real estate issuesreal estate issues 2 volume 35, number 2, 2010 published by the counselors of real...

Published by THE COUNSELORS OF REAL ESTATE Volume 35, Number 2, 2010

REAL ESTATE ISSUES®

www.cre.org

F E AT U R E S A N D P E R S P E C T I V E S

After the Recession: Florida, Nevada, Arizona, and the Next 5,000 Days

Supply Constrained Markets

The Valuation of Mortgage Security by Italian Banks

A Corporate Guide to Implementing a Sustainable Real Estate Program

Residential Energy Efficiency: A Model Methodology for Determining Performance Outcomes

Are Condos Securities? How to Determine When You Have a Security

Valuing Tax-Exempt Real Estate Bonds

Reconsidering the Definition of Highest and Best Use: The Case for a Post-Disaster Highest and Best Use

Ethics Versus Compliance

CRE Global Outreach: The Kenyan Student Exchange Program

1REAL ESTATE ISSUES Volume 35, Number 2, 2010

EDITOR IN CHIEF

Peter C. Burley, CRELarkspur, CO

ASSOCIATE EDITOR

Mary C. Bujold, CREMaxfield Research, Inc., Minneapolis, MN

2010 EDITORIAL BOARD

Owen M. Beitsch, Ph.D., CREReal Estate Research Consultants, Orlando, FL

Michael Y. Cannon, CREIntegra Realty Resources-Miami, Miami, FL

Susanne Ethridge Cannon, Ph.D., CREDePaul University, Chicago, IL

Maura M. Cochran, CREBartram & Cochran, Inc., Hartford, CT

John A. Dalkowski, III, CREPHOENIX Real Estate Counselors, Inc., New York, NY

Karen G. Davidson, CREDavidson & Associates, Anaheim, CA

P. Barton DeLacy, CRECushman & Wakefield, Inc., Chicago, IL

Anthony Downs, CREThe Brookings Institution, Washington, DC

Jack P. Friedman, Ph.D., CREJack P. Friedman & Associates, Dallas, TX

Steven M. Friedman, CREErnst & Young LLP, Washington, DC

John L. Gadd, CREGadd Tibble & Associates, Inc., Wheaton, IL

Lewis M. Goodkin, CREGoodkin Consulting, Miami, FL

Anthony M. Graziano, CREIntegra Realty Resources, Toms River, NJ

Tom Hamilton Ph.D., CREUniversity of St. Thomas, Saint Paul, MN

Peter L. Holland, CREBartram & Cochran, Hartford, CT

Paul G. Johnson, CREThe Paul G. Johnson Company, Phoenix, AZ

Steven Kaye, CRECB Richard Ellis, Boston, MA

Mark Lee Levine, CREUniversity of Denver, Denver, CO

Gerald M. Levy, CREGerald M. Levy & Co., LLC, New York, NY

Marc Louargand, CRESaltash Partners, West Hartford, CT

Timothy R. Lowe, CREWaronzof Associates, Inc., El Segundo, CA

David J. Lynn, Ph.D., CREING Clarion, New York, NY

Richard Marchitelli, CRECushman & Wakefield of Washington, D.C., Inc., Charlotte, NC

Michael S. MaRous, CREMaRous & Co., Park Ridge, IL

William P.J. McCarthy, CREW.P.J. McCarthy and Co., Ltd., Burnaby, BC, Canada

Ed Morse, CREMorse & Company, Coeur D’ Alene, ID

Brent A. Palmer, CRENewTower Trust Co., Seattle, WA

Joe W. Parker, CREAppraisal Research Co., Inc., Jackson, MS

Martha S. Peyton, CRETIAA-CREF, New York, NY

Jeanette I. Rice, CREVerde Realty, Fort Worth, TX

James P. Ryan, CREGriffin Realty Advisors, Atlanta, GA

Roy J. Schneiderman, CREBard Consulting, San Francisco, CA

Karl-Werner Schulte, CREIREBS International Real Estate Academy,

Eltville, Germany

Daniel L. Swango, CRESwango International, Tucson, AZ

F. Thomas Ustler, CREUstler Properties, Inc., Orlando, FL

David R.Walden, CRENational Property Valuation Advisors, Inc., Chicago, IL

Robert M. White, Jr., CREReal Capital Analytics, Inc., New York, NY

PRESIDENT AND CHIEF EXECUTIVE OFFICERMary Walker Fleischmann

MANAGING EDITORCarol Scherf

DESIGN/PRODUCTIONDave Hunter

COVER PHOTODillon Gusmano, Chicago, IL

The articles/submissions printed herein represent the opinions of the authors/contributors and not necessarily those of The Counselors of Real Estate or its members. The Counselorsassumes no responsibility for the opinions expressed/citations and facts used by the contributors to this publication regardless of whether the articles/submissions are signed.

Published by The Counselors of Real Estate, a not-for-profit organization of the National Association of REALTORS®, 430 N. Michigan Ave., Chicago, IL 60611.Copyright 2010 by The Counselors of Real Estate of the National Association of REALTORS®. All rights reserved. (Printed in USA.)

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Real Estate Issues is a registered trademark of The Counselors of Real Estate, a not-for-profit organization.

Published by THE COUNSELORS OF REAL ESTATE®

REAL ESTATE ISSUES

EDITORIAL BOARD

®

REAL ESTATE ISSUES 2 Volume 35, Number 2, 2010

Published by THE COUNSELORS OF REAL ESTATE Volume 35, Number 2, 2010

4Editor‘s NotePeter C. Burley, CRE

8Contributors

9After the Recession:Florida, Nevada, Arizona, and the Next 5,000 DaysOwen Beitsch, Ph.D., CRE, FAICPWith the recession now deemed to have ended in 2009, it willhave exceeded, by many months, those that occurred in the1970s and 1980s, with extraordinary disruptions to the housingmarket. In this article the author discusses emerging trends inthree states that may point to future changes in the needs of thehousing market moving forward.

20Supply Constrained MarketsDavid Lynn, Ph.D., CRE; Bohdy Hedgcock; and Jeff OrganisciakConstraints on new supply in a given market reduce an owner’scompetition for tenants, which typically leads to higheroccupancy, higher rent levels and faster rent growth. Supplyconstraints can stem from several sources and vary across bothmarkets and time. This article discusses several aspects ofsupply constraints, including their origin and economics, andintroduces a way of measuring this feature across propertysectors and metropolitan areas.

28The Valuation of Mortgage Security by Italian BanksMassimo Biasin; and Halbert C. Smith, CRE EmeritusThis case study takes a looks at four Italian banks and themethods and procedures implemented by them in valuing realestate used as collateral for loans both in the loan originationand credit monitoring process. Impetus for the study was gener-ated by the “disastrous results” of the holdings of mortgages andmortgage derivatives in U.S. banks, and this article takes a lookat whether the same risk factors could be at work in Italianbanks, which hold an even greater percentage of assets inresidential mortgage loans. The authors provide recommenda-tions which may be helpful in evaluating an institution’s ownpolicies and procedures related to mortgage lending and,ultimately, in avoiding disastrous bank failures.

36A Corporate Guide to Implementinga Sustainable Real Estate ProgramColette M. Temmink, CRESustainability is no longer thought of as a passing fad but rathera business imperative across the globe. As a result of changingenergy prices, anticipated carbon regulation, stricter futurebuilding codes, cost containment, limited natural resources, orincreasing pressure from stakeholders, the question has clearlychanged from whether sustainable design should be consideredto why one would choose not to consider it. This article looks ata seven-step program that can help in implementing a sustain-able real estate program.

41Residential Energy Efficiency: A Model Methodologyfor Determining Performance OutcomesPierce Jones, Ph.D.; Ujjval K. Vyas, Ph.D., J.D.; Nicholas Taylor, M.S.;and M. Jennison Kipp, M.S.The current climate of opinion in both the residential andcommercial sectors for new and existing building stock gives aprominent role to energy efficiency as a policy tool. Executiveand legislative branches of government at both the state andfederal levels are considering and adopting policy options tovalorize energy efficiency in the service of everything fromnational security to curbing global warming to creating a greeneconomy. While the authors support this activity, it should benoted that actual evidence regarding the benefits or outcomes ofmost funding initiatives or policy activity in this area remainsdifficult to assess meaningfully. In this article, the authors stressthe need for validation of post-occupancy performance anddemonstration of persistence of energy efficiency benefits attrib-utable to energy efficiency initiatives and policy activities, andsuggest a methodology to assess actual performance using awell-known green building rating system for homes.

48Are Condos Securities?How to Determine When You Have a SecurityPatricia S. Wall, J.D., CPA, MBA, Ed.D.; and Lee Sarver, Ph.D.Can real estate ever be a security? Can disgruntled buyers voidpurchases by claiming securities fraud? This article reviews caselaw regarding related real estate transactions and addresses whatbuyers and sellers should know. For example, if the real estateventure in question is a security, a purchaser can claim that theseller should have registered it as such under state or federalsecurities law, unless an exemption applies. If the seller did notdo so, the purchaser may be able to void a now-undesirable dealby claiming securities fraud. Moreover, the person controllingthe selling company and those involved in the sale may bepersonally liable. Read more beginning on page 48.

