The Ground Floor

Paranoid Optimism: The Best Attitude Toward Economic Recovery

This post was written by Trisha Riggs, vice president of communications for ULI.

"Paranoid" optimism--a belief in the ability to overcome the negatives that could be coming--may be the best attitude to take regarding the economy’s recovery, according to renowned economist Bill Emmott. The former editor-in-chief of The Economist provided a global economic outlook during yesterday’s opening session of ULI’s Annual Fall Meeting in San Francisco.

Borrowing an analogy from former U.S. Department of Defense Secretary Donald Rumsfeld, Emmott said that moving from recession to recovery might best be analyzed by considering the "known knowns" versus the "known unknowns."

Among Emmott’s known knowns: 

• An economic recovery is underway to some extent in most countries, with the rebound in the U.S. and Western Europe being more gradual while China and India will be more immediate.
• Economic globalization and openness to cross-border trade has remained intact. "We are seeing some sense of global sharing of the rebound," Emmott said.
• A continuation of the fiscal stimulus in the U.S. and Western Europe helps to keep the momentum going.
• An acknowledgement that consumers remain cautious and that consumer spending will not lead the recovery.
• The likelihood that more government-funded programs will be created in the U.S., China, and Japan.
• The likelihood of tighter financial regulation in the U.S. and the U.K.

Among the "known unknowns":

• The extent to which consumers and corporations will pay down debt.
• How quickly eliminated jobs will be recreated.
• How quickly the value of Chinese currency will be re-evaluated in relation to the dollar. Quicker re-valuation so the currency is not artificially low would benefit world trade and revive U.S. exports, Emmott noted.
• The future of oil prices, which as yet have not reflected the global recession.

The known unknowns, Emmott said, have created a course of "uncharted waters" that could change the character of the economic recovery. His reasons for optimism: a belief that job growth will occur sooner rather than later; faith in the flexibility of the economy, particularly that of the U.S.; and encouraging prospects for U.S. exports.

"Be realistic but positive," he advised ULI fall meeting attendees. "There is much we do not know, but new situations bring as many positive possibilities for growth and change as negative ones. Paranoid optimism is the right feeling to have as we move forward."  

"Muddling Through" Toward Economic Recovery

What is keeping the economic recession from morphing into a "full-scale" depression is a series of quick, unprecedented action by the Federal Reserve Board to thaw the credit markets, says former Federal Reserve Board Governor Frederic S. Mishkin, now Lerner professor of banking and financial institutions at the graduate school of business at New York City’s Columbia University.

Mishkin, a keynote speaker at ULI’s recent Spring Council Forum, praised the Fed’s actions to shore up the nation’s financial system by pumping capital into institutions and by continuing to lower interest rates. Had the Fed not 'pushed the envelope' to make capital available, "there would be a global depression," he predicted. "The economy will recover only if the financial systems recover."

According to Mishkin, the economic stimulus package alone will not end the recession, primarily because the number of jobs the package is expected to create--about 2.5 million--will only dent the millions of jobs that have been lost and are continuing to be lost. As a result, more federal intervention is needed, despite the political risk and unwillingness by the U.S. Congress to spend funds on any additional "bailouts," he explained. "The Administration has to reallocate enough resources to fix the financial system. If it (the Obama Administration) does not get this right, it will fail, no matter how good its (domestic) policies are."

In Mishkin’s view, the Obama Administration would be better off forging ahead with steps necessary to restore the credit markets now, rather than getting bogged down in politics while the economy languishes. He described four possible economic scenarios:

The "happy" scenario, in which the recession is deep, but the recovery is quick and significant. This scenario is not likely, he said, due to the severity of the financial crisis.

An economic depression, which "is not out of the realm of possibility," he said, "if more shoes drop (specifically in the form of financial failures)" and further federal intervention is stymied.

