners and facility managers can use these tips to keep expenses under control and forecast what will be spent in the coming months.

Common Mistakes

First, determine if the property is located in a deregulated market. These markets are ideal for controlling energy costs: Owners can shop around for utility providers and plans that best meet their usage needs for the best price.

Many organizations plan their budgets by reviewing historical expenses, identifying a trend, and projecting it forward by adding on a guessed growth factor. Others may contact utilities to ask about projected rate increases in the coming year. While utilities often claim that no increase is expected, this just usually means that their requests to their respective oversight commissions have not been approved at the time. Again, owners may just make a guess on inflation and tack it onto the general ledger.

Both of these methods are inaccurate. Utility rates are constantly changing and are affected by factors that are uncontrollable and cannot be predicted, such as natural and human disasters, extreme weather, or political unrest.

Additionally, owners need to be aware of non-recurring expenses that might have affected the previous year’s general ledger but does not need to be incorporated into a budget, such as late fees and deposits paid to utilities. Such historical transactions should be scrubbed so they are not factored into the next year’s budget.

Another common mistake is to apply budget increases to the general ledger. For example, say that a property owner is budgeting for a 2 percent increase in gas for the next year. Some owners may apply this increase across the board for all 12 months and apply the growth assumption on a same-period basis. In other words, the budget for January 2012 is based on the January 2011 actual expenses plus 2 percent.

What’s wrong with this? Utility suppliers rarely, if ever, increase their rates right on January 1. Most suppliers will increase their rates at random times throughout the year, resulting in an off-track budget. For example, say a rate increases by 5 percent in May of this year. If you assume a 2 percent increase for 2012, the January through April 2012 budgets will be based on adding 2 percent to the old rate that was in effect during those same months in 2011, not the current rate that went into effect in May. This means that an owner is under-budgeted for the first four months of the year.

The Right Way

The most effective method is to create a budget based on actual energy usage and rates. Collect all the data from the different utility accounts and base the forecasts on this data. The assumption in this method is that usage drives cost, not vice versa. Along with usage data, you will also need to have the rate data at the utility account level.

Now it’s a simple equation of usage: x rate = $ forecast. Assumptions will need to be made regarding future rates, and inquiries to the suppliers are made with the same results as those who budget based on the general ledger.

By analyzing the usage data, areas in need of attention are identified. Portfolio candidates in need of attention are easier to discover and it is easier to forecast the return on investment for these specific projects as the account level usage and rate data are all on hand. The usage data will make it possible to benchmark, giving additional insight into a property’s performance. Forecasts will be more accurate. By identifying areas of potential savings, the forecasts can be tweaked by account and by rate.

By using the actual rates in effect at the end of the current budget period, you avoid basing any assumed increases on the old rate that was in effect during the same period last year. An analysis can be made to determine if the rates and tariffs charged by the utility provider are correct. Many times they are not, resulting in refunds or credits for overpayments along with reduced future expense. This is particularly true in Texas and Florida, where the utilities are notorious for charging incorrect rates and tariffs.

Accurate budgeting is crucial for multifamily property owners. Budget too little for utility costs and other areas of the business will suffer. Budget too much and opportunities to reinvest in your properties will be missed. Be smart about utility expense analysis and forecasting to maintain steady, healthy growth throughout your portfolio.

Howard Berends, CPM, is a senior account manager for American Utility Management and has over 20 years of experience in multifamily operations and asset management. Contact him at hberends@aum-inc.com or visit www.aum-inc.com.

In early February, Jenni’s Noodle House announced a competition: Take a photo of your favorite spot in Houston and tag it with #JNHlovesHou on Instagram. Curators picked 12 finalists for an art show and auction, with the proceeds going to Spacetaker.

Some of the favorites Via Culturemap

And some of our favorites

Via the Loopnet Blog

1. Longaberger Company “Basket” Building – Newark, OH

2. Wonderworks building – Pigeon Forge, TN

3. Shoe House – Hellam, PA

4. Kansas City Public Library – Kansas City, MO

5. Dog Bark Park Hotel – Cottonwood, ID