August 14, 2019
On the heels of the past couple weeks’ WIN themes of “Enough Already” and “If you are perplexed, so too am I,” this week’s theme is merely an acknowledgement that when you think you have seen, heard, and experienced it all – that’s when you will get surprised.
You may recall that two weeks ago I confessed that hearing Bitcoin characterized as a “safe-haven” on CNBC tripped my “thought I had heard it all” meter. This shocker was followed last week by my “thought I had seen it all” meter going on the fritz with negative yielding global bond debt topping $15 trillion, accompanied by a near record low 2.12% yield for the 30-year Treasury bond. Note that the U.S. 30-Year Treasury Bond has never dipped below 2.10%. It stands at 2.12% this morning - August 13th. I still can’t fathom why any investor (individual or institutional) would invest in negative-yielding bonds versus hold the cash.
So what caught me off guard this past week that has surprised me further?
Let’s start with Emotional Support Snakes and Rodents. In an August 8, 2019, feature by Forbes titled "Department of Transportation (DOT) Will Let Airlines Ban Emotional Support Snakes And Rodents", the DOT announced that airlines could:
“Deny transport to snakes, other reptiles, ferrets, rodents, and spiders" and an airline may refuse to transport any animal that "is too large or too heavy, poses a direct threat to the health or safety of others, or would cause a significant disruption in cabin service."
I never knew so many critters could be claimed as “emotional support.” For my own emotional support as a frequent flyer, I am relieved Delta won’t be adding an “Emotional Support Snakes & Rodents” section behind “Comfort Plus.”
On a more serious and real estate related note, there were two items that pleasantly surprised me:
The first was that theatres are not dead. It pays to read earnings reports and Forbes. AMC Theatres just posted strong Q2 Earnings. The earnings are telling us that theatres too have taken a queue from retail disruption and turned to a broader experiential offering. Experiential isn't just a Retail thing. Even legacy experiential is having to reinvent itself as the demographics change, new offerings emerge - like say a TopGolf, and loyalty programs become a bigger deal in retail. Note the following from this Forbes feature on AMC and the theatre industry:
"AMC Theatres today reported second quarter revenues which were up 4.4%, net earnings up 122.5% for the same period, and an all-time attendance record with 97 million tickets sold during the quarter. AMC generated record U.S. food and beverage per patron of $5.58 and total food and beverage per patron of $5.08, representing growth of 5.5% and 3.9%, respectively. AMC CEO stated, “We continue to drive this performance by leveraging the power of the AMC platform, from experiential initiatives and enhancements at our theatres to a frictionless use of technology to communicate, engage and sell to our guests."
And with respect to the economy, the surprise this week is that small business optimism isn’t cratering under the weight of the headlines. The NFIB Small Business Optimism Index (SBOI) is one of those five key metrics I use to gauge the health of the economy - along with: i) RailTime Indicators; ii)ADP & LinkedIn Workforce employment reports, iii) the Spread between the 2-Yr and 10-Yr Treasury; and iv) the Cass Freight Index. Today, the NFIB reported its July survey results. The headline, remarks from NFIB President Duggan, and the press release statement take the words right out of the mouth of the late Jim Neighbors (Gomer Pyle): “Surprise, Surprise, Surprise!”
NFIB Small Business Headline for July Period:
"Optimism Continues to Defy Expectations"
NFIB President Juanita Duggan Remarks on July Survey:
“While many are talking about a slowing economy and possible signs of a recession, the largest economy in the world continues to defy expectations, generating output, creating value, and expanding the economy. Small business owners want to grow their operations, and the only thing stopping them is finding qualified workers.”
NFIB Small Business Optimism Posts 2nd Highest Reading of CY 2019 at 104.7 – 32 Consecutive Months >100
Other Economic and Real Estate Industry News of the Week:
Employment: NAR’s chief economist Lawrence Yun had a good LinkedIn post covering the updated state-level employment data from the BLS. Who led in job creation at the state-level? The West, Florida & Texas lead. Alabama now has a record 2.1+ million employed persons.
Inflation / CPI: What the Fed couldn’t find in the June data for its July FOMC meeting is present in the July data – rising prices and inflation. According to this morning’s BLS press release, the CPI overall and excluding food & energy categories, was up 0.3% for July. Except for new car prices, we have inflation in the U.S. No need for more rate cuts or negative yielding debt here! The Fed rate cuts are not about stimulating the U.S. economy; rather, they are about weakening the U.S. dollar and combating the European Central Banks and Emerging Markets continued QE and negative interest rates.
“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in July on a seasonally adjusted basis after rising 0.1 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.
The index for all items less food and energy rose 0.3 in July, the same increase as in June. The July rise was broad-based, with increases in the indexes for shelter, medical care, airline fares, household furnishings and operations, apparel, and personal care all contributing to the increase. The index for new vehicles was one of the few to decline in July.”
Opportunity Zones: The National Association of Realtors (NAR or just R in new Ad campaign) has introduced a Qualified Opportunity Zones Toolkit. This item is just what the Doctor ordered for Realtors to service the needs of clients interested in OZ investing. The link and toolkit are a soup-to-nuts resource providing the program details, state-level resources, critical dates and timelines, etc. If you are involved with Opportunity Zones, you want to download this toolkit and mark this NAR resource link.
Property Type News - Retail continues to be front and center.
