Q&A: Jack Kern of Kern Investment Research Counselors Discusses the Florida Housing Market
- Jul 03, 2008
Jack Kern is the managing director of Germantown, Md.-based Kern Investment Research Counselors. He talks to MHN’s Online News Editor, Anuradha Kher about when Florida’s skyline is likely to return to normal, the oil crisis and its effects on housing and how he believes transit-oriented developments will become commonplace–not anytime soon.MHN: What is the likely impact of foreclosures in South Florida on the existing condo inventory? Kern: At least initially, the foreclosures in South Florida are proceeding along at a fairly orderly pace. Because there are a large number of unsold condo units, the foreclosure actions will ultimately add to the unsold housing stock, making it harder to sell condos at anywhere near their original asking prices. We do expect that condos will be severely discounted in most buildings. With around 25,000 units expected to be delivered this year, and perhaps 10,000 more next year and later, the pressure to sell off the excess inventory will become overpowering for the lenders.MHN: What is your forecast for the amount of time it might take for the Florida skyline to return to normal? Kern: The housing stock numbers are just breathtaking, and I wouldn’t expect to see sufficient levels of absorption for roughly four years. The condo inventory, the foreclosures and the normal housing movements are all going to suffer broad-based declines while this gets cleaned up.MHN: How is the rental market typically affected in times like this? Kern: The rental markets have actually shown some gains in the past year, but they are very modest, probably less than 2 percent. The increase in available rental units that is going to come from foreclosures and unsold or condos reverted to rental will make it harder for the rental market to gain strength. It’s a classic story of excessive inventory not being absorbed fast enough.MHN: Are developers and vulture funds finding much success cherry-picking assets so far? Kern: There are some very sophisticated investors out there trying hard to put deals together. After a long lag, some deals are getting done, but they are generally small and pretty varied. It seems that it’s just too early yet for vulture funds to make major gains, but that’s going to change by early next year. Our forecasts show that on average, developers/owners don’t have much time left in their reserves and their banks will probably compete to see who can short sell the fastest. Once that happens, the prices will decline to a rate not seen probably in the past five years.MHN: How does the U.S. economy overall affect Florida housing? Kern: As the U.S. economy has gone into this recession, (we believe it is a recession), those states most at risk, Florida and California for example, started to show stresses much faster than usual. It’s no wonder they have such huge numbers of foreclosures and unsold houses. Housing is a major component of the state’s economy and its slowdown is affecting most of the rest of the state. Once the U.S. economy picks up, Florida will begin to rebound as well.MHN: How is this affecting businesses and employment in Florida? Kern: Economic conditions in Florida can be described as tenuous at best, with some bright spots. Florida has traditionally been a state dependent on real estate activities, and that’s slowed to a crawl, while some other sectors–international business, finance and trade sectors–seem to be holding their own for now. We think that, overall, the state is slow pretty much everywhere for the most part.MHN: How has this affected senior housing in Florida? Kern: The senior housing sector, particularly age-restricted and the more care-intensive assisted living/nursing hasn’t been affected particularly because it’s so different from traditional housing. It may potentially be affected by foreclosures, but not to a significant degree. The senior housing business seems to run on its own cycle.MHN: How can a developer or a property owner salvage his losses here? Kern: The key to winning in this kind of economy is patience and smart management and deployment of the assets in question. Values fall and values rise and ultimately if the developer or owner can wait out the cycle, they’ll be vastly better off. Only those tight on the margin right now are apparently trying to fire sale their properties and there aren’t a lot of them at the moment. An effective strategy is to find a partner, and then a joint venture structure can be established to help someone in trouble. We currently help to represent roughly $1.5 billion in overseas equity capital, mostly looking for multifamily deals. The terms are tough but the funds are available.MHN: How do you expect the oil crises to affect the housing market in the U.S.? Kern: Oil prices, and by extension energy costs in general, are high and will rise further for the short term, and for the foreseeable future, we will never return to the days when oil was cheap by world standards. Operators are now having to budget for much higher onsite energy costs and the added difficulties of inflation-based price increases in just about everything the industry uses. The fact that oil might drop to roughly $90 to $95 a barrel by year-end will be scant relief for the damage the energy markets are suffering now. The next big wave of costs will be in the electricity markets, where double-digit increases are likely.MHN: Will there be demand for a different kind of product, for example transit-oriented buildings projects? Kern: Transit-oriented development and mixed-use projects have become the darlings of planning departments across the country. These projects have shown success and great promise in lots of places, but unfortunately there are still too many projects with vacant retail space, ill-planned unit layouts and insufficient access to the kinds of transit and services that really make these projects successful. It is unlikely that current economic conditions coupled with high gas prices will push a lot of residents into this kind of project, at least for now. Ultimately there is a change in attitude and a desire to live a greener life that’s taking hold, but it may take a generation before it’s commonplace.