A Time To Be a Seller

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.