Last week we learned of the bankruptcy filing of iconic Barneys of New York. This past week the latest retail casualty is A'gaci. For those of you men located outside Texas – particularly San Antonio – you may wonder what’s an A’gaci? It is a comparatively small women’s apparel retailer (54 stores) that has filed bankruptcy once before. It is a quintessential example of why smaller retailers are going bankrupt. It is 1-part overleverage & 1-part failure to figure out online. Many more of these to come. CCIM President Barbara Crane can explain A’gaci in San Diego.
The retail news, though, is not all bad. Previously in this WIN I covered AMC theatres. Last week I profiled an innovative Adaptive Reuse of a former Macy’s store in Pittsburgh into a combination of office and a school. This week we learned Barnes & Noble commences its next life stage under ownership of a UK bookstore.
Elliott Advisors, the private equity firm that owns Waterstones (UK’s largest bookstore retailer), closed its deal to buy Barnes & Noble for $683 million. It thinks it can turn around Barnes & Noble in much the same way it did Waterstones in the UK.
Barnes & Noble has been sliding for years. Nearly 400 stores have closed since 1997 (627 stores still operating) and $1 billion in market value has evaporated in the last five years. Waterstones has a plan to deal with the behemoth Amazon that is quite innovative. It involves how it inventories books and adding elements of experience along with a touch of Oprah Winfrey to the equation. Regardless of how it all turns out, there are two retailer lessons from Barnes & Noble. The first is overleverage kills quickly and if you can tame it you have time to reinvent yourself. The second is that retailers have to constantly revisit their offering and process to understand what it can do differently to add value and draw traffic. It’s not just having an online presence or doing e-commerce well. Both AMC and Waterstones in the UK are case studies in how to resuscitate nearly dead Amazon road-kill. Check out the NY Times feature on Barnes & Noble’s next life strategies under UK ownership.
Industrial: It is still humming along like a well-oiled machine. I recently concluded an Industrial Outlook with Larry Callahan (CEO of Patillo) on the Michael Bull radio show. Click here for the link to the show. The key points conveyed by me were:
1. We are in the early innings of the industrial CRE cycle.
2. Nationwide stats fresh from Colliers show record low vacancy (4.9%) and record high asking rents >$6.00/ SF for the first time.
3. Reshoring companies broke a record in 2018 with 1,389 companies.
4. The new Big-Box in retail is an industrial warehouse.
5. Don't fret the 300msf of new construction. We need it - and over half the purported 6, "Spec" space is actually committed to a tenant but under a confidentiality agreement until completed or occupied.
7. Tariffs won't beat up Industrial. Companies need to warehouse more to avoid Supply-chain disruptions until they figure out the new Supply-chain channels that will flow more through places like Vietnam, South Korea, Malaysia, etc than China. Read the recent Corp Earnings to see how companies are managing.
In closing this week’s WIN, I want to highlight recognition of two entities that have been impactful to Alabama.
The first is Bayer Properties. They have been named a finalist in ULI Atlanta’s 25th Annual Awards of Excellence for its Pizitz project in downtown Birmingham. What is the Pizitz project; and why is Atlanta ULI recognizing it? First, Alabama doesn’t have a ULI chapter; therefore the Atlanta ULI chapter extends its reach to include Alabama. And the Pizitz is one of Alabama’s best Adaptive Reuse projects that ranks up there with Mike Mouron’s redo of the Federal Reserve Building in downtown Birmingham and Rotary Trail. Next up in downtown Birmingham? Watch what happens to the former Greyhound Bus Terminal by Mike Mouron.
The Pizitz is a $72M, 250,000 SF adaptive reuse project in the heart of downtown Birmingham that transformed an iconic former 1920s department store into a vibrant mixed-use destination. The Pizitz is home to a world-class Food Hall now home to 12 unique food stalls, and a full-service restaurant. The development also features 143 multifamily residences with 29 affordable units; Birmingham’s first modern coworking space; a multi-use flexible event space; and a future film center and cinema.
The second is Jim Newsome, South Carolina State Port Authority CEO: A long-time industry colleague, friend, and leader in the ports and Logistics industry, Jim Newsome, has been named a DC Velocity Logistics Rainmaker — a prestigious accolade that recognizes logistics professionals whose achievements and contributions stand out in the industry. Newsome, one of eight 2019 Logistics Rainmakers in the country, is recognized for his impressive career in logistics, shipping and ports industries. He has been CEO at the SC Ports Authority (SCSPA) port for nearly 10 years and is credited with transforming the Port of Charleston into a top 10 U.S. container port, achieving unprecedented cargo growth including record-breaking volumes in fiscal year 2019.
As some of you will recall, Jim was ACREcom 2018’s keynote speaker.
Thanks to leaders in the port industry like Jim Newsome, the port of Mobile is on track for the same kind of success as the port of Charleston SC under the leadership of Jimmy Lyons.
The recently passed Rebuild Alabama legislation along with AirBus and WalMart anchoring port users ensure that port of Mobile too will be a top-10 U.S. port within this next decade.
Congratulations Jim Newsome and the port of SC for giving all of us along the East and Gulf coasts a model to grow and compete on a global level. We may have to start exporting more of those AL made cars out of port of Mobile in the next few years with our new Roll-on, Roll-off facility under development.
Have a great week!
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