The latest set of employment and economic statistics are unclear at best, and maybe not good at worst. Two months of weak new jobs statistics may or may not reflect a slowdown from the recovery. It is unclear because of the bad weather effect and the difference between ADP and the labor Department. U6 remains very high, but it is a tiny bit better. There is substantial anecdotal evidence that Obamacare is affecting hiring, but due to the constant revision of the law rules by Obama it is unclear if many companies are or are not keeping hours and hiring down as yet. It is also clear there is no material inflation showing up and that is likely to continue as the economy here and in Europe remain weak.
On the positive side, the ten year has fallen substantially, in a surprise to many who projected a continued rise as it appeared last year the economy was improving and tapering was starting. Maybe the bond market, a somewhat good predictor of the economy, is confirming that the economy is really slowing again. The stock market seems to be saying the same, but it is not a good predictor of economic results.
In short, it is completely unclear what is really happening right now, and where we are really going. It seems that the economy is limping ahead, but if the employment numbers are correct, then we are falling backward to the extent that population growth in the labor market is greater than new hiring. Labor participation is still at near record lows, and this is at a time when the baby boomers are retiring and therefore becoming a net drain on the fiscal side through Medicare and social Security. There are less and less workers to support more and more entitlement takers. When you add on all the entitlement takers Obama is creating with food stamps, and other entitlement programs, we are headed toward an eventual crisis.
Now we have a new economic theory that it is better to pay low wage workers not to work as hard through Obamacare, so they can “pursue their dreams”. So if that is true then the rich should hand over all their money to even the middle class to pursue their dreams so everyone can be happy and not stuck in their jobs. I have heard spin from Washington, but this is such utter nonsense that it has reached a new level of absurdity. The bad news is this philosophy of it is OK not to work and to take entitlements is driving the administration policy on many fronts and is creating a fiscal hole it will be very hard to get out of.
Lastly, Bowles makes the point over and over that when rates do rise back to more average levels of a 4% to 5% ten year, then the debt service on the deficit will overwhelm the budget and result in massive reductions in government spending on things that need to be done to grow the economy and maintain a credible defense infrastructure. That is when things will really get rough for the country.
What to make of all this for real estate. Don't expect inflation to be what you thought. It will remain low for awhile. Rates will bail us out for awhile by keeping the ten year below 3% for longer than we all had expected. Cap rates will remain where they are, but maybe they will rise in 2015. Very likely in my view. If the economy remains slow, and earnings of corporations remain lower than they might be, then rents are not likely to rise as you would have hoped. So maybe it is time to be a seller. Get out while rates are low and buyers can get cheap debt and mezz. Get out while cap rates are lower than they will be in a year or two. There is no way to predict what 2015 or 2016 will bring. Guessing is no better than dart throwing at this point.
I would suggest that if you can get a good price now, take it.
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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.
