June 12, 2019
Although the news of the past week (Mexico tariffs, disappointing jobs reports, Fed Speak and Amazon fails at something in e-commerce retail space) is tempting you to abandon your overdue R&R with family at the beach, lake, or mountains to return to work and the markets, don’t do it!
I was reminded of the importance of down time this week as I opened my calendar to a reminder that June 11 would have been my late father’s 102nd birthday. He was a true real estate and land development guy with nerves and a stomach of steel. By that, I mean I never saw him reveal stress or divert time from family R&R – not during the 1973-1974 oil embargo; not during President Nixon’s resignation August 9, 1974 (ruined my 12th birthday ); not during the Volcker Fed when the Fed Funds Rate surpassed 20% in February 1981; and not even when his bank real estate land and construction loans in Vail, Colorado were called due by the bank in 1978. Instead, he traded his 25% ownership in the Vail Corporation to honor his debt obligations - and then spent the remaining quarter century: i) believing in and spending time in Vail and the Colorado Mountains, ii) believing and investing in real estate, and iii) investing time with family.
Below is a “KC history insight” with a snap shot of the original stock offering of Vail Ski resort in 1961 revealing the true basis of the Vail Valley land acquisition in 1959 by my late father ($110 per acre). The message to take away from the Vail saga and my father’s obituary are to: i) enjoy the journey; ii) spend time with family; and iii) know the markets will make and crush you many times over. Just be nimble and always studying the market. It’s also all beyond your control, so just set your compass to true north, take life one step at a time, and let ACRE absorb the stress while on R&R this Summer. It’s a WIN, win proposition!
Onto what mattered in the economy and CRE last week, and for the week ahead:
Mexico Tariffs, Jobs Reports, Fed Speak: The big news last week was the market free-fall over Trump threatened tariffs on Mexico, the ADP and BLS jobs reports, and Fed speak about rate cuts. Fast forward a week and what do we know?
First, we know the “Fed doth speak too much.” Thank goodness this week is a blackout period before the June 18-19 FOMC 2019 Meetings. The Fed won’t cut rates next week; however, they will tell us they are still “data dependent” and ready to take “appropriate action” if needed. No way the Fed cuts rates this month with +3.1% GDP, <4% unemployment, and now a truce on Mexico tariffs. Stay tuned for July 30-31 meeting and a plethora of confusing "Fed speak" in early July. Note, there is no August or November FOMC meeting so take an end of summer vacation in August and enjoy Thanksgiving.
We also know that all is good again between Trump and Mexico, but we remain anxious as to the damage that may have been done to ratifying USMCA/NAFTA 2.0 before Congress’ summer recess. Fingers crossed, but tariffs remain a market anxiety factor. I have emphasized since early January that the single most important event for the U.S. economy in 2019 is ratification of USMCA. It has to get ratified, or the U.S. will slip into recession in 2020. How is that for being direct with no wishy-washy forecasting?
Second, the Jobs Reports: Perhaps the most concerning news from last week was the ADP and BLS jobs reports. Both missed expectations by more than 100,000 jobs; and both showed weakness in small business. In fact, ADP revealed small business employment contracted by 52,000 jobs in May – and a contraction hasn’t occurred in small business employment since this recovery began 118 months ago. Read more about my take on the June Jobs Reports Perspective for the May period on ACRE's exploRE media platform.
Commercial Real Estate Related:
Multi-Family – “Recap & Release” of GSEs could entail largest Public Offering EVER – bigger than Alibaba: The big news here is things are heating up to get Fannie Mae and Freddie Mac out of government control. According to the Wall Street Journal, the Trump administration is finalizing a “recap and release” proposal to return Fannie Mae and Freddie Mac back to private conservatorship. The plan, which is being drafted by the Treasury Department and the Federal Housing Finance Agency, could reportedly be submitted for approval at the White House as early as this month.
If carried out, the companies could return to a status similar to how they operated before the financial crisis. Former officials of the companies and housing experts say the moves could be daunting. Shoring up Fannie’s and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering. In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.
