The Year Ahead: Down But Not Out

Volatile Stock Market: Often a leading indicator of future economic direction, the stock market has been wheezing lately even with all the corporate tax rate reduction help from last year and highly favorable regulatory environment. It's not just incremental interest rate increases, which are still well below averages. China fights back on the trade/tariff front and Europe looks shaky—Merkel's days are numbered, France lurches through political chaos, Italy teeters, and a hard Brexit seems possible. Add in all the turmoil in the White House, not to mention looming high stakes political war with Congress. All this friction won't help the global economy or the U.S.

Debt Doesn't Matter? Typically, at economic peaks, budget deficits should be in decline or governments are realizing surpluses for rainy day funds. But not today in the U.S. Again, we have another lesson in bogus supply-side economics—as deficits balloon from tax cuts and the annual national debt service now costs taxpayers more than what we pay for in our defense. What happened to the Tea Party sentiment or are tax cuts all that matter? And what happens in the next recession, when there is no budget cushion? Answer: An ever-bigger deficit and more debt, which will constrain government programs and force spending cuts, and make dealing with a recession that much more painful and difficult.

Empty Retail Space: Unemployment is near record lows, wages are rising finally, consumer confidence is up, and more than a few store fronts are still empty along Main Streets, High Streets and in many malls and strip centers even with most development a non starter for years. Okay, we know about e-commerce's impact. But what happens when the next economic downturn occurs? Then we'll see what empty really means. And you want to own retail real estate? Keep only the best.

Office Vacancy at 15%: Again, we are at an economic zenith, ten years from the last downturn and nationwide office vacancy is still in the mid teens. The top 24-hour markets with tighter numbers have been softening for a year or more. Suburban office remains a basket case with dim prospects. And you feel good about the sector?

The Safe Sectors: It doesn't change. I have been watching this for decades. The best investment sectors are rental apartments and industrial. The high cost of housing and growing population insulates the multifamily sector. Everyone needs a place to live, and now we can work and shop from home. While stores and offices are more expendable that is not the case for residences. Warehouses may not be warehouses anymore—they are distribution or logistics centers, but they are benefiting at the expense of bricks and mortar retail's decline. Bread and butter industrial has virtually no cache, but it delivers the best cash on cash returns year in and year out. Here is where you want to be.

Miami and NYC Condo Red Flags: Miami is always a harbinger for bad news ahead. It over develops high-rise apartments targeted at wealthy South Americans and the Euro crowd and gets wildly overbuilt just as demand looks more iffy. That's happening now. A typical crash is dead ahead. In more stable New York, French fry residential towers keep rising south of Central Park and on the Upper East Side even though recently completed projects aren't meeting their sales targets and developers mothball units. Overall—high-end residential pricing is down and it is infecting the coop market. The next hit comes after April when owners in high tax residential markets feel the bite from losing their federal income tax deductions. There will be buying opportunities after prices take at least a dip.

Tempered Development: Outside of condos and luxury apartment rentals in 24-hour markets, development has been under relative control in most places. That bodes well as markets continue to crest offering a softer landing in the event of an economic downtown. The problem will stem more from the demand side and from long standing vacancy in older properties which never really recovered from the last recession.

Time to Sell: Hotels. Recessions kill their bottom lines. Move to sell while you still can or at least reduce leverage. Developers and lenders on new lodging projects are getting uncomfortable or should be.

Best Markets: Follow the money and the brainpower. That's where you want to be. That still means the traditional 24-hour gateways. Sorry Kansas City and all the other cities that wonder why they can't attract Amazon or Apple. This story won't change.

Critical Unmet Need: Shoring up infrastructure in the gateways. These metropolitan areas are straining with ageing highway and mass transit systems and increasing user demand. Traffic snarls and rising travel times threaten to strangle the nation's key economic generators in transportation gridlock. It's been a slow-moving crisis waiting to happen. And it will cost hundreds of billions of dollars to address. Add in repairs to sewage and water systems and the electric grid. How is there a fix without new taxes and fees (tolls)? Answer: There is none.

Real Estate Returns: Income rules. Expect give or take no appreciation. But I will gladly register a 6-7% return this year delivered from well-leased properties. 2020 will be more likely a flat to down year, but after a great 10-year run.

We're heading down, but certainly not out… Happy New Year.

The views expressed here are the author's own and not that of ALM's Real Estate Media.

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A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.