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Wagenseller Law Firm

An Evening With Alfred Gobar

The $65,000 question. A bubble? Irrational exuberance? Where is the economy taking us, especially with regard to real estate. I recently attended a talk by Alfred Gobar, the renowned real estate economist and founder of AGA (Alfred Gobar Associates), a real estate market research firm that investigates market feasibility for a wide range of land use development ventures.

In This Issue

• The Key Variable in Real Estate
• Governmental Decisions
• Macroeconomic Outlook
• Evaluating Retail
• A Bubble?

The Key Variable in Real Estate

Employment

The key variable in assessing the strength or weakness of the real estate market, according to Dr. Gobar, is employment. Moreover, the factor which correlates best with the housing market is employment (not population). In the early 1990s, prices plummeted when Southern California lost hundreds of thousands of aerospace jobs. However, those jobs have already been lost and the region is not as vulnerable to an industry downturn as it was at that time. While he sees the housing market softening, he does not see a dramatic downturn in prices like we experienced fifteen years ago.

Governmental Decisions

Beating the Law of Supply and Demand?

Dr. Gobar also discussed the effects of government decisions on housing prices. For example, he noted that local zoning policies created an inversion in land value. In order to try to collect more in taxes, municipalities have over-zoned for commercial uses but not enough for residential. The zoning allocations create an artificial market. Now, zoning decisions, such as smaller lots and higher density, are changing that market. With regard to governmental subsidies for ìaffordable housing,î he noted that the influx of government money skews the market and drives up prices. Although they think they can, the politicians cannot beat the laws of supply and demand. These subsidies do not achieve what they set out to do.

Macroeconomic Outlook

Rising Interest Rates In a macroeconomic sense,

Dr. Gobar noted two negative trends: the negative balance of trade and the declining value of the dollar. However, both the federal debt and the federal deficit did not concern him as much. The debt has, in the past, been higher as a percentage of Gross Domestic Product. The deficit is not high in comparison to other countries nor as high as it has been historically. He does foresee interest rates continuing to rise.

Evaluating Retail

Supermarket Struggles

Dr. Gobar addressed some of the rules he uses in evaluating retail properties. For example, his rule of thumb when looking at strip centers is that anything over 30,000 square feet of floor space is too big for the centerís trade area and he would not own it. For neighborhood shopping centers, he avoids drug store anchored centers since they do not generate the repetitive traffic that a supermarket does. However, he also believes that a lot of supermarkets will close in the face of competition from Wal-Mart and larger power centers.

A Bubble?

Low Cap Rates: The New High P/Es?

Overall, Dr. Gobar feels we are in a ìbubbleî based on the low capitalization rates for property right now. In the housing market, he noted that speculators are putting up deposits for properties and watching the prices while the property is constructed. Although developers try to stem speculation by requiring written agreements by purchasers that they intend to live in the property, these agreements are not stopping the speculators. He believes that prices may dip as speculators get out of the market. However, he notes that he does not see the same decline in commercial properties because most mortgages are at fixed rates and buyers are more likely to hold these properties than sell them at the same or lower price.