History can shed light on today’s acquisitions
New Hampshire is a small state, in a small region, in a corner of the world’s largest national economy, but with China and India coming on like gangbusters. So while we continue to hum along with a tepid stock market, with housing prices holding their own, most folks tell me they are working harder for the same money and lesser benefits as health care and other insurance costs climb, along with energy, transportation, housing, taxes and even wages.
For the past 10 years, America has become more and more productive. This rise in productivity offsets some of the increases in core inflation. Two quarters ago, with oil over $70 a barrel, there was discussion of a sharp rise in inflation. Today, oil is back under $60 and the immediate concerns about inflation have abated.
In fact, if you think back over the past 24 months we seem to have been on a roller coaster ride of near panic about the economy — a housing bubble, energy costs, inflation, the national deficit, and so on. But the sky has not fallen, which is not to say that it might not, and perhaps in the not-too-distant future.
I find myself increasingly thinking and speculating about these global concerns for risk and uncertainty when I have clients looking for hard assets, such as real estate.
The risks of ownership of real estate can be measured and calculated fairly accurately. This is especially the case if you have studied and monitored the local and regional markets over many years.
For instance, we tracked office rental rates in various parts of the state going back to the early ‘80s. We were concerned about office volatility in the late ‘80s but were caught off guard when the Federal Deposit Insurance Corp. came in and took over five New Hampshire banks. The reaction took many years to work off.
The general economy was sluggish and only began to rise with the dot-com and telcom boom. We leased office space to start-ups with no products or services to sell, only ideas. (Of course we got one, two or three years of rents paid in cash up front.) April 2000 brought the Tech Wreck, and we have slowly been climbing out of that cycle — but for the most part commercial landlords were not hurt because they were not overleveraged and because they had leased to better credit tenants. We saw lots of space for sublease, but most landlords were getting paid.
Today, those leases are rolling over. In many cases tenants are renewing for shorter terms or less space. Some are “trading up” to better space, but overall the market is far from robust.
One good example is Verizon (whose New Hampshire operations may soon belong to FairPoint), giving back half its space at 900 Elm St. in Manchester. This vacancy will take quite some time to fill. The tenant will not be a new tenant in the market, but someone trading up from nearby space. But there have been very few office properties built in the market, so the newer properties in the existing inventory are being upgraded and leased, while the older properties suffer. To purchase wisely today, one needs to have intimate knowledge of these properties along with an understanding of the long-term history of market rates, vacancies and turnovers, among other things. With few new properties to choose from, this equation gets harder and harder to solve.
The global view
We tend to forget how much our northern brethren depend on Mother Nature to pay the bills. I was in the North Country in December and January, and business was very slow. Winter tourism and recreation was down, and with it ancillary services. Logging lagged because there was no snow cover in the woods.
The North Country’s economy is a somewhat simpler model of that south of Notches. It doesn’t have the depth of services and is much more reliant on visitors coming up and spending money to prime the economic engine.
The middle and southern tiers of the state have larger populations and a stronger service sector. Residents have access to far more jobs of all types within a reasonable commuting range. Of course, for every benefit there is a cost, such as congestion on the roads and higher housing costs.
While we think of ourselves as one small, tight cohesive — some would say homogenous state – New Hampshire is much more stratified than it first appears. When you consider that in our small state of less than 1.3 million people in urban, suburban and rural regions, we do in fact mimic much of the country. We are less diverse ethnically than most areas of the United States, but that too is changing.
The peculiar winter weather and the New Hampshire presidential primary campaign that is already in full swing are only part of our overall economy and have an impact on only some of us in terms of how we put food on the table. The rest of us have to practice law, sell real estate, lend money, develop software, invent gizmos, or hundreds of other things to support and supply the global economy.
In the past few weeks I have been on three international conference calls. The world is truly getting smaller (and yes, Tom Freidman, flatter). One of our overarching challenges is to spend time thinking ahead strategically while at the same time paying the bills this week, month and year.
Much of the angst about the global economy may be a measure of the political unrest. The war in Iraq, global terrorism, Iran’s nuclear program, another nuclear program in North Korea, long-term disputes between India and Pakistan, Israel and the Palestinians — the list goes on. In a “flat” world, sitting here in New Hampshire, we cannot ignore these things, and if we do, it could be at our peril.
Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 2020 Vision for Concord. He can be reached at email@example.com.