Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Smashing Pumpkins in 2018 and 1991

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The Smashing Pumpkins came to Portland on Saturday, August 25th at the Moda Center (the arena where the Portland Trail Blazers play). It was a good show and the sound was excellent (we recently saw a show at the Veterans Arena adjacent to the Moda Center and the sound was so terrible we walked out half-way through the show).

They played the hits – most of the show was based on their first few albums – Gish, Siamese Dream, and Mellon Collie and the Infinite Sadness, and a bit of their next two.  There wasn’t a lot of their most recent work – the local paper described the show as “Give the Gen X’ers What They Want”.

The whole band was there except for original bassist D’Arcy.  Like (nearly) everyone else, I had my story of when I ran into the Smashing Pumpkins back in Chicago – James Iha and D’Arcy were behind me in line at Best Buy purchasing CD’s a long time ago.

While I love the Smashing Pumpkins unconditionally, I can see how Billy Corgan’s “woe is me” routine would be grating.  He had a bad childhood and it was highlighted from the very first song “Disarm” where he had pictures of himself as a child with annotations and they weren’t happy, for sure.

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West Coast Real Estate Starts to Turn

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When I moved to the West coast I noted that prices were generally high relative to incomes.  It is well documented elsewhere that San Francisco area housing prices are very high and Seattle has been skyrocketing as well.  In Portland, housing isn’t as costly as Seattle or San Francisco but is very high relative to the local job market, particularly within the city limits and in the nicer areas.  A condo in “the Pearl” in Portland (a local high rise market) is 2-3 times what I’d pay for a comparable unit in my former River North area in Chicago.

From an economic perspective, the income tax changes passed in late 2017, particularly the virtual elimination of the State and Local Tax deduction (SALT) for high earner households, along with continuing reductions in the mortgage interest deduction, should have had an immediate, negative impact on house prices in high tax states such as Oregon and California.  I didn’t see these effects, but changes in the housing market take a long time to appear, because many transactions are already under way and sellers will hang on in the market rather than taking a perceived “hit” to the value that they expect to receive.

It looks like the market, in Portland at least, has crested and is (likely) to proceed in a downward direction.  From an article in Bloomberg titled “The US Housing Market Looks Headed for Its Worst Slowdown in Years“

Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.  “Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”

The real estate agent refers to this as moving from a ‘peak’ to ‘leveling off’ and we will see if this moves to a prolonged rout, like we had back in 2008-9.  It will also be interesting to see if real estate in high tax states doesn’t bounce back as fast as real estate in states with lower tax rates, but we won’t be able to see the net effect of this for many years (and it is but one variable among a sea of variables).

I have a semi-sad theory about this – I don’t think folks understand the impact of the changes in tax laws until they file their taxes.  Whether due to complexity (it is hard to model just a couple of variables in a tax program unless you know what you are doing) or a lack of financial acumen, I believe that after 2018 taxes are filed in the middle of 2019 you will start to see more of a “wealth effect” as home owners start to realize the potentially large impact of the changes to the SALT deduction.

As I look out my window in Portland I hope that they complete the high rise buildings that they are working on, and don’t break ground on new ones.  We used to look at partially completed buildings for many years in Chicago after the 2008-9 crisis, until they finally completed them up to 5 years later.

Cross posted at LITGM

Disruption – Scaling an Application

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Today in the NYT they had an article about an online dating app called “Raya”. This tool is designed to let exclusive rich / celebrity folks match rather than being mixed in with everyone else on Tinder.

From my perspective, the interesting fact isn’t what the application is “about”, but how easy it is to build a scale a worldwide tool with all necessary functionality. From what I can gather in the article:

  • The entire company is run with only 13 people, including technical staff
  • The platform is exclusive to Apple iOS, and costs $7.99 / month (if you are accepted, which is rare), with additional up-charges
  • This world-wide, fully functional app was built with limited investment and seed funding
  • The app was built and launched quickly, in likely a year or so (based on the dates provided in the article)
Let’s look at how modern platforms and capabilities have enabled this sort of rapid delivery, scaling and enabling of a business model.  In the past, building a business such as this would have been a large-scale project.  By building it on the Apple iOS platform, however, the developer is able to tap into a huge amount of existing infrastructure, including:
  • Apple basically provides distribution through the iPhone, operating system, and entire infrastructure of the App store which includes billing 
  • Increasing power of the phone itself (likely all these rich and famous folks are on the latest models) enables advanced features and fast responses, as well as a consistent experience for users
  • The platform and embedded capabilities allow for rapid builds and prototyping, upgrades and security
It is astonishing that such a ubiquitous and enabling platform exists, with the ability to scale to an essentially infinite degree, with little (to no) up front investment.  This platform and environment facilitates rapid prototyping, the ability to grow quickly (if there is demand for your app), and provides an entire environment for notifications, customization, etc… that you can leverage.
If someone would have told you ten years ago that you could
  • Build a piece of software that can reach customers around the world
  • Scale up at a rapid rate with little or no upfront investment
  • Have billing, notifications, user experience, etc…. mostly done for you “out of the box”
You’d think that they were dreaming.  And yet it is here, today.
What are the implications of this?  I think that a lot of the assumptions that we make about how strong incumbent positions are, how fast challengers can emerge, and how low the barriers to entry are for many markets are incorrect.  Since the key demographics are already all mobile (and the majority of the highest income US consumers are on iOS), you can jump quickly into Apple and evolve rapidly.
Since many companies today make little or no profits and “value” is the stream of future cash flows (when presumably the company will be profitable and able to capture and hold market share and customer revenues), the fact that competitors can rapidly come into your space with little incremental investment should make long-term investors shudder.  
Cross posted at LITGM

