June 19, 2019
This past week we celebrated both Father’s Day and the birthday of the Army. Both institutions (fatherhood and Army) are integral to our way of life and economy. Therefore, I believe it is appropriate to commence this week’s WIN with a note of remembrance for dad in service serving family and country via all of our military institutions.
Father’s Day: Believe it or not, Father’s Day was not officially recognized as a holiday until 1972 when President Nixon signed the legislation making the third Sunday in June a national holiday. The origin of Father's Day has an interesting legacy tracing its roots back to the early 1900s from events at opposite ends of the Country. The earliest tracing is back to 1908 when Grace Golden Clayton set out to remember the 361 men whose lives were lost due to a deadly coal mine explosion in West Virginia. The other tracing is back to 1910 when Sonora Smart Dodd set out to honor fathers – like her widowed father who raised her and her five other siblings on a small farm in Washington state. Regardless of the origins or why it took until 1972 to recognize a day to honor fathers or dads of service, what matters is we have a dedicated day to honor both mothers and fathers. My final note on Father’s Day is that I ran across a post this week that made me simultaneously laugh and think: "Why can’t advertisers, media and TV programs portray the service side of fathers?" Most portrayals today are of dads that are idiots unable to load a dishwasher or use a TruCar app to find a new vehicle versus engaged in service of family or country. Invest 90 seconds to view this “Art of Listening” Video Clip of a dad conversing with baby posted by Malcom Forbes on LinkedIn.It exemplifies a modern-day characterization of what both Sonora Dodd and Grace Golden Clayton intended in honoring fathers.
Army’s Birthday: This past Friday (June 14), the Army celebrated its founding in 1775. Believe it or not, the Army was formed even before the signing of the Declaration of Independence. The Army is also our nation’s oldest serving military institution – to the ire of the Marines who were formed five months later in November 1775. (Trust me, the Marines I know do not like being second to Army, Air Force or Navy at anything!) The Navy was created as well in 1775 (October), and the Air Force (as we know it today) was created as a separate branch of the military on September 18, 1947. Before then, the Air Force existed in some fashion as part of the Army dating back to 1909. My late father served in WWII in the predecessor organization to the Air Force known as the Army Air Corps. But the oldest of all our military organizations is the National Guard. Its roots trace back to 1636 and the idea of a citizen’s militia. To all in our commercial real estate and ACRE community that have served in the military – especially the Army – thank you for your service!
On to what mattered in the economy and CRE last week, and for the week ahead:
There is not much material happening until this week’s FOMC meeting on Tuesday and Wednesday June 18-19. I will go out on a limb and predict no change in interest rates this week - but more confusing "Fed Speak" at the press conference that includes the phrase “data dependent.” As I noted in last week’s WIN, it would be a huge monetary policy blunder for the Fed to prematurely cut rates with a backdrop that: i) lacks any forward view on Q2 GDP; ii) has the labor markets still producing jobs and maintaining a <4% unemployment rate; iii) is maintaining a positive spread between the 2-Year and 10-Year Treasury Bonds (+15-20 basis points); and iv) is weeks before refreshed corporate earnings for Q2. Q4 2018 and Q1 2019 corporate earnings have been surprisingly strong and shaken off the 10% tariffs from last summer, no Korea deal, no China Trade deal, and Trump Tweets. The remaining Fed meetings for 2019 that you need to have plugged into your calendar are as follows (Note: no meeting in August):
Remaining 2019 Fed FOMC Monetary Policy Meetings:
- June 18-19 (Tuesday-Wednesday)
- July 30-31 (Tuesday-Wednesday)
- September 17-18 (Tuesday-Wednesday)
- October 29-30 (Tuesday-Wednesday)
- December 10-11 (Tuesday-Wednesday)
- January 28-29, 2020 (Tuesday-Wednesday)
Upcoming Earnings Reports that could be Q2 bellwether indicators for Q2 retail earnings in August:
- Darden Restaurants (DRI) reports on Thursday, June 20, 2019, and could provide insights into both consumer strength and dining out expenditures as well as input cost inflation.
- Kroger (KR) also reports on June 20, 2019. The battle for online grocery is heating up and Kroger earnings could provide insights into the battle for online grocery penetration by the Amazon, Walmart and Target titans. Amazon recently fumbled its online food delivery business and is refocusing on grocery at Whole Foods. Walmart is hitting full stride with online showing 30% YOY gains, and Target is ramping up with its Shipt acquisition.
- CarMax (KMX) reports earnings Friday June 21st. Anxiety has been building over slipping auto sales and the impact from tariffs. Will CarMax be an early warning that auto sales will fall below 17 million units in 2019 and reveal increasing incentives to move stale inventory in advance of new models this Summer?
Commercial Real Estate Related:
MSA Ranking Analyses: It seems we get almost as many MSA and state ranking studies of late as we do Fed speeches. While it is great to have our hometown or state make a top ranking in a study, many of these “studies” have methodologies and conclusions that require questioning. The past two weeks a couple of new state or MSA rankings studies have surfaced that warrant some critique.