REAL ESTATE ISSUES

CONTENTS

®

3REAL ESTATE ISSUES Volume 35, Number 2, 2010

53Valuing Tax-Exempt Real Estate BondsDevon W. Olson, CRE, MAIIn today’s constrained lending environment, tax-exempt realestate bonds are a viable apartment financing option because oftheir low “all-in” costs (interest rates), extended maturity termsand potential assumption features. These bonds are generally onlyassumable on properties originally developed with them in place,but in some cases, are available for existing properties undergoingsubstantial renovation. This specialized financing cannot beduplicated in the marketplace and provides financial and non-financial benefits to a variety of associated parties. In this article,the author gives an overview of estimating the value of thesebonds for acquisition, appraisal or accounting purposes, and theneed for an in-depth understanding of their characteristics.

59Reconsidering the Definition of Highest and Best Use:The Case for a Post-Disaster Highest and Best UseDonald R. Epley, Ph.D. CCIM, MAIOrderly development and ownership of real property followinga disaster depends critically on the estimation of the highest andbest use and real property value. It is the number used in thepayment of insurance loss claims, possible sale, construction ofimprovements, and financing. The typical market concept anddefinition of highest and best use commonly used in a marketeconomy is neither structured nor applicable in a situationwhere the marketplace has been severely impacted, and perhapsdestroyed, by a catastrophe. The presumptions underlyingmarket value and the approaches to value do not exist. In thisarticle, the author reviews the deficiencies and suggests that anew disaster highest and best use be adopted. His recommenda-tions include surveying a select group of informed individualsto estimate the value of the existing site “as is.”

72Ethics Versus ComplianceBowen H. ‘Buzz’ McCoy, CREIn this perspective, the author addresses the conflicts thatprofessionals may encounter during a career in business, and theimportance of building trust relationships with clients, fellowemployees, the government, shareholders, and the generalpublic, and sustaining them through personal performance overmany years.

74CRE Global Outreach:The Kenyan Student Exchange ProgramMaura Cochran, CRE, SIORThe Counselors of Real Estate (CRE) recently established asmall-scale student exchange program in one of the lastemerging global markets: Africa. Funded by The CREFoundation, the program brought three Kenyan students fromthe Kenya School of Monetary Studies (KSMS) to New YorkCity in May 2010 to learn about U.S. real estate practices. In thiscommentary, the author talks about the program’s completion,with a trip by several Counselors to KSMS this past June, andshares thoughts from one of the Kenyan students.

78About Real Estate Issues

79About The Counselors of Real Estate


SUMMERTIME, AROUNd THESE pARTS, IS A vERY bUSY SEASON, farfrom the lazy, hazy days in town. Our neighbor, Kenny, whois the grandson of the man who originally laid out hishomestead here, continues to tend to his horses and cattleand to mow the fields for hay. His work begins early in Apriland continues through the waning days of early autumn,until the first snows bring all to a halt. Kenny shows nourgency in his labors; he simply presses on in his slow,methodical pace all summer long until the valley is fullyprepared for our long, relentless Colorado winter.

by mid-September, Kenny’s cows are fat. The hay is in. And,the valley, having completed its job, lies back, satisfied thatthe bounteous green months have fully met our needs forthe coming several months. The grass turns golden brown,and the cottonwoods and willows along the creek mellowinto a mosaic of soft yellows.

Autumn is a time for looking back at what we have accom-plished during the warm green months. And, it is a timefor looking ahead toward what we would like to accomplishin the months to come.

Looking back, I wanted to paint the house over thesummer. I wanted to fix a few things and make ready forthe coming winter. Like Kenny, I occasionally went out tomow my fields (though I left the baling to him). And, Isometimes sat to watch the cows get fat across the road.

For the most part, though, my summer was filled withconversation. About the economy. About the industry.About specific businesses and their needs. About, maybe,securing a paying job to meet those business needs. Formany of those conversations, I scurried to places likeWashington and Austin, and even up to denver a fewtimes. plying my trade and selling my wares. pointing to

where we have been and where we might be going,suggesting direction, offering ideas. It’s all what aCounselor does, after all, and it has been my appointed taskto demonstrate the skills and knowledge that thisCounselor has to offer.

Alas, the house remains unpainted. And, those few thingsthat need fixing remain unfixed. And, I continue to lookfor a place to do my best work.

but, the hay is in and the cows are fat. And, winter willcome, whether I have a job or not.

The other part of my summer has been devoted to RealEstate Issues. The editorial board has been deeply involvedin discussions, fleshing out topics and issues, seekingthought leadership, investing huge blocks of time to ensurethat this remains one of the industry’s premier publications.

This issue is evidence of that effort. The articles hereinreveal the breadth and depth of knowledge and expertiserepresented among the membership of The Counselors ofReal Estate.

Editor’s NoteBY PETER C. BURLEY, CRE

“Neither spring, nor summer beauty hath such grace,As I have seen in one autumnal face.”

—JOHN DONNE

Kenny Mows All Summer Long


In his article “After the Recession: Florida, Nevada,Arizona and the Next 5,000 days,” Owen beitsch, CRE,offers an in-depth examination of demographic forcesand residential property markets in some of the placesmost deeply stricken by the recession. As beitsch pointsout, “…little has been written about the actual use of realestate. The scrutiny of financial metrics has takenprimacy over many fundamental social and demographicinfluences underlying the basic need for or the utility ofreal estate.” In fact, demographic shifts that have occurredin places like Florida, which has experienced a netpopulation loss in recent years, have resulted in changesin the need for, and use of, certain kinds of housing stock.A housing recovery in markets that have always relied onheavy in-migration will likely be slower, beitsch asserts,as market activity is likely to fall short of the necessaryvolume to right current oversupply.

david Lynn, CRE, visits the measurement of supplyconstrained markets, and the implications of investmentstrategies that focus on them, in his article “SupplyConstrained Markets,” Lynn presents the definitions andeconomics of supply constrained markets and providesmeasures for various property types within them. Lynncompares metropolitan area markets, based on the priceelasticity of supply, for office, retail and industrial proper-ties. The measures lead to the conclusion that investmentin supply constrained markets should lead to strongerincome and capital appreciation.

Massimo biasin, of the University of Macerata, Italy, andHal Smith, CRE Emeritus, present a researchstudy/consulting project conducted in 2008–2009 in Italyentitled “The Valuation of Mortgage Security by ItalianBanks.” prompted by the disastrous results in themortgage and mortgage derivatives markets in the UnitedStates, the project sought to discern whether Italianbanks, which hold large portions of assets in residentialmortgages, faced similar risk factors. Interestingly, thestudy concludes that losses in residential mortgages inItaly were relatively minimal, the result of rules limitingexposure to subprime mortgages, among other factors.While there are clearly issues surrounding value estimatesmade by Italian appraisers, Italian banks have beenjudicious in their assessment of the property in thecontext of the immediate neighborhood and thesurrounding economy.

We return to sustainability, this time in the corporate realestate arena, with CRE Colette Temmink’s “A CorporateGuide to Implementing a Sustainable Real Estate

Program.” Temmink offers seven steps that can be takenby corporate real estate executives to implement asustainable program in their respective portfolios.Temmink advises that corporate real estate executives arethe “stewards their companies’ assets and are positionedto provide the leadership needed to preserve and protectthe environment, while still meeting the needs of theiremployees,” and she concludes that “whether the drivingmotivation is cost savings or saving the environment—orboth—now is the time to act.”

Unlike the commercial sector, residential energy efficienciesare measured in newly completed stock only once. In theirarticle “Residential Energy Efficiency: A ModelMethodology for Determining Performance Outcomes,”pierce Jones, ph.d., of the University of Florida, and Ujjvalvyas, ph.d., of the Alberti Group, offer an evaluation ofENERGY STAR-rated homes, along with colleaguesNicholas Taylor and M. Jennison Kipp, of the program forResource Efficient Communities. Having noted a deteriora-tion in energy performance over time, the authors have setout to determine if ENERGY STAR homes, which havebeen promoted (and underwritten) as superior to non-ENERGY STAR properties, maintained an advantage inenergy use. As the authors point out, “If the performance ofENERGY STAR homes decayed measurably compared withnon-ENERGY STAR homes within five years, any attemptto use the certification as the basis of underwriting advan-tages (would be) in doubt.” While the ENERGY STARhomes meet the performance thresholds early on, theirperformance tends to decline over time, often consumingmore energy in subsequent years. From a policy standpoint,the authors find that a lack of any large-scale validation ofENERGY STAR-certified home performance could lead todifficulties in decision-making and market integrity.

patricia Wall and Lee Sarver, of Middle Tennessee StateUniversity, discuss the nature of condominium ownershipas securities in “Are Condos Securities? How to DetermineWhen You Have a Security.” The authors providebackground on the nature of securities, suggesting thatthere is more to what defines a security than merely whatwe normally understand in the realm of stocks and bonds.In fact, “Not only are stocks and bonds securities, but manyother things are as well.” The nature of ownership and useof cooperative and condo units could be interpreted asowning something that at least looks more like a securitythan a home, changing the requirements that units be regis-tered as securities. For the real estate community, the deter-mination of what constitutes a security is “unsettled law.”


