The economy and equity markets roll on to new heights, the economy in general is continuing to perform superbly, and it is likely that nothing is going to derail it for at least the next six-twelve months unless the Democrats get complete control of Congress, than all bets are off. It is very likely GDP in Q3 will be above 4%, unemployment will drop to 3.8% or even lower, and rates will remain reasonable, even though moving higher. Clearly the Fed is going to raise rates this month, and very possibly in December, but even if they do, and even if the ten year goes to 3.5% by year end, that is still far below historic norms of 5%-6%. If your deal does not work with the ten year at 3.5%, you should not do the deal, because when they go to 5%, you will be crushed.
It is clear the NAFTA and EU trade deals will get done in the next month, and Japan and S Korea will also be signed this year. The real fight has always been China and revising the WTO to make it functional, and not just another make believe powerless organization like the UN. The belief by westerners was the WTO would force China to adhere to western trade norms, but all it di was to cover for China and allow them to break every rule. You may hate Trump and you may think tariffs are the wrong way to deal with this, but decades of inaction by all past administrations accomplished zero, so maybe by taking advantage of the economic weakness in China now, Trump can really force change. Once the other trade deals are done, other than China, the stock market will continue its bull run, and capital costs will remain low for corporations. Effective borrowing rates will remain relatively low on a historic basis, so the overall cost of capital for everyone will still be at a lower basis than most anytime in modern history. This translates to the ability of corporations, and consumers to spend on new projects and renovations.
CRE is not going to experience the big increases in value of the prior decade when we were recovering from the crash, but on a risk adjusted basis, real estate will remain a very good place to invest. Development in selected markets will remain good, and will be helped by the difficulty of obtaining construction funding in some markets. Supply will remain constrained other than multi in place like Manhattan, where it was considerably over done and where the new tax bill has materially impacted the economics of owning.
The one real exception is hotels. They are a business and not real estate and they are totally dependent on cheap and available labor. Neither is now available. While the industry is touting increased revpar, that is meaningless since it is only increasing slightly faster than inflation, and it is not able to cover the quickly increasing shortages and cost of labor, which is 80-% of costs of operation. Hotel have seen their best days in 2015 as to values, and most likely, values will decline form here as NOI declines due to much higher and less efficient labor cost. Why would anyone be a housekeeper at minimum wage when they can earn much more easily at a less physically demanding job which is readily available down the street. A lot of hotel labor costs cannot be replaced by robots or automation. Front desk duties might be reduced, and some housekeeping chores, but that is about it.
So CRE should see a continuation of good times for at least the next year, and capital should remain available and reasonably priced. Development opportunities continue. The thing to watch is the November election. If the Democrats get control, then it might all end quickly. They will make the Kavanaugh fiasco a daily event about everything. They will try to impeach Trump and fail, but make a mess in DC. Nothing will get done and the administration will be kept busy fighting off interference and roadblocks to progress on the economy. None of that is good regardless of your political leaning.
The views expressed here are the author's own and not that of ALM's Real Estate Media Group.
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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.