First: WalletHub's 2019 Best States to Live in. It ranked the following states as its top 10 and bottom 15 states to live. While I have nothing against Massachusetts, New Hampshire, New Jersey or Colorado (I grew up in Colorado and love the mountains), these states rank poorly on measures pertaining to affordability, taxes, and are places companies are leaving - for states like Texas, Florida, Georgia, Tennessee and the Carolinas. Where do the states that companies are migrating to rank in this WalletHub study? They rank in the bottom 15. Consider and reconcile to this WalletHub study the following:
- Apple is building its new HQ in Texas – not New Jersey, Massachusetts or California.
- Tennessee won a big IT piece of the Amazon HQ2 search, but it ranks in the bottom 15 states by Wallet Hub.
- Arizona is growing like a tumble weed, but WalletHub treats it like a barren economic desert landscape.
- Georgia just attracted NFS Rail as its latest corporate HQ, and was an Amazon HQ2 finalist, but ranks in bottom 15 states by WalletHub.
- South Carolina is an economic engine on steroids with its port, BMW, and attracting the likes of Boeing, Samsung, Volvo and Harbor Freight on the heels of growing BMW to the top U.S. automaker.
- And Alabama once again received no RESPECT ranking in the bottom five despite being named by Forbes as Silicon Valley Southeast and Barron's magazine for being a GE global 3D/additive manufacturing center attracting global manufacturing companies like Airbus, Mercedes, Toyota-Mazda, Hyundai, Honda, etc. It is also a 3D print manufacturing center at Auburn University and just surpassed 2.1 million employed persons (a new record). Just as the Brookings Institution gave no RESPECT to Alabama recently, this WalletHub MSA ranking ignores economic data ranking it 43rd. Be wary of these type “Best Places” to live studies and rankings.
I wonder if the researchers at WalletHub spent much time in the respective states it ranked, or really looked at the economic activity, schools (maybe a bias to Massachusetts universities over Southern schools in Texas, Georgia, and Alabama that produce more STEM workforce and are luring more industry) and true quality of life? I have to just call "BBQ Sauce" on this WalletHub 2019 Best States to Live study.
KC’s top 10 states on the metrics used by WalletHub would be: Florida (luring more business from New England, New Jersey and New York than any other state), Texas (most pro-business state in the country), North Carolina (the southeast center for banking and tech with best airports of any state), Arizona (affordable and an economic magnet with best consistent weather in the U.S.), Tennessee, Utah, South Carolina (it has Charleston, fastest growing top 10 port, BMW, Boeing, SEC football champs, and it epitomizes economic development), Georgia (affordable, top urban universities in Atlanta, Amazon HQ2 contender that lures Fortune 500 company after company, such as recent Norfolk Southern Railroad, world’s busiest and most connected airport, home to CDC, UPS, IHG (Holiday Inns), Pulte Homes, Home Depot, Chick-Fil-A, and so many more companies), Michigan (Detroit is back and western Michigan and Grand Rapids region are home to Amway, JW Marriott, Steelcase and maybe the safest region with an A+ quality of life even in the winter) and Alabama (despite being somewhat biased, the state of Alabama is a rising power with all the ingredients to be a top 10 state on every metric luring companies like Amazon, WalMart, Mercedes, Toyota-Mazda, Hyundai, and incubating entrepreneurship with likes of Innovation Depot and home-grown companies like Shipt, Blue Origin, etc. It produces thousands of top STEM workforce graduates, will have a top 10 port in less than five years, has housing affordability and arguably the top 5 beaches along the Gulf Coast). And yes, I have spent a lot of time in all the aforementioned states, and WalletHub’s top 10 in the past 12 months. I also study site selection extensively and published a paper on the topic in Q1 2018 relating to the Amazon HQ2 search in collaboration with CCIM Institute and ACRE titled: Amazon HQ2: A Reset Button for Site Selection.
Second: FDi's (Foreign Direct Investment) 2019 American Cities of the Future recent study is a robust and credible look at American cities with an eye as to where foreign direct investment should be looking in the U.S. AL.com news covered this new research and findings and noted the following:
- Birmingham and Mobile were among the top American Cities of the Future in the 2019-2020 ranking by FDi magazine, a news and foreign direct investment publication based in London.
- Mobile was ranked No. 5 in the top 25 American Cities of the Future for Foreign Direct Investment Strategy. New York City and Chicago were also among the top five.
- FDi stated that Mobile "is home to several high-growth sectors including a thriving aerospace cluster, and Mobile is also known for its extensive transportation infrastructure, including a deep-water port, two major interstate connectors, five Class 1 railroads and two Federal Aviation Administration certified airports.”
- Birmingham ranked No. 9 in mid-sized American Cities of the Future overall and in human capital and lifestyle, No. 10 in connectivity and No. 4 in business friendliness.
- Other mid-sized American cities ranked in the top 10 overall are Raleigh, North Carolina; Salt Lake City, Utah; and, Richmond, Virginia.
This FDi annual study is quite robust and includes visits to hundreds of cities and interviews with business leaders, capital investors and city leaders. It is one MSA rankings study with credibility, and not just because Alabama finally received some appropriate RESPECT. Check this study out and see where your city ranked and in which category.