Many municipalities are keen to issue tax-exempt bonds “toencourage development of blighted areas, increase the taxbase and/or promote more affordable housing in high-costhousing areas.” In his article “Valuing Tax-Exempt RealEstate Bonds,” devon Olson, CRE, discusses the legislativebackground and definitions of tax-exempt financing and theissue involved in valuing bond financed properties. “Giventax-exempt bonds’ attractive characteristics,” Olson pointsout, “evidence indicates that sophisticated investors arewilling to pay a premium for bond-financed apartmentproperties. Whether for acquisition or ongoing reportingpurposes, accurately valuing tax-exempt real estate bondsrequires knowledge of how they work.”

With his article, “Reconsidering the Definition of Highestand Best Use: The Case for a Post-Disaster Highest and BestUse,” don Epley makes a return visit to Real Estate Issues toconsider whether, in post-disaster situations, a new defini-tion and procedure for determining Highest and best Use(HbU) might be applied when conditions are such thattraditional methods are inapplicable. “problems ariseimmediately,” Epley tells us, “that bring into question thevaluation process of a normal market. public records may bepartially or totally destroyed, property lines and boundarymarkers may be gone or hidden, and the infrastructure maybe damaged in a manner that makes usability questionable.”Epley argues that the normal approach and concepts used,such as market value, may be questionable, since normalmarket conditions simply may not exist in a post-disasterenvironment. He offers and discusses in detail alternativeapproaches “to solve and relieve the deficiencies” he finds intypical methods to estimate value in post-disaster situations.

Recent events in our institutions and society suggest that, attimes and in some places, our values and our ethics havebeen, well, forgotten. buzz McCoy, CRE, points out, in“Ethics vs. Compliance” that “several prominent financialinstitutions... seem to have forgotten the distinction betweenbeing legal and being ethical.” There is a very real distinctionbetween walking a legal line and doing business ethically inan environment of trust. Ultimately, business is built on

trust, on relationships, on knowing certain limits. McCoypoints out that values, when operable in the workplace, willlead to higher performance. “It is important,” buzz tells us,“to be rigorous about certain core values and constraints andto provide freedom for innovation and creativity aroundthose cores.” I fully agree.

CRE Maura Cochran summarizes interviews she conductedwith several participants of a high-level conference held inKenya as part of a CRE Foundation student exchangeprogram with the Kenya School of Monetary Studies. In herarticle, “CRE Global Outreach: The Kenyan StudentExchange Program,” Cochran interviews fellow CREs SamKuckley, byron Koste and Tom Justin, who traveled toKenya, and Kenyan exchange students Nancy Atieno Jamal,Florence Apondi Amuok and Sylvia Wanjiru Kimani, whovisited New York as part of the program. The conference inKenya brought together bankers, regulators, practitioners,researchers, academic and senior policymakers. CREs HowieGelbtuch and Hugh Kelly helped host the students in NewYork City. Cochran discusses the program, its origins, itsfocus, and expected achievements.

As I look ahead to the coming months, I imagine I will becontinuing my conversations with potential employers. Idon’t know where those conversations will lead. but, like therest of the industry, I remain hopeful.

I do know that the other part of my professional life, thisjournal, has a great year ahead. We are planning a specialissue, devoted to the banking and financial environment, forJanuary. And, we are already reviewing articles for the springto include even more of the best thinking and insight forwhich The Counselors are so well respected. Stay tuned. �

PETER C. BURLEY, CRE

EDITOR IN CHIEF


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Wishes to Thank the Following Sponsors for Their Supportof Our National Meetings and Programs During 2010

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REAL ESTATE ISSUES 8 Volume 34, Number x, 2009

OWEN BEITSCH, PH.D., CRE, FAICP, is aprincipal with Real Estate Research Consultants,Orlando, Florida, a firm offering variouseconomic and planning services to both publicand private clients with substantial real propertyassets or engaged in policy or strategic mattersdependent upon the deployment of such assets.He is adjunct faculty at the University ofCentral Florida and a research associate in thecollege's department of public affairs.

MASSIMO BIASIN is a professor of FinancialIntermediaries at the University of Macerata,Italy, and also serves as principal in theconsulting firm of biasin & biasin, with officesin bolzano, Italy, and Munich, Germany,holding the equivalent designation of CpA. Hereceived a doctorate in banking and finance in1999 from the University of venice, and servedon the faculty of Catholic University of Milanprior to accepting the post at Macerata. biasinalso serves on the investment boards of severalItalian REITs.

MAURA COCHRAN, CRE, SIOR, joinedbartram & Cochran in 1987 and has worked inthe commercial real estate industry for morethan thirty years. She practices both nationaland local consulting and project implementa-tion, including due diligence analysis, adaptivereuse studies, marketing plans and corporaterelocation assignments.

DONALD R. EPLEY, PH.D., CCIM, MAI, isa USA distinguished professor of Real Estateand director for the Center for Real EstateStudies, Mitchell College of business at theUniversity of South Alabama in Mobile. He hasauthored and co-authored nine textbooks, andhas been the editor of two academic journals.

BOHDY HEDGCOCK is a senior associate inthe Research & Investment Strategy group atINC Clarion, New York City and currentlyoversees bottom-up market analysis for privateequity acquisitions and portfolio management.previously he worked as a real estate consultantand urban planner. Hedgcock holds a master’sdegree in real estate finance from New YorkUniversity, a master’s degree in urban planningfrom the University of Colorado, and abachelor’s degree from Southwestern University.

PIERCE JONES, PH.D., earned his graduatedegree in mechanical engineering from theUniversity of Florida in 1980, and is a professorthere in the Agricultural and biologicalEngineering department in the Institute of Foodand Agricultural Sciences. He directs theprogram for Resource Efficient Communities, aninterdisciplinary, self-funded, entrepreneurialgroup that promotes the adoption of “bestdesign, construction and management practices”in new, master-planned residential developments.Under his direction, the program for ResourceEfficient Communities is directly participating inland development and building projects thatadopt and demonstrate “green” practices.

M. JENNISON KIPP is a resource economistand project manager with the program forResource Efficient Communities. Sheconducts applied outreach and researchprojects on water, energy and land-useefficiency in Florida, with a focus onaccounting for the full costs and benefits ofdifferent resource management scenarios.Kipp holds master’s degrees in appliedeconomics and environmental pollutioncontrol from The pennsylvania StateUniversity.

DAVID LYNN, PH.D., CRE is an economist,institutional real estate investor and strategistwith extensive experience in national andinternational markets. He currently serves asmanaging director of strategy and researchand general portfolio manager at ING Clarionpartners in New York. He is an author of threebooks, a noted speaker and commentator, andwrites a regular column called “CapitalTrends” for the National Real Estate Investor.

BOWEN H. ‘BUZZ’ MCCOY, CRE, is aretired investment banker. He was responsiblefor the real estate finance unit at MorganStanley for many years. McCoy is a past presi-dent of The Counselors of Real Estate and aLife Trustee of the Urban Land lnstitute. Hisrecent two books are: The Dynamics of RealEstate Capital Markets: A Practitioner’sPerspective (Urban Land Institute, 2006) andLiving Into Leadership: A Journey in Ethics(Stanford University press, 2007).

DEVON W. OLSON, CRE, MAI, is thedirector of the Utah Retirement Systems realestate portfolio, and is responsible foroverseeing its acquisition, asset management,disposition, and strategic planning. He hasmore than thirty years experience in realestate valuation, management, investment andfinancing. Olson currently serves on the RealEstate Information Standards board and is anadjunct professor at brigham YoungUniversity in Real Estate Finance.

JEFF ORGANISCIAK is a senior analyst atING Clarion partners.

LEE SARVER is an associate professor offinance in the Economics and Financedepartment at Middle Tennessee StateUniversity. He received his doctorate ineconomics in 1987 from the University ofTennessee.

HALBERT C. SMITH, CRE EMERITUS, isprofessor Emeritus of Real Estate and Financeat the University of Florida. previously he was afaculty member at Ohio State University, andwas director of economic research for theFederal Home Loan bank board. Smith is adirector of the Homer Hoyt Institute and aFounding Fellow of the Weimer School ofAdvanced Studies in Land Economics. From1993–1998, he served as editor in chief of RealEstate Issues. He has taught and conductedresearch in several Italian and U.S. universities.

NICHOLAS TAYLOR has worked as researchassociate with the program for ResourceEfficient Communities since 2005, focusing onanalysis of utility consumption data to identifyeffective energy efficiency measures. Taylorworks with utilities, government entities andUF/IFAS Cooperative Extension Service agentsto tie conservation program performance topolicy initiatives.

COLETTE M. TEMMINK, CRE, currentlyleads the corporate real estate interests of SunMicrosystems. previously Temmink served asvice president and general manager of JohnsonControls, where she was responsible for its realestate transaction and brokerage line ofbusiness for the West Coast. Her expertiseincludes all aspects of facilities, property andasset management, real estate transactions,distressed asset workouts, large-scale complexredevelopments including entitlements, masterplanning, infrastructure development,public/private partnerships and strategic corpo-rate planning and outsource contracting.

UJJVAL VYAS, PH.D., J.D., is the principal ofAlberti Group, a Chicago-based interdiscipli-nary consultancy specializing in emergingissues in the building industry includingsustainability and high-performance buildings,building information modeling, and alternativeproject delivery systems. He has lectured andpublished extensively on legal and businessrisks in the sustainable building marketplace,covering large-scale policy, insurance, legal andtechnical issues. vyas holds a ph.d. from theUniversity of Chicago and a J.d. with honorsfrom Illinois Institute of Technology/Chicago-Kent College of Law.

