December 11, 2019
The Naughty and Nice Economic and CRE Elves of 2019 are …
This week’s WIN is 1-part getting into the Holiday Spirit and 1-part recognizing the Naughty and Nice in our economy and real estate industry in 2019. The following lists are not meant to be all inclusive; rather, they are meant to stimulate some thought and discussion as you contemplate recalibrating your CRE Vectors (Direction and Magnitude of CRE Investing) for 2020 - and complete your 2019 Scorecards in preparation for a new 2020 “What have you done for me lately” scorecard. Let’s first dispense with the list of Naughty list of 2019 elves.
The Naughty (aka Heat Misers):
Top of the list has to be the 435 Congressional Elves – and not for the paralysis over Russian Collusion in 2016 elections or the Impeachment Inquiry; but rather for these elves failure to do important business - like ratify NAFTA 2.0 – formally known as USMCA (United States, Mexico, Canada Agreement). This trade legislation would unite our largest trading partners. It would also give us insurance that our economy can continue adding to its record 125-months of economic recovery in 2020.
On December 10th came news House Democrats and the White House have agreed to terms to bring USMCA to a vote by year-end 2019 or early 2020. Below are a few of my perspectives on how passage of USMCA will aid our economy and real estate industry. Keep pressure on these 435 elves to act before they leave for 2020:
- U.S. based manufacturing is half of all our export activity – and it is nearly 12% of our annual GDP supporting jobs that drive demand for real estate & construction activity.
- This manufacturing activity and export trade support more than 1/3rd of all new U.S. CRE construction in the form of new warehouses to new housing for factory workers like the new Toyota-Mazda plant U/C in Huntsville AL. CBRE notes that 3.4 billion in warehouses have been built in the Southern US from LA/LB across to AZ and TX and over to AL, GA and SC since NAFTA 1.0 was passed in 1994.
- With advancements in Logistics and the e-Volution of e-commerce, USMCA is estimated to stimulated at least 1.0 billion in additional logistics warehouses in the first 5 years of its passage. To put that figure in perspective, a record 300msf of new warehouse space is under construction in the U.S. in 2019 (Source: Colliers and CBRE)
- CRE construction Costs Get Relief that aids all CRE construction from new SF homes to MF apartments and warehouses. – The U.S. is incurring near double-digit construction costs increases (Source: ENR – Engineering News Record Dec 2019 Construction Economics showing double-digit materials costs increases and Assoc of General Contractors) – largely from material, but also labor shortages – resulting form 5 Cat 3-4 hurricanes in past 3 years. These rising construction costs could be mitigated by USMCA reducing tariffs on material costs form lumber and steel to concrete and refined diesel supply for construction equipment. USMCA ratification is an important cost consideration in the rise of new housing prices
Second on the list is the Federal Reserve and its voting FOMC elves. One might think they should be on the Nice-List for the three rate cuts in 2019 (sorry no rate cut this week), but they merely unwound the havoc they wreaked last December with a fourth rate hike in 2018. The real reason for the Naughty rating is their inability to utilize robust industry data, such as LinkedIn Workforce report, NFIB Small Business surveys, or Trepp CMBS loan performance data to fix it’s “ED” problem (Economic Data Dependency Dysfunction) – and/or forecast reliably. The worst Elf in the FED is the GDP-Now Elf that routinely posts the most inaccurate and volatile GDP forecasts causing short-term market volatility. The Atlanta and NY FED Elves teamed up to forecast <0.5% Q4 2019 GDP at Thanksgiving; and now reverse course and forecast +2% after the December Jobs report. Santa, please send these GDP-Now Elves back to forecasting reform school. If they were left to forecast the volume of toys on your sleigh December 24th, it would be 75% light on December 24th and then packed full on New Year’s Day after leaving 3 in four children without a toy from Santa on Christmas Eve. FYI Atlanta & New York FED, Santa has a Tesla 2.0+ Sleigh that has capacity for 3% GDP. Fix your model!
