Jonathan D. Miller
Strip away all the rhetoric about the "great economy"–real estate markets and the stock market have been living off abnormally low interest rates since the deep 2008-2009 recession. After a record of 10 years and counting between recessions will a downturn be kept at bay indefinitely? And will this apparent new normal of low interest rates enable worry-free piling on of debt and ongoing lowering of investment risk? Then again is economic growth, which peaked around 3%, and now hovers around 2% really so "great"?
Despite the record federal deficit, record corporate debt, and consumers back to credit binging—we're told to relax because of low rates. It's all about low rates and keeping rates low. After some reasonable rate upticks given extremely low unemployment, corporate earnings gains spurred by tax cuts, and the stock market advances, the Federal Reserve even reversed that course last year, possibly cowed by a President with an eye on re-election. But why not? Inflation, including wage gains, has been anemic. With rates so low where else can you invest to get a decent yield, but in stocks and riskier plays? And that's okay for now, because of the low rates.
Trade wars. No problem. The threat of another Middle East War and higher oil prices. No problem. Impeachment and government turmoil. No problem. Record federal deficits. No problem. Just keep rates low. No problem.
Let's face it. We're in uncharted and uncertain territory.
Look at real estate returns. Full-year 2019 NCREIF performance for core funds will be in the mid-single digit range. Appreciation is mostly tapped out as retail properties pull down overall results. Luxury apartments have been overbuilt and office is overpriced. Industrial looks like a great income play, but cap rates have lowered to levels that would normally signal caution. And core investors are disappointed. Money instead is going into debt juiced funds or overseas investments when Europe is much weaker than the U.S. economy, India flags in ethnic turmoil and ongoing corruption, and China further cools. Investors are also back to looking at student housing or senior care facilities. Infrastructure gets more attention too. Anything that may have more juice. This is the time in the cycle when investors go off the cliff, taking higher risk when they should stick to core. But those low rates offer cushion in case of a downside. Or so the thinking goes.
A little more than 10 years ago, everyone had bought off on how housing prices would keep escalating and CDOs were failsafe investments. A decade before, internet stocks had nowhere to go but up. And in the mid 1980s, it was junk bonds and various tax dodges that couldn't be missed.
So why are low interest rates any different? Indeed why?
A Note: Neal Peirce, founder of the CitiStates Group of which I was a member, died at year end. Unquestionably, the nation's leading journalist on urban affairs, Neal championed cities as the nation's engines of economic growth at a time when white flight was in full dimension and most observers saw our future in the suburbs. Today our 24-hour cities stand preeminent and secondary markets realize the necessity of strengthening their urban cores to sustain prosperity, attract new industry, and benefit from cultural diversity. Cheers to Neal.
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Jonathan D. Miller
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.
