Monday, January 12, 2009

Theme from the Bottom - Part Four

We’ve written in the last few entries about oversupply and its causes (namely, Demand Overestimation, Optimism Bias and Strategic Misrepresentation). We even found a timely example of those themes in David Lereah’s confessed divorce from the so-called “positive spin.” Lereah, as you may recall, was chief economist for the National Association of Realtors.

Today, we find a related but more practical take on the impact of oversupply and market disequilibrium in the commercial environment here in Southwest Florida. The title of Mark Alexander’s Commercial Connection article in the News Press this week was Market for office space follows the job market: Current high vacancy rates favor tenants. For those who don’t know, Mark Alexander, CCIM, is senior medical office adviser at Sperry Van Ness in Fort Myers.

Mr. Alexander’s thesis – that it’s a buyer’s/tenant’s market in the commercial market in SWFL – is sound because, as he notes and as we’ve discussed, there is a terrific oversupply of commercial space. This is the practical portion and should not be too striking a proposition. Based on the market forces, buyers and lessees of commercial space should be able to negotiate a pretty good deal.

Theoretically, I am more interested in the cause(s) of the oversupply. Mr. Alexander cites the downward employment spiral as one major cause (“The office market follows the job market”). He explains that when employment was on the rise (2004-2006), demand rose concomitantly and “developers . . . planned more office buildings to construct and keep pace with this glorious rising demand.” This planning is typically on a two-year cycle, so developments planned during the end of the employment rise in 2006 would have been scheduled for occupancy in 2008. Unfortunately, the fall in employment has left many of those developments unoccupied (Mr. Alexander gives a very thorough look at the percentages of vacancies in the area, worth taking a look at if you are interested in the ratios and what constitutes equilibrium and a disturbance thereof).

One can not discount the impact of employment on the commercial market. But, as we have discussed, there are other forces (namely, demand overestimation, strategic misrepresentation and optimism bias) that contribute to oversupply. How, then, do we monitor these forces in order to make better planning decisions in the future? Mr. Alexander says only that maintaining “the supply and demand balance for office space can be tricky [because developers] typically need close to 2 years to finish an office building once they commit to a project.” “Tricky” is probably a purposeful understatement because going further would have been beyond the scope of the article. That said, future development due diligence would benefit from exploring market forces beyond employment.

I would be interested in learning from you developers or commercial professionals what factors are considered during the planning stages to best estimate (it is, after all, always an estimate) rates of occupancy two years out.

Tuesday, January 6, 2009

Theme from the Bottom - Part Three

In the last entry we sought examples of Strategic Misrepresentation (SM), Optimism Bias (OB), and Demand Overestimation (DO). The following Q&A from evidences SM, which might very well have led to OM and DO. This is not to point a finger at the National Association of Realtors or at Mr. Lereah, previously NAR's chief economist. As any advocate should, both the Association and Mr. Lereah were zealously representing their constituents and the interests thereof. Rather, this is merely an example of the previously discussed economic theories that could have contributed to the current demand shortfall.

Link to Article:

Text of Article:
Confessions of a former real estate bull
As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he's abandoned what he calls the 'positive spin.'
(Money Magazine) --

Q. Were you wrong to be so bullish?

A. I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren't good. I never thought the whole national real estate market would burst.

Q. The NAR's latest forecast calls for a slight increase in home prices next year. Thoughts?

A. My views are quite different now. I'm pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we'll see a very modest recovery in sales activity in 2009. But we've still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It'll take a long time to get back to the peak prices we saw in many markets.

Q. Any regrets?

A. I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

Tuesday, December 30, 2008

Theme from the Bottom - Part Two

Lest anyone think I am a “bottom” dweller and focused on the negative, please know that I am not. I was simply interested in the rudimentary economic theory and the opportunity to learn just how the market got to where it is, what we can do to improve it, and what we can do to prevent future demand shortfalls. That said, let’s sink back to the bottom.

The last entry left off with an introduction to Demand Overestimation (DO), Optimism Bias (OB), and Strategic Misrepresentation (SM). I came across these concepts while boning up on supply and demand theory. They were cited as causes of Demand Shortfall, which is what we are experiencing here in Southwest Florida. This entry will define each of the concepts in a bit more detail. I would then like to have open comment and discussion about how each of these concepts might have contributed to our Demand Shortfall.