Third is the Yield Curve. This Elf thinks bonds and government debt are an amusement park ride in which the more thrilling the drops and twists the better. The world saw global negative yielding debt rise to unprecedented levels that spiked toward $17 trillion in late Summer - and still stand at more than $14 trillion today. The Yield curve inverted with a 10-Year Treasury bottom of 1.47% September 3rd. Fortunately, this Naughty-Elf has been in time-out of late and we appear headed to normalizing the Yield-Curve again with 20 basis points spread between the 2-Yr Treasury (1.60% Dec 10) and 10-Yr Treasury at 1.80% (Dec 10 close). For some recent historical perspective as to how mischievous this Yield-Curve Elf has been, below is the Dec 2016 to Dec 2019 10-Yr Treasury yield range – what a ride!
10-Year Treasury Yield
Dec 27, 2016: 2.57% Dec 28, 2018: 2.72% Dec 11, 2019: 1.80%
Rising with Fed hikes Peaked Nov 8 @ 3.24% Bottomed Sept 3 @ 1.47%
Next on the list is “Builder Elf” and Construction Costs. “Builder Elf” (as my son Luke refers to this one) has been quite naughty raising prices on all items from Elf Labor to materials for Santa’s workshop. The December 2019 ENR edition of its Construction Economics revealed just how naughty this elf has been in 2019. Concrete and steel elves have been two of his most devious among the construction-costs elves. Note the year-over-year increases in these key commodities that impact everything from home building to new warehouses: i) crushed stone up 17.5%; ii) Portland Cement up 23.9%; iii) Sand up more than 10% (+10.2%). This elf may be tough to reform in 2020 with the U.S. still rebuilding from 5 CAT 4 hurricanes in 2017 and 2018.
Finally, “Derail the Rail Traffic” Elf. This elf has had a hard time keeping the supply-chain train to the North Pole on track. Thank goodness we have had FedEx and National Network sponsor Monmouth MREIC on the job to mitigate the derailment. What has been going on? First, “Derail the Rail” Elf let the Green-ESG Elves derail coal, then he wouldn’t let any female elves play with the trains. Then the Pipeline Elves tried to hide the needed petroleum to Santa’s Workshops in pipelines. And finally, the Matchbox Elves went on strike in October against the new GM cars causing auto shipments to slow. There is so much mischief going on with the Rail Traffic elves that this economic indicator may not be the reliable economic recession indicator Santa once thought it to be. Warren Buffet is still hoping for another train under his tree – especially with the efficiency and earnings being produced by NFS and CSX railroads. I warn not to short Santa’s favorite toy – trains!
The Nice Elves (aka Freeze Miser team):
Top of the list has to be the Jobs Elf. Last Friday’s BLS Employment Situation Jobs report for the November period shows just how busy Jobs-Elf has been hiring for Santa’s Workshop in 2019. In case you had to head out early last Friday due to the shortened holiday this year with a late November Thanksgiving, Vroom is back in the economy!
Here is a rundown on Jobs-Elf’s employment scorecard.
- +266,000 jobs for November
- 21st consecutive month unemployment below 4%.
- All metrics improved - and it's not just a skewing from end of GM strike.
- The revisions for prior two months were up as well a total of 40k.
- U6 (the real unemployment rate is below 7%. And the U3 unemployment rate is back down to 3.5%.
- Finally, look at the wage growth! Wages up again to +3.1% YOY.
December was an incredible jobs report with a 3-month average job creation rate now back above 200k. Santa, can we now get some R-E-S-P-E-C-T for this economy from the Naughty-Elves?
Second on the Nice-List, and closely tied to the Jobs-Elf, is Corporate Earnings. Since last Summer the Naughty Earnings Elves have been trying battling to derail the economy with tariffs and trade disputes between Trump Snow-Miser (casting a deep freeze over unfair trade practices) and China-Heat Miser (bent on melting away all fair-trade practices). What resulted?
