The canaries in the mine continue to fall over and the black swans have struck. It was not just Paris, but the airliner, Mali, Ankara and others. Now we have ISIS and Al Quaeda competing for who can stage the deadliest attack. Junk bonds have become much less liquid and rates on many issues have risen materially. Junk bonds have been a signal as to real estate values over time showing some degree of correlation. Chinese have become less willing to invest in US real estate as the combination of the stock market volatility, new capital controls, the anti corruption crack down and the general decline in the economy have made moving money harder and more questionable. On the other hand the problems in China have motivated many to move money here. It is unclear how Chinese investment in CRE will be affected over the next year or two, but there is indication it may not be as robust as we have seen in 2015. Rating agencies are tightening their underwriting for certain types of CRE as they get more concerned about current prices holding over the long term. Retail sales in the US have been weak, and there is a lot of concern about retail results this Christmas. Consumers are worried and are saving, not spending. Inventories at all levels are much too high. Corporate profits have begun to decline which is likely to mean cost cutting ahead. That might mean less ability to raise rents or expand space, and a downturn in hotel revenues. More and more CRE buyers are finding it harder to make the numbers work as prices in 2015 rose too much, too fast. And now we have Paris and growing concerns that there will be some type of incident here which could make the already moderate economic growth slow further. The Fed is highly likely to raise rates 25 basis points in December if for no reason than to keep some level of credibility. Where rates go from here is hard to know because we have the offsetting pressures of fed increases, but European decreases driving capital to US Treasuries and holding rates lower than would be expected.

One can only conclude the world is a real mess now, and as we saw with the Turkish shoot down and Paris, we don't have any way to predict what black swan will poop on the world tomorrow. Obama has left it to France to lead the fight against ISIS, as he spends his time finding new ways to add regulations on labor, environment and now refugees. All of which will cost the economy more and leave the world less safe without US leadership. It leaves one wondering what the US economy could really be doing if we had a real president who focused on building up American business instead of regulating it to death.

So what should we conclude from all this. 2016 is not likely to be a year of economic growth beyond the moderate level we have seen of 25-2.5%. The risk of a downside below that level is high now with the geopolitical mess of the war. The risk of missing a little more appreciation is far outweighed by the risk of a downturn in real estate values next year. 2015 was possibly the peak year for upside and from here it is very possible that selling should be the priority, instead of buying.

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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.