For a guy who spends 8 hours per day in a lab, I have a pretty decent informal education in real estate and finance. Two friends work in private wealth management, one is a marketing director for a new real estate development, one worked in reverse mortgaging for the past several years, and one appraises commercial real estate. It is from this last friend that I've been hearing for acouple years now that the punctured residential real estate bubble has merely been the tip of the iceberg.
The coming trouble, he says, is that commercial real estate leases typically run on five-year terms before re-evaluation and negotiations for renewal. The favorable interest rates and cheap credit of the early and mid 2000s resulted in tons of business expanding, getting new offices, warehouses, production facilities, etc etc. Now they face the double blow of stagnant demand (though the economy does seem to be improving) and the end-term of drastically distorted leases they can no longer pay for. Bad enough for the lessees--many of which are downsizing already-- and a boon for appraisors like my friend, whose firm has never been busier, but a nightmare for property owners and banks. Yet, I hear surprisingly little about this in the media. Why, I don't know. I watch for such things in WSJ, The Economist, and HuffPost, to name a few, but perhaps the news cycle is just dominated by other, slightly more tractable problems-- such as the foreclosure crisis currently being subjected to government action and intense media coverage.
I'd like to think that my buddy is wrong, at least in his estimation of the magnitude of the problem, but I'm afraid he's not. Oy. Just what the country needs now-- another gaping hole in the mortgage market and empty buildings instead of productive businesses. Huzzah! Makes me pretty sick to think that the same banks that played a significant part in inflating the last credit bubble and financing, out of thin air, the building and purchasing of hundreds of thousands of homes that Americans truly couldn't afford, are now paying "Foreclosure robots" to stamp papers on even deserving homeowners, whilst the second wave of pain from this crisis is just ahead. Thank God I'm 26, rent, earn next to nothing, and have no kids.
Sunday, October 31, 2010
Thursday, October 28, 2010
Yes, we have vacancies.
In the same week the chronic vacancies plaguing Dubai's army of new buildings made the Yahoo! front page, my friend announced he was visiting the emirate with his girlfriend after a stop in Europe. Oddly, for middle-class kids originally from Idaho, he is not the first of my friends to make the trip to this tiny experiment in controlled excess on the Arabian peninsula. The first time someone went, I was stunned. Why, with the funds at your disposal, would you visit a creepily post-modern amalgam of oil money, hot sand, and impetuously tall, empty buildings? Why not Thailand, or Peru, or...my backyard!? Frankly, any place with plants!?
The bottom line here is that I've read, watched, and listened to numerous reports on the construction debacle occurring in Dubai, and I find the place simultaneously fascinating and repulsive. I want to say it's a classic case of trying to get ahead the wrong way and paying for it, but it's not really so clear-cut. Dubai is, as Johann Hari calls it in one of his articles for the London Independent (see below), a glittering neo-liberal facade teetering on the edge of oblivion. I think of it as an archetype for the globalized world-- a desert state that has leveraged meager natural resources into a playground for the elites of finance and global trade-- and its current travails might tell us much about the solvency of the ideas behind Dubai's rise and fall.
*A quick aside, as per wikipedia for context :Real estate and construction (22.6%),[10] trade (16%), entrepôt (15%) and financial services (11%) are the largest contributors to Dubai's economy*--- When things go sour for the rest of the world, Dubai is in quicksand. Its own success is not based on homegrown industry, manufacturing, agriculture, etc. Aside from the construction of office and apartment buildings for the service elite, Dubai's own success is inextricably tied to those of the greater world economy. A better long-term bet than oil alone, but, as the past two years have shown, potentially more volatile!
Both friends made the trip with American companions who had already spent months working in England, and a trip to Dubai was the highly recommended choice from those in the know-- the new flavour du jour at reasonable prices. Maybe Marbella and Malaga were too crowded, but whatever the reason, everyone from highly-paid footballers to spring-breakers wanted to soak in the rays--and take in what I must imagine to be a bizarre cultural crossroads--in sunny Dubai.
*Note- as I search for the original article on the 90% vacancy rate in some of these towers (including the world's largest, the Burj Kalifa at 2717 feet), I have a hell of a time actually finding any such information from any recent source. I wonder if the good people in the UAE Real Estate and Tourism PR office have put the lean on Yahoo....
Anyway, the first of my friends to make that trip went in the summer of 2008, just before the world economy began to unravel. He returned wide-eyed and loquacious over the late model Mercedes-Benz driven by the entire police force, the Burj Kalifa, and the two massive man-made sand islands visible from space in the shape of a palm tree. Yeah, that's a great idea. Build record-breaking towers on sand. I'm sure it's not just the Bible that recommends against this architectural brain fart. I was irrationally offended by his excitement, and I held it against him not to have known about the charges of environmental ruination and slave labor leveled against the authorities (including one instance where a hastily-executed sewage system overran capacity and backed up into the waters of Dubai's acclaimed beachfronts). I had also heard that the desalination plants all along the coastline were (a) not producing enough to meet the needs of the growing vertical city and (b) were washing toxic heavy metals out to sea as part of a byproduct.
Now that another friend is making this trip, two years on and after seismic shifts in world travel, finance, and real-estate development, I am very keen to hear his take on everything. He's (geo)politically savvy, knows the history of the Middle East, and, as a finance manager, risks palpitations when discussing the enormous sovereign wealth funds of the Emirates. A soccer fan myself, I am reminded on a weekendly basis of the grasping reach of this money-- do I watch the Arsenal players run around in shirts sponsored by "Fly Emirates" in their London "Emirates Stadium", or should I flip the channel and see the now-familiar logo on the shirts of AC Milan? The long-standing rumours of Dubai International Capital buying out Liverpool never came to pass, but Sheik Mansour of Abu Dhabi did pump a few hundred million into Manchester City FC.
