Nothing Bad Happened To CRE

In the real economy, nothing changed when the stock market and other markets tanked. Interest rates will rise this year for certain, but for those of us old enough to recall, 4.5% or 5% rates are still excellent. Many of us once believed 8%-9% was the norm and in the eighties it was considered good after the spikes in 1981 to 21%. If you cannot justify a deal at 5% or 6% rates, don't do the deal. It has too thin a margin.

Powell is known to economists and bankers as a sound guy, who is not a hawk and not a wild dove. He is pretty much a steady hand and will not suddenly go pushing rates a lot higher than what we all know will be three or at most four raises. We all know these raises are baked in, so you should long ago have been assuming a ten year at 3% -3.5% for this year, and maybe at 4% in 2019 in your models. While it is possible rates could move higher faster, that would only be the result of GDP growing at 4%, and that is a good news thing.

The overall economy is like in the nineties and is doing very well, and will only get better as the tax bill fully kicks in. I cannot recall optimism being so high across the board sine the nineties, and with all the tax savings, capital will be no restraint for many companies. Reality is now the US is very competitive. Not only do we have one of the lowest tax rates, but we also have the lowest energy prices, top level technology and the rule of law for commercial transactions, even though it seems not to apply to Hilary. Many EU companies now are saying they plan to build out their US operations instead of in the EU, where labor laws, energy prices and regulations are much worse than here. As the next year progresses you will see growing demand for industrial and warehouse distribution even better than what we are already seeing.

As consumers find they now have more cash in the pocket, and as millions get raises and $1,000 or higher bonuses, and as their 401K has real value, along with their home, then consumers will continue to spend. With that even with mortgage rates rising, there will be many more who now feel they can afford to buy a home with the surety of a steady job and a rising economy. It is a self enhancing cycle. We are just at the start of this major upturn in optimism and capital expenditure. Once there is a infrastructure program in place, and it relies heavily on public private projects, and once the regulatory approval process is dramatically altered to a two year period from 7-10 years now, money will flow and CRE will be the big beneficiary.

It is obvious now there was no collusion by Trump and the Russians, and there is no obstruction case since all he did was edit a press release. There has been no crime to obstruct and editing a press release is not a crime. Don Jr had a twenty minute meeting that was about adoption. No crime here. Especially now we know Senator Warner was instigating contacts with Russians to get dirt on Trump, as opposed to a simple 20 minute meeting Don Jr was invited to attend. As the investigations roll out, there will be much more evidence that Hilary and the DNC, were in fact colluding with the top level of the FBI and Bruce Ohr at DOJ to do a hit job on Trump, which they all assumed would be hidden when she won. Except she lost and now it is all going to come out and it will be the Dems who face possible criminal charges.

Bottom line to all this is the economy will be booming at election time, indictments might be issued for Dems, and Republicans hold the House and increase the majority in the Senate. Democrats cannot explain why the voted to stop workers from getting higher take home pay and getting bonuses and wage increases. They will not be able to explain why $1,000 to a family with $55,000 income is just crumbs and not reality of being able to finance a new refrigerator, or washer, or paint job or TV.

By November unemployment will be under 4% and wages will be rising. Job security will be as high as it has ever been. A new Rasmussen poll has Trump with a 48% approval rating. We do not know if this is correct, but even the polls by groups like NBC who hate Trump, show his approval rising along with the perception the economy is doing very well. That combination of Mueller having no case for collusion or obstruction, possible indictments of Democrats for colluding against Trump, economic growth, higher wages, ultra low unemployment, job security, and Trump and the tax bill having 50% or better approval, will give the Republicans a win.

So ignore the new volatility in the markets. Inflation is not going to roar out of control like in the eighties. The Fed is not going to go rogue, The world is going to continue coordinated economic growth, and CRE will be fine. Not great in terms of value increasese as rates do rise, but fine.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.