DALLAS—Industrial real estate developers, owners and investors, as well as the association that serves them, NAIOP, are well aware of the economic and political headlines of the day. Quarterly corporate profits are flat. Again. Interest rates in the US are going to go up. No, it turns out the Federal Reserve Bank was just kidding about that. Japan has tasked its REITs with investing in US real estate, which is a good thing, right? (spoiler alert: not quite). So the industry reads these stories and thinks about what they might mean for the US economy and their particular industry. And then they go about with the business of the day, namely keeping their properties leased, servicing their tenants, deciding when and whether to build or buy new properties and if so, where and at what price. Undoubtedly, industry-specific news for industrial real estate is quite bright these days with fundamentals at their most favorable levels in years. Indeed, spec industrial development in Dallas (just to name the city that recently hosted I.CON '16: Impact Projects , the NAIOP event during which these issues were discussed) is rather common. Still, though the question looms: is the US heading into a recession? And if so, what does that mean for industrial real estate? NAIOP Turns to Real Estate Economist Mark Dotzour To address these matters, NAIOP brought in real estate economist Dr. Mark G. Dotzour. Dotzour was the chief economist  of the Real Estate Center at Texas A&M University in College Station for 18 years. Now he is in the private sector, advising banks, private equity firms, REITs construction firms, engineering companies, wealth managers, private foundations, and commercial and residential brokerage firms.
  1. Ignore the media, or rather follow global financial events but form your own interpretations of what the impact of these events will be. 
  2. That interpretation should be this: there is very little, to nothing else, in the world market that can deliver as good a return as US commercial real estate – and industrial is at the top of the food chain in terms of returns. If you are an owner sitting across from a reluctant investor disgruntled by the ever-falling cap rates, Dotzour said, feel free to suggest to this investor that he consider as an alternative the yields in the global bond market or a hedge fund. 
  3. Yes, a recession is coming. So what? Or as Dotzour put it, “I have yet to meet a businessman or woman who, when it became obvious the economy was going into recession, decided to close up their business and wait it out.  The US economy goes into recession at regular intervals. All capitalist economies do. You deal with it.” 
Still Some Room to Run Still, a rough date as to the start of the next recession would be useful and Dotzour does oblige. His prediction is that the current cycle has about another year to eighteen months to two years left of expansion. There is plenty of anecdotal evidence, of course, to suggest otherwise. The first quarter of 2016, for instance, was yet another three-month period of flat corporate profits. The stock market has been on a roller coaster all year. Consumer confidence is meh. Dotzour takes down all of these as irrelevant. The only indicator that is important is job growth, and here the scenario brightens. Besides the steady increase in jobs over the past several quarters, there are several indications to suggest job growth will continue by both small businesses and larger corporations, he said. “Buildings fill up as long we are creating jobs,” he said. Another bright note: The Commerce Department's Leading Index of Economic Indicators has shown no sign of a recession. That is a six-month forward-looking index. Inflation? That is nowhere to be seen, and in truth, the Federal Reserve should be sending gift baskets to the multifamily industry as a thank you, Dotzour said. “If it weren't for the 5 percent increases in apartment rents over the last few years, we would have negative inflation right now.” Dotzour is not the only one to come to this conclusion. Foreign investors in real estate have also decided that, of all the options available to them, the US stands out as the safest and most stable economy in the world.  The UK would normally be on that short list, but it is about to vote on a game-changer of a referendum – that is, whether to stay in the European Union or not.  It still does attract investment as do a handful of other countries in Western Europe, but there are troubles in that market. Market Distortions and How to See Through Them Indeed there are troubles in most of the world's markets and in large part these troubles can be traced to significant distortions created by the various policies by the world's Central Banks. We can include the US and the Federal Reserve Bank in that statement, Dotzour said. The good news is that our distortions are the least severe. For example, Japan recently took the world aback with its negative interest rate policy but this was just the latest manifestation of what the Central Bank had been doing all along, which was a form of aggressive quantitative easing, Dotzour said. In China, the government has been encouraging its citizens to invest in the Shanghai Stock Exchange over the years.  