Here’s a synopsis of what I learned over at Wikipedia. A Demand Shortfall (which, of course, is a lack of equilibrium between supply and demand and which causes a decrease in price) is the result of DO. DO is just what it sounds like – the overestimation of demand for any given product. DO is caused by our two other players, OB and SM. “OB is the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events.” Put another way, OB is overconfidence in the face of a starkly contrary reality. “SM is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process.” Outside of its budgetary context, I think the concept of SM is nonetheless applicable in the real estate business, where many of our professionals are compensated on a commission basis and “in response to incentives.”

So here we are in a Demand Shortfall. Let’s think for a minute about examples of each of the Shortfall’s causes defined above. What do you remember from late 2005 that resembled Demand Overestimation? What about Optimism Bias? And Strategic Misrepresentation?

Sunday, December 28, 2008

Theme from the Bottom - Part One

Denny Grimes' and Gary Tasman's recent News Press articles (Grimes' from 12/7; and Tasman's from 12/21) got me thinking about the economics of our market here in Southwest Florida. Now this is not something I, an English and classics and J.D., ordinarily do. Economics and math are not my bag, baby. But the little bit of follow up I did after reading the two articles proved interesting and instructive.

Both articles focused on "the bottom." Or, more precisely, both articles focused on the impossibility of pinpointing "the bottom." On the one hand, Grimes mocked those who predict where the "the bottom" will be and himself predicted that "[w]hen the market will hit bottom is anyone's guess." On the other, Tasman noted that sluggish "demand . . . , especially with more rigorous mortgage qualification standards, declining employment and reduced spending in general" impede our ability to pinpoint "the bottom." When the market achieves balance, or equilibrium, the authors noted, is the only time we should expect to reach "the bottom."

This talk of balance and equilibrium moved me to explore these terms in relation to economics. The balance, of course, is the balance between supply and demand. And, as everyone is well aware, we are awash in supply and thirsty for demand here in Southwest Florida. The result of this imbalance is price/value decline in which, of course, we are also awash. The same Wikipedia search that provided the Economics 101 lesson also introduced me to three terms and theories with which I was not familiar. They are:

1) Demand Overestimation
2) Optimism Bias; and
3) Strategic Misrepresentation.

This will be the first of a series of entries that will explore each of these in more detail. Stay tuned and please feel to comment and add to the discussion.

Monday, December 22, 2008

Winged Foot Title eRecords

Winged Foot Title, LLC is proud to announce its first successful eRecording. In keeping with our commitment to crafting exceptional real estate transactions through the use of the latest technology, Winged Foot Title, LLC this week became one of the first settlement services companies to begin eRecording with the Lee County Clerk of Courts.

“eRecording is the process of submitting, receiving, and processing documents for recording via the Internet that have traditionally been sent to the County for recording by runner, express mail, or courier service.” We simply scan the recordable documents (e.g., deeds, mortgages, powers of attorneys, affidavits, etc.); upload those files to the Clerk; and within very few minutes receive an electronic copy of the already recorded documents.

What does this mean for real estate professionals and their clients? Our investment in eRecording technology means reduced costs, increased efficiencies, and a more memorable closing experience. A process that once took not less than a week (sending the original documents via courier to the Clerk; awaiting their recording and return to us via mail) now takes less than an hour. The cost of sending and receiving recordables is instantly reduced by 75%, a savings that is necessarily passed on to consumers.

The process is so efficient that in most cases your buyers can walk away from our closing table with a copy of their recorded deed and their owner’s policy of title insurance. This gives new meaning to the term “closing.”

If you would like to experience the cutting edge of settlement services, contact Winged Foot Title, LLC today to find out more.

Tuesday, December 16, 2008

Out and About - Fort Myers Women’s Council of Realtors Turns 50

Winged Foot Title, LLC had the pleasure of sponsoring the 50th anniversary celebration of the Fort Myers Chapter of Women’s Council of Realtors in November. Plantation Golf and Country Club hosted a lovely evening full of formal dresses, tuxedos and a lively dance floor.

Lydia and I had the privilege to sit with past WCR presidents Edna Wade and Jayne Peterson. Also at Table 12 were Lois and Colin Feng. Lois is a terrific agent at Sellstate Premier; and Colin, from my two previous experiences, wins everything whether by skill or by chance. Our table assignment put us right near the photo booth; so we were privy to much of what went down in the booth that evening. Not to worry, what happens in the photo booth stays in the photo booth. At least I hope so!

Kudos to the entertainment for the evening as well. Denise and Gordon Corey’s (VIP Realty) son spun records and did a great job with both selection and execution. Be sure to keep Sean in mind the next time you need entertainment: Sean Corey Entertainment.

It really is our pleasure to be able to give back to the organizations and people who have helped make Winged Foot Title, LLC a success.