PATRICIA S. WALL is an attorney and CpA,and presently serves as associate professor ofbusiness law at Middle Tennessee StateUniversity. She also has taught accounting andbusiness law at the University of Alabama inHuntsville, St. John's University (St. vincent'sCollege) and Hofstra University. Wall receiveda juris doctor in 1979 from the University ofTennessee College of Law; a master’s inbusiness administration in 1987 from theUniversity of Tennessee (Chattanooga); and adoctorate degree in education from TennesseeState University in 2004.

REAL ESTATE ISSUES

CONTRIBUTORS


TO dATE, WHAT HAS bEEN WRITTEN AbOUT THE REAL ESTATEindustry and its association with the current recession hascentered primarily on the flow of capital and its impacton yields, lending practices and the valuation of realestate.1,2,3,4,5 Accordingly, on Aug. 3, 2010, Jay Marling,editor in chief of The Counselor, solicited opinions of TheCounselors of Real Estate (CRE) membership via emailregarding current United States fiscal policy, unemploy-ment, the current availability of real estate financing,pricing, and cap rates.

With some obvious exceptions, it is notable how little hasbeen written about the actual use of real estate. Theindustry’s scrutiny of financial metrics has taken primacyover many fundamental social and demographic influ-ences underlying the basic need for or the utility of realestate. because these social and demographic forces haveeconomic consequences, they ultimately affect the needfor capital. If these are structural in form, they presageour entire decision making and planning processes, notjust locally but at a macroeconomic level, much as thechange in the 1986 tax code forced passive investors toevaluate all their interests in real estate as an asset class.

With the recession now deemed to have ended in 2009, itwill have exceeded, by many months, those that occurredin the 1970s and 1980s, with extraordinary disruptions tothe housing market. While the needs of the commercialreal estate industry are emerging, residential property isof particular interest because it so badly lags othereconomic indicators.

Nevada, Arizona and, especially, Florida offer a laboratoryfor examining some of the social, economic and politicalconditions that may have relevance to other areas of the

country. Like these states, many areas large and small haveexperienced extraordinary growth and are left to weighthe longer-term implications of a housing market thatseems grossly overbuilt and reluctant to respond.

To illustrate the dimensions of the problem, Floridaremains one of the country’s fastest-growing states andhas been on a trajectory to overtake New York, thenation’s third-ranked state, no later than 2015. Suddenlythat timetable, and its need for housing to accommodatethat growth, is askew. In 2008, for the first time since1940, the number of persons exiting Florida was greaterthan the number of persons entering Florida, resulting indecreased population estimates for 2009.6,7,8 For this andother reasons, the bureau of Economic and businessResearch (bEbR) at the University of Florida hasmodified its long-term population projections whichnow show slowing rates of growth through 2035. In fact,future population counts in 39 of the state’s 67 countiescould fall below those of the 2007 projections.9 The U.S.Census bureau (USCb) estimates an inconsequential0.61 percent increase, rather than a decline, for the

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After the Recession:Florida, Nevada, Arizona, and

the Next 5,000 DaysBY OWEN BEITSCH, PH.D., CRE, FAICP

About the AuthorOwen Beitsch, Ph.D., CRE, FAICP, is aprincipal with Real Estate Research Consultants,Orlando, Florida, a firm offering various economicand planning services to both public and privateclients with substantial real property assets orengaged in policy or strategic matters dependentupon the deployment of such assets. He is adjunct

faculty at the University of Central Florida and a research associate in thecollege's department of public affairs.


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2008–2009 time period. Thematically, even if thesedifferences underscore the variability in population, thenumbers speak to major change.

Should Florida’s sudden population contraction beevidence of a structural shift, the industry’s expectationsabout real estate needs over the long term may requireadjustment in analysis or scale. Much less threatening, thecontraction may represent nothing more than anunpleasant but forgiving and manageable temporarydisruption. because so much of the value implicit in realestate is tied to job or population growth occurring acrossbroad regions, it is worth (re)examining basic socio-economic data suggestive of immediate and futureimpacts, if any.

Without doubt, the supply of vacant residential product isat a historic high, juiced by builders looking for recordprofits, buyers looking for quick returns, and financialmarkets ostensibly looking at very little. The conse-quences of this housing overhang, however, invite variedperspectives. The extreme view is that the economy haschanged and, along with it, the way we deploy and valueshelter. Adjustments to policy may fall well behindconsumer response.

CURRENT STATE OF THE ECONOMY

There seems to be little question that much of the slowingmigration into once rapidly growing Florida, Nevada andArizona stems largely from economic constraints thattogether limit individual mobility.10 Almost overnight,these states show the scars of development dependentupon growth and movement.

Economic conditions in the past made these populationcenters very attractive in the context of their neighbors.Over a period of thirty years, migrant populations carriedhousing equity to these areas. Equity dollars seeded reset-tlement, often without concern for a specific job opportu-nity. As the data continue to demonstrate, it is difficult torelease equity from an existing homestead in another statewhere home prices have also flattened or declined.Although conditions are better in Arizona, the joblessrate in Nevada and Florida materially exceeds thenational level of unemployment for the first time indecades. To establish context, although unemployment isalso high in Michigan, Florida shed nearly twice thenumber of jobs lost in that state.11

because these same three states lead in the rate offoreclosures, prospective newcomers with available

capital have a motivation to find locations more favor-able to their residential purchases as either residents orinvestors. A recent Case-Shiller Index provides no expec-tation that low pricing offers immediate rewards inseveral markets covered by the report, pessimisticallyforecasting value recovery as late as 2020 in Jacksonville,2039 in Orlando and 2020 in Tucson.12 In the case of Lasvegas, values have fallen 56.1 percent from their peak;Miami 47.3 percent; and phoenix 50.7 percent. A well-timed purchase in phoenix may bring rewards theresince year-to-year (2009–2010) values have increasedabout 5.4 percent. In both Miami and Las vegas, valueshave only fallen further.13

Much of the unemployment experienced in these highgrowth settings is centered on the construction trades,certain segments of the tourism or gambling industriesand professions tied to the planning, design or implemen-tation of development. The construction jobs, in partic-ular, are unlikely to be replaced for many years but thetroubles are deeper. Even senior and establishedemployees have proven vulnerable. In a less severedownturn, substitute employment may have been avail-able locally for the most capable of these workers. Thesethree troubled states, however, have not shownthemselves as a safe haven for the legions of unemployedworkers that might have worked to build their futuresthere. As suggested by the population counts in Florida, anumber have instead returned to their home states wherethey have family and social infrastructure, even if theyhave no jobs.

despite efforts to diversify, the options for skilled ortechnical labor in these former boom states remainlimited, discouraging talented newcomers and forcing outthose that might otherwise stay. Nothing illustrates thisprospective economic dislocation better than NASA’stermination of the shuttle program in Florida. The end ofshuttle operations may release thousands of highlytrained technicians and scientists with few industriesnearby to absorb them.14,15

For the foreseeable future, management will emphasizeincreased worker productivity, not materially increasedemployment. Such decisions will only slow recovery inthe south where, according to the bureau of LaborStatistics (bLS), news is grim. The bLS reports thatGeorgia, Florida and Arizona were among the five biggestlosers of jobs from 2007–2009.16 Altogether, they shedalmost 1,300,000 jobs during these years.17


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To regain anywhere near the levels of employmentachieved prerecession will necessitate that phenomenalnumbers of jobs be created. The scale is difficult to grasp.In Florida alone, some 700,000–800,000 jobs would haveto be created to reach full employment. Assuming nochange in the current labor force or population, thisnumber is more than twice the number of jobs created in2005. In retrospect, the number of jobs realized in 2005seems an anomaly—exceeding the previous year by morethan 80,000.18 Even with the recession ending, it is sure tobe painful for those needing a job.

Counter arguments offer the prospect that technicaltalent, such as that separated from NASA, will beredirected into self-employment and research opportuni-ties. This will seed future economic expansion. While jobgrowth in the U.S. will likely remain concentrated amongsmall employers, they have also shed a disproportionatenumber of workers according to some reports.19 Anybeneficial effects coming from new businesses willrequire a period of time to extend across the regionaleconomy in a manner that job and population growth aresustained. The credit outlook dims this prospect. becausebanks, the primary source of loans to small businesses,and venture funds, an important source of entrepre-neurial support, are themselves in retrenchment, thedesirable impacts stemming from these potential newoperations will take much longer.

EMPLOYMENT DIVERSITY

during prior recessions, economic conditions in Floridaand Nevada seemed brighter than they were elsewhere.Jobs requiring marginal education were relatively quick toform and easy to fill. perceptions about opportunity luredeconomic migrants so local unemployment rates were lowcompared to those elsewhere.

Interestingly, Oregon—the portland area in particular,which is often held up as a model of growth and financialresponsibility—is experiencing its own economicmeltdown despite its strong employment diversification.In terms of reengineering its economy, Oregon offersemployment and wealth opportunities that are the envy ofthe boom states, but even Oregon has its problems: Theunemployment rate (February, preliminary) is 11.4percent, comparable to Florida’s. Although explanationsfor Oregon’s job losses remain conjectural, the state’smany economic dimensions appear to offer variedavenues to recovery. Even California, struggling with its

budgetary and political problems, has the advantages of amature economy.

