Paul Ryan should be listed as an American hero for having the guts to formulate a budget plan
that tries to address not only the budget, but also the real issue of entitlements. While his proposals may not be the best solutions, at least he has forced open the discussion to get to solutions. Unfortunately Obama chose to launch a highly partisan and false attack. He is back to class warfare, claiming many of us are attacking seniors well being, and we are getting some sort of huge tax breaks at the expense of seniors and children. That was absolutely not the response the country needed. The damage that speech did will be terrible as the potential for intelligent dialogue has now been obliterated by Obama, and the dollar and the economy will suffer for it. Apparently this is what he meant by bringing a new day to Washington and an end to partisan warfare. So much for anything he promises.
What does all this have to do with real estate investment and your ability to succeed in this business? It is hard to really know. The dollar will continue to decline as there will now be no solutions to the deficit and to the entitlement problems. This is very likely to become a longer term trend as other countries seek to hold other currencies, and bonds of more responsible governments. Talk of another reserve currency will continue, and at some point it may begin to get traction. This may have two impacts. First it will mean eventual inflation here as the dollar buys less and less. This is compounded by the ultra low rates and excessive monetary stimulus from the Fed and huge government deficits. The inflation side will mean rents go up, but also costs, especially oil. Second there may be an increasing influx of foreign investment dollars since buying US assets will become less and less expensive as the dollar continues to decline.. Investors, however, may begin to lose confidence in investing in the US as the fiscal problems continue unresolved, and as Obama rails against anyone who is successful and makes over $200,000.
It is likely that owning hard assets, such as real estate,AC will become more attractive as dollar based assets continue to decline in value. While the stock market will very likely continue to rise through the next several months on the improving earnings trend, it will at some point reverse as the political wars ramp up and as Obama continues to push for higher taxes on capital gains and income, and as he refuses to deal with Medicare and Medicaid. While I have felt for some time that gold is in a bubble phase, it may become even more high priced if the US refuses to begin to deal with its deficits and especially entitlements.
Offsetting some of the benefits is the certainty that interest rates are going to rise over the next few years, and what works for leverage on your building now at Libor at 26 basis points, is not going to be pretty when Libor is again at 5% in a few years. We forget that 6% Libor was common for many years. Some of us recall that real estate loans were at 10%-12% back in the eighties. Don’t think that cannot happen again. I don’t know if it will, but there was a time when we considered that as market rates on senior debt.
It is very clear that the Republicans are not going to let Obama and Harry Reid continue to mouth off that we have to do something about the deficit and then raise spending. That is over. It is just not possible to know where all of this goes over the next 18 months during the election cycle. Harry Reid is no better than Pelosi and Obama just proved he cannot be trusted to live by written agreements. The 2011 budget agreement required terminating four of Obama’s czars. Immediately after singing the budget bill with that requirement, Obama signed a new presidential appointment of the same four czars who were required to be fired. If he cannot even live up to this tiny issue, then there is no hope he can be trusted on any issue.
By responding so badly and irresponsibly to the Ryan proposal, and by once again claiming all of us are getting too many tax benefits and too good a deal, Obama has missed a historic opportunity to finally deal with the nation’s huge fiscal mess. He has done terrible damage to the economy and the country. Bottom line, there are pros and cons about US real estate as an investment now, but likely it is a far better place to be than US dollar cash or US dollar based bonds over the next several years. You will get killed in bonds, but REITs and direct real estate investing at least gives you the opportunity to raise rents and try to stay ahead of the wave.
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Joel Ross
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.