National News that Impacts Commercial Real Estate:
There were three particular stories that stood out to me in the absence of any material economic news. The respective news stories have a common thread involving retail and logistics and the states of Texas and Florida. They also involve two of my most closely followed companies: i) FedEx; and ii) Chick-Fil-A.
#1: Florida passes law authorizing driverless trucks – Do you still think driverless trucks are an aspirational technological goal that will not be realized in your life time? Think again. They are already deployed by Walmart along our horizontal interstates, UPS (in a test trial between Phoenix and Dallas), and last week the Florida legislature passed the law allowing driverless trucks to proceed on Florida highways. The autonomous trucking technology is being deployed a decade ahead of most experts’ forecasts - and will bring changes to logistics and industrial warehouse design. The technology is ahead of our ability to process the implications that range from: i) a new type truck driver (one that sits remote from the truck cab in a control center and operates a fleet of vehicles much like an air traffic controller manages a batch of aircraft at an airport); ii) better utilization of highways as autonomous trucks do not object to driving at night, weekends or holidays; iii) safer highways without the human-error factor or need for ELD (Electronic Truck Driver Logs); and iv) added roadway and warehouse imbedded technology and sensors to aid in the navigation and docking of these autonomous trucks. If you are engaged in logistics or industrial warehouse real estate, are you connecting the dots for autonomous trucking? It’s no longer aspirational technology. It’s here.
#2: Save Chick-fil-A Bill in Texas was signed by Texas Governor Greg Abbott last week on June 13, 2019. The so-called “controversial bill” emerged to address the bias against Chick-fil-A from operating a restaurant in the San Antonio airport because some view Chick-fil-A as anti LGBT. This never should have been an issue as Chick-fil-A is not LGBT and they should be free – as any company in America – to support any religious group.
Here is what the legislation says/does:
The measure prohibits the government from taking "adverse action" against any individuals or businesses based on membership, support or donations to religious groups.
All I can say is that religious freedom survives to live another battle – at least in the state of Texas. These battles matter because next up could be something like property rights.
#3: FedEx will no longer deliver your Amazon Packages: Amazon vs. FedEx is a broader battle over logistics. Amazon is on a path to dominate all aspects of the retail and logistics industries. FedEx is responding to Amazon tactics by pulling the plug on Amazon to focus the other 97% of its business and customer relationships. Pay attention to this battle over logistics as a lot is at stake. Amazon has fumbled recently pertaining to the logistics involved in online food delivery, and I ascribe to the thesis that Amazon has under-estimated the depth and strength of FedEx, in not just U.S. logistics, but global logistics. For those of us involved with the industrial warehouse side of logistics, the stakes couldn’t be higher in this Amazon vs. FedEx battle. Do you think Amazon will stop at logistics transportation and next want to control the warehouses and the rent paid to use warehouse space? The real estate industry has a dog in this hunt and developers, owners and investors of warehouse CRE better dial into this battle as to who dominates logistics! Here are some facts to consider as this battle for leadership in U.S. and global logistics heats up:
- “FedEx has made the strategic decision to not renew the FedEx Express U.S. domestic contract with Amazon.com, Inc. as it focuses on serving the broader e-commerce market,” FedEx said in a statement on Friday, June 14, 2019. The relationship will end June 30, 2019.
- FedEx delivered 3% of Amazon packages last year, according to Wolfe Research. That’s about 200,000 Amazon boxes a day of FedEx’s daily volume of about 2.9 million packages, Moody’s Investors Service estimated.
- FedEx Express, the company’s air freight sector, will benefit in the long-run, analysts said. Moody’s wrote to investors that Amazon — a customer requiring massive amounts of residential, small-package deliveries instead of more fruitful business-to-business contracts — is among FedEx’s least-profitable businesses.
- “FedEx will achieve higher margins and better returns on its investments in its Express network by redeploying capacity to customers other than Amazon,” the Moody’s note said.
- "In a sense, the trainer wheels are off the Amazon logistics operation," an investors' note from Morgan Stanley's freight-analyst team said. "This announcement is likely to put extra strain on AMZN's in-house shipping offerings," it added.
- Amazon said one motivation to develop its logistics network was to manage its quickly rising shipping costs. Amazon's worldwide shipping costs have grown fifteen-fold from 2009 to 2018. Net sales increased by sevenfold in the same time.
- However, many observers say Amazon is actually building a third-party logistics company that will someday compete against FedEx and UPS. Amazon has started to describe itself as a transportation company. And the Morgan Stanley analyst Ravi Shanker said in a previous Business Insider interview it's clear that Amazon is looking to break into third-party logistics.
The FOMC meeting is the big news to follow this week. No rate cut. And, corporate earnings on Thursday from Darden Restaurants, Kroger, and CarMax could be early bellwether indicators or what might be in store for Q2 earnings and the economy. I hope the Fed has corporate earnings as part of its “data dependent” bucket.
Get ready for Q2 corporate earnings July 15-September 15. We will finally get some real data on impact of tariffs on GDP and business optimism. Will the 120th month of this recovery (longest on record) yield to a recession in 2020?
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