States such as Oregon and California offer the prospectthat some sectors will show improving financial condi-tion, though others are slower to respond. These statesprovide an economic base sufficiently diverse andpositioned to diversify further still. despite their troublesthey maintain an attractive advantage. by contrast, thebusiness models of Florida and Nevada, drawing largelyon a narrow class of jobs, do not offer comparablepromise for the future.

AGING OF THE POPULATION

The population is already rethinking the age of retire-ment, which may be a forced decision should benefitsavailable through Social Security be altered or postponedto a more advanced age. Commensurate with retirement,substantial segments of the population have traditionallyelected to choose states other than their own for theirsenior years.

As the decision to retire is delayed, so are the largemovements that dominated the historical rates of growthin Florida, Nevada and Arizona.20 Among its southernneighbors, Florida had proved itself especially attractive,but this preference is showing signs of weakness.Currently, Tennessee, Georgia and North Carolina areshowing increases because they are aggressively recruitingretired populations as a matter of policy.21 In the west,Colorado, Idaho and Utah also have experienced veryhigh rates of retirement age migration.

The decision to postpone retirement and move to anotherlocation has many influencing factors. It is, at least inpart, dependent upon one’s ability to convert thehomestead into a source of capital for a new residence,often anticipated to be debt-free. Renters are spared thestress of selling a home prior to moving. Homeownersnecessarily must partner with other people wishing toacquire their existing homestead.

Generally, the pairing of retirees and buyers has usuallybeen necessitated by demands stemming from upwardmobility and increasing family size. In the past, thisarrangement worked well, as the aging World War IIpopulation (in control of larger homes and seekingrelease from their mortgage obligations) transacted withthe baby boomers (in need of residential units moresuited to their family size and incomes). Since this WorldWar II group of homeowners was significantly smaller


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than the baby boom cohort, the former found it easy tosell and to move, pushing housing prices upward asdemand and supply reached equilibrium.22

Those older than 45 comprise the largest segment of thepopulation. In the category of homeowners, this group ofpersons (64.3 percent), based on 2000 data from theUSCb, literally dwarfs the population falling into the25–44 age group which in the past has been the mostactive home buying segment.23 detailed age segmentationmay offer other conclusions but the gross comparisonsseem to identify many more potential sellers than buyers.

Not only are the physical numbers of the active buyingpopulation seemingly lower, their housing needs aresubstantively different based on the size of household,which is about half the size of the family started by theirparents. While recent trends toward larger single familyhomes suggest otherwise, the only reasonable short-termjustification for larger homes would be continued pricereductions to clear inventory. More rationally, over thelonger term, a younger, smaller and potentially lessaffluent population seems likely to avoid a real estatetransaction resulting in a larger debt burden than itsactual needs require.

Myers and vidaurri have written thoughtfully on futurehousing needs based on age segmentation in the popula-tion.24 They argue plausibly that age cohorts, as describedhere, are much more fluid, that conventional compar-isons of age groups may not be a suitable basis forprojecting future housing requirements. They reason thatcohorts are indicative of a static condition. The problemwith this kind of analysis, as they observe, is much morecomplicated.

The issue however is not about measuring housingdemand broadly across the population. Rather thechallenge is to match a specific seller with a specific buyer,releasing equity on terms that provide optimal benefit toboth, an outcome suspect whatever method is used toanalyze the problem. The complexities mount when thecultural differences in age groups, characterized by thelikes of urban theorist Richard Florida, are presumed toplace less emphasis on the homestead.25 These differencesmay be even more pronounced over the next severalyears since the recession has exposed so many to thepenalties, as well as the rewards, that can come withhome ownership.

The upshot of these size and population imbalances isthat many seniors simply will not be able to sell theirhomes and relocate to one of the traditional retirementsettings when they deem it time to stop working. Wherethey are successful in selling their homes, the priceconcession necessary to accomplish the transaction maynot confer the intrinsic economic advantage expectedwith a home sale. For those, retirement may not be socomfortable financially.

LOW TAXES, FAST GROWTH

Only a handful of states have no income tax, with Nevadaand Florida being among the least diverse in terms oftheir financial resources to make government work. Thatthey would also be among the fastest growing and mosttroubled real estate markets hints at the lurking dangersof sparking economic diversification by touting fiscalconservatism while also ignoring required communityinvestments. For years, Florida has refused to address theimbalances among growth, services and financialresources. It is not surprising that in 2009 the pew Centeron the States found Florida, Arizona and Nevada—alongwith Illinois, Michigan, New Jersey, Oregon, Rhode Islandand Wisconsin—to be at grave budgetary risk.26

Over the last several decades, Florida’s combination ofwarmer weather, lower housing prices generally, and alower tax burden proved very attractive to migratingpopulations. For the younger populations, home owner-ship was deemed relatively affordable. For retiringpopulations, the state offered financial sanctuary byextending the resources of fixed or limited incomes.However, should the theoretical attractiveness of lower-cost living be stripped away, replaced instead bymounting bills for deficient services, Florida offers fewadvantages to leverage in the short term.

Like Nevada and Arizona, both foils for costly California,Florida is a tax haven for residents in the nation’s Northeastand Midwest regions who may be considering migrating toa southern state. Compared with New York, New Jersey,Ohio, and pennsylvania, which have been principal sourcesof in-migrants to this state over the last 10–15 years,Florida’s tax burden (measured in terms of dollars percapita) has ostensibly proven beneficial to individuals andbusinesses. Florida’s overall tax burden places the stateamong the lowest relative to income.27 The most recentreport ranks Florida overall at 47th, Nevada 49th andArizona 41st. For comparison, New Jersey and New Yorklead at first and second place respectively. In terms of its


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business environment, the foundation ranks Florida fifth,Nevada fourth and Arizona a more distant 29th.

Even with its low tax burden, Florida’s property taxeshave been the subject of recurring news and politicalattention. The Tax Foundation edges Florida up to 22ndplace on this single measure.28 because property taxesseem so visible, the very public rancor directed towardthis levy may have discouraged future residents fromchoosing Florida, certainly given other economic consid-erations of a near-term concern. For those who believetheir properties are now badly over-assessed relative totheir real value, tax relief is relatively slow to come sinceproperty assessments often lag real activity in the market-place.

The focus Florida’s legislature has given to capping bothtaxes and spending continues to draw attention to thestate’s poor management and fiscal practices.29 Withoutaddressing the ideological merits of competing views, theconsequences of ill-conceived or implemented policieshave not proven compatible with increased job growtheven if they spur some population growth. If low taxes arethe most potent measure of economic prosperity, Floridawould be a growth leader with its job and housingsystems quickly recovering. Even the most ardent fiscalconservative can see the reverse is happening.

THE IMPACT OF SEASONAL UNITS

According to the USCb, about 20 percent of the nation’sseasonal homes are located in high-growth Nevada,Florida and Arizona.30 by itself, Florida had more than 16percent of the nation’s seasonal homes, a percentage inexcess of the state’s proportionate population. If time-shares are added to Florida’s count, the disproportionwould be higher but their impact is not clear from theavailable data.

To reinvigorate the moribund economies of Florida andthese other boom states, excesses in the seasonal housingmust also be cleared. They will be sold to users orinvestors but many of the same considerations impactinggeneral mobility and housing choice affect the market forthe state’s inventory of seasonal units as well as its perma-nent housing stock. As with other forms of housing,patterns of ownership elsewhere, financial resources andrelative cost are important determinants of second-homepurchases.

In Florida, many buyers will be from South America,taking advantage of strong growth or favorable currency

exchange rates as these conditions vary over time. In thecontext of this article, it is probably not unreasonable toassume these populations will continue to represent abuying segment but the numbers won’t themselves besufficient to offset other lost opportunities. If anti-immigrant fervor builds in Florida, as it has in Arizona,the economic consequences could be large.

For many American baby boomers approaching retire-ment age, seasonal or second homes in Florida, Arizonaand Nevada are viewed as transitional homesteads,intended for eventual permanent residency. Should theboomers be precluded or constrained from making aseasonal purchase, they may never become permanentresidents in Florida or other states seen attractive forretiree populations.

How second homes function in these states as transitionalunits for the future population may be speculative. Whatseems assured is that the current turbulence in the finan-cial markets will retard favorable mortgages for secondand seasonal homes for all but the most qualified buyers.different banks and investors, of course, have their owncriteria within federal guidelines. Among those criteriaare their own internal standards for what comprisedeclining or failing markets. Many lenders—withoutdoubt, the more conservative ones—have labeled Florida,Nevada and Arizona as stressed markets, placing them atthe higher end of the risk scale.

Condominiums, as second or seasonal homes, pose adifferent set of problems for lenders and buyers.Condominiums have underwriting criteria different fromthat applied to single-family units, and now typicallycarry onerous conditions or terms, if prospective buyersqualify at all.31 While mortgage guidelines speak to theinvestment preferences of individual institutions, theselenders must stay within federal rules and regulations thatare already assuming draconian change.32

SALES VELOCITY

The data available from the National Association ofREALTORS® (NAR) measure the speed and velocity ofsales without addressing the matter of occupancy. Thelatest reports show some slowing in sales activity butthere have been sparks of interest, probably stemmingfrom tax credits. From the standpoint of a beleagueredlender or homeowner, a sale reported by NAR issomething of a victory. For the moment, set aside thedownward pressure on prices that has occurred in thecourse of this improving sales pace compared with a


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badly depressed past year. It is evident that the volume oftransactions is not having the hoped for effect on overallvacancy rates. They remain virtually unchanged for therental and ownership inventories combined.

