The Snowflake That Caused he Avalanche

The Snowflake that Caused the Avalanche

I had lunch Friday with two of the finest gentlemen in real estate development; John Armenia and his son Joe. (The Armenia Group most recently developed Riva Del Lago ). We met first at their offices on Sanibel Island. The office speaks well for them without shouting; polished wood, high stylized ceilings, glass partitions and low voltage light pendants always illuminating just the right spot for work. I felt more like I was in a fine lounge than in a place for business.

I shared with John and Joe the 3D rendering or the amenities center at Cyperlin Center. The amenities center at Riva Del Lago was one of the inspirations for what we designed at Cyperlin - fine finished, understated class, and pure luxury.

We continued our discussions over lunch. As what usually happens when real estate people get together we eventually talked about what caused the slow down and what will precipitate the turnaround. Many root causes were brought up and the talk went from hurricanes to over-building to overzealous and inexperience investors; greedy pricing increases by developers and unrealistic profit anticipation by flippers. (By the way – Riva Del Lago continues to be a great value here in Fort Myers – if you have not seen it, get Deb@ma-realty.com to give you a tour.)

I would like to share with you some of my feelings on these two issues – the slow down and the eventual turnaround. Pointing a finger at the cause for the slowdown is about as easy as pointing a finger at the one snowflake that caused the avalanche. Some might call it the perfect storm. That might by apropos because the general consensus was that the timing of the slowdown coincided with the hectic hurricane season of 2005.

The hurricanes themselves were not the only issue, but there certainly was unrest in the mid east and oil prices that spiked because of the short term shutdown of supply caused by Katrina in the gulf heightened sensitivity about gas prices. The increased gas prices caused concerns abut some people contemplating a second home that their pocketbooks might suffer.

By that time last summer and fall the developers where capturing the margins that in the past were going to the investors. Most had already bumped up preconstruction prices to eliminate the investor by then.

Raw material cost and interest rates were on the rise. This is a one two punch that hits from both sides. China consumption of concrete and steel drove down supply and increased prices here in the US. Prices of new homes went up and so did the cost of borrowing. Adjustable rate mortgages went up for existing home owners making them think twice about a second purchase.

The resale market slowed as new homes attracted more buyers than used homes did. The trade up market (buyers looking for bigger or better homes) suffered as sellers could not sell their existing homes. High property taxes and skyrocketing insurance rates were financially trapping folks in their homes.

Reaction time by developers is slow. It takes a long time to entitle and permit a project. We were already in a slow down and some projects were not even out of the ground yet. But they could not stop; they had presales and monies committed. So even though condos and homes were not moving, more and more inventory was added – kind of like adding more dry wood to a raging fire; and to add accelerant to the incendiary situation, costs continued to rise – both on raw materials and land.

Ok, so the cause of the slowdown may have been:

□ Hurricanes
□ The war in Iraq
□ Gasoline Prices
□ Interest Rates
□ Property taxes
□ Insurance rates
□ Raw material and labor costs increases
□ China’s emergence as a huge consumer of construction goods.
□ Inexperienced real estate investors
□ Developer’s reaction times
□ Too much inventory
Which snow flake caused it all? I don’t know. I think the answer is different for different folks. Conditions were precarious and ready to fall. We just did not know it at the time.

The recent BP oil field debacle, which by the way only effects under 2% of oil usage here in the U.S, is another scary example of just one snow flake causing an avalanche. By all rights this should not have caused the stir on Wall Street that it did. I am now reading a superb book on energy situation; A Thousand Barrels a Second by Peter Tertzakian. I highly recommend it. It will give you a better understanding of wher we will be going on the oil situation.

My feeling is that the turn around will happen very quickly (but not very soon,) but we will be into it before we know what hits us. Look at the potential list of causes for a clue. First, for things that will not change quickly, like the cost of gasoline, we have to get dulled to the effect. Other issues, like interest rates, need to make a turn or stall. The recent pause by the fed is a good sign. I see another increase before the end of the year and then perhaps more pauses and a turn around. But this may mean that the economy is starting to cool.

Inventory will be depleted – BUT VERY SLOWLY - and when supply and demand is in better balance prices will increase more rapidly again.

A point to make here is that indeed prices are still increasing. We are still experiencing housing inflation. Don’t be fooled into thinking prices in general are dropping. They are not. As I have said before there are a pocket of super deals. But long term players will do very well in the real estate market.

Certainly the inexperienced investors are out of the market. As Joe Armenia correctly pointed out to me yesterday, the situation was similar to the stock market dot com boom. Those inexperienced investors will not be back very soon.

Watch for the snowflakes good and bad. No hurricanes this year would be a good snowflake. A terrorist attack on our transportation system a bad one. Both could have a great effect on our little corner of paradise.

I may have a few opportunities that I would like to talk to experienced investors about. If you are interested drop me a call 239-425-0771 or an email Gregg@ma-realty.com.

Gregg
www.investinwaterfront.com
www.cyperlincenter.com