Monday Morning Quarterback (Monday, May 23, 2022)

Monday Morning Quarterback

(Monday, May 23, 2022)

I am pained and anguished by the tragedy at the Buffalo mall last week.?It was caused by a teenage racist.?Yes, a teenage white supremacist, an anti-black punk kid who believes in the suddenly fashionable “Replacement Theory.”?In brief, the Replacement Theory holds that current government officials and big business elites are conspiring to bring large numbers of immigrants across our borders in a deliberate effort to replace the native-born population with more subservient people who will work for less and vote for whom they’re told. Now you may think this is a radical conspiracy theory, but you would be wrong.?The spread of toxic falsehoods, largely relegated to the fringe, is rapidly going mainstream. According to a new study by the National Opinion Research Center and the Associated Press (“AP-NORC”), nearly 1 in 5 American adults now believe the major tenets of this theory. The AP-NORC study asked a number of questions about immigration, including two aimed specifically at gauging how many Americans believe key parts of the Replacement Theory.?One question asked whether “there is a group of people in this country who are trying to replace native-born Americans with immigrants who agree with their political views.” About 1 in 5 Americans said they “strongly agree” with this statement. A similar share said they were “very concerned” that “native-born Americans are losing economic, political, and cultural influence in this country because of the growing population of immigrants.” Fortunately, the American public still remains largely supportive of immigration, the new AP-NORC study found. Almost 40% of Americans say that the number of immigrants to the U.S. should remain at current levels, while 25% think the number of immigrants should be larger.?On the opposite side, 36% say the number of immigrants should be reduced, with 19% saying the number should be cut “a lot.”?The Replacement Theory, which gained traction on the far right in Europe before being popularized in the U.S., has become a staple of some prominent cable television personalities, who argue that?the current administration wants to increase immigration “to reduce the political power of people whose ancestors lived here while dramatically increasing the proportion of non-white immigrants newly arrived from the Third World.” The AP-NORC study reflects the partisan nature of America’s immigration debate today and measures the expanding popularity of the Replacement Theory.?But, before I get “replaced,” let’s get down into the weeds…

Housing Starts Declined in April. Housing starts declined for the second month in a row in April as builders continued to navigate rising mortgage rates and ongoing supply-chain issues.?Notably, residential construction is still just 3% below the fastest pace since 2006 set in February, demonstrating resiliency despite the pressure coming from both the supply and demand sides of the housing market. But builders are constructing apartment buildings, not houses.?But example, single-family construction was entirely responsible for the decline in April, posting a decline of 7.3%.?Meanwhile, multi-unit construction surged 15.3% in April. In the past year multi-unit construction is up 40.5% while new single-family construction has risen just 3.7%. In my opinion, there are two major reasons developers are shifting resources towards apartment buildings. First, rental rates are rising rapidly due to the end of the national eviction moratorium and people moving back to the more expensive cities now that the worst of the COVID restrictions have ended. Both Zillow and Apartmentlist.com estimate that rental costs for new tenants are up 16.4% in the year ending April 2022, easily exceeding typical gains in the 3.0 - 4.0% range.?Second, 30-year mortgage rates are now above 5%, pushing affordability-challenged buyers back into the rental market and away from purchasing single-family homes.?Recent distributional effects aside, the level of new housing starts remains impressive given that the number of homes already under construction are at the highest level on record back to 1970.?Moreover, builders still have a huge number of permitted projects sitting in the pipeline waiting to be started.?In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999.?These figures illustrate a slower construction process due to a lack of workers and other supply-chain difficulties. In this context, it's not surprising for me to see new building permits fall 3.2% in April.?But with plenty of future building activity already in the pipeline, builders looking to boost the near record-low levels of inventory to satisfy buyers (and as more Millennials finally enter the housing market), new construction in 2022 is very likely to surpass the 1.605-million units started last year despite these ongoing headwinds.?Keep in mind the US needs roughly 1.5 million housing starts every year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.), and 2021 was the first year in the aftermath of the 2008/9 recession that has finally crossed that threshold.?

