News

Landmark Links November 10th – Disconnected

 

Lead Story…. This is Part II of a three part series that I’m writing about “the middle class,” tax reform and why it is so difficult to achieve in today’s environment.

My post on Tuesday of this week focused on how it’s essentially become impossible to craft policy to benefit the middle class on a nationwide basis due to massive regional inequality.  I concluded that post by saying that there were steps that could have been (and still can be) taken to mitigate the high housing cost and high barrier to entry issues that plague so many of our vibrant large cities.  If you read that and assumed that my solution was something along the lines of “build baby build” you would be correct…..but only partially.  To be clear, we do need a lot more housing units in our urban cores, – especially on the west coast –  and it will be impossible to craft a long term solution to the housing affordability crisis without a substantial ramp up in construction of additional units.  However, there is another element essential to maintaining a vibrant middle class in a dynamic, global city that often gets overlooked: infrastructure.  When discussing how regional inequality distorts the middle class, a common argument is that people do not need to live in San Francisco, Beverly Hills Beach or Manhattan.  This is correct and is also the reason that I think it’s better to gauge middle class by county rather than city or zip code.  However, moving further away from the urban core while still having the ability to utilize it is far easier said than done in some regions – unless, of course you don’t have an issue with 3 hour commutes.

When confronted about their opposition to development, a common retort from NIMBY’s is to point out that Manhattan is incredibly dense and still incredibly expensive.  While this argument has merit, it also misses a larger point: New York City does not have a middle class crisis – at least not in the same way that coastal cities in California do and the reason is infrastructure.  Justin Krause made this case very effectively in a post on Medium entitled How To Save San Francisco (emphasis mine):

New York City has faced similar problems — economic booms, affordability crises, and bodies of water. And while nobody would say New York has solved all of its problems, it has done better in a key area: diversity. In fact, it may be getting more diverse.

Teachers, fire-fighters, artists, and people in different income brackets can find housing in New York. They may not be in Soho, but they are accessible to the urban core. This is the key difference between San Francisco and New York: New York has a broader range of housing that is integrated.

It’s not just about affordability, it’s about integration.

Take a look at the maps below. Both New York and San Francisco have expensive cores, with one bedroom units fetching rents of $3k+. But both also have less expensive areas, mostly across bodies of water. In New York, you can find a one bedroom in Bushwick for $1k per month. In the Bay Area, you can find similar deals in parts of the East Bay and pockets of the Peninsula.

But in New York, if you live in Bushwick, you are still in New York. If you live in the East Bay or even in Daly City, you aren’t in San Francisco.

The next maps show places you can reach using public transportation within 45 minutes. If you live in Bushwick, you can access a large swathe of Manhattan and Brooklyn. In the Bay Area, you’re unlikely to have easy access to San Francisco at all if you’re not in San Francisco proper.

This is not to say that NYC doesn’t have any problems of it’s own.  I’ve been there a couple of times in the last few months and that’s far from the case.  New York is currently massively overbuilt in the high-end condo space, it’s mass transit is governed by an alphabet soup of competing city and state agencies that are often at odds with each other and much of it’s prime retail space has become a ghost town thanks to landlords pushing rents to levels that are completely unsustainable.  Still, NYC is able to maintain a large, economically diverse population while San Francisco, Los Angeles and other west coast cities increasingly are not and the reason is that NYC’s infrastructure is far better and the region is far more integrated.  Krause explains why this is the case (emphasis mine):

It’s true that the San Francisco Bay is bigger than the East River. And Brooklyn is denser, with more rental units, than many Bay Area cities. And, crucially, that “San Francisco” isn’t the only urban core in the Bay Area (Oakland and San Jose are also urban cores).

But the simple fact is that in New York you have the option of moving to a less expensive “fringe,” still accessible to your friends, work, and community. In San Francisco, you have the option of moving to a different city — a different community, entirely. And that’s not an option at all.

Options don’t exist because the Bay Area is not integrated. BART, the entity that should connect us, doesn’t. It doesn’t go to San Jose or North Bay. It’s very expensive and doesn’t offer a monthly pass. It barely runs at night. We’re talking about building bullet trains and hyper-loops to Los Angeles, but there is no easy way to get from Oakland to Palo Alto. Or most of San Francisco to San Jose. Or North Bay to anywhere. Even commuting from Oakland to most of San Francisco is difficult and expensive. In fact, according to SPUR, no new transportation capacity has been added across the Bay since BART’s transbay tube opened in 1972.

Transit has gotten so bad that tech companies are contracting private bus fleets. This is the opposite of openness and integration.

It seems absurd, but this is the choice that we’ve made. Expanding and improving regional transportation to better integrate the Bay Area isn’t rocket science— it simply requires cash, commitment, and political will.

The Bay Area has cash. It’s the second two pieces that are missing. But it’s not necessarily intentional; it’s a function how we’re governed.

In New York, Los Angeles, and Chicago, communities are tied together under central leadership. Powerful mayors can address systematic issues broadly and holistically. And citizens have someone they can hold accountable.

In the Bay Area, we have a collection of fiefdoms. Villages are parading as cities, addressing problems myopically. For example, Brisbane (a city of 5,000 people between San Francisco and SFO) is currently blocking a large housing development for local reasons. It’s NIMBY-ism on a broad scale – a regional tragedy of the commons.