The USCb reported that the nation’s rental vacancy ratefor the 4th quarter of 2009 was higher than the 4thquarter 2008 rate (10.1 percent), but not statistically

different from the 3rd quarter (11.1 percent).33 Amonghomes intended for owner occupancy, the 2.7 percentvacancy rate achieved in the 4th quarter of 2009 was notstatistically different from the 4th quarter 2008 or fromthe 3rd quarter. Nationwide, there are now almost twomillion vacant units for sale despite the upturn in activity.As the graphs illustrate, the nation’s housing vacancy rateshave never been higher during other periods of recession.

Figure 1

Annual Rental and Homeowner Vacancy Rates for the United States: 1968–2009

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Figure 2

Quarterly Rental and Homeowner Vacancy Rates for the United States: 1997–2009

Source for Recession Data: National Bureau of Economic Research, Inc., 1050 Massachusetts Ave., Cambridge, MA

1514131211109876543210

1Q1997 1Q1998 1Q1999 1Q2000 1Q2001 1Q2002 1Q2003 1Q2004 1Q2005 1Q2006 1Q2007 1Q2008 1Q2009

Gross Vacancy Rate

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Source for Recession Data: National Bureau of Economic Research, Inc., 1050 Massachusetts Ave., Cambridge, MA


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These trends and numbers offer perspective on Florida’sinventory and vacancies which are well above the averagefor the remainder of the U.S. In Florida, the 4th quartervacancy rate for the rental inventory was 15.3 percent.Three other states—Arizona, Kentucky and Alabama—were higher.34 The 4th quarter rate for the ownershipinventory was 4.1 percent in Florida. At the end ofdecember 2009, Nevada was the only other state with ahome ownership vacancy rate higher than Florida.

The failure of the sales pace to clear the inventory ofvacant units suggests that a transfer of ownership is notsystematically matching an actual user with the unit inquestion. In some cases, bargain units acquired throughshort sales or foreclosures may themselves subsequentlybecome short sales or foreclosures.

CONDOMINIUMS AND THEIR IMPACT ON VALUES

From 1968–2008, the detached single-family vacancyrate had rarely exceeded 1.7 percent, never exceeding2.0 percent. At the end of the 4th quarter of 2009, therate had jumped to 2.3 percent, decreasing from 2.5percent for the same period in 2008. Not surprising,multi-family units in larger, attached structures (thosewith five units or more) intended for home ownershiphad higher vacancy rates, 9.2 percent, up from 8.4percent through the 3rd quarter and up for the sameperiod in 2008.35 These are not the worst rates histori-cally but they combine with somewhat smaller struc-tures to yield one of the worst overall occupancy rates.Though discrete data are lacking, given their physicalconfiguration, these are likely to be largely condo-minium properties.

data from NAR offer a glimpse into this segment of theresidential industry which anecdotally, over the past fiveyears, has repositioned many urban projects andsettings.36 The NAR data, as of late 2009, seem to indicatethat Florida remains disproportionately representedamong those states with the most seriously deterioratingcondominium markets.37 Seven of the reported ten worstdeclines are in major metropolitan areas within Florida.Orlando is at the top of the list, suffering a 56 percentdecline in median sales price since 2008. Not surprising,the three other metro areas in the top ten are located inArizona and Nevada, with Las vegas in the secondposition.

One factor contributing to crashing prices is the obviousdifficulty in securing favorable mortgages. Implicitly, the

aversion of lenders requires that condominiums bepurchased for cash or with substantial down payments.Ironically, the family or individual most suited to thesenow lower priced units also will be the same family orindividual who would most likely not have the cashresources to make the purchase in the first place.Consequently, units available for purchase are left to largeinvestors whose bulk purchases remove inventory butfurther reduce values and prices. Several examples inFlorida offer anecdotal evidence of these effects.38,39,40

In any case, the acquired condominium still must beoccupied, and the rising vacancy rates indicate occupan-cies are not improving at the moment. Left unoccupied,and possibly moving into a state of permanent physicaldecline, these units may become uninhabitable. Theyalready are becoming a management concern as ownersand distressed owners clash over financial responsibilitiesof maintenance and upkeep.41

COMPETING STATES

Under now outdated assumptions, Florida was projectedto replace New York as the third largest state in just a fewyears. While it eventually will achieve that position, thepopulation could reflect a different cultural or socioeco-nomic composition than once expected and, in the shortrun, slowing growth offers little to abate the state’s supplyof residential inventory.

For reasons cited, Florida’s preference as a haven forretirees and second-homeowners is being challenged byGeorgia, North Carolina and Tennessee, among others.because the economies of neighboring states have notshown a dependency on these population segments, theirhousing inventories, even if excessive, have not been asbadly overbuilt as in Florida. Consequently, theireconomic recovery is plausibly swifter. In the race forpopulation stability, these other states—while notreaching Florida’s numbers—will become more attractive,drawing some population away from Florida.

At the same time, some 19 million total housing units inthe nation remain vacant. Expressed in absolute numbers,the sum is a historic high. In this context, Florida doesretain certain locational advantages even as the disadvan-tages must be acknowledged. Still, the housing optionsacross the country reflecting style, price and location arefar greater than they have ever been before because thelevels of production achieved in the last four years wereso extraordinarily high.


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VARIATIONS IN POPULATION PROJECTIONS

The bEbR remains the state of Florida’s most recognizedsource of projected population. Arizona and Nevada havesimilar resources that guide legislative initiatives andfunction as controls for the distribution of some funds.

In the case of Florida, statutory rules (9J-5) require thatthe data be used to guide planning for the built environ-ment. The data are treated as immutable, not as a measureof what could be. In the current economic environment,the limitations in the data may lead both investors andregulators to flawed decisions about the likely future,especially if plans involve extremely large projects. Thesehave been the foundation of Florida’s residential growth.

Several forces are working to intervene in this calculus,which has historically equated population with aprescribed number of housing units but it’s too early todetermine the true effect. On one hand, the rate of house-hold formations is slowing due to a variety of social andeconomic causes. These formations are producing smallerhouseholds, so a moderately increased number of units arestill required, though the units themselves may be smallerin size. On the other hand, among some ethnic groups, thegrowing number of extended families suggests that thehousing inventory will expand at the rate below that ofpopulation growth. This latter indicator, with itsdampening effects on housing, is itself mitigated by thehigh birth rate among these same populations. This higherbirth rate would normally drive an increased rate of house-hold formations.

Then there are the confounding reports coming fromAndrew Hacker, a sociologist at Queens College of theCity University of New York, who claims a decline in thebirth rate resulting from the recession.42 In 2007, thenumber of births in the U.S. exceeded those during thebaby boom. but last year there was a decline, according todata from the National Center for Health Statistics.Specific to Arizona and Florida’s rapid population trajecto-ries, births declined in the former about 3 percent during2008, the first decrease since 1991 when there was also aneconomic slowdown. In the beginning of 2009, there were7 percent fewer births than the year before. Thesenumbers follow the jobless rate which increased from5.5–8.7 percent over the same time period.

These are obviously competing forces and trends but theargument for smaller families and fewer households isespecially compelling in the wake of the recession. IfHacker’s analysis holds, his sharply falling rates would

offer the prospect of materially lower populations andfewer household formations, certainly over a lengthyplanning horizon.43

SETTLEMENT PATTERNS

While intuitively attractive, residents are not returningto the nation’s central cities on a massive scale. The datado not support these claims. The fact remains thaturbanizing trends are at best nascent, and it will requiremany years before a major shift in residential patternsand work settings occurs. At the most basic level ofscrutiny, it is hard to conceive that the nation’s existingcentral cities, without unprecedented intensification,have adequate land to satisfy the need of the nation’sexpected population.

According to Nathaniel baum-Snow of brown University,there are substantive economic forces that tether industry,workers and residents to the suburbs.44 because of avail-able infrastructure, productivity has increased whilemany firms have decentralized. baum notes in his recentpaper that both jobs and residents from 1960–2000continued to elect suburban locations at about the samerate, an option enabled partially by investments in infra-structure, saving time and costs. despite claims andcomplaints to the contrary, the time metric is observablein a simple statistic: the mean commute by car is about 25minutes.45 The commute by public transportation systemsrequire literally twice that amount of time.

Let’s be clear: the argument isn’t that a trend may not beforming. Nor is it that policies enhancing urbanization orintensification are inappropriate. Rather, conditions stilllargely favor the suburban form of development becauseit is has certain efficiencies and scale, is compatible withmainstream lifestyle choices and offers the capacity forgrowth. From the perspective of the user, it has theadvantage of at least appearing to be far cheaper. becauseof their cost basis, dense urban dwellings are relativelyinelastic in their pricing structure. They seem much lesslikely to see the absolute declines in price now sweepingthe nation’s outer rings where housing options abound.

