Archive for category: Hot Topic

In its latest release, the U.S. Census Bureau reported that total housing starts in December 2012 increased 36.9 percent over December 2011 to a seasonally adjusted annualized level of 954,000. This level is the highest reported since July 2008 and signals the housing market continues to improve. While this is a positive indicator for the economy, additional time spent investigating the underlying data may lead to a better understanding of current market conditions.

A closer look at the seasonally adjusted annualized data reveals that the 36.9 percent year-over-year growth was driven primarily by increased starts for multi-family units (apartment complexes) rather than single family units. Compared to a year earlier, multi-family starts increased 115.7 percent while single family units increased only 18.5 percent. The table below reports historic seasonally adjusted annualized data for the month of December from 2009 through 2012. This information uncovers a longer term trend in which multi-family start growth outpaced single family growth in each of the past three years, based on December data, and these growth rates have widened over time. The remaining component of housing starts, two-to-four unit data, is typically not given much consideration due to its small representation.

Could this growth inequality have any impact on the pace of our economic recovery? According to data released by the National Association of Home Builders (NAHB), it is very possible. Based on historical estimates from 2008, the average new single family home creates 3.05 jobs and $231,288 in total income, while an average multi-family rental unit creates only 1.16 jobs and $86,709 in total income. A detailed account of these potential economic impacts is shown in the table below.

This data suggests that the economic impact of constructing a new single family home is greater than that of a multi-family unit. Therefore, while housing start growth of any kind is positive in this environment, growth driven by single family units rather than multi-family units would likely prove more beneficial to the economy, all else being equal.

By: Brad Dulas

Over the last five years, Shenehon Company has had the opportunity to value several residential developments, including both single-family and multifamily residential dwellings, with significant construction defects. Construction defects to real property are often so complex that market participants rarely understand or fully appreciate the ramifications of such defects to the value of the defective property or neighboring properties. As a given property loses value, the property and neighboring properties become less desirable to potential buyers and investors, and the size of the pool of potential buyers shrinks, oftentimes, dramatically.
In the case of residential dwellings, a large percentage of market participants refuse to purchase homes with either existing or remediated construction defects. The small percentage of market participants with an interest in purchasing affected residential dwellings may be further limited due to the inability to secure mortgages or find other means of financing. The inability to secure financing would require a potential buyer to enter into an all-cash transaction, further depleting the potential pool of buyers. As a result, sellers of defective and damaged real property are often forced to offer significant discounts in sale price or other incentives to entice interested parties.
In many instances, owners may simply abandon the affected property. The abandonment of a property may have a detrimental effect on neighboring properties, resulting in a loss of value for other units in a development or neighboring properties simply by association. This loss of value has the potential to set the ripple effect in motion. As residential units decline in value, nearby commercial properties, including retail establishments, may experience a drop in overall business activity as well as revenue. Thus, the economic and social structures of an entire neighborhood have the potential to change relatively quickly; the direct result of a defective or damaged property in the area.
Neighborhoods blighted by abandoned buildings suffer from a variety of problems connected with commercial and residential structures that have fallen into disuse or disrepair. Although these issues are commonly associated with inner cities, the problems presented by abandoned buildings are not confined to urban areas. Issues often resulting from the abandonment of buildings include a decrease in property values, an increase in criminal activity, and a loss of neighborhood pride, vandalism and vagrancy. Blight and abandonment are akin to the broken windows theory, which suggests that a broken window, if left unrepaired, leads to others being broken and sends a clear signal that nobody cares.
Although neighborhood blight is not an objective condition, a blighted area, loosely defined, is an area that in its present condition and use, substantially impairs or reduces anticipated growth, stunts housing accommodations, constitutes an economic or social liability and/or is a menace to public health, safety or welfare. While neighborhood blight remains a subjective condition, the effects are quantifiable. According to a report published by the National Association of Home Builders, abandoned buildings in a neighborhood reduced the value of a standard new home in the same neighborhood by approximately $28,000. This reduction in value could be multiplied many times over based on the composition of the affected neighborhood.

By: Joshua Johnson

Even the most casual observer of the markets cannot help but notice that the Dow Jones Industrial Average (DIJA or the Dow), experienced an overall increase between 2011 and August 2012. Although a few setbacks occurred, particularly in summer 2011 amid talks of the European debt crisis, the Dow has generally trended upwards. Increasing from roughly 11,500 in early 2011 to the present 13,000, the Dow experienced an approximate 11.5% gain over that time period.