The Corporate-Earnings elves have been hard at work back at their workshops redesigning supply-chains and efficiencies for Santa so he doesn’t have a shortage of materials - nor cost increases - that disappoint parents shopping at WalMart, Target, new Levi’s stores, or the Gap with 800 new store openings on the horizon. And boy have these Corporate Earnings elves delivered beating top and bottom line expectations each of the first three quarters of 2019. Take that Scrouge! Just look at these S&P 500 earnings result 2016 to Dec 2019:
S&P 500 Stock Index
Close Dec 2016: 2,259 Close Dec 2018: 2,499 Close Dec 10, 2019: 3,135
Third are the Optimism Elves. Who are they? They are NFIB Small Business Optimism, NAHB Home Builder Optimism and the University of Michigan Consumer elves. All three have shrugged off tariffs, impeachment inquiry and misleading Federal Reserve GDP-Now forecasts and stayed the economic course. No “Reeling of the Sails” by these upbeat elves with inclement Fall and early Winter weather.
The NFIB Elf just turned in its 36th reading above 100 - and second highest reading of 2019 at 104.7 (July was the highest at 105). These elves with workforce teams of under 500 employees make 60% of what goes on Santa’s sleigh. And the NAHB Home Builder Optimism elves are back in their “Let’s Build It and They will Buy it” mode with the Wells Fargo NAHB HMI back reading 70-71 here in Q4 2019. The economy and our C-RE industry run on sentiment and both rise and fall on the level of optimism. Thanks to these three Optimism Elves, small business, home builders and consumers are optimistic with growth plans for 2020. They all have lists into Santa for more workers, equipment and capital to grow, grow, grow. Below is some 2016 to Dec 2019 perspective on Small Business optimism.
NFIB Small Bus. Optimism
Nov 2016: 98.4 Dec 2018: 104.8 Nov 2019: 104.7
(Longest streak above 100 since President Reagan Administration and holding)
NFIB Dec Optimism Report for Nov
NAHB Home Builder Optimism for Nov
Fourth are the CRE Performance Elves. Who are these “nice-elves?” They are the elves at places like Real Capital Analytics (RCA), Green Street Advisors, REIS/Moody’s, CompStak, and Trepp that track how the real estate conditions are for Santa’s travels. All three are telling us that commercial prices are still rising, and the credit metrics are in good shape. Providing assistance to these CRE Performance Elves are the FDIC and Community Bank elves who are making sure all are well-capitalized and producing best-in-a-decade revenues while maintaining record low delinquency ratios.
No visibility problems for CRE this Christmas Eve and into 1H2020. And the top performing among these elves are:
- i. Manufactured Housing with +16 YOY property price appreciation;
- ii. Industrial Warehouses with +13% CPPI, according to Green Street; and
- iii. Lodging and industrial warehouse C-RE with lowest CMBS delinquency rates now - and since 2009.
Finally, Nice-List is rounded out by the CRE Industry Organization Elves. Who are these elves?” These are the critical industry professional organizations and trade associations that provide the fuel and directional guidance to our industry. In essence, they are Santa’s radar system. They include the likes of National Association of Realtors (NAR) and its Affiliate organizations, such as the CCIM Institute and Counselors of Real Estate. This elf group also includes organizations like Urban Land Institute (ULI) with its much anticipated and relied upon Emerging Trends report, the Appraisal Institute on matters of real estate valuation, and the American Property Tax Council (APTC) who provide the only representation to a taxpayer group with no representation – corporate property owners.
The list is long here and includes NAIOP, SIOR, The Realtors Land Institute and RMA – Risk Management Assoc. While our industry tends to focus on the property metrics, it is these C-RE Industry Organizations that give Santa the real estate conditions he needs every Christmas Eve. Check out these organization websites for some great real estate research done by each.
I particularly recommend CCIM.com/Insights - and at the University level, the Alabama Center for Real Estate at the University of Alabama, NYU Stern, University of Florida Bergstum Center for Real Estate, Texas A&M and Brian Andrews at LSU. Thank you to our many university institutions with real estate programs that are creating our next generation of CRE leaders – and all those corporate entities supporting the programs. It takes money to make a real estate village.
KC’s 2020 calendar is under-construction. Please put ACRE’s annual commercial real estate conference on your calendar for Friday February 7th in Birmingham. The theme will be “Building Your Future.”
There is just 1 WIN to come in 2019 (Dec 18) and then I will be taking some down time until Wednesday January 8th. Travel safe and with patience – its weather delay time of year again exacerbated by reindeer practicing their takeoffs and landings wreaking havoc on air traffic control systems across North America.
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