In his annual letter to shareholders, billionaire and Berkshire Hathaway CEO Warren Buffett talks about how two small non-stock investments in real estate from years ago were keys to teaching him about investing. Buffett says in the letter that in 1986, he purchased a $280,000 400-acre farm about 50 miles north of Omaha, Neb. From 1973 to 1981, the Midwest saw an explosion in farm prices, but then the bubble burst and prices declined up to 50 percent or more. That’s when Buffett decided to buy.
“I knew nothing about operating a farm,” Buffett writes. “But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10 percent. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out. I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property.”
Now 28 years later, Buffett says the farm has tripled its earnings and is worth five times or more what he originally paid for it.
He also talks in the letter about another key small investment he made in 1993: a New York retail property adjacent to New York University that the Resolution Trust Corp. (RTC) was selling. He made the purchase just after the bubble had burst in the commercial real estate market.
“Here, too, the analysis was simple,” Buffett writes about purchasing the property with a small group of investors. “As had been the case with the farm, the unleveraged current yield from the property was about 10 percent. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20 percent of the project’s space – was paying rent of about $5 per square foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere. … Annual distributions now exceed 35 percent of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150 percent of what we had invested.”
Buffett says he uses the two stories to teach fundamentals of investing, such as the importance of focusing on the future productivity of an asset and its prospective price change.
“My two purchases were made in 1986 and 1993,” he writes. “What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in determining the success of those investments. … A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values.
“A climate of fear is your friend when investing; a euphoric world is your enemy.”
Source: “Buffett’s Annual Letter: What You Can Learn From My Real Estate Investments,” Fortune (Feb. 24, 2014)
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The Conference Board Consumer Confidence Index®, which had increased in January, fell slightly in February. The Index now stands at 78.1, down from 79.4 last month.
The decline was driven by the Expectations Index, which gauges attitudes about the economy six months from now. That component dropped to 75.7 from 80.8. The Present Situation Index, by contrast, climbed from 77.3 to 81.7.
“While expectations have fluctuated over recent months, current conditions have continued to trend upward and the Present Situation Index is now at its highest level in almost six years (April 2008, 81.9),” says Lynn Franco, director of economic indicators at The Conference Board. “This suggests that consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead.”
Consumers’ appraisal of current conditions improved for the fourth consecutive month. Those claiming business conditions are “good” increased to 21.5 percent from 20.8 percent, while those claiming business conditions are “bad” declined to 22.6 percent from 23.4 percent.
Consumers’ current assessment of the labor market also improved. Those claiming jobs are “plentiful” increased to 13.9 percent from 12.5 percent, while those saying jobs are “hard to get” decreased slightly to 32.5 percent from 32.7 percent.
Consumers’ expectations about the future, which had been improving over the past two months, retreated. The percentage of consumers expecting business conditions to improve over the next six months decreased to 16.3 percent from 17.0 percent, while those anticipating business conditions to worsen increased to 13.3 percent from 12.2 percent.
Consumers’ outlook for the labor market was also more pessimistic. Those expecting more jobs in the months ahead declined to 13.3 percent from 15.1 percent, while those anticipating fewer jobs increased to 20.6 percent from 19.0 percent. The proportion of consumers expecting their incomes to increase declined from 16.6 percent to 15.4 percent, but those anticipating a decrease in their incomes also declined, from 13.9 percent to 13.1 percent.
Nielsen conducts the monthly Consumer Confidence Survey, based on a probability-design random sample, for The Conference Board. The cutoff date for the preliminary results was Feb. 13.
© 2014 Florida Realtors®
Market fundamentals in commercial real estate continue to improve but at a slower pace, according to the National Association of Realtors® (NAR) quarterly commercial real estate forecast. Lawrence Yun, NAR chief economist, said fundamentals are still on an uptrend.
“Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy,” says Yun. “Companies appear hesitant to add new space. Office demand is expected to see only slow and gradual improvement. Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space.
“Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners,” Yun adds.
National vacancy rates in the coming year are forecast to decline 0.2 percentage point in the office market, which has the highest level of empty space, 0.1 point in industrial, and 0.3 point for retail real estate. With rising apartment construction, the average multifamily vacancy rate will edge up 0.1 percent, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.
NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS Inc., a source of commercial real estate performance information.
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