A number of groups have publicly expressed their opinions of where the Dow is headed. Most predictions fall into one of two categories. In one camp are the ever-indomitable bulls, who believe the markets are getting ready for continued upward growth as evidenced by improving corporate profits. On the other hand, there are the bears who tout current employment and personal income figures as evidence that continued growth will be difficult to sustain. While there is evidence to support both hypotheses, only time will tell which way the Dow will go.

Relevant analysis is one of the key elements of a top-notch business valuation. This is especially true in times of economic instability. Valuation experts, such as those at Shenehon Company, constantly analyze companies, industries, and the economy to develop a sense of which way the pendulum will swing.

Questions or comments? Please email Joshua Johnson at JJohnson@Shenehon.com

By: Charles Miller, CBA

The following bullet points are excerpts sourced from Strategic M&A Deals: Regions, Sectors and Structures, a May 2011 white paper prepared by Merrill Datasite and The Deal, LLC. In the publication, Merrill Datasite and The Deal surveyed 97 large-cap companies to determine their strategic acquisitions forecasts for the year ahead.

• With the stock market roaring back, companies flush with cash and credit flowing freely, global M&A totaled $608 billion in the first quarter of 2011-a 32.7% jump over the same period last year, according to Dealogic. What’s especially interesting is that most of the deals fueling this increase have been strategic acquisitions by corporates, amounting to more than 90% of transaction revenue.

• While M&A activity has showed renewed signs of life, so far, much of that activity has been concentrated among bigger deals and a handful of dealmakers. Of those who participated in the survey, just 41% say they engaged in an M&A transaction in the first four months of the year. Bankers say they see more dealmakers warming to transactions in the months ahead.

• Information from The Deal Pipeline reflects this move toward bigger deals. According to the data, there were 437 deals in the first quarter, compared with 405 in 2010, with a dramatic rise in large deals: 78 transactions were valued at $1 billion or above in the first quarter, a rise of 23% over 2010. On the other hand, the number of smaller deals has declined so far this year, from 137 deals under $50 million in the first quarter to just 97 this year.

• Costs are a big factor. Nearly half of the respondents say that the price of the target company is the biggest challenge they face in making a strategic acquisition. A further 29% say economic uncertainty is the big challenge, 11% cite availability of financing options, and 4% point to global instability.

• “I think we are getting back to more normalized multiples for acquisitions,” says Andrew Ballheimer, co-head of the global corporate practice at London law firm Allen & Overy LLP. “In the boom market of 2007 and 2008, the multiples were very, very high, and then they dropped to a very low level. Now they are getting back to more normal levels.” Raymond James’ Lane says values have ratcheted down about 25% from their 2007 highs.

• For those who prefer debt, financing is now relatively easy to obtain, compared with the tight money situation following the mortgage crisis two years ago. According to the survey, 68% of executives feel lending opportunities have opened up, while only 32% say that lending conditions remain tight.

• “There’s a more competitive environment now for strategic acquirers than there was in the past,” Curragh says. “While the economy is improving, organic growth is not substantial enough for a number of corporates, which are seeing attractive opportunities for M&A.”
• Technology is the most sought-after sector, with 33% of dealmakers saying they believe the sector is likely to have the largest number of acquisitions in 2011. This was followed by financial services at 16% of respondents, healthcare with 11% and energy at 10%.

• If the executives’ predictions prove accurate, 2011 is slated to be an outstanding year for strategic M&A. While the economic recovery has been lacklustre so far, that has helped keep valuations reasonable and presented attractive buying opportunities to many firms.

In sharp contrast, small businesses (under $5 million in revenue and less than $1,000,000 in loans), seem to be playing in a different ballpark. Big banks’ outstanding loans to small businesses dropped 14% between March 2011 and March 2010 according to an analysis by the Kansas City Federal Reserve Wall Street Journal, Smaller Businesses Seeking Loans Still Come Up Empty.

Only 17% of loan-seeking small businesses landed bank financing over the past six months, as noted in the article. As seen in the excerpts from the Strategic M&A Deals article above, the situation is quite different for larger companies. About 37% of respondents from privately held companies with revenue greater than $25 million have successfully secured bank loans in the last six months.

The Strategic M&A Deals report may exhibit some optimism (possibly over optimistic) in that more deals are getting done and financing is available for the larger deals. Nonetheless, the small businesses seem not to be participating in any improvement in the capital markets as lenders may perceive the small business too risky for investment.