Monthly Letter for January 2017
Welcome to 2017! As the Trump train enters Washington D.C., I am reminded of the words of Abraham Lincoln in his first inaugural address, when in the face of a very contentious environment, he invoked a call for “the better angels of our nature.”
For all my long-term clients, you will remember my annual Gold Report – our yearly forecast. Given the high speed of news delivery and the miniaturization of everything have made it obsolete, However, I will attempt to give you my prognostications for the year and a New Trump presidency in 14 bullet points:
● There will no doubt be a short-term stimulus to the economy. Tax cuts, reparation of overseas corporate profits, government spending on infrastructure will all provide a boost to the economy and probably inflation.
● Accompanying gains in consumer confidence will move the economy higher.
● Inflation is likely but if GDP can keep growing it should be manageable. Remember GDP is productivity times hours worked.
● The trade deficit will rise. That’s because a rising economy will lead to more Italian wine, German cars and Japanese game consoles. If tariffs are raised so as to lessen the deficit, prices will rise and recession will follow.
● Despite all the positives and froth in the economy, a recession (albeit slight) is a possibility. Lots of indicators; rising rates, unemployment near full employment, stock market topping, bond market reversing and yield curve flattening.
● Watch for the double impact of potential deportations. If we get rid of 2-3 million people (regardless of where you stand politically) it will have an impact on consumption. In the construction trades where Hispanics are as much as 50% of the work force, unavailable workers may increase already rising construction costs.
● Trade wars could affect costs; cement (most of our cement comes from Mexico), glass building facades and curtain walls (most comes from China) and lumber (a lot comes from Canada).
● Community colleges are likely to grow and get more funding as they train/retrain more trade workers and medical assistants.
● Freddie Mac and Fannie Mae may not survive.
● Dodd Frank to be gutted loosening up mortgage underwriting and less regulation.
● Congressional gridlock will ease with single party control of the three branches.
● Job creation, good demographic trends, wage growth and limited development pipeline bode well for commercial real estate.
● Rising interest rates will keep pressure on cap rates to rise (and lower values unless rents rise).
● Change taxes (lowering mostly) could influence yields and/or make more money available for investments.
Although most of you know Nick (my son) who has been working with me for the last eight years, starting this year we are going to carve out a section of my letter to share “Nick’s Numbers”:
Hi all, thought we’d start by looking at retail and office vacancy. As of the end of the 3rd quarter office had absorbed 540,655 SF with a vacancy rate decrease to 10.7%. There is still almost 750,000 SF of sublease space. Average rent throughout San Diego is $2.54 PSF. Retail vacancy has dropped to 4.1% after absorbing 336,053 SF. Asking rents actually decreased slightly to $1.84 PSF. There is also 481,421 SF of retail space under construction in the County.
As we focus on a Happy and Prosperous New Year along with building walls and fences, I thought you would enjoy the story…
Once upon a time, two brothers who lived on adjoining farms fell into conflict. It was the first serious rift in 40 years of farming side-by-side, sharing machinery, and trading labor and goods as needed, without a hitch.
Then the long collaboration fell apart.
It began with a small misunderstanding, and it grew into a major difference, and finally, it exploded into an exchange of bitter words, followed by weeks of silence.
One morning, there was a knock on John’s door. He opened it to find a with a carpenter’s toolbox. “I’m looking for a few days’ work,” he said.
“Perhaps you would have a few small jobs here and there that I could help with? Could I help you?”
“Yes,” said the older brother. “I do have a job for you. Look across the creek at that farm. That’s my neighbor. In fact, it’s my younger brother!
Last week, there was a meadow between us. He recently took his bulldozer to the river levee, and now there is a creek between us. Well, he may have done this to spite me, but I’ll do him one better. See that pile of lumber by the barn? I want you to build me a fence. An 8-foot fence so I won’t need to see his place, or his face, anymore.”
The carpenter said, “I think I understand the situation. Show me the nails, and the post-hole digger, and I’ll be able to do a job that pleases you.”
The older brother had to go to town, so he helped the carpenter get the materials ready and then he was off for the day. The carpenter worked hard all that day – measuring, sawing, and nailing. About sunset, when the farmer returned, the carpenter had just finished his job.
The farmer’s eyes opened wide, his jaw dropped. There was no fence there at all. It was a bridge… a bridge that stretched from one side of the creek to the other! A fine piece of work, with handrails, and all!
And, the neighbor, his younger brother, was coming toward them, his hand outstretched… “You are quite a fellow to build this bridge, after all I’ve said and done.”
The two brothers stood at each end of the bridge, and then they met in the middle, taking each other’s hand. They turned to see the carpenter hoist his toolbox onto his shoulder.
“No, wait! Stay a few days. I’ve a lot of other projects for you,” said the older brother.
“I’d love to stay on,” the carpenter said, but I have many more bridges to build.