Oil might have bottomed with the reduction of rigs and the pull back from major new drilling projects. There is no way to know how high it will go back up, but maybe $60, maybe $70. The point is the little bonus consumers got for a few months was nice but not that material to any one household, and what did get realized is being used to reduce debt or saved. Restaurants have seen an uptick but not goods to any notable extent. I continue to believe that what the polls show is correct- the majority of people still do not believe that the economy is growing well, and many still think we are in a recession. That is because it is not showing up in their paychecks. Wages are barely rising for most people in the middle and below. There is still what I have theorized to be the economic shock effect of the crash. Tens of millions saw their net worth decline and that is because their house value still has not achieved 2007 levels and whatever 401K or stock portfolio is probably not material enough in size to matter even if they left it invested which many did not. Reality is for most there is no improvement in 6 years and their median family income adjusted for inflation declined materially. That is why we are not seeing any real improvement in retail sales. Add on the widespread feelings in polls of a lack of leadership from the White House and the majority correctly believing that Obama is not doing what needs to be done regarding terrorism and keeping us safe, and you have little that will incent consumers to spend. I do not believe this is going to get much better for much of this year.

So the implications are that retail will not be a place where substantial risk and investment seems justified. Condos and new homes are not going to be a place to make sizable investments. While the hotel sector continues to celebrate that things are wonderful again, reality is that on an inflation adjusted basis NOI is still below 2007. Costs are increasing and while revpar is increasing, it is not doing so for all segments. Luxury is doing well as one would expect, but the average hotel and motel in most of the country is still behind in cash flow from the peak. Now there is new development and, just as has happened now in Manhattan, the extra rooms will be too many in a year or two in many markets and revpar increases will abate and NOI will either still not be back to 2007, or will be barely higher. Had you invested in the stock market in 2009, you would have made far more profit than investing in a hotel, especially if you used margin. As I have pointed out prior, the one area is multi and that remains, and will remain good. How much higher rents can be pushed is a real question since incomes are not rising to pay much more rent. Rent increases may slow materially over the next year as a lot more product comes on line and as incomes do not increase.

That leaves factories and warehouses. Here is what you need to understand. Last week a partner of mine toured a new factory turning out very precise metal parts which are coated with extremely precise coatings and paints which have to match batch to batch. The plant is around 175,000 sq ft. Only FOUR people work there. The entire factory is run by robots and computers. The metal is measured by lasers and cut exactly. The paint is mixed by computer and robots and is done so that every batch is exactly a match to every other batch of that color. The application of the coatings and paints is calculated by lasers such that there is never any blemish and the surface is exactly smooth with not even a millimeter of difference across the metal. The lasers adjust the paint sprayer head to assure the thickness of the paint is perfect. No human is involved. Maintenance is performed by computer at the equipment manufacturers headquarters and adjustments to software are made remotely in most cases. There is a food processing factory being built which will be run in a similar way and will displace dozens of workers at the old facility. This is where manufacturing and warehousing are going at an increasing pace. Artificial intelligence is taking over the factory floor. It has already taken over large scale warehousing.

So consider the ramifications. Vastly fewer workers and far lower social security tax and Medicare tax collected. Huge issues of retraining these former workers. An educational system in the US dominated by a corrupt teachers union that is only interested in bigger dues to use to bribe politicians with campaign contributions to raise pensions and to not cut back the teacher's goodies- thereby depriving the kids of a good education to be able to get the sorts of jobs which will exist in ten years as this technology spreads. From Jamie Dimon to almost everyone I know who runs a company, the issue is the same, the schools are turning out politically correct kids who have no real skills, but who think they are entitled to be paid even for poor performance and to not be told they are incompetent. As robots take over, unions will become even more irrelevant. Manufacturing in China will also be less competitive. If Google can make cars that drive themselves in traffic, and if drones can make deliveries, and human looking robots can provide information in a store to consumers who walk through the door, you see where all this goes. Just think about all the things that you once needed a human to do or answer, but is now done by a computer taking messages, answering basic questions, and even checking you into your hotel room that you just booked with no human help. You can now travel around the world without ever talking to a human to book the trip. Everything is now online. Think how many lower level and mid level people were displaced from a job just from that.

We are still at the very dawn of this technological revolution which is really the second industrial revolution. There are giant ramifications for the economy, real estate development, and for society. It is happening quietly and fast, so be aware of these trends when considering building big office buildings, how factories are built, and is there enough power and data lines. What do we do to provide work for all the displaced workers. Huge questions that will play out over the next 10-20 years.

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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.