JackChat October, 2018

Since my last blog in June, the year continues to be robust for most. With the sun and wind at our backs; transactions flourish. Hit ratios suffer given the competition everyone faces to find, capitalized, and recapitalize a deal; but everyone seems to be prospering nonetheless.

From what I am reading and hearing, in the US we sit at a 30-yr high in labor shortage! The best talent seems to live in a “sellers” market driving wage growth up, income up, personal spending up, and consumer sentiment at a high not seen in a very long time.

No one seems to think stresses suggest a Bear Market lurking around the corner. I read recently that 2/3 of economists surveyed expect the next recession not till 2020; with the next real estate recession not till 2023! As my mom would say “From your mouth to God’s ear!”

So what to write about? A collection of great soundbites I have heard over the last few months to share:

• “Economies don’t die of old age; it’s always something else.”
• “We as retail developers are not in the real estate business; rather, we see ourselves as ‘anthropologists’”.
• “While Bull Markets do not die of old age, they do become more susceptible to ailments over time.”
• “Our present reality is we have an aging population with unmet medical needs.”

What am I focused on and concerned about?

• 10-yr Treasury Bond at 3.1%; Cap rate on SoCal Industrial (premium big box) 3.6%. This simply blows my mind. Now, don’t get me wrong, I love the industrial asset class; however, the risk premium to enjoy the best of the best is 50bp? Is it conceivable that it is no longer worth it (in terms of risk adjusted yields) to own real estate hard assets?
• Modest returns across all asset classes as interest rates rise.
• Yield curve. EVERYONE says if the yield curve inverts it is a precursor to a recession.
• Tariffs, Trade Wars, Trump.
• Capital driving developers; I have ALWAYS felt that developers need to lead the capital markets not the other way around.
• The affordability crisis is real everywhere; I worry about the high-end Class A apartments. Too much development seems to be going to cater to the top 15% of the rent payers. Where is the non-amenitized multifamily project being built (for affordability)?
• Construction costs continue to rise.
• Taking development risk for 150-250 bp spread. OR LESS.
• JV terms being negotiated as a barometer of the next tipping point.
• When the last piece of debt in the capital stack is priced at the unlevered deal return.

What I would like you to join me in thinking about:

• Are we in the US in an inflationary (rising construction costs, tight labor market, rising interest rates) or deflationary (asset value) period? What about the rest of the world? What happens if we and the world are out of sync – inflationary/deflationary?
• Staying short on duration because the opportunity costs for tomorrow are high (rather than due to a fear of rising interest rates.)

Wishing you all a robust finish to 2018, joyous holiday season, and a happy, healthy and prosperous new year.