We saw how well that turned out for these people this year, as well as the numerous other policies the government put in place to fuel growth. Now, China is in repair mode, putting in place several restrictive measures including anti-corruption rules, which at the very least will reduce the number of Chinese buying US properties. The European Central Bank has embarked on its own form of quantitative easing, which Dotzour described as printing money and loaning it to dead businesses. European Central Bank President Mario Draghi's “biggest concern is they will run out of bonds to buy,” Dotzour said. The US Federal Reserve has its own problems, namely how to keep the US from realizing that it truly has no control over interest rates, except for the federal funds rate, which only controls overnight borrowing from banks.  The 10-year US Treasury, on which much of the world's corporate and public finance is based, is influenced only by perceived inflation, he said. Nonetheless, “the US stock market is addicted to low interest rates and that is one reason why the Fed needs to raise interest rates now. So when a downturn does happen it can show the market it has a bullet to fire – it can lower interest rates,” Dotzour said. This obsession with the US stock market over interest rate direction, incidentally, is the reason why Dotzour dismisses the volatility in the stock market as a telling sign of recession. “It's really just a sign of the addition we have to low interest rates,” he says. Not a Pretty Place Dotzour's litany of the world's Central Bank missteps is not a pretty one and indeed the one black swan event he fears is a simultaneous realization around the world that these various monetary policies have all been chimeras, distorting the true economic fundamentals. Without these distortions, it would become clear that Europe, China and Japan are barely hanging on, he said. Certainly, the one-trick economies, dependent on oil, are not doing well. But the US, especially in comparison, is. An Asset You Can Trust “That is why investors from around the world will continue to pile into CRE,” Dotzour said. “They can trust it. It is straightforward. There are no chimeras.” Well, maybe there are a few. Some real estate companies have gotten the stock buyback fever, allowing them to nudge up earnings even as profits remain flat. But stock buybacks are mainly the favored tool in other industries, which is fortunate as these are usually chimeras as well, Dotzour said. “A stock buyback is the CEO is telling investors that, 'I can't find a place to invest your money so I am giving you your money back.' He is borrowing money to get rid of you, the investor.” And actually, that is another reason why Dotzour is so bullish on the CRE market. “There simply is no other investment that delivers steady returns right now,” he said. The S&P 500 delivered a whopping 1.4 percent last year, he noted. Hedge funds, for their part, delivered a whole lot of pain with some, such as Third Avenue, suddenly restricting redemptions. By contrast, real estate, both public and privately held, delivers returns that in some cases go into the teens. “This is what investors understand,” Dotzour said. And, by extension, embrace. DALLAS—Industrial real estate developers, owners and investors, as well as the association that serves them, NAIOP, are well aware of the economic and political headlines of the day. Quarterly corporate profits are flat. Again. Interest rates in the US are going to go up. No, it turns out the Federal Reserve Bank was just kidding about that. Japan has tasked its REITs with investing in US real estate, which is a good thing, right? (spoiler alert: not quite). So the industry reads these stories and thinks about what they might mean for the US economy and their particular industry. And then they go about with the business of the day, namely keeping their properties leased, servicing their tenants, deciding when and whether to build or buy new properties and if so, where and at what price. Undoubtedly, industry-specific news for industrial real estate is quite bright these days with fundamentals at their most favorable levels in years. Indeed, spec industrial development in Dallas (just to name the city that recently hosted I.CON '16: Impact Projects , the NAIOP event during which these issues were discussed) is rather common. Still, though the question looms: is the US heading into a recession? And if so, what does that mean for industrial real estate? NAIOP Turns to Real Estate Economist Mark Dotzour To address these matters, NAIOP brought in real estate economist Dr. Mark G. Dotzour. Dotzour was the chief economist  of the Real Estate Center at Texas A&M University in College Station for 18 years. Now he is in the private sector, advising banks, private equity firms, REITs construction firms, engineering companies, wealth managers, private foundations, and commercial and residential brokerage firms.
  1. Ignore the media, or rather follow global financial events but form your own interpretations of what the impact of these events will be. 
  2. That interpretation should be this: there is very little, to nothing else, in the world market that can deliver as good a return as US commercial real estate – and industrial is at the top of the food chain in terms of returns. If you are an owner sitting across from a reluctant investor disgruntled by the ever-falling cap rates, Dotzour said, feel free to suggest to this investor that he consider as an alternative the yields in the global bond market or a hedge fund. 
  3. Yes, a recession is coming. So what? Or as Dotzour put it, “I have yet to meet a businessman or woman who, when it became obvious the economy was going into recession, decided to close up their business and wait it out.  The US economy goes into recession at regular intervals. All capitalist economies do. You deal with it.” 