The "Japan" scenario, in which monetary policy is not eased consistently, and thus impeding the financial recovery. (This refers to the extremely slow response by Japan’s government to turn around that nation’s financial markets when Japan entered into a recession years ago that lasted for more than a decade.)

A scenario of greatly increased financial regulation that, while perhaps well-intended, is poorly planned and ineffective at stabilizing the financial system, further hampering an economic revival.

Mishkin’s best guess: The nation "will muddle through" and experience a slow recovery.  Perhaps the only good news from the recession: 'there have never been more interesting times" for economists, he said.

Huckabee's Economic Remedy: Tax Reform and Healthcare Reform

Former Arkansas Governor and Republican presidential nominee hopeful Mike Huckabee has two solutions for lasting economy recovery--tax reform and healthcare reform. At ULI’s recent Spring Council Forum in Atlanta, Huckabee, who now hosts Huckabee with Mike Huckabee on Fox News Network, offered some views on maintaining economic prosperity through a simpler process for tax collection and a more efficient, less costly process for keeping Americans healthy. 

The course for recovery, he said, could be made easier if the U.S. tax system and healthcare system were radically changed. Huckabee discussed his long-held support for a "fair tax" system that is based on consumption, eliminating the complexities of the current system, and, he contended, leaving individuals of all incomes wealthier. As described by Huckabee, such a code would eliminate all income taxes for individuals and corporations and instead impose a flat tax on the purchase of all retail items.

This simplified system, he said, would help lure back corporations that have left the United States to escape what they perceive to be an onerous tax system, and it would allow individuals and companies to keep far more of their earnings, thus building wealth that would lead to an economic revival. The consumption tax would be lifted for the low-income on fundamental items such as food and medicine, with the relief phased out based on level of income. 

In the area of healthcare, Huckabee called for a complete transformation of the system into one that is based on treating disease, rather than preventing it. The current system is set to fail, he said, because 80 percent of the costs are typically used during a person’s last 18 months of life. "We need a prevention-based model, not one that is intervention-based."

While acknowledging that his proposals for tax reform and healthcare reform are often viewed as politically difficult, Huckabee said he remains steadfast in his belief that both types of reform are necessary and doable. "Changes to the tax code and healthcare systems are fundamental to the long-term success of this country," Huckabee said. "If we make progress in these areas, we will see long-range benefits to help get our children out of the debt we are leaving them (from soaring federal spending). I refuse to believe that we cannot change our country, that we cannot make a better country for our kids."

ULI and Oscar Week in LA

This post was written for The Ground Floor by Phil Hart, managing director of Diversity and Inclusion at ULI.

It was just after Oscar week in 2001 when a ULI Advisory Services Panel visited Hollywood. The American City Coalition cosponsored a panel visit along with the Hollywood Chamber of Commerce and the ULI Foundation. ULI Sustaining Member firm Corcoran Jennison Companies and its Chairman Joe Corcoran and I headed up The American City Coalition at that time. 

In March 2001, the Oscars were held at the Dorothy Chandler Pavilion in downtown Los Angeles.  The ULI panel visited the under construction Kodak Theatre in Hollywood where the Oscars were slated to move the following year. After the Oscar ceremony moved back to Hollywood at the Kodak Theatre in March 2002, I received excited calls from nearly all the ULI Hollywood panel members because one year after they toured the Kodak they were able to see the awards show on television (along with about one billion other viewers worldwide).

The public presentation the ULI panel made at the Hollywood Roosevelt Hotel on March 16, 2001 was standing room only. The ULI Advisory Services Panel Report "A Strategy for Hollywood's Comeback" has helped guide the multibillion redevelopment of--perhap--the most famous neighborhood in the world.

In 2005, Urban Land magazine asked me to write an article, "Hollywood's Time to Shine," describing the progress made in Hollywood since the ULI panel visit. I sit on the Hollywood Chamber of Commerce Board of Directors and its Economic Development Committee, so I continue to see first-hand how this ULI Advisory Services panel visit and report has accelerated the rebirth of Hollywood.

