Category Archives: Economic Observations

Gary shares short observations about the economy.

Why Aren't Big Banks Lending?

Money!
Image by Tracy O via Flickr

The Business Review reports an explanation from Hugh Johnson:

Hugh Johnson, chief investment officer for Johnson Illington Advisors in Albany, said there may be other reasons why big banks aren’t throwing open the purse strings, and he expects the tightness to continue as long as the Federal Reserve keeps short-term interest rates low.

He said low short-term rates, coupled with rising longer-term rates, “present an interesting opportunity for banks” by allowing them to borrow funds at bargain prices and then buy U.S. Treasuries with higher returns. According to the FDIC, banks increased their Treasury holdings by 49 percent in the third quarter.

“In other words, banks can be very profitable without taking any credit risk,” Johnson said. “The Fed is hoping that bank financial strength will be restored this way, and once that happens their appetite to lend will come back. That is the unspoken agenda, to get the big banks back on their feet financially.”

But Johnson believes inflation will force the Fed to raise rates later this year, making Treasuries less attractive.

“So to maintain those profit margins, banks will have to take the risk and start lending again,” he said. “My guess is that by mid-2010, banks will have to take more risk and will have to respond to stronger loan demand.”

Read the entire report: Finance: Cash or credit? Businesses weigh options as they jockey for the recovery – The Business Review (Albany):.

What's the Cap Rate?

A group of brokers recently asked me to comment on another appraiser’s newsletter. The newsletter reported three capitalization rates, each for a different property. “How can this possibly be the retail cap rate in our region?” they asked about one.

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The Valuation of a View

I presented a PowerPoint presentation on the appraisal of the Olana Viewshed (and conservation easements in general) on May 16, 2009 at the Hudson Valley ASA Fred Iusi Conference in Albany, NY. Here’s a sample of the presentation (without audio).

[slideboom id=69270&w=425&h=370]

Statistical Stupor

The availability of statistics has made the appraiser’s life much easier over the last ten years. But good access to data does not ensure good analysis. My friend, appraiser Robert Pichette (Real Estate Appraisal Associates, West Milford, NJ), sent this along:

“He uses statistics as a drunken man uses lamp posts – for support rather than for illumination. ” – Andrew Lang.

Dealership Deals

Smart ForTwo

James R. MacCrate, MAI, CRE, ASA argues on his blog, Appraisal and Valuation Issues, that automobile dealerships, often considered to be special

use properties, may no longer be considered as such due to the expected glut of vacant dealerships as Chrysler and General Motors reorganize.

While automobile dealerships are usually special purpose properties, they also have many attributes that make them attractive for alternative uses, but the market value as an alternative use is substantially different and probably results in a lower estimate of value.  Location has always been a primary concern for determining the success of an automobile dealership, as it is with most commercial real estate uses.  Many are located in desirable locations with good visibility.  The typical dealership has the following features:

Excellent access to the site.
Large, level, rectangular sites with good road frontage that can support alternative uses.
Brightly lit showroom for display.
Separate parts department area.
Large service area facility.
Above average security, fencing and exterior lighting.
Adequate on-site employee and customer parking areas.
Automobile reconditioning center.

It is now clear that there are too many dealerships and one must be concerned with the highest and best use of the property and consider alternative uses for the property.  Many of the expensive improvements that have been made may no longer contribute to the overall value of the property even though lenders may have made a loan based on the value-in-use, versus the value in exchange or market value based on alternative uses.  As automobile sales have plunged following the typical cyclical pattern, so too will the dealership properties fall in value unless an alternative use can be found that can utilize the existing improvements.

The key to determining alternate uses for the dealership properties is to look back to the fate of older and obsolete dealership properties and more recent re-uses of dealerships no longer needed. Capital Region re-uses which come to mind include a centralized laundry facility, motorcycle dealership, RV dealerships, a supermarket, a church, and at least one flex building with the showroom converted to office area and the service garage converted to equipment and product storage. Value and prices will of course change as well.

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Creative Commons License photo credit: drewgstephens

Deja Vu

Robert L. Heilbroner, in his text, “The Worldly Philosophers,” describes the years preceding the Great Depresion:

…the average American had used his prosperity in a suicidal way: he had mortgaged himself up to his neck, had extended his resources dangerously under the temptation of installment buying, and then had ensured his fate by eagerly buying fantastic quantities of stock-some 300 million shares, it is estimated- not outright, but on margin, that is, on borrowed money.

Sound familiar?

The Language of Real Estate

Charity in the dictionary
Creative Commons License photo credit: HowardLake

Among new terms reported in the New York Times article, Buzzwords 2007, today are two related to real estate:

Ninja Loan n. No income, No Job or Assets. A poorly documented loan made to a high-risk borrower.

Walkshed n. The area that can be conveniently reached on foot from a given geographic point. Compare with foodshed, the area sufficient to provide food for a given location, and viewshed, the landscape of topography visible from a given geographic point, especially one having aesthetic value. All are patterned after watershed.