Brighter Side

Thursday, October 30, 2008



There's even a possible silver lining, said Wheaton, professor in MIT's Department of Economics and principal of Torto Wheaton Research . "This could be a little like the end of the internet bubble," he said. In the long run, "Real estate is Steady Eddie."

Wheaton spoke to New England Women in Real Estate last week at the Four Seasons, and there was a lot in addition to his relatively positive long view.

"Three Real Estate Mega Trends" was the topic, and they are:

-- Cap rates will be permanently lower after the current turmoil -- in the 5-6 percent range, not 7-9, as they have been. (Cap rates are the product of a formula that indicate how much of a return investors get on their money.)

-- High energy cost are here to stay, with significant effects on cities.

-- Demand for commercial real estate is expected to decline sharply, particularly in the developed world.

Doesn't sound so positive. Let Wheaton explain.

Something new is happening, in that the developing world is beginning to create a global surplus of investment capital. "Everybody says this is a permanent change," Wheaton said.

The developing world will save at a rate of about 30 percent, while ours is 3 percent.

All that increased capital will cause interest rates to be lower -- they've already dropped significantly since 1990. With increased capital chasing fixed assets (that is, real estate), you can imagine that prices will rise, or at least won't fall.

Another effect of all that money is it tends to create bubbles and busts; things aren't as stable. Wheaton said we've seen that in the Asian banking crisis, the internet boom-bust, in housing, and maybe we're seeing it in oil. "Maybe the capital markets are going to be much more volatile in the decades ahead."

But right now, considering the cost of borrowing money and the amount of income growth and the amount of liquidity, there's a balance, Wheaton said. "I actually think real estate is perfectly priced at a 6 percent cap rate."

He said the recent difficulties in real estate are closely related to the "decline in risk premiums." When there's too much capital and too little supply, and prices are zooming up, "You tend to forget about risk."

It happened when money was so cheap for so long. "People think real estate is worth more.

There was greater liquidity, low treasury-bill rates, surplus capital, and people ignoring risk. "Nothing's going to change. We can't see any of this reversing itself" in the long run, because the liquidity will return, and risk premiums will fall again from where they are now.

"That's a good thing," Wheaton said. "In the long-term sense I'm quite a bull."

Even though "the debt markets are insane right now, there is no massive overbuilding in commercial real estate. There are no empty buildings."

Cap rates will rise, but not much, maybe 100 basis points over the next year, he said. Incomes will grow, and there won't be a big fall in property values.

Not being overextended, as they were in the early 1990s, "Most sellers just aren't selling," Wheaton said.

A big reason for Wheaton's relatively sunny outlook is the lack of supply, especially in Boston, and a pipeline that's pretty empty. "We'll look back on the period '09 to '12 and say nothing was ever built," he said. "I actually see a lot of opportunities."

*****

Oil prices are up, down temporarily, and will just keep going up "until we invent substitutes, which we will," Wheaton said.

That means transportation will get more expensive, and, "There's no magic bullet."

Looking back 150 years -- Wheaton had some fascinating charts -- transportation and travel costs plummeted since 1850. Speed increased, costs decreased.

Urban areas grew to reflect that. It used to be 4-5 miles to the edge of New York City, and it took an hour to get there. Now it's 40-50 miles, and it takes the same amount of time.

If transportation costs increase, "everything in the center becomes more valuable." They call this the monocentric city.

"But that's now how cities work anymore. Firms have disbursed to the suburbs."

Here, Biogen Idec may move from Kenmore, the life sciences mecca, to Weston.

"Cities are becoming polycentric -- there are several centers," said Wheaton.

"That's very good. We get what city planners call better-balanced land use."

"You live where you work, you work where you live."

Europe and Asia are also becoming polycentric, but they usually have developed transit.

Bangkok has plans for five well-connected city centers, and Tokyo has a ring five miles out.

It won't happen in most of widely dispersed America though. "Transit systems don't work unless you live in cities as dense as New York as Hong Kong," Wheaton said. And to build them in already dense places will cost trillions of dollars.

Instead, jobs and people will be better-aligned, "and we'll all drive small green cars, and have backyards."

*****

Forecasters are now scrambling to incorporate slower job growth into their US models. Slower than ever before. "We're going to have to adjust all our benchmarks," Wheaton said.

The baby-boom echo is so small "it's not even on the radar screen."

"It's not a crisis, it's a reality," but the United States and other countries, some as in Europe even in negative-population-growth periods, will have to cope.

A few -- Brazil, India, for example -- will grow, and France may make up a decline with immigration.

Russia's and Germany's and Japan's populations will fall.

Bringing it back to real estate: Without population growth, there won't be need for a lot of new buildings.

But still there will be spending and activity. "People will take older buildings and make them nicer."

"With all that savings, there should be really good GDP growth. Everybody will be wealthier, even as the population and job growth slow."

In this country, there won't be enough people to go around, and some cities will decline: Pittsburgh, Cleveland, Detroit, Buffalo, Hartford.

Some will grow: San Francisco, Denver, Orange County, Seattle, Phoenix, Orlando. "In Boston you're going to have only barely positive net job growth over the next 10 years."

Boston used to forecast 8 percent growth, and now that could go as low as 1 percent.

Wheaton, who's taught at MIT since 1972, noted he didn't make many short-term predictions in his talk. "So you can't hold me to it."






A Second Chance

There are lots of names next to the John Francis Fitzgerald plaque that was re-rected this year on a monument at the old Turnpike administration building in the North End.

The Tip O'Neill Tunnel is mentioned. And Sen. Kennedy, and Gov. Patrick, and Mayor Menino, and Secretary Cohen, and Chairman LeBovidge.

But it was Vincent Zarrilli, the longtime North End businessman who pushed to get the plaque out of storage. In the '80s and '90s, Zarrilli unsuccessfully fought the Big Dig with his ubiquitous yellow "Back the BB" signs, symbolizing an alternative "Boston Bypass" on a series of bridges over Boston Harbor.

Who knows? Maybe it would have cost less than $15 billion.

Honey Fitz Fitzgerald was of course mayor of Boston twice and father of Rose Fitzgerald Kennedy, after whom the new Greenway is named.

The bronze plaque was first raised in 1958, on the old elevated Central Artery highway as it was completed through our city.

It came down when the Artery was razed and interred. Now it's back. Thanks, Vinnie.








Heard on the Waterfront

Three young women were having their morning jog this week along the Fort Point Channel.

Puffed one: "The Mandarin -- have you checked out the bar? Higher prices on weekends."