Existing Home Sales Declined in April. ?Similar to Housing Starts (above), existing home sales fell for the third month in a row in April, marking the slowest pace since 2020.?Recent volatility shows that the housing market is struggling to find its footing so far in 2022, with falling affordability playing a role.?The prime culprit recently has been 30-year mortgage rates, which have already risen roughly 200 basis points since December.?On top of that, potential buyers are also dealing with a huge mismatch between supply and demand that has pushed up median prices 14.8% from a year ago.?Assuming a 20% down payment, the double-barrel rise in mortgage rates and home prices since December amounts to a 42% increase in monthly payments on a new 30-year mortgage for the median existing home.?No wonder sales have slowed down! Although the months' supply of existing homes for sale (how long it would take to sell today's inventory at the current sales pace) rose slightly to 2.2 months in April, inventories are still down 10.4% from a year ago (the best way to look at the data given the seasonality of the housing market).?What is really impressive is that despite the lack of options demand remains strong, with buyer urgency so high in April that 88% of existing homes sold were on the market for less than a month.?While sales are clearly under pressure, this is not a repeat of 2008/9. I do not foresee a collapse in home sales even with higher mortgage rates, though it is likely that existing home sales wind up moderately lower in 2022 than 2021.?More inventory is becoming available (though more slowly than we would like) which will eventually help price gains moderate.?Also keep in mind that Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for sales for the foreseeable future.?

New Mayor Must Tackle Homelessness.?Homelessness has been one of the most fraught issues that Los Angeles (and neighboring cities) and its elected leaders have faced in the last decade.?Mayor Eric Garcetti, who is leaving office soon, gets blamed for not having reduced the size of the homeless population. But to his credit, you probably forgot that Garcetti helped convince residents to vote for Proposition HHH, the $1.2-billion bond measure that will build as many as 10,000 units of permanent supportive housing, and created A Bridge Home, the shelter program that has built more than 2,000 beds of temporary group housing. Yes, HHH construction has gone slowly; only 1,200 units are open more than five years since the measure passed in 2016. And none of this effort has stemmed the flow of people into homelessness.?But here’s the good news; Los Angeles voters will choose a new mayor this year, and poll after poll shows that homelessness is the top issue in the campaign. We know what all the candidates are saying: “No one should be living on a sidewalk. Homelessness is a public health crisis. It needs to be treated like an emergency.”?Agreed. But those are only sound bites. Let’s move on to the harder part: (1) getting homeless people housed and (2) preventing housed people from becoming homeless.?Here are some things I would like to see from mayoral candidates when they are out there talking about homelessness.?Don’t say the root cause of homelessness is mental illness and substance abuse. Yes, both of those problems bedevil some people on the street, and they can be contributing factors to an individual becoming homeless or staying homeless. According to the 2020 demographic survey?of homeless people conducted by the Los Angeles Homeless Services Authority, 25% reported that they suffered from a mental illness and 27% reported that they had a substance use problem. About 41% had one or the other or both in 2020, according to the authority’s analysis.?But the most pressing problem for all homeless people is a lack of housing.?Yes, there are certainly people who need treatment for mental health or substance abuse problems. But service providers say that for most homeless people dealing with those issues, providing them a home first gives them a stable base from which they can get treatment. L.A. Homeless Services Authority officials say that about 90% of people who go into permanent supportive housing in L.A. County are still housed a year later. The National Alliance to End Homelessness?puts the retention rate at 98%. The philosophy of Housing First doesn’t mean Housing Only. What it means is get someone housed first (called “temporary housing”) and then offer them treatment options.

Get Ready for The Grand LA: You gotta love Frank Gehry.?The renowned architect has done it again! Gehry’s latest development “The Grand LA” will bring millions of square feet of shopping, dining and entertainment to Downtown Los Angeles.?The Grand LA will debut this summer. The County and City of Los Angeles and the Community Redevelopment Agency (“CRA”) aggregated land downtown and looked to developers. “We teamed up with Frank Gehry, and we won the competition in 2004 with a very forward-looking plan that added about 3.2 million square feet that would really create a 24/7, fully functioning neighborhood, developed in three phases,” says Grand LA Spokesperson. The Grand, an architectural complement to Gehry’s adjacent Walt Disney Concert Hall. The Grand LA team envisioned affordable housing, accessible retail and public venues serving the community. The 1.6 million-square-foot project consists of a 45-story residential tower with 436 luxury units (20% of which is affordable housing) and the 28-story, 305-room Conrad Los Angeles with interior design by Tara Bernerd & Partners, both opening in late spring. Connecting the two towers is a large public plaza with landscaped terraces that will host outdoor events, and 164,000 square feet of retail space coming late fall will house dining, shopping and entertainment concepts. But, it was important to Gehry that this structure didn’t feel towering or over-dominating, like the high-rise office buildings built in the 1980s on Bunker Hill. The complex includes a central open plaza he calls the “urban room,” gently receding towers and incredible sightlines to his designed Walt Disney Concert Hall. In addition to luxury living, shopping and dining, the inclusive development was decades in the making.?Retail outlets will serve a wide range of price points, and accessible cultural programs, performances and celebrations are designed to bring the community together.