Still Some Room to Run Still, a rough date as to the start of the next recession would be useful and Dotzour does oblige. His prediction is that the current cycle has about another year to eighteen months to two years left of expansion. There is plenty of anecdotal evidence, of course, to suggest otherwise. The first quarter of 2016, for instance, was yet another three-month period of flat corporate profits. The stock market has been on a roller coaster all year. Consumer confidence is meh. Dotzour takes down all of these as irrelevant. The only indicator that is important is job growth, and here the scenario brightens. Besides the steady increase in jobs over the past several quarters, there are several indications to suggest job growth will continue by both small businesses and larger corporations, he said. “Buildings fill up as long we are creating jobs,” he said. Another bright note: The Commerce Department's Leading Index of Economic Indicators has shown no sign of a recession. That is a six-month forward-looking index. Inflation? That is nowhere to be seen, and in truth, the Federal Reserve should be sending gift baskets to the multifamily industry as a thank you, Dotzour said. “If it weren't for the 5 percent increases in apartment rents over the last few years, we would have negative inflation right now.” Dotzour is not the only one to come to this conclusion. Foreign investors in real estate have also decided that, of all the options available to them, the US stands out as the safest and most stable economy in the world.  The UK would normally be on that short list, but it is about to vote on a game-changer of a referendum – that is, whether to stay in the European Union or not.  It still does attract investment as do a handful of other countries in Western Europe, but there are troubles in that market. Market Distortions and How to See Through Them Indeed there are troubles in most of the world's markets and in large part these troubles can be traced to significant distortions created by the various policies by the world's Central Banks. We can include the US and the Federal Reserve Bank in that statement, Dotzour said. The good news is that our distortions are the least severe. For example, Japan recently took the world aback with its negative interest rate policy but this was just the latest manifestation of what the Central Bank had been doing all along, which was a form of aggressive quantitative easing, Dotzour said. In China, the government has been encouraging its citizens to invest in the Shanghai Stock Exchange over the years.  We saw how well that turned out for these people this year, as well as the numerous other policies the government put in place to fuel growth. Now, China is in repair mode, putting in place several restrictive measures including anti-corruption rules, which at the very least will reduce the number of Chinese buying US properties. The European Central Bank has embarked on its own form of quantitative easing, which Dotzour described as printing money and loaning it to dead businesses. European Central Bank President Mario Draghi's “biggest concern is they will run out of bonds to buy,” Dotzour said. The US Federal Reserve has its own problems, namely how to keep the US from realizing that it truly has no control over interest rates, except for the federal funds rate, which only controls overnight borrowing from banks.  The 10-year US Treasury, on which much of the world's corporate and public finance is based, is influenced only by perceived inflation, he said. Nonetheless, “the US stock market is addicted to low interest rates and that is one reason why the Fed needs to raise interest rates now. So when a downturn does happen it can show the market it has a bullet to fire – it can lower interest rates,” Dotzour said. This obsession with the US stock market over interest rate direction, incidentally, is the reason why Dotzour dismisses the volatility in the stock market as a telling sign of recession. “It's really just a sign of the addition we have to low interest rates,” he says. Not a Pretty Place Dotzour's litany of the world's Central Bank missteps is not a pretty one and indeed the one black swan event he fears is a simultaneous realization around the world that these various monetary policies have all been chimeras, distorting the true economic fundamentals. Without these distortions, it would become clear that Europe, China and Japan are barely hanging on, he said. Certainly, the one-trick economies, dependent on oil, are not doing well. But the US, especially in comparison, is. An Asset You Can Trust “That is why investors from around the world will continue to pile into CRE,” Dotzour said. “They can trust it. It is straightforward. There are no chimeras.” Well, maybe there are a few. Some real estate companies have gotten the stock buyback fever, allowing them to nudge up earnings even as profits remain flat. But stock buybacks are mainly the favored tool in other industries, which is fortunate as these are usually chimeras as well, Dotzour said. “A stock buyback is the CEO is telling investors that, 'I can't find a place to invest your money so I am giving you your money back.' He is borrowing money to get rid of you, the investor.” And actually, that is another reason why Dotzour is so bullish on the CRE market. “There simply is no other investment that delivers steady returns right now,” he said. The S&P 500 delivered a whopping 1.4 percent last year, he noted. Hedge funds, for their part, delivered a whole lot of pain with some, such as Third Avenue, suddenly restricting redemptions. By contrast, real estate, both public and privately held, delivers returns that in some cases go into the teens. “This is what investors understand,” Dotzour said. And, by extension, embrace.
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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.

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