January 15, 2020
Ready, Set, Go – It’s start of 2020 economic data releases and earnings season:
The holidays and 2019 are behind us. Now we commence with a new round of economic data and view on Q4 corporate earnings as a proxy to how 2020 might unfold. The good news is that we are starting off on the right foot with last week’s ADP and BLS employment reports. Last Friday we learned that December was yet another decent month for job growth and was the icing on another year of more than 2.0 million net new jobs. ADP revealed +202,000 private sector jobs and BLS a reasonable 145,000 while maintaining a record low U6 unemployment rate of 6.7%. The U3 rate stayed at the 50-year low of 3.5%. However, we now are more focused on Iran and energy prices as things settle down on tariffs and trade with a phase I China deal concluded and USMCA on track to clearing the Congressional hurdle. It’s always something, and as I advised at the beginning of 2019, focus less on the “R” word (recession) and more on the “V” word (volatility). With 2020 being an election year, volatility is likely front and center again. So what was noteworthy this past week, and what is worth paying attention to this week?
Noteworthy News from the past week:
- 2/10-Year Treasury Yields and U.S. Budget Deficit: Despite the events in Iran and news of new record budget deficits, the 10-Year Treasury yield has remained calm in a 1.8%-1.85% range and the spread between the 2-Yr and 10-Yr treasury also a consistent spread of 20-25 basis points. This calm in Treasury yields is surprising to me, especially given the update news on our unrestrained deficit spending and recent budget news. MarketBeat commenced this week with a concerning feature on the latest spending data for the first fiscal quarter of 2020 in which they noted:
- The U.S. budget deficit through the first three months of this budget year is up 11.8% from the same period a year ago, putting the country on track to record its first $1 trillion deficit in eight years.
- In its monthly budget report, the Treasury Department said Monday that the deficit from October through December totaled $356.6 billion, up from $318.9 billion for the same period last year.
- Both government spending and revenues set records for the first three months of this budget year but spending rose at a faster clip than tax collections, pushing the deficit total up.
- The Congressional Budget Office is projecting that the deficit for the current 2020 budget year will hit $1 trillion and will remain over $1 trillion for the next decade. The country has not experienced $1 trillion annual deficits since the period from 2009 through 2012 following the 2008 financial crisis.
In other words, we have a sending problem versus a revenue collections problem. Let’s hope the focus in the 2020 elections pivots at some point to spending and not just more taxes. The government will spend what ever amount it can collect. Lack of fiscal discipline is a cancer on economic growth. This won’t end well.
- U-Haul Top States for Growth 2020 report confirms what Florida, Texas, the Carolinas and Alabama have known – more people are moving to these 5 states. The just released U-Haul 2020 Migration study for CY 2019 period has Florida beating out Texas for top spot for 1st time in years. It also recognizes the growth occurring in the Carolinas as they ranked #3 and #4 for most “move-ins” during 2019. Also of significant note – especially for the Brookings Institute which is under the mistaken impression that Alabama is not a growing or economically diverse economy – was that Alabama ranked #1 as the state which had the largest year over year gain for net move-ins? Thank you Amazon, Airbus, Mercedes, Shipt, SpaceX, WalMart and the many technology, professional business services, logistics, and even banking companies that are adding to the move-ins to Alabama. Check out the top 25 states in the latest U-Haul migration report. Condolences to CA for a #49 ranking. I am in the camp that California out-migration is an affordability issue!
- TREPP adding to its depth of CRE intelligence with Life Comps and Life Comps Index: Preceding the annual CREFC meetings in Miami this week, it was announced that Trepp has been selected to be the exclusive manager and administrator of the life insurance commercial mortgage whole loan index known as LifeComps™. LifeComps provides a quantifiable investment performance index and serves as a benchmark for privately held commercial real estate mortgages. Current LifeComps participants represent about a third of the life insurance commercial mortgage market with more than $144 billion principal balance as of June 2019.
The index, which was created in 1997, calculates and publishes quarterly returns and cash yields for the commercial mortgage portfolios owned by the participating members.
Going forward, Trepp will generate the LifeComps Index, all underlying reports, and analytics for each of the life insurance industry participants, and use the 20-plus years of data to produce new reports, analytics, and insights. Adding the loan insights from life company CRE mortgages to Trepp’s unmatched data in the CMBS securitized realm of permanent CRE debt will make Trepp the go-to resource for CRE debt performance intel that not even the Federal Reserve, FDIC, rating agencies, or comparable CRE transaction companies will be able to match. Guess what new bellwether metric is going to be added to my list of items to monitor as closely as market intelligence from RailTime Indicators, NFIB, 10(q) corporate earnings reports, and LinkedIn Workforce reports?
- Retail Store Closings: On the heels of a record 9,300 retail store closings in 2019, the new year has started off with announcements of nearly 1,100 more announced closings ahead in 2020. MoneyWise has a great profile of all the retail store closings ahead for 2020. The tally of noteworthy ones in order of most store closings is as follows:
Pier 1 – 450 stores to close in 2020: Pier 1 Imports' familiar assortment of scented candles, silk pillows and wicker furniture isn't the draw for shoppers that it used to be. So, the chain has begun 2020 by announcing that nearly half of its 936 stores are shutting down. That's after closing at least 70 locations in 2019.