Decentralized decision-making and local governance are important, but a complete lack of high level vision and executive authority is hurting all Bay Area cities (including Brisbane). All Bay Area cities are struggling with housing and affordability. All Bay Area cities are worried about fraying community, rising inequality, and how to manage change.

We’re facing regional problems, but we don’t have regional leadership or an effective regional plan for fixing them. San Francisco, Oakland, and San Jose can only do so much on their own. We need a commitment and a strategy that encompasses the entire neighborhood.

The article quoted about is about the Bay Area but could just as easily be about greater Los Angeles.  Every small city in these regions declines to deal with the housing crisis and claims that providing more units is the job of it’s neighbors.  Also, the region isn’t well connected because mass transit is mostly expensive crap.  It’s relatively easy and cheap to commute in NYC even if you are coming to Manhattan or Brooklyn from a far-flung neighborhood or even a neighboring state.  In the Bay Area or LA, a middle class commuter may have to drive for hours in order to reach a price point that they can afford.  This is one of the primary reasons that regional inequality has gotten so bad along the west coast.  People and business want to be here but no one can afford to move here except for high earners, leading to an ever-upward skew in median incomes, home prices and rents.

Perhaps the most unfortunate part about this state of affairs is that the problem could be addressed if leadership was merely competent.  California is spending billions of dollars on a bullet train that will initially take (very few) riders from nowhere (Bakersfield) to nowhere (Fresno).  Our leaders are pushing this because it’s a large, sexy, legacy type of project if it can ever be completed, linking LA and San Francisco.  However, our regional infrastructure is absolute garbage.  Improving light rail, commuter rail and subways may not be sexy or legacy-defining for politicians but it is actually substantially more environmentally friendly than a largely un-needed bullet train and would make our cities far more efficient. It would also allow for development in more far-flung suburbs where land is cheaper and blue collar workers could actually afford to rent or buy which would help to alleviate many of the issues that have exacerbated cost of living pressures and pushed regional inequality to record levels.  Functional infrastructure would not bring the cost of living in San Francisco and LA in line with rust belt cities like Cleveland – we’re way past the point of no return on that one – but it would go a long way towards reversing the cost of living spiral that we now find ourselves in.  A spiral that could be exaggerated further under the new tax reform proposal.

Economy

How Low Can You Go?  The yield curve is now at it’s flattest level in a decade and doesn’t look poised to reverse course anytime soon with the Fed widely expected to raise short term rates again in December.  The reason for the flattening is being hotly debated between those who think that the long end of the curve is overvalued and those who think that the Fed is running out of room to raise rates further.

The Slog: Jeremy Grantham of GMO is famous for correctly predicting the last two crashes.  However, this time around he thinks that asset valuations are rich but that they may take decades of subpar returns to slowly come back to the long term average rather than crash.

Commercial

Only the Beginning? The retail apocalypse could just be getting started as high yield debt maturities from retailers begin to pile up:

Just $100 million of high-yield retail borrowings were set to mature this year, but that will increase to $1.9 billion in 2018, according to Fitch Ratings Inc. And from 2019 to 2025, it will balloon to an annual average of almost $5 billion. The amount of retail debt considered risky is also rising. Over the past year, high-yield bonds outstanding gained 20 percent, to $35 billion, and the industry’s leveraged loans are up 15 percent, to $152 billion, according to Bloomberg data.

The Squeeze: Rising labor inputs, rents, and a recent uptick in commodity prices are going to force restaurants to start passing more costs on to customers or face  deterioration in their already slim margins.

Residential

Sea Change Coming? Home ownership has risen to its highest levels since 2014, driven largely by Millennials and causing analysts and investors to wonder whether the rental market’s good times are ending.  See Also: Where people spend the most and lease on rent in America.

NIMBY Consequences: This is so incredibly sad and is a direct result of NIMBYs preventing necessary housing from getting built:

“I’ve got economically zero unemployment in my city, and I’ve got thousands of homeless people that actually are working and just can’t afford housing,” said Seattle City Councilman Mike O’Brien. “There’s nowhere for these folks to move to. Every time we open up a new place, it fills up.”

Profiles

Dud: Eight months after Snapchat went public the company is a train wreck with Facebook poaching it’s most popular features for it’s larger user base and declining growth prospects.

Accretive: The surprisingly compelling case for Apple to buy Netflix in order to compete with Amazon in the original content and streaming video space.13102550_1187025494654529_535629253_n

Chart of the Day

Retail Distress

Retail Lender Concentration

WTF

There Goes the Neighborhood: A Nebraska man was arrested for hiring hookers and strippers to strip on his neighbors porch at least 75 times since 2013 while he watched from his house across the street.  Where I come from, this is typically referred to as being a good neighbor. (h/t Scott Barnard)

….Or Are You Just Happy to See Me? Police in Germany found a python in a drunken man’s pants after he was arrested for getting in a fight.  The pickup lines pretty much write themselves.  (h/t Steve Sims)

Resourceful: A Duncan Donuts worker in Denver was busted selling meth and heroin in addition to donuts while on the job.  Sounds like a great way to make some extra cash.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com