“In general the art of government consists of taking as much money as possible from one party of the citizens to give to the other.” – Voltaire (1764)
As I toil through my day I am encouraged by the headlines that scoot across my desk:
- “It won’t feel like a classic recovery”
- “Stirrings of life”
- “Lenders make guarded moves”
- “Inflection point”
- “County may lead rental market rebound”
As I intimated in last month’s letter, when you are up to your ass in alligators, it is hard to remember that you were there to drain the swamp! The University of San Diego (USD) Index of Leading Economic Indicators continues to rise (13 straight months now –but employment up for the last 3 months). A statement released by USD in early May states that if the local economy did not bottom out at the end of 2009, it likely did in the first part of 2010.
Other signs of economic recovery in the making are:
- Housing starts – up
- Retail sales – up
- Consumer sentiment – up
- Industrial production – up
- Empire State manufacturing survey – up
With the “Great Recession” starting to recede, opportunities for commercial real estate investors will begin to surface. While the recession might be technically over, the sheer magnitude of troubled assets and loans that have yet to be recycled through the economy is enormous. As a result, full economic recovery, along with normalization at the capital markets, may well be a few years away. Right now, there is too much equity capital chasing too few deals. As we stated in our Gold Report this year, look for a strengthening recovery in the second half of the year and look for the next year or two to be filled with “workouts” as owners, lenders and the government restructure, recapitalize and redistribute income assets and debt.
The Euro crisis is rattling markets around the world, but here in the U.S., it means cheaper loans, lower gas prices and perhaps good news for investors. However, in the long run, it is a message to get our “house in order”. Deflation is a very serious risk, but inflation is a greater likelihood. I expect the central banks and governments of the world to take the path of least resistance which will be to monetize the public sector deficits. In laymen’s terms, the Fed will print money to buy Treasuries. Printing more money will inflate the dollar. Modest inflation, combined with higher taxes will be the medicine of choice.
Why hasn’t inflation occurred yet? Although a lot of money has technically been created, much of it so far is not being used. Most of it is sitting in “excess reserves” that banks keep on deposit with the Fed. This is “high power” money because if the banks loan it out it has a multiplying effect on the money supply. For now, however; most of it is sitting idle on deposit with the Fed.
Speaking of taxes, on January 1, 2011, the capital gains tax rate will revert back to the former 20 percent rate. Beginning in 2013, the National Health Care Reform Legislation recently passed, will impose a new 3.8 percent tax on certain investment income. In general, the new tax will apply to investment income that is subject to income tax, which includes capital gains (best to discuss with your accountant).
Now, how and why does this affect your property and your tenants (new or existing)? Let me tell you, these issues cut to the core of the tenant’s decision structure. Tenants are still pretty frozen because of uncertainties in the economy, concerns of new legislation affecting their business, fear of higher taxes and finally, inability to obtain that money sitting in the banks’ reserve accounts at the Fed.
Even in the slow economy, people are still going out shopping and using office services, they are just spending less and being more needs and value-driven than ever before. So look over your shoulder at the government (remember they are here to help – as this month’s story will attest). Watch for a sluggish recovery that has begun, expect moderate inflation and higher taxes. The most important number to watch as a pre-cursor to when things will be better for commercial real estate is when unemployment drops (and the USD index says that has started).
After more than 25 years in this game, I realize that after all is said and done, development will reignite, alternative investment managers will emerge and transactions will return, fueling the brokerage business – not to mention all sorts of new financial products to fuel the recovery. Now that I think about it, I feel much better knowing that this is just another cycle and the bust will be followed by another boom.
A Cowboy Named Bud
A cowboy named Bud was overseeing his herd in a remote mountainous pasture in California when suddenly a brand new BMW advanced out of a dust cloud towards him.
The driver, a young man in an Armani suit, Gucci shoes, Ray-Ban sunglasses, and YSL tie, leans out the window and asks the cowboy, “If I tell you exactly how many cows and calves you have in your heard, will you give me a calf?”
Bud looks at the man, obviously a yuppie, then looks at his peaceful grazing herd and calmly answers, “Sure, why not?”
The yuppie parks his car, whips out his Dell Netbook computer, connects it to his AT&T iPhone G4, and surfs to a NASA page on the Internet, where he calls up a GPS satellite to get an exact fix on his location which he then feeds to another NASA satellite that scans the area in an ultra-high-resolution photo.
The young man then opens the digital photo in Adobe Photoshop and exports it to an image processing facility in Hamburg, Germany. Within seconds, he receives an email on his iPhone that the image has been processed and the data stored. He then accesses an MS-SQL database through an Excel spreadsheet in Google Apps with an email on his iPhone and after a few minutes receives a response.
Finally, he prints out a full-color, 150-page report on his hi-tech miniaturized HP LaserJet printer and finally turns to the cowboy and says, “You have exactly 1,586 cows and calves.”
“That’s right. Well, I guess you can take one of my calves.”, says Bud.
He watches the young man select one of the animals and looks on amused as the young man stuffs it into the trunk of his car. Then Bud says to the young man, “Hey, if I can tell you exactly what your business is, will you give me back my calf?”
The young man thinks about it for a second and says, “Okay, why not?”
“You’re a Congressman for the U.S. Government.”, says Bud.
“Wow! That’s correct”, says the yuppie, “but, how did you guess that?”
“No guessing required.”, answered the cowboy. “You showed up here even though nobody called you. You want to get paid for an answer I already knew, to a question I never asked. You tried to show me how much smarter than me you are, and you don’t know a thing about cows…this is a herd of sheep…”
“Now give me back my dog.”
– Author Unknown