Vicente Fox – Building Bridges of Hope

This post was written by Marge Fahey, director of media relations for ULI

The charismatic former president of Mexico, Vicente Fox, drew a standing ovation from the more than 6,000 attendees at the Urban Land Institute’s fall meeting.

Fox told attendees that his grandfather was born in Cincinnati and emigrated to Guanajuato, Mexico where he was born and lives today on the family ranch. It was clear that he was pro-American and spoke of many common interests.

Fox is proud of the fact that Mexico has finally adopted a free trade philosophy and has trade agreements with 40 countries. He spoke of the progress Mexico has made in the 21st century. “[We] succeeded in controlling inflation and interest rates and lowered the unemployment rate,” he said. His election in 2000 broke the ruling party’s hold on Mexico that it enjoyed since 1929. 

He spoke of the need for cooperation between Mexico and the U.S., and of common interests in solving issues, such as drugs and immigration.  He suggested that the U.S., Canada, and Mexico should band together in order to compete with other economic blocks in the world. “By staying together, we can accomplish that; the largest consumer block in the world.” And he said he hopes for an agreement and reform of immigration, which is a key issue for Mexico. He noted that Mexico buys more products and services from the U.S. than Italy, Germany, France, and Britain combined, and those imports account for many U.S. jobs.

He spoke of the financial crisis and the challenges facing the world, and said, “Today we have to act and act rapidly; no excuse for a government not to intervene. We need back the leadership of this nation. It’s not the time to build walls; it’s the time to build bridges of hope, understanding, and working together. That’s the leadership that’s missing,” he emphasized.

Fox said Mexico has enjoyed a 10-year expansion, which can be seen by the numbers of people who bought homes. Mexico’s home building rate has increased from 200,000 homes eight years ago to 750,000 homes built last year and the poverty level has been reduced by 35 percent.  “In Latin America and Mexico we come from a lost 20th century; we did not enjoy freedom and democracy.” But, the country has made changes and embraced democracy and freedom, opened markets and instituted economic reforms. Mexico is growing at a rate of 6 percent and is building infrastructure, homes and developing communities, he said. “We are now on the right path. I hope we will have the vision to keep consolidating those structures; that we will have the vision with NAFTA and keep increasing our competitiveness and markets.”

Fox admitted that the relationship between the U.S. and Mexico is tense. “It’s a situation to be controlled and worked out.  One million people cross that border every day; import $250 billion and export $250 billion – seventh largest trading partners in the world,” he explained.

He indicated that Mexico would have to reduce consumption and act with moderation in the next ten years, but was convinced that by 2040 Mexico would be the fifth largest economy in the world.

Leaping into the Future with "The City in 2050"

This post was written for The Ground Floor by Trisha Riggs, vice president of Communications at the Urban Land Institute.

ULI took a leap into the future with the debut of  "The City in 2050: Creating Blueprints for Change," which opened earlier this week at the 2008 Urban Land Institute Fall Meeting in Miami Beach Florida. Many of the meeting's 6,000-plus attendees have walked through the 3,600-square-foot exhibit that explores factors shaping the future design and development of cities worldwide, including emerging trends for alternative energy use; new technology affecting housing; and new approaches to achieve economic, social and environmental sustainability. 

According to Richard Rosan, president of ULI Worldwide, The City in 2050 is designed to shift people's thinking beyond the current economic recession and to longer-term issues that will continue to reshape the urban landscape for decades to come. At the October 27 kick-off reception for ULI leaders, Rosan said, "This year will go down in history as the year the market dropped, and it will be remembered for a history-making Presidential election. But it's also the first year in history in which the majority of the world population lives in cities." Rapid urbanization (by 2050 the world population will grow by three billion, with two billion living in urbanized areas) calls for "new thinking" about better ways to design and build cities, he noted.