Trump Closes On Record Sale Of Old Post Office. The Trump International Hotel?in D.C. is no more. Last Wednesday night, crews removed Trump signs?from the hotel on Pennsylvania Avenue?after a Miami-based investment group closed on its $375 million purchase of The Trump Organization's lease for the historic Old Post Office Building. CGI Merchant Group (which counts stars like Alex Rodriguez and Floyd Mayweather among its investors), confirmed plans to turn the property into a Waldorf Astoria?via a partnership with Hilton Worldwide Holdings.?Trump and CGI first reached a deal on the property?at 1100 Pennsylvania Ave. NW in November, after it had been on the market for two years, in what is likely the final turn for the complicated sale process (which required approval from the General Services Administration?that came down in March). CGI landed a $285M loan from MSD Capital (the firm backed by tech billionaire Michael Dell), to fund the acquisition and renovation of the hotel.?The GSA approved the deal?after getting?commitments from Hilton that it would operate the hotel as a high-end brand befitting the landmarked property. That approval came despite?calls from the House Committee on Oversight and Reform?to terminate Trump's lease, since elected officials were barred from profiting from the property under the original terms. The House panel also found that Trump lost $47 on the property?between 2016 and 2020. The Trump Organization disputed the panel's findings.?Nevertheless, the total Trump ultimately received for the property will likely earn him a tidy profit and sets a record as the priciest hotel deal in D.C. history.

L.A. Office Sector’s Mixed Performance in Q1. Office construction activity is finally returning to pre-pandemic levels in Los Angeles. As of March, the metro had 3.2 million square feet of office space under construction, according to?CommercialEdge.?Following nationwide trends, most gateway office markets have experienced a slowdown in development. After a higher-than-usual number of deliveries, the pipeline shrunk in Los Angeles as well—also influenced by significant changes across office-using employment sectors. Another effect is the plateauing vacancy. As of March, overall vacancy in Los Angeles was 13.7 percent, down only 10 basis points year-over-year. Developers remained focused on bringing new Class A office space online, a large portion of which is intended for creative use, such as media, film and entertainment. Six projects were completed during the first quarter, totaling over 2 million square feet—well above the quarterly average over the past year (about 700,000 square feet). Submarkets that recorded significant development activity include East Los Angeles (310,000 square feet under construction), Pasadena (470,000 square feet), San Gabriel Valley (210,000) and South Los Angeles (290,000). Other submarkets that recorded better vacancy than the metro’s average included San Gabriel Valley—down 50 basis points month-over-month, to 9.8 percent in March—, Wilshire Corridor (up 40 basis points, to 6.6 percent), Burbank (down 10 basis points, to 6.1 percent) and West San Fernando Valley (up 210 basis points, to 12.6 percent). The metro remains poised for robust activity, despite an overall decline. Adding planned and prospective square footage to the mix, the pipeline represented 3.7 percent of total stock in March. Despite being 50 basis points higher than the previous quarter (at 13.2 percent in December), office vacancy in Los Angeles maintained a better position among metros tracked by CommercialEdge. The national vacancy rate was 15.9 percent in March. Other gateway markets such as San Francisco (17.3 percent) and Chicago (20.3 percent) are significantly slower to recover from the pandemic than Los Angeles.

Magic Castle Getting New Preservation-Minded Owner.?If you’ve ever been to the Magic Castle in Hollywood, you know it’s, well, a “magical” place.?I say this because lately it has run into a slew of criticism.?So in a move to preserve the historic Magic Castle, video game mogul Randy Pitchford is buying the famous home to the Academy of Magical Arts.?The purchase, which is expected to close next week, will ensure the castle (in the heart of the tourist district) remains the academy’s clubhouse and performance venue, Pitchford said. The price has yet to be disclosed.?Pitchford is best known as the founder of Gearbox Entertainment which developed the popular Borderlands franchise of video games. He is also a lifelong magician and member of the Academy based at the Magic Castle, where he learned the tricks of the trade. “Basically everything I know about entertainment started at the Magic Castle,” said Pitchford, whose magic specialty is sleight-of-hand. “I feel like I owe my career to the Magic Castle.”?The sale comes a little more than a year after the storied institution was shaken by allegations of bad behavior, detailed in a Los Angeles Times investigation. In interviews with The Times, 12 people (among them guests and former employees) accused Magic Castle management, staff, performers and academy members of abuses that included sexual assault, sexual harassment and discrimination on the basis of race or gender. The Magic Castle (a familiar sight on Hollywood’s Franklin Avenue), is an Edwardian manor with French and Gothic elements built in 1908 by Rollin Lane, a Redlands financier and orange grower, and his wife, Katherine. Pitchford is purchasing the Magic Castle from the Glover family, which had owned the property since 1961 when Thomas O. Glover bought the home and land. In that same year, Glover leased the building to William “Bill” Larsen Jr., Irene Larsen and Milt Larsen, all of whom began the Magic Castle.?Glover and Larsen, who was a television writer and magician, turned it into a clubhouse for magicians. It still serves as headquarters for the Academy of Magical Arts, a group of several thousand magicians and enthusiasts dedicated to the celebration and preservation of the performing art.?The academy, a nonprofit public benefit corporation, has become a lucrative enterprise: In 2019, it generated revenue of $21 million and net income of $1.39 million, according to its annual report.