Chico’s – 250 stores to close in 2020: Chico's specializes in sophisticated clothing, accessories and intimates for women. It serves "the lifestyle needs of fashion-savvy women 30 years and older," according to its website. The company was founded in 1983. It grew rapidly to more than 1,400 locations in the U.S. and Canada. Now, the chain is shifting gears away from traditional stores. Chico’s has partnered with Amazon, ShopRunner and QVC to accommodate its 8 million customers' changing needs and shopping behaviors.
The GAP – closing 230 stores and divorcing from Old Navy.
Office Depot – 90 stores to close: Office Depot has announced it will close 90 locations by 2021. That's on top of 55 that have gone dark over the last year. The office supplies company also owns OfficeMax, so some of those stores are on the chopping block as well. At its peak in 2006, the retailer’s stock price reached almost $44. It was a mere $2.50 in the third quarter of 2019.
Bed, Bath & Beyond – closing 60 stores, but more expected: Bed Bath & Beyond stores are behemoths. Some occupy more than 80,000 square feet and display around 300,000 items from floor to ceiling. The retailer plans to turn 40 of those stores into empty big boxes by March 2020. Another 20 stores are closing from the other chains BB&B owns, including buybuy BABY and Cost Plus World Market. As of the end of August 2019, the company had more than 1,500 stores in the U.S. and Canada, including about 1,000 Bed Bath & Beyond locations. Executives say the goal is to strike a better balance between the retailer's brick-and-mortar trade and its digital presence.
And the list goes on with Macy’s (28), more Sears, K-Mart and a new round for CVS. A lot of Adaptive Reuse is going to be needed for all this real estate. Property Tax authorities need to recognize this trend in retail and that retail is likely not the highest and best use of these closing stores.
What is Ahead to Monitor:
Economic Releases: Keep an eye on a plethora of new economic reports that include updates from the NFIB on small business optimism (Jan 15), U.S. PPI and gauge on inflation, the Beige Book by the Federal Reserve (an anecdotal report in which the comments from the St. Louis, Kansas City, and Dallas Fed District Banks are usually the most insightful), Housing Starts (Friday) and the JOLTS (Job Openings and Labor Turnover) employment report. Expect some erosion in the number of openings after the Holidays (maybe below 7.0 million), but we will still likely have more openings than unemployed persons.
Corporate Earnings: These are the real harbingers of what lies ahead – especially in the forward guidance provided that hint at capital spending and hiring plans. Below is a listing of what earnings releases are on my radar this month and for early February:
This Week it’s all about the Banks: It all starts with bank earnings from the likes of Citi, Wells Fargo and Bank of America (Jan 14-15) and then Regions (Jan 17), ServisFirst (Jan 21), Synovus (Jan 24) and the newly created Truist Bank (Jan 30) from the merging of legacy SunTrust and BB&T).
Next Week the Logistics and some bellwether Industrial CRE companies: These would include CSX railroad (Jan16), KCS (Jan 17), ProLogis (Jan22) and UPS (Jan 30)
End of January key Consumer Staples, Housing and Manufacturing companies: Proctor & Gamble was a most valuable proxy in 2019 as to tariffs and trade and reports Jan 23; then DR Horton Jan 27, and very important aircraft manufacturing and our largest exporting companies Boeing & GE on Jan 29. Boeing is a big deal to our economy as the #1 exporter and it impacts employment well beyond Washington State and South Carolina.
Retailers: They always come later in the reporting cycle and will start with the likes of Levi Strauss on Feb 4th. Then pay attention to O’Reilly Auto Parts on Feb 5, CBL Properties Feb 6 (a retail REIT hit by a lot of anchor store closings in recent years), Auto Nation Feb 11 (nation’s largest auto dealer), Shopify Feb 13 (small retailer alternative to Amazon), and then biggies like WalMart & Home Depot on Feb 18.
2020 is off to a fast start. I have started sharing my 2020 Outlook in presentations across the U.S. and to a range of industry groups. Below is a snapshot of what I am adding to my list of 2020 “Pitcher Influences.” If you are in the Birmingham metro area Friday February 7th, consider attending our annual CREcom 2020 - Building the Future commercial real estate conference where I will reveal all of my economic and CRE insights for 2020. This year is ACRE’s 20th anniversary of this conference. The theme is “Building Your Future”. All my insights for 2020 will be presented the morning of February 7th during my opening Outlook - followed by panels with all-star industry leaders from the capital markets (Hunt Mortgage, Protective Life and Regions Bank), leading CRE industry group CEOs including CCIM (Greg Fine), Appraisal Institute (Jim Amorin), IREM (Denise Froemming), and SIOR (Tom McCormick) etc. Additional sessions about ULI Emerging Trends, Opportunity Zones, and LinkedIn and a lunch keynote from the CEO of World Games 2021 (Nick Sellers) will fill out the day.
Get business concluded early in 2020 as I fear that just as the opposite resulted from the consensus view at the start of 2019 (rate cuts versus hikes), the opposite could result in 2H2020 from the optimistic outlook here at the beginning of 2020.
Happy New Year - KC
NATIONAL NETWORK MEMBER NEWS
LEGAL / RISK MANAGEMENT
WORKFORCE DEVELOPMENT (powered by CCAP)
ACRE Industry Presentations
Real Estate Group of Atlanta
Pennsylvania CCIM Chapter Economic Forecast
Colliers Kansas City Economic and CRE Outlook
Kansas City, MO
National Land Summit
New Orleans, LA
ACREcom 2020 Economic and Commercial Real Estate Outlook