Retail: Lets skip the retailers that disappointed with earnings or announced more potential closings (Nordstrom, Gap Inc., Calvin Klein, and Canada Goose – and Abercrombie & Fitch rumored to be closing its flagship stores), and let’s look at a real retail shocker – Amazon failing at something e-commerce or retail. The good news for Chick-Fil-A, McDonalds, Uber, Grubhub, and DoorDash is that they won’t be competing with Amazon in casual food delivery: Amazon Restaurants Shuts Down business in the U.S.
Geek-Wire and restaurant industry analysts are reporting that Amazon is pulling back to focus delivering groceries from Whole Foods via Prime Now in its 100 U.S. markets. The closure of Amazon Restaurants after investing serious time and money in the service is a rare retreat from the e-commerce behemoth.
Amazon Restaurants first launched in Seattle in 2015. Amazon expanded the program across more than 20 U.S. cities and later in London. The service gave Prime members a way to get meals delivered to their door, using the Amazon Restaurants website or through the Prime Now shopping app. Amazon will also shut down Daily Dish, a workplace lunch delivery service that launched in 2016. This move comes less than a month after Amazon led a $575 million funding round for Deliveroo, a U.K.-based food delivery company. The real story here – and lessons for those that aren’t executing like Chick-Fil-A or Uber Eats – is that the competition is fierce in the food delivery market. While it is true that companies such as Uber, Grubhub, and DoorDash have experienced big growth in recent years, it’s a “dog-eat-food delivery” industry. Uber Eats, Grubhub and DoorDash combined hold more than 75% of the U.S. food delivery market share.
Industrial (7:1 Land to Building Ratios now the standard): My focus on industrial property this week is on one of our National Network sponsors that make the WIN feasible, Monmouth REIC (MNR). Monmouth participated in REIT-Week in New York last week and hosted a most enlightening session.
Monmouth REIT Stream from REIT Week in NY - The Monmouth session at REIT Week in NY last week is the one session to listen to regarding the Where and Why behind Industrial CRE growth and logistics impact on Industrial property. Take 30 minutes and listen to CEO Mike Landy explain how the oldest Industrial REIT has the youngest portfolio; how Monmouth has maintained 27 consecutive years of Dividends - even through recessions; and is able to forward invest in build-to-suit assets at 6 25% range Cap Rates that likely could trade south of 5% after completion or maybe south of 4% as a portfolio using the recent Prologis and Blackstone acquisitions as a proxy. Landy also shared what is happening to land-to-building ratios and why Industrial is so much more than a masonry box. Industrial buildings today are high tech occupied by tenants who invest more on the inside than to acquire the land and construct the building. If you touch Industrial CRE, you need to listen to this session!
The FOMC meeting is the big news to follow next Tuesday-Wednesday. No rate cut, but lots of media coverage.
I am working on a new CCIM paper on retail CRE, as well as an Affordable Housing Solutions paper for ACRE. The retail paper is going to tell a new story about retail that is NOT focused on store closings or experiential retail, and instead on developments like: i) online food delivery growth from groceries to casual dining; ii) expansion of the digital wallet and cashless checkout; iii) coworking going to the malls; iv) retail taking flight at airports and getting back on its meds at hospital and medical campuses; v) Gen Z undoing all that the millennials are doing to work, retail and housing (hint, they don’t like doorbells or open workspaces); vi) property tax and retail store market value; and vii) where physical retail is still working (hint Ollies and new mall in NJ).
With regard to the Affordable Housing Solutions paper, I was struck this week by news that California (LA in particular) is zoning homeless parking lots to allow homeless (especially college students) living out of their cars a safe place. Ironic that Homeless Parking Lots are being introduced in CA – a state with a new state budget to allow $100 million for health care to illegal immigrants, but not much for its legal, working-poor. Yep, California and many Western MSAs are creating dedicated parking lots for homeless living in cars versus real affordable housing solutions. I just don’t get California!
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