City Attorney Mike Feuer Drops Out Of Race & Endorses Bass.?When I was a new attorney just starting my legal career (back in the Ice Age), I volunteered at Bet Tzedek Legal Services in Venice, handling pro bono real estate matters.?The guy running Bet Tzedek at the time was also a young attorney, Mike Feuer.?He was a great guy to work with, professional but informal, brilliant legal mind, and uber-sensitive to the plight of the under-privileged who needed legal representation.?I always knew he had a bright future ahead of him.?He eventually became a state assemblyman, L.A. City Councilman, and then L.A. City Attorney, and this year decided to run for mayor.?But last week, Mike became the second candidate in as many weeks to drop out of the Los Angeles mayor’s race and endorse another candidate. Mike was unfortunately polling less than 1%. The move comes less than three weeks before the June 7 primary election and with ballots already in many voters' homes.?Mike is endorsing Congresswoman Karen Bass. (Last week, L.A. City Councilman Joe Buscaino ended his bid to replace current mayor Eric Garcetti. Buscaino, whose final term on the city council ends in December, endorsed billionaire developer Rick Caruso.)?Bass and Caruso are running neck-and-neck in the race, with each polling at just under one-quarter of likely voters, according to a UC Berkeley poll.?Notably, 39% of likely voters surveyed said they are still undecided. Now that Mike will not be mayor, I can only pray that the next person that becomes mayor will find a meaningful position for a super-qualified attorney and public servant.?

Women Making Moves (& Money) in Real Estate. ?Join us on Thursday night, June 9, 2022, when we have a very special panel on women investors.?Our moderator will be Deborah Razo, President of the Women’s Real Estate Network (“WREN”). Deborah is an all-star investor, including fixing and flipping houses, residential construction, and multi-residential properties in the U.S. and Puerto Rico.?The panel will feature Cindy Coleman discussing note investing, Angela Sillman discussing short-term rentals, and Jen Maldonado discussing raising capital for your projects.?The women will be discussing how they started investing and challenges they confronted along the way. If you’re a woman investor, DO NOT miss this presentation.?(If you’re a man, but you can attend only at your own risk!)??Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. (But don’t come “fashionably late” or you’ll end up having to park in Long Beach and taking an Uber!)?RSVP at www.LARealEstateInvestors.com.

Vendors Expo Returns!?Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo"?returns on Thursday night,?June 9, 2022. The Vendor Expo opens starting at 6:30 pm. We'll have 40+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Our Vendor Expo will be held at our new home, the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LARealEstateInvestors.com.

Basic Training Boot Camp.?On Saturday, June 18, 2022, 9:00 am to 6:00 pm, will be our semi-annual Real Estate Basic Training Boot Camp.?Everything you ever wanted to know about real estate investing but were afraid to ask.?The best news of all is that this Boot Camp will be LIVE and In-Person!?No Zoom!?Location: Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (it’s really Culver City, but don’t tell anyone). The cost of the Boot Camp is $149.00 per person if paid before June 11 ($1 million after June 11).?Gold Members (and former Boot Campers) can attend for FREE. You can register at LARealEstateInvestors.com.

This Week. Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. We will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the Commerce Department will release New Home Sales tomorrow (5/24). Durable Orders, an important indicator of economic activity, by the Census Bureau will be released on Wednesday (5/25). Also, on Wednesday, the Federal Open Market Committee will release its minutes from their early-May monetary meeting. The Core PCE Price Index, the inflation indicator favored by the Fed, will be released on Friday (5/27).

?Weekly Changes:

10-year Treasuries:????????????Fell????010 bps

Dow Jones Average:??????????Fell????900 points

NASDAQ:?????????????????????????????Fell????400 points

?

Calendar:

Tuesday (5/24):???????New Homes Sales

Wednesday (5/25):??Durable Goods

Friday (5/27):????????????Core PCE

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

[email protected]

310-409-8310