And that's the funny thing to me. The sheiks who manage the money generated from their man-made oases are smart guys. Economics and finance degrees from Harvard, Cambridge, LSE. .. They knew fifty years ago that they were a few dry oil wells short of returning to the hot sands, so they diversified. They bet big on Western tastes, building gigantic concrete-and-steel edifices to the exchange of money, with tax incentives (read: no taxes) and cheap labor to attract foreign executives and expatriates, and built as fast as they could, frantically fleeing the prospect of a return to a poorer time. And now, as the greed-and-opportunism-mechanisms built into "first-world" economic policies and consumer tastes have brought us low, Dubai again faces the empty desert, only this time with empty buildings to boot. It might not last forever, but the lesson is clear-- live by the sword, die by the sword. Worst of all, you can't blame the emirs for following the best-looking path out of poverty and into modernity. That this path comes to a jagged end says a lot more about the rest of the world than it does about Dubai.
http://www.swfinstitute.org/fund/adia.php
http://en.wikipedia.org/wiki/Dubai
http://www.huffingtonpost.com/johann-hari/dubai-has-always-been-ban_b_372795.html
http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html
The bottom line here is that I've read, watched, and listened to numerous reports on the construction debacle occurring in Dubai, and I find the place simultaneously fascinating and repulsive. I want to say it's a classic case of trying to get ahead the wrong way and paying for it, but it's not really so clear-cut. Dubai is, as Johann Hari calls it in one of his articles for the London Independent (see below), a glittering neo-liberal facade teetering on the edge of oblivion. I think of it as an archetype for the globalized world-- a desert state that has leveraged meager natural resources into a playground for the elites of finance and global trade-- and its current travails might tell us much about the solvency of the ideas behind Dubai's rise and fall.
*A quick aside, as per wikipedia for context :Real estate and construction (22.6%),[10] trade (16%), entrepôt (15%) and financial services (11%) are the largest contributors to Dubai's economy*--- When things go sour for the rest of the world, Dubai is in quicksand. Its own success is not based on homegrown industry, manufacturing, agriculture, etc. Aside from the construction of office and apartment buildings for the service elite, Dubai's own success is inextricably tied to those of the greater world economy. A better long-term bet than oil alone, but, as the past two years have shown, potentially more volatile!
Both friends made the trip with American companions who had already spent months working in England, and a trip to Dubai was the highly recommended choice from those in the know-- the new flavour du jour at reasonable prices. Maybe Marbella and Malaga were too crowded, but whatever the reason, everyone from highly-paid footballers to spring-breakers wanted to soak in the rays--and take in what I must imagine to be a bizarre cultural crossroads--in sunny Dubai.
*Note- as I search for the original article on the 90% vacancy rate in some of these towers (including the world's largest, the Burj Kalifa at 2717 feet), I have a hell of a time actually finding any such information from any recent source. I wonder if the good people in the UAE Real Estate and Tourism PR office have put the lean on Yahoo....
Anyway, the first of my friends to make that trip went in the summer of 2008, just before the world economy began to unravel. He returned wide-eyed and loquacious over the late model Mercedes-Benz driven by the entire police force, the Burj Kalifa, and the two massive man-made sand islands visible from space in the shape of a palm tree. Yeah, that's a great idea. Build record-breaking towers on sand. I'm sure it's not just the Bible that recommends against this architectural brain fart. I was irrationally offended by his excitement, and I held it against him not to have known about the charges of environmental ruination and slave labor leveled against the authorities (including one instance where a hastily-executed sewage system overran capacity and backed up into the waters of Dubai's acclaimed beachfronts). I had also heard that the desalination plants all along the coastline were (a) not producing enough to meet the needs of the growing vertical city and (b) were washing toxic heavy metals out to sea as part of a byproduct.
Now that another friend is making this trip, two years on and after seismic shifts in world travel, finance, and real-estate development, I am very keen to hear his take on everything. He's (geo)politically savvy, knows the history of the Middle East, and, as a finance manager, risks palpitations when discussing the enormous sovereign wealth funds of the Emirates. A soccer fan myself, I am reminded on a weekendly basis of the grasping reach of this money-- do I watch the Arsenal players run around in shirts sponsored by "Fly Emirates" in their London "Emirates Stadium", or should I flip the channel and see the now-familiar logo on the shirts of AC Milan? The long-standing rumours of Dubai International Capital buying out Liverpool never came to pass, but Sheik Mansour of Abu Dhabi did pump a few hundred million into Manchester City FC.
And that's the funny thing to me. The sheiks who manage the money generated from their man-made oases are smart guys. Economics and finance degrees from Harvard, Cambridge, LSE. .. They knew fifty years ago that they were a few dry oil wells short of returning to the hot sands, so they diversified. They bet big on Western tastes, building gigantic concrete-and-steel edifices to the exchange of money, with tax incentives (read: no taxes) and cheap labor to attract foreign executives and expatriates, and built as fast as they could, frantically fleeing the prospect of a return to a poorer time. And now, as the greed-and-opportunism-mechanisms built into "first-world" economic policies and consumer tastes have brought us low, Dubai again faces the empty desert, only this time with empty buildings to boot. It might not last forever, but the lesson is clear-- live by the sword, die by the sword. Worst of all, you can't blame the emirs for following the best-looking path out of poverty and into modernity. That this path comes to a jagged end says a lot more about the rest of the world than it does about Dubai.
http://www.swfinstitute.org/fund/adia.php
http://en.wikipedia.org/wiki/Dubai
http://www.huffingtonpost.com/johann-hari/dubai-has-always-been-ban_b_372795.html
http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html
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