Disruption – Online Ordering

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The retail restaurant industry already is an area of fierce competition. Just think of all the restaurants in your community vying for your attention and business. And this is also an industry with slim margins and a high mortality rate – even after a couple years’ away from Chicago, many of the local restaurants we used to patronize have turned over in one form or another.

Since I’ve lived in a “big city” environment for decades, I am used to just walking over to a nearby restaurant to eat or potentially pick up a delivery. However, that isn’t an option for everyone, and digital delivery through various methods is now an important differentiator between chains and individual firms.

The NYT had an article titled “App Takes Orders for Mom-and-Pop Pizzerias” about a company called Slice that offers a tool for small, individually owned pizza restaurants to offer sophisticated ordering capabilities in multiple methods in order for them to compete with chains like Dominos which run a significant portion of their business through online ordering. Small chains typically cannot build their own specific tools and will need to purchase these capabilities as a service.

Slice sends customers’ online orders to the restaurants through their preferred method — email, fax or phone. Restaurants deliver the meals with their own couriers. For each order processed, Slice receives a $1.95 commission, or around 6 to 7 percent of order totals on average, Mr. Sela said. In contrast, GrubHub charges up to 18 percent of the order to process online sales for its clients.

In a business with small margins, giving up 18% or even 6-7% of revenues off the top line seems to be a very significant cost, but at least it allows these restaurants to “even the playing field” with larger chains.

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Seismic Upgrade, Moral Hazard and Gentrification

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While there has not been a recent major earthquake in the Pacific Northwest, research has proven that the area is seismically active. Building codes were established to withstand earthquake damage and new buildings have been held to this higher standard. However, there is a substantial portion of the commercial and residential buildings which have not been retrofitted to date. This cool interactive map shows earthquake risk in Portland based on the age of construction… and the pervasive color “red” is bad.

While wood frame houses may fare reasonably well in an earthquake, the highest risk buildings are large structures made of brick. The term for these sorts of buildings in Portland is “unreinforced masonry” or URM for short. They are the buildings that give Portland all of its “character” like classic old apartment buildings and multi-use commercial and residential structures. Many schools, churches and community centers also fit in this classification. This article estimates that it would cost $4.6B to retrofit the remaining URM buildings in Portland. They also note that at the current rate of upgrades, it would take 100 years to complete the effort.

I read a different local article and an engineer put it most pithily

The value of an URM building is zero

I do see some building owners “biting the bullet” and doing a seismic upgrade. When I look out the window of my building I can see many of the older buildings that gabapentinoral have been upgraded in this manner, and many that have not. Here is a construction notification for a nearby 5 story masonry building that is being retrofitted.

There are two threads here that are most interesting to me:

1. How do owners of apartment buildings, where residents will most certainly be at higher risk of death during an earthquake, sleep at night? They talk about the costs of retrofitting as if it is an abstract event; but not doing so creates an economic externality of human misery that apparently they value very little if at all

2. Any mandate the city or region employs on URM will almost certainly drive gentrification because owners will have to invest in higher cost apartments and in turn raise rents; ironically, the city’s mandates on re-use and burden of oversight rules will make the future rent increases even more burdensome

The likeliest solution is some sort of “muddling along” in the near term. For valuable commercial and high rise residential locations, the inevitable commercial upgrades will drive the URM upgrades. For apartment buildings, the future is much dimmer, because if you are a landlord owning an URM building, you can’t raise and invest the money if your local competitors are just going to “accept” the URM risk (on behalf of their residents, ironically). In fact, it makes no sense at all to invest anything more than the cosmetic minimum in these URM buildings, which will move them down the road of being slums at some point in the future.

Cross posted at LITGM