The corollary is that the suburbs, even at their distanceand the cost of fuel, may recover more quickly than weimagine. places like Florida with plentiful land, fullyentitled for development, may benefit.

THE PREFERRED PLACES

Is it possible to be more specific about the communitiesand locations in the U.S. where growth is likely to occur? Ifthe various considerations outlined in this article have


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merit, they hint that growth capacity may exist in somelocations but fall short in others. Where growth pressuresshould be most evident are in those jurisdictions that havehistorically had the greatest growth simply because theycan demonstrate stability and have a foundation capable ofsupporting additional growth. More simply, unlessdisrupted, growth will follow its current path.

Consider that the 50 largest of the nation’s census-desig-nated metropolitan areas were all established manydecades ago, and all but four continue to support growthbased on 2000 population counts.46 viewed as relativelynascent urban communities, the metropolitan areas ofsoutheast Florida (rank: 7), Tampa (rank: 19), Jacksonville(rank: 40) and Orlando (rank: 27) are all on this aging listof significant commercial centers.

CONCLUSION

Fairly and correctly, other industry analysts will offertheir opinions concerning overlooked real estate trends ormarket influences. Some of these will deal with thefunction of the credit markets. Obviously credit enablesreal estate opportunities, whatever they are, to be realized.The trends described in this article, however, are substan-tively more basic than matters associated with creditmarkets that should themselves be responding to thedictates imposed by users of the nation’s real estate assets.The state of the economy evidences the credit marketsbroadly ignored underlying demand. While locationalconsiderations have been discussed, preferences forparticular forms of housing have been addressed onlyminimally. but preferences have proven to be transitory.Too many houses or too many shopping centers, ifnothing else, results in misallocation of resources.

The industry’s brokers, developers, builders, and econo-mists will infer different interpretations of the trendsthat are identified. That too is fair, but overall thosementioned have been discussed in terms of theirrelative advantages and disadvantages to lendcompeting perspectives.

Accepting the likelihood of oversights or added interpre-tation, the trends outlined here give fewer reasons to beoptimistic than pessimistic and more reasons to becautious. In the main, they lead to the worth in reexam-ining conventional thinking. On balance, the evidencereinforces that recovery will be slower rather than faster,and the numbers necessary to right the market are farbigger than many people fully appreciate. In this context,Case-Shiller’s outlook and the rate of employment growth

are particularly sobering. While it should not be inferredthat claims are being made for a sudden, seconddownturn, such an event is not an impossibility. Indeed,this article is largely silent on the growing storm in thecommercial marketplace.

Enough forces are in play to suggest that the nation’ssuburbs, though they may be objectionable on manycounts, will remain an integral part of the built environ-ment. Florida, for better or worse at this stage of its devel-opment history, is dominated by this pattern of activitysimply because the supply of newer housing necessary tosupport its large population has been sited there. Theneeds of the future population, when matched to thecharacter of today’s housing stock, may be somewhatdebatable. past rates of population growth, however, aresubsiding. This decline signals, at the very least, a need toexamine older ideas about the linkages between buyersand sellers. Many variables are working together todampen the rate of job and population expansion, someof which must be assumed as structural. Without regardto their location, we may simply need fewer homes toaccommodate the future population.

Absent some cataclysmic event (hurricanes: New Orleans)or industry movement (disney: Orlando), growth favorssettings where it has proven fertile over many years. Inthe places where population growth is occurring, thesuburbs seem better positioned because of cost, prece-dent, available supply, and simple preference. They haveobvious locational advantages that policy cannot simplyundo. As a result, the excess lot and home inventoriesmay yet find buyers over time. Florida looks very attrac-tive weighed on this scale of variables.

Most of the observations described in this article involvelong-term perspectives that the real estate industry israrely willing or needs to address except for the mostcostly or unusual projects. builders and developers rarelyhave been able to contain themselves as the market showseven the faintest signs of moving forward. The observa-tions summarized are not a substitute for careful andinsightful evaluation of local market trends and influ-ences, but these considerations might form the basis of aninitial checklist, again for larger projects in particular.

If the conditions described are not structural, theyabsolutely affect each Florida community in the shortterm nonetheless, in large measure because the state’srevenue structure is closely correlated to growth in thereal estate industry. This connection is a policy matter,


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not strictly a growth matter.

There is scant evidence that the fiscal and job challengesfacing Florida and similarly constructed states will abatein any immediately foreseeable time frame. Consequently,this data might flag caution for other states with depend-ence on very discrete industry sectors and large numbersof migrating retirees or seasonal residents. Althoughneither Arizona nor Nevada have Florida’s level ofgrowth, investors eager to act there should observe thisstate’s struggles to regain stability. The comments in thisarticle aptly apply to these states but the social cost issignificantly lower because their populations are so muchsmaller. Logically, the ideas outlined should relate toother states identified by pew as also financially at risk.

While economic conditions in the past made Florida,Nevada and Arizona more attractive in the context oftheir neighbors, the current circumstances do not favorthese states or their leisure industries. California hassome of the problems that Florida, Nevada and Arizonaalso face. Unlike these areas, it has a mature and diversi-fied economy that will cushion its current condition. Thesame should apply to Oregon.

New construction seems almost out of the question formany years in the boom states, so it is not without ironythat lost real estate value, much of it concentrated largelyin suburban settings, may be the salvation bringingrecovery. As a result of diminished development, welllocated properties, listed well below replacement, willlook like good buys to astute purchasers. These propertiesshould be the first to clear the market. Very patient capitalin the most troubled settings will experience absolutelyno limit to these other opportunities presented. �

ENDNOTES

1. Ackermann Matt, M., “REIT Yields Topped Every Equity Sector,”American Banker, 2010, vol. 175 (9), p. 7.

2. Hopkins, Cheyenne, “Majority of Lenders Toughen Terms,”American Banker, 2009, vol. 174 (139), p. 16.

3. Kelly, H., “e Morphology of the Credit Crisis,” Real Estate Issues,vol. 34 (3), pp. 14–24.

4. Levitin, Adam, Audrey pavlov and Susan Wachter, “Securitization:Cause or Remedy of the Financial Crisis?” Aug. 27, 2009,Georgetown Law and Economics Research paper No. 1462895.Retrieved Aug, 1, 2010, from: http://ssrn.com/abstract=1462895

5. Morgan, John, "distressed debt Reaches for Fair value,” MoneyManagement Executive, Jan. 18, 2010, vol. 18, (3), pp. 1–8.

6. “Florida Reports First population decline Since 1946,” bureau ofEconomic and business Research, University of Florida, Aug. 17,2009. Retrieved April 6, 2010, from: http://74.125.45.132/search? q=cache:nCGrZ9CwLswJ:www.bebr.ufl.edu/news/title-raw%255D-63+bebr+population+declining+in+florida&cd=2&hl=en&ct=clnk&gl=us

7. “An Analysis of Annual Migration Flows in Florida, 1980–2008.”bureau of Economic and business Research, University of Florida,2010. Retrieved April 6, 2010 from: www.bebr.ufl.edu/category/subject-index/population-trends.

8. Morello, Carol, “Census: Florida, Nevada had More AmericansMove Out than In,” Washington Post, dec. 24, 2009. Retrieved April6, 2010 from: http://www.washingtonpost.com/wp-dyn/content/article/2009/12/23/AR2009122301412.html?hpid=topnewss

9. “projections of Florida population by County, 2008–2035.” FloridaPopulation Studies, vol. 42,153, bureau of Economic and businessResearch, University of Florida, March 2008.

10. “Off the Road: House prices and Mobility,” The Economist, vol. 394(8663), p. 22, Jan. 2, 2010.

11. “Regional and State Employment and Unemployment,” bureau ofLabor Statistics (bLS), March 2010. Retrieved April 16, 2010, from:http://www.bls.gov/news.release/pdf/laus.pdf

12. Case-Shiller, “Home price Insights: For Many U.S. Markets, theReturn to peak Home prices will be a Long, Slow Road,” Fiserv.April 8, 2010. Retrieved April 14, 2010, from:investors.fiserv.com/releasedetail.cfm?ReleaseID=457516.

13. Case-Shiller, “House price Indexes Increase in May,” July 27, 2010.Retrieved Aug. 4, 2010, from: www.calculatedriskblog.com/2010/07/case-shiller-house-price-indexes.html.

14. Halvorson, Todd, “Obama Unveiling plan Thursday on Space Coastto Add Jobs, Revive Orion,” April 14, 2010. Retrieved April 17,2010, from: http://www.tcpalm.com/news/2010/apr/14/obama-unveiling-plan-thursday-on-space-coast-to/

15. WFTv, “Estimates: 23,000 Job Losses on Space Coast,” (Newsstory), Feb. 26, 2010. Retrieved April 12, 2010, from:www.wftv.com/news/22685258/detail.html

16. Kanell, Michael, “Georgia Job Loss Fih Worst in Nation,” eAtlanta Journal-Constitution, October 21, 2009. Retrieved on April 6,2010, from http://74.125.45.132/search?q=cache:KqNNxiGF-k0J:www.ajc.com/business/georgia-job-loss-fih-168624.html+georgia,+florida+,arizona+job+losses&cd=14&hl=en&ct=clnk&gl=us

17. bLS op. cit.

