The new year is off to a wonderful start. China is struggling to find balance, it has devalued, and small and medium sized companies are often in default on their shadow bank loans. The volatility of the stock market is much less important than what it signals, which is the government is not able to find the right tools to revive the economy without much more difficulty. As a result of the corruption crackdown many things at banks and at government offices are ground to a halt, as most do not know how to function without the normal graft and payoffs. The typical loan officer got paid 10% of the loan amount personally so he was incented loan the maximum. Officials got 10% of the deal or cash to approve development, so approvals of even dumb deals were given. The government was trying to employ the maximum number of people, and to build the country's industry and infrastructure, so all sorts of projects needing government or state bank funding got funded. The result is much got built and over leveraged that never should have happened, and China now is similar to the US in 2008. This is going to take years to sort out and probably one or two more devaluations. Result is oil stays low, commodities stay low, and many countries that supply China remain in worse and worse trouble. To try to protect the currency, China has clamped down on capital flight and has made it much harder to move capital out. However, in good Chinese tradition, for a 10% payment it is possible to do. That is a lot of extra cost for investors to carry and possibly will mean they will want higher returns from investing here. It will also mean less cash comes out than might have. Because the Chinese economy is much more troubled now, and cash is tight, there will be a lot fewer tourists coming from China. China will disrupt the world economy for several more years.
The Middle East is spiraling completely out of control now that Obama has completely disassociated himself from our allies and is seemingly solely focused on the disastrous and insane nuke deal. By doing nothing about the Iran missile tests and launches, he has told Iran and N Korea, go do whatever you want, I will not do anything. Result, the Saudis and the other Arabs and Israel know for sure they need to protect themselves and ignore Obama, which only serves to exacerbate the risk of all out Sunni, Shia war. Assad and Russia now know Assad is not going anywhere and Egypt has partnered with Russia since it knows it will get nothing useful form Obama. Bottom line, the region is on the brink of all out war and the chance of that is now higher than ever since the old days of Israel vs the Arabs.
Brazil and Venezuela are in total collapse and maybe civil disruption or even civil war at some point as Maduro tries to hang on and as the corruption in Brazil becomes even more exposed. All of Latin America will suffer badly when these two giant countries collapse. Canada is in deep recession and with the new regime will sink further.
Europe is possibly stabilized, but it is very far from real recovery. The basic structural problems remain and the euro will weaken further.
Taken all together, there is no place in the world where we can look for good news. Slow economic growth across the world, currency volatility, possibly all out wars, and mass social disruption with the refugees and political upheavals. While this may push tens of billions of flight capital to the US, it is going to be pretty much impossible for the US economy to improve much with all of this black swan events around the world.
For US CRE none of this bodes well, and now the regulators have made it clear to lenders that high leverage and risky loans are no longer. The once saving grace, is with all the bad, it means the ten year remains low all year. It is hard to imagine how the fed keeps raising rates in this environment. It is unlikely that REIT stocks will move above NAV and so there will be less capital to make acquisitions. When combined with the regulatory clamp down, and maybe less capital from China, and many fewer tourists and business visits from there, it is hard to see how CRE values continue to climb as the year progresses. With Obama in office another full year, there is no real hope for any positive turnaround of this situation, and by the time a new president takes over, the situation will be much worse and take longer to fix. It is time to sell and hunker down. There will be better opportunities in two 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.