The exhibit, sponsored in part by the Galbreath Family Foundation, explores various “drivers of change” that will have a lasting impact on urban development patterns globally in the coming decades, including: rapid urbanization; rising energy costs; climate change; infrastructure needs in both mature and emerging markets; population growth, demographic shifts; household formation changes, and economic shifts. It will underscore the need to pursue efficient, intelligent land use as a critical strategy for sustainable development.

"From creative development around transit to alternative energy use, from the latest in green technology to advances in retail delivery, this initiative encourages innovative thinking and the exploration of future scenarios of land use practices," Rosan said. "We see this as a compelling new way for ULI to advocate responsible land use and think ahead to the best possible ways to create sustainable, thriving communities. There is no silver bullet solution."

The debut this week is only the beginning for this far-looking exhibit. It has three components: the display itself, a related publication (available through the ULI bookstore at www.uli.org/bookstore), and ongoing engagement. "It's a great way to trigger dialog and actions leading to positive change in urban growth," Rosan noted.

Building a Bridge to a Better Economy

This post was written for The Ground Floor by Trisha Riggs, vice president of Communications at the Urban Land Institute.

"There is no doubt" that the U.S. economy is in a recession that will get worse before it gets better--so says Paul Volker. The former chairman of the Federal Reserve Board offered a frank assessment of the status of the nation's economy and financial market woes to ULI members attending the 2008 Urban Land Institute's Fall Meeting in Miami Beach, Florida this week.  While Volker has witnessed his share of U.S. economic downturns, he said he has never seen a crisis "as complicated or difficult as this."

The series of events, ranging from the subprime mortgage market meltdown to tens of trillions of dollars in credit default swaps, led to what Volker described as the "semi-nationalization" of the U.S. financial industry. "Who would have thought that the current [Presidential] administration…that moved toward getting government out of the industy would end up with a government-dominated financial market?"

He noted that while the Fed has taken massive steps (even going beyond its charter) to bail out the troubled system, the fact that Wall Street remains jittery is a "serious problem" that illustrates a "steady erosion" of faith in government leadership. "A sense of confidence and trust must be restored in the government's ability" to address this crisis and manage it, Volker said.

The silver lining behind the crisis: it has forced much-needed change in what is viewed as an effective economic stimulus, he said. The U.S., which for years has increasingly relied on runaway consumer spending to boost the GDP, will no doubt go through a painful withdrawal as consumption is reined in, Volker said. "We learn lessons the hard way, but we do learn from them."

According to Volker, it would serve the nation's economy well for the U.S. to step up its investment in infrastructure, and to emphasize more training in civil engineering and deemphasize "financial engineering." By doing just the opposite for too long, the U.S. wound up with "lousy infrastructure and a lousy financial system," he said.  To dig out of the economic hole, Volker said a new fiscal stimulus is needed; one that will grow the economy in a sustainable manner, with less emphasis on consumer spending and more emphasis on with long-term, wide-ranging, job-producing investments such as infrastructure programs.

In other words, he says, we can build a bridge--literally--to a better economy. Sage advice indeed from one who knows.

How to Survive Your First Down Cycle

This post was written for The Ground Floor by Marge Fahey, director of Media Relations at the Urban Land Institute.

Surviving in today’s economic environment requires a new way of thinking; a need for flexibility; a new business model; and a dose of optimism, according to a panel of industry experts at the 2008 Urban Land Institute’s Fall Meeting in Miami Beach, Florida.

“Anytime you get a tremendous amount of leverage you have to worry,” says Harvey Green, president and CEO, Marcus & Millichap, Encino, California. But Green says he has “made a decision not to participate in a recession,” and instead see this as an opportunity to reposition his firm, “which takes proactive senior management and a positive attitude. To survive, we need to be innovative and break out of the mold.”

Green says it’s time to “shake it up.”  He suggested taking people from different teams and putting them into something they don’t know, which leads to new thoughts and new ideas. “How you position for the next cycle is important,” he noted.

