There’s a New Menace Stalking Suburbia. Meet the McBasement. | Kanebridge News
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There’s a New Menace Stalking Suburbia. Meet the McBasement.

Limits on above-ground mansion sizes lead to mammoth grottos with tennis courts and whiskey-tasting rooms. Beverly Hills pushes back: `Violence against the land’

Wed, Oct 12, 2022 8:45amGrey Clock 4 min

When Sterling McDavid’s parents bought a roughly 9,000-square-foot home on Aspen’s Red Mountain, the 33-year-old interior designer directed the architect and contractors to start digging.

Limited by zoning above ground, Ms. McDavid, who led the renovation, envisioned an expansive basement with a world-class gym, guest suites and hotel-caliber spa for her parents, former college track star Stacie McDavid, and David McDavid, a former owner of the Dallas Mavericks and car-dealership mogul.

“I love a basement,” says Ms. McDavid, who ultimately blew out her parents’ basement to more than double its size. “When you walk into a home, if all the magic is just within the first few steps, that’s no fun.”

Wealthy Londoners have long built basements reaching two, three, and even four stories below ground. Now, there is a cellars market in the U.S. among property owners facing restrictions on mansion sizes above ground. The McBasements of today have bars, bowling alleys, pools, climbing walls and whiskey-tasting rooms. To sidestep subterranean gloom, builders usher in natural light via grand staircases or skylights cut into the ground above.

“Down is the new up,” says Randy Correll, partner at Robert A.M. Stern Architects, who designs basements with luxe finishes. “Twenty years ago, basements were the ‘B word.’”

Ms. McDavid says the excavation for her parent’s 4,000-square-foot Aspen basement added about a year to the three-year renovation, since workers dug underneath the home and into a mountainside. The resulting basement has guest suites, a gym with white oak floors, a 12-person hot tub and an “absurdly large” steam room, she says. “You feel like you’re in a luxury cave.”

She says the prior owner, by contrast, had done little to maximise the basement, which was “absolutely heinous.” (“It had wine storage, not to be confused with a wine cellar,” she says.)

Still, some towns have cracked down on the chic crypts, worried about unsettling topography and having truckloads of excavated dirt roll through residential streets. In Aspen, a resident sued the city for permitting a neighbour’s two-story basement, alleging excessive noise and dust. Aspen now limits basements to one level. And the Beverly Hills Planning Commission is now mired in a down-and-dirty basement brouhaha.

The island of Nantucket, just 14 miles long and 3.5 miles wide, limits home sizes with more than 20 zoning districts. Some areas allow a footprint covering only 2 percent of the property.

One solution? Go low. “The possibilities are endless,” says Stephen Cheney, owner of Cheney Custom Homes, who is currently constructing a roughly 16,000-square-foot home and guest home with a 5,600-square-foot “bunker” below for a bowling alley, 3-D golf simulator, and spa.

Basements can dwarf homes above. Designer Andrew Kotchen, a principal at Workshop/APD, is working on a 5,000-square-foot Nantucket abode that will have a 10,000-square-foot basement with a basketball court, garage, bedrooms and a wellness space.

In beach towns, architects are deploying extreme waterproofing measures.

For the 10,000-square-foot grotto, workers are using the same waterproofing technique as Boston’s Big Dig highway project, Mr. Kotchen says. An emergency pump system and thick concrete slab underneath will prevent the foundation from floating up should water levels rise, he says.

In Aspen, a 5,000-square-foot basement at the confluence of two rivers required “dewatering,” says Ryan Walterscheid, a partner at architecture firm Forum Phi. Workers drilled wells around the site and pumped out almost a billion gallons of water before pouring the foundation. (The water was poured back into the river.)

Architect Charles Cunniffe, who designed the McDavids’ remodel, also did a basement with a tennis court. “You can’t hit big lob shots,” he says, “but you can play a decent game of tennis.”

Interior designer Bryan Graybill says a large basement at his home in East Hampton, N.Y., was the only way to fit all the amenities he and his husband desired in their 4,100-square-foot house. For frequent hosting, their 1,800-square-foot lower level has full guest quarters, a laundry room with three sets of washers and dryers, and a catering pantry with extra stemware and service for 48. “It’s like an instant party,” he says.

Beverly Hills residents are also keeping up, and down, with the neighbours.

Architect Paul McClean crafted a house there with 7,400 square feet above ground and another 12,000 below, including a 3,000-square-foot garage. The firm also designed developer Nile Niami’s roughly 105,000-square-foot Los Angeles megamansion “The One,” where about half the home sat below grade. First listed at $500 million, the property fetched $126 million at auction this year. (A relative bargain-basement deal.)

Beverly Hills leaders passed ordinances in recent years in response to what Craig Corman, former Planning Commission chairman, called a “pernicious” trend of mammoth dwellings with wedding cake-style retaining walls and massive basements. “They can be quite offensive,” he said during a recent commission meeting. Now, property owners in the Hillside area cannot remove more than 3,000 cubic yards of earth without special permits.

This has hampered real-estate investor David Taban, who is trying to build a 23,144-square-foot house, of which 9,829 would be a basement. (He wants to dig down to appease neighbours who worried his home would hurt their views.) But getting a basement of that size required removing 5,346 cubic yards of dirt, which one city planner said would amount to 594 truckloads.

“Violence to the land,” Planning Commission Chair Myra Demeter dubbed it at an August meeting.

Asked to revise, Mr. Taban’s team is set to return to the commission Thursday. As of late September, plans called for removing just 3,276 cubic yards of soil, according to attorney Ronald Richards, a representative for Mr. Taban, who also argued the project should be permitted since the proposal predates some restrictive rules.

“It’s not even that crazy of a project in our mind,” says Russell Linch, another Taban representative.

Spec developers know the more liveable space, the bigger the price tag, says Brett Loehmann, a project manager at McClean Design. “If you don’t have great amenities, you’re not going to be the coolest person on the block.”


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A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.

After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.

The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.

Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.

We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:

‘Animal spirits’ could return

Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.

Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.

If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.

“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.

Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.

“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”

—Gunjan Banerji

Keeping dollar’s moves in focus

For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.

Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.

The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.

Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.

“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.

This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.

“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”

Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.

—Caitlin McCabe

Stocks still appear overvalued

Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.

Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.

The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.

“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”

One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.

Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.

Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.

“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.

—Gunjan Banerji

A better year for bonds seen

Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.

After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.

Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.

“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”

Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.

“That is why we are wary on the equity side,” he said.

Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.

—Caitlin McCabe


Find the fear, and find the value

Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.

“When fear really rises, you can buy some very well-run businesses,” she said.

Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.

“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.

The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.

“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”

Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.

It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.

“These are reasons the market is so happy,” she said.

—Justin Baer


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