18. Ibid.

19. Whitehouse, Mark, “Q&A: Atlanta Fed’s Altig on Small business’spotential to derail Recovery,” The Wall Street Journal DigitalNetwork. Retrieved on Aug. 2, 2010, from:http://blogs.wsj.com/economics/2010/03/11/qa-atlanata-feds-altig-on-small-businesss-potential-to-derail-recovery/

20. pollard, Kelvin and Mark Mather, “Slower Growth of U.S.Retirement destinations Linked to Economic downturn,” March


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2010. Retrieved from the population Reference bureau on April 16,2010: http://74.125.45.132/search?q=cache:MUNwuhI69AYJ:www.prb.org/Articles/2010/censusdata.aspx+Retirement%2BDestinations%2BLinked%2Bto%2BEconomic%2BDownturn&cd=1&hl=en&ct=clnk&gl=us

21. Sasso, Michael, “Retiree Flow to Florida Slows,” The Tampa Tribune,dec. 20, 2007. Retrieved April 4, 2010, from:http://www.retirementlivingnews.com/retireeflow.html

22. McIlwain, John, “Housing in America: e Next decade.” paperpresented at ULI Trustees Meeting Jan. 26, 2010. Retrieved fromULI on April 6, 2010, from: http://www.uli.org/sitecore/content/ULI2Home/ News/MediaCenter/ Press Releases/2010%20archives/Content/~/media/Documents/ResearchAndPublications/Fellows/McIlwain/HousinginAmerica.ashx

23. “Tenure by Age of Householder,” U.S. Census bureau. Table H-14,2000. Retrieved from the department of Commerce, U.S. Censusbureau on April 9, 2010: http://factfinder.census.gov/servlet/DTTable?_bm=y&-geo_id=01000US&-ds_name=DEC_2000_SF3_U&-_lang=en&-redoLog=false&-mt_name=DEC_2000_SF3_U_H014&-format=&-CONTEXT=dt

24. Myers, dowell and Lonnie vidaurri, “Real demographics ofHousing demand in the United States,” Lusk Review for Real EstateDevelopment and Urban Transformation. Summer 1996, pp. 55–61.

25. Florida, Richard, “How the Crash will Reshape America.” Atlantic.(Electronic version), March 2009. Retrieved March 12, 2010, from:http://www.theatlantic.com/magazine/archive/2009/03/how-the-crash-will-reshape-america/

26. vock, daniel, pamela prah, Stephen Freh, et al. “beyond California:States in Fiscal peril.” Monograph. Philadelphia: Pew Center on theStates. Retrieved March 2, 2010, from:http://downloads.pewcenteronthestates.org/BeyondCalifornia.pdf

27. “Facts & Figures: How does your state compare?” Tax Foundation,2010. Retrieved on Aug. 6, 2010, from:http://www.taxfoundation.org/publications/show/2181.html

28. Ibid.

29. vock d., prah C., Freh, S., et al. “beyond California: States in Fiscalperil.” Monograph. Philadelphia: Pew Center on the States,November 2009.

30. “Housing Units,” American Community Survey. Table B2500, U.S.Census bureau, 2006–2008. Retrieved from the department ofCommerce, U.S. Census bureau on April 9, 2010:http://www.census.gov/acs/www/index.html

31. Smith, Jed, “Economist’s Commentary: Realtor’s Confidence Index.”Retrieved on July 17, 2010: http://notes.rets.org/research/economists_outlook/commentaries/rci0110

32. Ibid.

33. “Housing vacancies and Homeownership,” U.S. Census bureau, Feb.2, 2010. Retrieved from the department of Commerce, U.S. Censusbureau on April 9, 2010:www.census.gov/hhes/www/housing/hvs/qtr409/q409ind.html

34. Ibid.

35. Ibid.

36. ”Total Sales with breakouts of Single-Family and Condo/Co-Op,”National Association of Realtors, 2009. Retrieved April 16, 2010,from: http://www.realtor.org/wps/wcm/connect/cc64300041d7e5f38bcbdb88f8e9afed/REL1002CD.xls?MOD=AJPERES&CACHEID=cc64300041d7e5f38bcbdb88f8e9afed

37. “Metropolitan Area Existing-Home prices and State Existing-HomeSales 2009, National Association of Realtors. 2009. Retrieved April12, 2010, from: www.realtor.org.

38. Fletcher, david, “Fractured Condo's bulk purchase Offer 'priceAveraging' Window.” Realty Times, April 8, 2010. Retrieved Aug. 5,2010, from: realtytimes.com/rtpages/ 20100408_ bulk.htm.

39. Miller, Kimberly K., “bulk buyer picks Up 106 Condos at boyntonbeach's bermuda Cay,” Palm Beach Post, July 15, 2010. Retrievedon August 5, 2010 from: http://www.palmbeachpost.com/money/real-estate/

40. valens, Jorge, “deal Said to be Largest bulk purchase of Condos inLauderdale,” Sun Sentinel, July 9, 2010. Retrieved Aug. 5, 2010 from:http://articles.sun-sentinel.com/2010-07-09/business/fl-las-olas-condos-20100709_1_condo-units-two-and-three-bedroom-units-consulting-firm-condo-vultures

41. “State of distress: Florida Community Association MortgageForeclosures Spawn Crisis within State's Condo and HOApopulation,” Community Association Leadership Lobby, Feb. 24,2009. Retrieved on Aug. 3, 2010, from: http://www.marketwire.com/press-release/State-Distress-Florida-Community-Association-Mortgage-Foreclosures-Spawn-Crisis-Within-953450.htm

42. Roberts, Sam, “birth Rate is Said to Fall as a Result of Recession,”New York Times, Aug. 6, 2009. Retrieved April 12, 2010, from:http://www.nytimes.com/2009/08/07/us/07births.html?

43. Ibid.

44. baum-Snow, Nathaniel, “Changes in Transportation Infrastructureand Commuting patterns in U.S. Metropolitan Areas 1960–2000,”2010. paper presented at the American Economic Association,2010. Retrieved April 9, 2010, from:http://www.econ.brown.edu/fac/Nathaniel_ Baum-Snow/aer_pandp_baumsnow.pdf

45. U.S. Census bureau. (2005–2007). American Community Survey.Table b01003 Total population; Table b08136 Aggregate TravelTime to Work of Workers (16 or older) by Means of Transportationto Work; Table b08301 Means of Transportation to Work [16 andolder]. Retrieved Sept. 2, 2009, from:http://www.debunkingportland.com/docs/ACS_UZA_Major_City-_Commute_2005_07a.xls

46. Lang, Rob, Mariela Alfonzo, and Casey dawkins, “Americandemographics - Circa 2109.” Planning. (Electronic version), May2009. Retrieved March 11, 2010, from: http://www.planning.org/planning/%20%202009/may/demographics2109.htm

CONSTRAINTS ON NEW SUppLY in a given market reduce anowner’s competition for tenants, which typically leads tohigher occupancy, higher rent levels and faster rentgrowth. Supply constraints can stem from severalsources and vary across both markets and time. Thisarticle discusses several aspects of supply constraints,including their origin and economics, and introduces away of measuring this feature across property sectorsand metropolitan areas.

DEFINING SUPPLY CONSTRAINTS

Supply constraints are broadly defined as limitations onthe ability to deliver new development. These constraintsgenerally fall into three categories, though some overlapamong the categories is common.

Legal: primarily zoning and land use regulations whichrestrict the location, quantity and/or pace of new devel-opment.

Geographic: physical limitations such as waterways,steep slopes and soil conditions, which limit the locationand/or quantity of new development. This category mayalso include the impact of existing development at ascale and density that limits available sites ripe forredevelopment.

Political: Local opposition to development which is notcodified through local regulations but which nonethelessconstrains development potential.

In addition to the above types of supply constraints,economic factors may also limit development feasibility.For example, the limited availability or high costs ofconstruction lending are currently serving as a supplyconstraint, even in markets that are not typically associ-ated with limited development opportunities. These typesof constraints are generally temporary and adjust with thelarger real estate market, however, and cannot, therefore,be counted on over the mid- to long-term to impact theoverall supply dynamics.

ECONOMICS OF SUPPLY CONSTRAINTS

The ability of a market to increase supply in the face ofrising demand varies across metro areas. If supply cannotbe added to meet additional demand, then prices (rents,and eventually capital values) will rise accordingly. Figure 1

About the AuthorsDavid Lynn, Ph.D., CRE, is an econo-mist, institutional real estate investor, andstrategist with extensive experience in nationaland international markets. He is managingdirector of strategy and research and generalportfolio manager at ING Clarion Partners inNew York. Lynn is responsible for developinginvestment strategies and recommending strategic

and tactical allocations across platforms and funds. He is the authorof three books; the most recent are Emerging Market Real EstateInvestment and Active Private Equity Real Estate Strategy.Lynn is a noted speaker and commentator and writes a regular columncalled “Capital Trends” for the National Real Estate Investor. Heearned a doctorate degree in financial economics at the London Schoolof Economics, a master’s in business administration from the SloanSchool at MIT, and a master's degree from Cornell University.

Bohdy Hedgcock is a senior associate in theResearch & Investment Strategy group at INGClarion Partners, New York City. He joined thefirm in 2007 and currently oversees bottom-upmarket analysis for private equity acquisitionsand portfolio management. Prior to joining thefirm he worked for more than sev