Weitz Commercial - 105 Central Way; Ste 202 - Kirkland, WA - (206) 306-4034

Thursday, June 30, 2022

What you can learn from Ted Lasso...

Probably the shortest post I will ever write, but this scene and this quote stuck with me the other night. 

"Be Curious. Not Judgment."

- Ted Lasso via Walt Whitman






 

 

Stagflation and a Macro Economic update/ prediction

 

It is my personal belief that we are entering some unprecedented economic times in this country. I’ve been saying from the better part of year that while others continually discuss ‘Inflation”, I believe we are entering into a Stagflation period or perhaps even a deflationary period. Below is an article from an economic idol of mine Ray Dalio who started and still manages the largest hedge in the world ‘Bridgewater’ out of Westport, CT. I have omitted some of the article and reorganized in an effort to make it more readable and succinct, but also made additional comments at the conclusion of article.  



For me, hearing supposed “experts” talk about what’s now happening in the markets and economy is like listening to nails scratch against a chalkboard because they are typically saying incorrect things in an erudite rather than commonsense way. Markets and economic movements are driven by much simpler and more commonsense linkages than most people articulate.

More specifically, I now hear it commonly said that inflation is the big problem so the Fed needs to tighten to fight inflation, which will make things good again once it gets inflation under control.

I believe this is both na├»ve and inconsistent with how the economic machine works. That’s because that view only focuses on inflation as the problem and it sees Fed tightening as a low-cost action that will make things better when inflation goes away, but it’s not like that. 

The facts are that:

1. prices rise when the amount of spending increases by more than the quantities of goods and series sold increase; 

2. the way central banks fight inflation is by taking money and credit away from people and companies to reduce their spending; 

3. They also take buying power away by raising interest rates which increases the amount of that has to go toward paying interest and decreases the amount of money that goes toward spending; 

4. raising rates lowers spending. 

My main point is that while tightening reduces inflation because it results in people spending less, it doesn’t make things better because it takes buying power away. It just shifts some of the squeezing of people via inflation to squeezing them via giving them less buying power. 

The only way to raise living standards over the long term is to raise productivity and central banks don’t do that. 

So, what do central banks do?

Central banks move demand around by providing and withdrawing spending power by influencing the creation and amounts of debt assets and debt liabilities. They do that in a way that naturally produces cycles in markets (bull and bear markets) and economies (expansions and recessions). More specifically, central banks inject doses of stimulation into the system via injecting credit and money into the system, which produces increases in demand for goods, services, and investment assets that are followed by periods of paying back and withdrawals of the stimulations, which produce lows in demand that are depressing. Whenever these depressing periods of paying back become too depressing, central banks typically provide another and even bigger dose of stimulation. They produce the short-term debt cycles (also known as the business cycle), which typically last for about seven years give or take a few.

These short-term debt cycles add up to the long-term debt cycles that typically last about 75 years, give or take about 25. That’s because most everyone wants the ups and not the downs, so the stimulations and debts that central banks produce typically add up over time to produce more ups than downs until the debt assets and liabilities get unsustainably large, at which point they have to go down via some mix of inflation (due to money printing to reduce the debt burdens by monetizing them, which is inflationary), debt restructuring, and paying the debt service in non-depreciated money (which is depressing). 

That is what we have been experiencing. It’s why debts have been increasing relative to incomes at the same time as each cyclical rise and each cyclical decline in interest rates since 1980 has been lower than the one before it until interest rates hit 0%, and since then each central bank printing and buying of debt has been greater than the one before it up until now.

So, what should central banks do to do their job well? 

Central banks should:

  1. Use their powers to drive the markets and economy like a good driver drives a car—with gentle applications of the gas and brakes to produce steadiness rather than by hitting the gas hard and then hitting the brakes hard, leading to lurches forward and backward.
  2. Keep debt assets and liabilities relatively stable and, most importantly, not allow them to get too large to manage well.

To do this they should not allow interest rates and availabilities of money to be either too good or too bad for the debtors or the creditors. 

By these measures central banks policies have not been good. More specifically,

  1. The Fed is moving from printing and buying debt at an annual rate of around $1.5 trillion to selling it at an annual rate of $1.1 trillion, and from sharply lowering interest rates to sharply raising them. For that reason, we experienced the big lurch forward and are now experiencing the big lurch backward.
  2. Because debt assets and liabilities are now very high and because government deficits will remain high, it is virtually impossible for the Fed to push interest rates to levels that are high enough to adequately compensate holders of debt assets for inflation without them being too high to support strong debtors, strong markets, and a strong economy. If the holders of debt don’t get adequate returns they will sell them, which worsens the free market debt supply/demand picture, which either leads to a dramatic cutback in private credit (which is depressing) or the central bank creating more money and buying more debt to fill in the funding hole (which is inflationary). 

