Norton On Real Estate: Distractions cloud the state of the economy
This brute of a winter is a mixed blessing. It has brought skiers and snowmobilers galore, for which the North Country is most appreciative. But for property owners, it has brought skyrocketing heating bills, unbelievable plowing, shoveling and ice treatment bills, and for some, sagging or collapsing roofs.
We had one warehouse building under agreement for sale and scheduled to close in mid-April. Then one loading dock roof let go, and while we were trying to sort that all out with the insurance adjusters, along came another 8 inches of snow and a former cooler section collapsed. So we are now trying to determine the value of the smaller building and whether the insurance proceeds will make the seller whole.
March also brings the deadline for filing tax abatements at the municipal level. This is tricky business. It used to be that you only had to show “disproportionately” where your property was assessed at a higher value than comparable properties. But today there is more and better data available, so the analysis is more complicated. For instance, many assessors will agree that a property will only sell for X but its replacement cost is 2X, so they rule the fair market value is 1.5X. We run into this often with commercial, industrial and institutional properties that are transitioning into new uses.
Given the strong reliance on the property tax for municipal and public school income, there is a strong reluctance to give up assessed values, which translate into lower real estate tax receipts. This is especially true for commercial vs. residential properties, because the commercial properties owners may not be voters.
The slowdown in the housing market, rising foreclosure rates and the subprime lending debacle all indicate a downward correction of housing values. The questions are, when and how much? Will this be a quick correction of the less than 5 percent that lasts a year or so? Or will this be a deeper and longer correction, perhaps 20 percent or more and lasting two to four years? Nobody knows at this point. There are so many factors, including the underlying demographics of population growth/shrinkage, aging (those darn boomers!) as well as job creation and stability.
With so much to think about, it is easy to get distracted by record snowfall, primaries and March Madness.
The office copier lesson
What we continue to see on a weekly basis is the rising cost of occupancy, which includes rent, utilities, real estate taxes, maintenance, insurance, etc. These have been rising for a while, but have been offset by increases in productivity. However, there are limits to how much productivity we can squeeze out of operations year after year.
In manufacturing, which today is about one out of five jobs, there are raw material costs, direct and include labor, transportation and overhead. These are reasonable to quantify. For the services sector, it is a much more challenging calculation. What is an “adequate” public education? What does or could it cost?
Our office copier is coming to the end of its three-year lease. The company wants to sell or lease a new one with lots of bells and whistles for the same monthly amount. But a bargain on something you don’t need is not a bargain at all. The service tech tells us that the current machine is in good shape. He can get parts and it will last quite a while more, like a car that can get to 250,000 miles. What to do? The economics appear to penalize us for not trading in/up. But how reliable is the new technology?
As my partner and I ponder these economics, it strikes us that many of our clients do this every day and specifically on trucks, printing presses, milling machines, computer networks, etc., that involve a lot more than a $5,000-$6,000 copier.
When the economy softens, perhaps even recesses, there is a wave of caution. Prices aren’t rising, so we turn to the spending side of the equation. The construction sector is often a leading indicator of what might come in other sectors. Even government is struggling to pay its bills. Remember those assessed values and potential for declining real estate tax income? Oh yes, fees from building permits are down as well.
Can a dynamic presidential candidate turn things around? Will the Red Sox repeat? How about the Patriots — so close. My guess is that we will continue with a general malaise through the summer, and perhaps into the fall. By then we will see positive momentum, the bounce-back, or we will realize that this correction will be deeper and longer than we hoped. So much for my crystal ball.
Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at firstname.lastname@example.org.