That thought was echoed by Frederick Merrill, principal, Sasaki Associates in Watertown, Massachusetts, said that firms need to find new ways to add value to their clients, “think about what they can do differently, and what they can do to differentiate themselves. Rethink projects in terms of sustainability that will make them better socially, environmentally, and economically.” He also suggested talking to clients around the world and try putting them together.

Wesley Podell, development manager, Duke Realty Corporation in Indianapolis, said his firm is looking at their core business and “finding creative ways to do it better. Offering flexibility in deals today is critical, as is doing everything we can to keep tenants by providing terms that help them meet their needs.” He added, it’s important to “focus on what you can control.”

All participants agreed that staffing and management were important elements in a down cycle. Layoffs will occur and most companies favor senior management, but Green suggested a balance between senior management and the best and brightest. He also recommended an open dialogue with staff to eliminate rumors. And, rather than cutting expenditures, he suggested challenging staff to demonstrate how they can get a return on investment.

Using technology differently and finding better ways to do things is critical, Merrill added. Having people with a good attitude is also important.

On the people side, Podell noted that the real estate industry is at risk of losing a generation of real estate professionals. “The reality is people are scared,” he said.

Merrill suggested reaching out to other companies, firms, and individuals who might add value with strategic alliances.

John Walsh, president, TIG Real Estate Services, Dallas, said “its been a rough 90 days; the biggest challenge is filling the spaces. Overall, … I think we have taught ourselves not to overbuild.” But, as Walsh cautioned, “As long as there is uncertainty in the market, we will be in a less confident mode.”

Sam Zell - Bullish on Latin American Markets

This post was written for The Ground Floor by Marge Fahey, director of Media Relations at the Urban Land Institute.

Extraordinary opportunities exist for investors in the emerging markets of Latin America, says Sam Zell. Zell was the keynote speaker at today’s session of the Urban Land Institute’s Latin America conference in Miami Beach. However, he said the past sixty days have seen something similar to the dot com bust, when people expected prices to keep going up.

In Latin America today there are three investment grade countries: Mexico, Chile, and Brazil. “Governments will do whatever it takes to defend that investment grade status,” Zell said. “Brazil and Mexico increased interest rates and have a level of transparency never seen before. We see countries that in the past allowed inflation to go wild and we see them exhibiting financial discipline; an extraordinarily positive sign.” Zell added that the Mexican parliament passed oil reform last week, which is the first time since 1938 when oil was nationalized, and that all three parties supported this; which has never happened before. 

There is no greater issue than demand, Zell noted. The developed world has little new demand, and part of the problem is it is overleveraged, Zell acknowledged.  Latin America has little debt and a high savings rate. Demographics tell us where demand will be tomorrow, Zell said. Brazil and Mexico will become world manufacturers.  Zell emphasized there are “extraordinary opportunities to take advantage of the growth opportunities in Latin America. Latin America, relatively speaking, will outperform the developed world. Once that is recognized, you will see more capital allocated to Latin America than has been withdrawn over the

past 60 days.”

He added that at the moment securities in Latin America are being given away at prices that don’t reflect reality. “This is the time when extraordinary fortunes will be made. Recognizing true value and having staying power to be there in the end is what it’s all about,” Zell said. 

However, Zell’s enthusiasm is limited as he sees countries with political instability, such as Ecuador and Venezuela, which will be the next problem areas.  He also does not recommend investing in Argentina because of governmental policies. 

Another problem looming is the repatriation numbers from the U.S. to Mexico and Central America. These keep going down, which will change employment scenarios at home and create labor shortages in certain areas in the U.S.  These are issues that are relevant to how we got to where we are today, Zell commented. “All of our anti-immigration policies make no sense. We should focus on how we make them citizens. He noted that he was born 90 days after his parents emigrated to the United States. 

And, he noted the fall of Lehman Brothers was the “game changer for the U.S.” The country will go through a recession but how serious remains to be seen.”