In summary my main points are that 1) there isn’t anything that the Fed can do to fight inflation without creating economic weakness, 2) with debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy, and 3) over the long run the Fed will most likely chart a middle course that will take the form of stagflation. 

Weitz take:  As I typically do, I agree with Ray whole heartedly in this assessment. Namely the buying debt to selling debt coupled with the dramatic increase in the Fed Funds rate is a double edge sword that is fairly insurmountable. I said to a colleague in late 2021 that if the Fed did increased rates as much as they intended to, it would be an intentional collapse. For better or worse, the inflation rates spooked the fed into slamming on the brakes, but that will not come without negative economic performance until we get to a new equilibrium. How far we must go to get there is uncertain, but the chance of severe headwinds is almost a certainty in my eyes. I'm always open to good faith dialogue so if you disagree, feel free to make a comment below. 

My Info for comments/ feedback: 

Scott Weitz

Scott@WeitzCommercial.com

105 Lake Street S; Ste 205

Kirkland, WA 98033

Cell: 206.306.4034




Tuesday, June 7, 2022

WSJ - Commercial Real Estate shows signs of slowing down


AP- The Wall Street Journal recently published an article on the slowing down of the commercial real estate market. For those that follow us on this blog and social media, this comes as no surprise. 

Here, we will provide excerpts from the article, highlight the important data and provide our own opinion feedback where appropriate. 

Commercial real estate is showing the first signs of cooling in more than a year, disrupted by rising interest rates that are already causing some deals to collapse. Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. (The decline followed 13 consecutive months of increases). 

Property sales tanked sharply during the early months of the pandemic…A rebound began in late 2020 as investors took advantage of low interest rates and started to buy in anticipation of an eventual rebound. Demand for multifamily and industrial properties in particular helped fuel commercial sales through 2021 and into this year. The success of those sectors outweighed the drag on property markets caused by underperforming office buildings which continue to be hurt by remote work.

Weitz Commercial: as we have referenced in our facebook posts, we think they office market will continue to face uphill battles as the desire to reduce office footprint will assuredly be a common theme in lease renewals. We predict the large companies will have more offices with smaller footprints to accommodate the hybrid work model and employees that may live a distance from city centers. 

Analysts are starting to ask whether the rally is running out of steam. Hotels, office buildings, senior housing and industrial properties recorded big drops in sales last month. Sales of retail properties were up in April, the fourth consecutive month that U.S. households boosted spending, while apartment building sales continued to rise due to strong tenant demand and landlords’ ability to raise rents. But analysts and brokers said activity in even these sectors may be slowing as rising interest rates keep some investors from making competitive offers.

April’s 16% decline in sales marked an abrupt turn from March, when total commercial property sales rose 57% from the same month a year before.

But with interest rates considerably higher—the yield on 10-year Treasury notes, a common benchmark for commercial mortgages, has nearly doubled this year—property investors that relied on large amounts of cheap debt to purchase buildings have been some of the first ones to fall out of the market, brokers and investors said.

“Suddenly, you’re just not competitive,” said John Carrafiell, co-chief executive of property investment firm Bentall GreenOak, describing buyers who use debt to finance 60% or more of a property’s sale price.

Surging interest rates in recent weeks have left many investors with a choice between losing their deposit or paying much more than expected for their mortgage, said Jay Neveloff, a partner at law firm Kramer Levin Naftalis & Frankel LLP.

Most have been moving ahead with planned purchases, he said, but other investors are more cautious now about signing new contracts. That will inevitably drive down prices. “The pricing can’t be blind to changes in capital markets,” Mr. Neveloff said.

But lower prices also offer an opportunity for bargain hunters, especially for real-estate investment funds that are sitting on big cash reserves. “I have heard people say, ‘this is when I’m making deals, this is when I’m finding properties. ” Mr. Neveloff said.

The investment firm Apollo Global Management Inc. and hospitality investor Newbond Holdings recently agreed to buy the Hilton Times Square for about $85 million, according to people familiar with the matter, a significant discount to the hotel’s 2006 sale price of $242.5 million. 

Weitz Commercial: this drop in price for the Hilton Times Square is fairly staggering. Its hard to say whether this is COVID driven, general malaise of the property, or a sign of the times in Manhattan these days. Whatever the reasoning, it’s a significant drop for a trophy property like this one.

As the buyer pool narrows and interest rates rise, sellers are becoming more likely to make concessions to close deals, said Henry Stimler, an executive in the multifamily capital-markets division at the Newmark real-estate firm.

