The economy is now in solid shape. GDP is likely to grow 3%-3.2% this quarter. Consumer spending is growing at 3% and is likely to move higher as the year progresses. Consumer debt vs income is at a record low, savings rates are 5%-6%, which is high, spending that is occurring is mainly out of current income or savings, and less on credit, the stock market is at record highs and home prices have mostly recovered, so there is a lot of potential spending power to come. Inflation is unusually low and likely will remain so for quite awhile. There are jobs for anyone who really wants one, and wages are likely to start to rise over the next year as labor shortages become worse. Bank regulation is being reduced, which will make it much easier to borrow for everyone. Bottom line, things for consumers are generally very good, and that is not likely to change for the worse over the next year. In fact, they will likely get better as tax reform will happen later this year and will be retroactive to January 1.
All of these factors bode well for corporate earnings over the next year. There may not be big growth in GDP, but there will be reasonable growth, low rates, and a recovery in Europe which will feed into better corporate income. Once the infrastructure program is in place , tax reform is approved late this year and repatriation of possibly $1.5-$2 trillion happens, then the stock market will push to new highs which will encourage new capital spending by companies who will be able to raise cheap capital with high stock prices and low cost debt. All of this is good for CRE.
We need to get past the absurdity of DC. There was clearly no collusion at all and that needs to get said by Congressional committees and Mueller. There is no obstruction according to neutral and liberal constitutional scholars. Hoping something goes away is not a crime. It is not ordering a cessation. On May 3 Comey testified there was no pressure to stop the investigations. The heads of the CIA and NSA said there was no attempt to stop or interfere with the investigations. Trump asking if there was anything they could do about all the investigations is far from him saying stop them. So obstruction is just another Democratic and media attempt to destabilize the administration. Nothing will come of it. So tax reform, healthcare reform, deregulation, infrastructure and a complete re-ordering of foreign policy will go forward. In the end Trump will survive all this, the Republicans will get major legislation passed and in 2018 the Republicans will gain seats. All of this is good for CRE. It means far less regulation, more lending availability and fiscal spending on infrastructure to prime the pump. Once these things happen, companies will be back in expansion mode.
On the foreign front, ISIS will be defeated and over time their offshoots will be obliterated. Terror will continue but under a different name- al Qaeda or some other group, and Europe will have more incidents. Putin will keep trying to push to see how far he can go with Trump, but Mattis and Tillerson are not John Kerry and Obama, and he will at some point likely try to find some level of accommodation with Trump. China cannot any longer let some nut job kid in North Korea destroy what China is trying to achieve. He now represents a real threat to their trade and economic growth, and it is very possible they will have him assassinated as that is the only real way to resolve the dangerous situation. If the rest of the world cooperates to shut off North Korea from cash and goods, then at some point maybe the North Korean generals take action to kill him. Very unlikely, but reports suggest he lives in fear of assassination.
I am in the large scale brownfield land development business. Two of my partners recently spent a week in China meeting with high level leaders in the environmental field. Despite what the press and politicians say about how China is committed to Paris and will lead the world, the reality is, China has a severe environmental problem far worse than is even apparent. It is not just the air and water, but also land. There is now a huge middle class in China, and they are well educated and on the internet. They are demanding the clean up be done now, and effectively. There is such strong demand it is an existential threat to the regime if they do not address the problem. The people are very angry and will rise up if nothing is done. So Paris is irrelevant. China has taken advantage of the publicity, but is under no obligation to do anything until 2030. For them Paris is just good PR, and the US press is too stupid and biased to understand what is really happening. So now there are huge potential opportunities in China for all types of clean up. They are talking to us about bringing our expertise to China to teach them how to clean the land. If that moves ahead there are endless opportunities for brownfield land redevelopment in China. However, it is China, so you cannot just go there and expect to get into the business. If you try, you will spend a lot of time and money and have little chance of success. It takes the right relationships. The country is like one giant New Jersey- it is one huge brownfield.
The views expressed are the author's own.
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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.