His firm recently brokered the sale and financing of a $457.5 million multifamily portfolio concentrated in the Carolinas, where rent growth has been strong over the past year. “It’s now turning into a buyer’s market,” Mr. Stimler said.

Weitz Commercial: For those in our investor database, we have been very clear that we think the market will fall, now is a good time to diversify into other assets/ cash and prepare for a changing market. That plan hasn’t changed one bit. In fact, articles like this are turning what was once a contrarian view to perhaps more of a mainstream analysis. Just how much the market turns will vary market to market, and we continue to like essential (multi-family/ industrial) properties in mid-markets, but generally speaking, we think tremendous opportunities lie ahead for a patient purchaser.

For more information on Puget Sound Commercial Real Estate News, consider contacting a Snohomish County or King County Commercial Real Estate Broker

Our Firm: 

Weitz Commercial

108 Union Street

Snohomish, WA

Scott@WeitzCommercial.com

 


Sunday, May 29, 2022

The U.S. Economy Shrinks in the First Quarter of 2022 and our prediction(s)

 The U.S. Economy Shrinks in the First Quarter of 2022

The Basics of GDP

GDP stands for Gross Domestic Product. GDP

measures the output of goods and services

produced by labor and property located within

the U.S. during a given time period. It was

developed in the 1930s as a way for

policymakers to gauge the recovery from the

Great Depression. GDP is essential as it

measures the total monetary value of all goods

and services which is important for seeing the 

economic growth or decline in the U.S.


The Shrinkage


The U.S. economy shrank in the first quarter of 2022, with GDP falling 1.4% in the first

three months of the year, the U.S. Commerce Department reported late last week.


Economists with CBRE Group Inc. (NYSE: CBRE) wrote last week the U.S. economy 1.4% shrinkage in Q1 was attributed to a decline in trade and inventory investment, which reflects the strength of domestic demand relative to a weaker global economy.


What does this mean for investors?


So far, the U.S. investment sales market for commercial real estate has been robust in 2022. Aggregate pricing was up 7.8% year-over-year in Q1 while investment volume reached $96.7 billion, according to Colliers International Group Inc. (NASDAQ: CIGI).


“The commercial real estate sector is in a pretty resilient position, as it was in 2019 and 2020 as we went into the covid crisis,” he continued “I haven't turned pessimistic just yet, especially for commercial real estate, but I would say buckle your seat belts to investors. Drive with caution”


“It might actually benefit certain property types and geographies,” said Victor Calanog, head of commercial real estate economics at New York-based Moody’s Corp. “capital is always looking to be deployed and for yield. In an environment of rising interest rates and potential uncertainty, U.S. commercial real estate is still an amazing promise of real yield


The Future


Consequently, we do not expect the Q1 drop in GDP will alter the Fed’s plans to continue hiking interest rates the year,” the economists wrote. “CBRE forecasts GDP growth of close to 3% for the year, which will underpin improving real estate fundamentals.”


Risks for the U.S. economy are more likely in 2023, as inflation falls and the lagged effects of tighter monetary policy take hold according to CBRE.


Calanog said most forecasters, including at Moody’s, are expecting capitalization rates to rise in accordance with the Federal Reserve’s moves. Calanog and others continue to expect the Fed to hike interest rates a half-percentage point this month, but economists have begun pointing to early signs of inflation potentially easing off.



Weitz Commercial Take:


While the above is from an AP article, we see a decrease in GDP as a major warning sign for the economy. While most don't believe it will have much effect on Real Estate prices, we think the negative effects (lease delinquencies and reduced SF usage in many classes (namely retail and office)) have not be recognized. While we remain confident in many mid-markets like Snohomish County, we think we are going to experience significant compression of lease rates and thus market values in 1) major cities; and 2) depressed areas. Bottom line: investors need to hedge as best they can, be very specific to growth areas, and reduce debt loads as best they can as change is coming.


For information on Snohomish County Commercial Real Estate consider contacting a Commercial Broker.


Our info:


Weitz Commercial

108 Union Ave

Snohomish, WA

Scott@WeitzCommercial.com.


Top Snohomish County Commercial Real Estate Deals - 2021


While this isn't really news or something many will use, we find it interesting and hope you may as well. - here are the top Commercial deals in Snohomish County in 2021. We use it to keep track of potential buyer(s), but we figured others may be interested as Snohomish County continues to grow. 

Apologizes in advance for the formatting, but it's the best we can do on blogspot. 


2021 Largest Commercial Real Estate Dates in Snohomish County

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For more information on Snohomish County Commercial Real Estate, consider contacting a Snohomish County Commercial Real Estate broker

Our Firm: 

Weitz Commercial

108 Union Ave

Snohomish, WA 98290

T: (206) 306-4034

Scott@WeitzCommercial.com