November 20, 2019
Thanksgiving - Thanks for Giving or Giving Thanks? This being the WIN before Thanksgiving, I selected this phraseology twist on the holiday to challenge some thinking about its meaning, and highlight a person we should thank for all of his giving.
Although I did not agree with this person regarding economic policy in his day, I am truly humbled by his giving policies and actions after his time in our nation’s spotlight. If you guessed Jimmy Carter as this giving person, you would be right. A good friend of mine, and MAI colleague in Florida provided the LinkedIn Post inspiring this week’s WIN with the following picture and caption of Jimmy Carter in action at 95. The caption says it all - and maybe explains why the good Lord has blessed the former president with such a long life.
As a bit of a sidebar, I actually met Jimmy Carter at age 18 in 1980 at the White House in a Rose Garden ceremony where President Carter (with the Iranian hostage sage heavy on his mind), and Vice President Mondale swore me in as the newly elected Vice President of Boys Nation (an American Legion program to teach youth about how our form of government operates). I continued the relationship later at Emory University where President Carter was an adjunct professor after being defeated by Ronald Reagan. If you have participated in a Habitat for Humanity build project, email me and I will share a picture of the event.
The WIN audience is fortunate to live in a country with so many freedoms, and to work in an industry that affords us a comfortable living and relationships unmatched in most other industries. Lawyers tend to eat their young (associates in particular with 80-hour work weeks); technology professionals are always “byte-ing” at how we do what we do; and journalists are always telling stories about us which we prefer remain private. In commercial real estate, though, we get paid well to spend time with clients and solve problems. And if the aforementioned is not enough reason to be “Giving Thanks,” reflect on the many reasons why we live in the greatest place on Earth. My hope for the ACRE, CCIM Institute, and WIN audience is that you have a most enjoyable Thanksgiving holiday next week - and that you cannot just give thanks for all that is good in your life, but also give thanks for those like former President Carter that do so much heavy lifting in the Giving area.
The Noteworthy Economic News:
While the past week was a lot about Earnings, there was more!
Before I cover the economic and property type news, there are three items of note to bring to your attention. First up is a new Barbeque Sauce award. Second is a pair of CRE projects of the year (one private development in North Carolina and one infrastructure in Florida). And third is an update on property insurance rates and the risk they pose to property returns if left unchecked.
Barbeque Sauce Award: My latest award goes to the Atlanta and New York Federal Reserve Banks for their Q4 GDP-Now forecasts of less than 0.5%. Those two FRB banks are suggesting Q4 GDP will slow to less than 0.5% (lowest of 0.3% by the Atlanta FRB GDP-Now Forecast Nov 2019). The 0.3% Q4 GDP estimate is interesting recognizing: i) the GDP-Now forecast is based on just 1 month of Q4 data that precedes any holiday activity; and ii) Q3 GDP of +1.9% is only an “Advanced Estimate”/1st - Guess with revisions ahead. The FRB needs to give this economy some R-E-S-P-E-C-T! They need to note data points like the October jobs report with 90k of upward revisions to August & September, October Retail Sales up +0.3% (3.1% YOY), low inflation, Small Business optimism, etc. into their GDP-Now forecasts. The data points to at least 2.0% GDP.
The Fed can no better forecast GDP than it can get interest rates. Look, for example at what they reversed out in 2019 after 4 rate hikes in 2018 that wrecked the market last December. The ATL Fed couldn't be more wrong about their Q4 GDP forecast. Both the ATL & NY Fed GDP-Now suggest Q4 GDP growth of less-than 1/2%. I say BBQ-SAUCE and point to 2 items:
- The poor track record of the ATL Fed GDP-Now - it's not good & more volatile than the weather forecast; and
- Q3 Corp Earnings that show 75% of S&P 500 companies beating earnings (4th consecutive quarter with tariffs).
I am concerned the Fed has an "ED" problem (Economic Data Dependent Dysfunction). The ATL Fed's GDP-Now forecasting tool is BBQ-Sauce not worthy to put on North Carolina, South Carolina, Tennessee, Georgia, Alabama or Texas BBQ meat.
Taking into account the volatility in these FRB GDP-Now forecasts - and the FRB’s less than stellar track record (refer to the following Atlanta FRB GDP Now chart history compared to consensus forecasts), FRB GDP-Now forecasts are volatile, and not-so-reliable. The market, on the other hand, is anticipating at least 2% GDP for 2020 - and maybe more if even a partial or phased China Trade deal is reached by year-end or early 2020.
Projects of The Year: A pair of projects – one private development and the other public/private infrastructure – caught my eye. The private project is a $1.0 billion mixed use in the urban core of Raleigh, N.C. The TRIAD Business Journal reported the news as follows:
“After decades of planning and preparation, a real estate company has announced its plans for a $1 billion mixed-use development in Raleigh. Raleigh-based Dewitt Carolinas has unveiled its master plan for Midtown Exchange — a project situated on 40 acres in midtown Raleigh. Upon completion, the project will feature 915,000 square feet of office space, 1,575 residential units — including multifamily units and senior living — and 300 hotel rooms.”
And this is part of my response to the news on the planned Midtown Exchange project in Raleigh on LinkedIn earlier this week:
“Raleigh has needed this type urban project to evolve and compete with the likes of Charlotte (a top-tier downtown that beats cities like Atlanta hands down), Austin, and Orlando. This project, combined with Raleigh's airport will make Raleigh a primary, first-tier MSA. Congrats on the vision, design, and incorporation of so much from a convention center to senior housing…This project is awesome urban planning, design and mixed-use development!”
The public/private Infrastructure project is the new Brightline high-speed rail project in south Florida connecting Miami to West Palm Beach today with planned phases to reach Orlando and Tampa. Brightline was the center of discussion at the NAI Miami conference last Friday. What is Brightline and why is it a real estate matters infrastructure project? The Brightline train system is an express rail service today connecting Miami, Fort Lauderdale, and West Palm Beach. Brightline was recently purchased by Richard Branson’s Virgin Group, to soon be renamed the Virgin Trains USA. Today, this service offers 30-minute trips between the three existing South Florida stations. The connectivity provided by this rail system has already influenced the strategies of commercial real estate occupiers, investors and developers and is resulting in record high occupancy rates and purchase prices for office buildings along the commuter rail line.
According to Transwestern, office users are benefitting from improved alternative commuting along Brightline. With heavy traffic being a fact of life in south Florida, Brightline’s alternative rail option has attracted users such as Viacom, Ernst & Young and Carlton Fields to the Miami Terminal at Miami Central 2 and 3. This commercial real estate development by Florida East Coast Industries consists of 320,000 square feet of office and retail space and was delivered in 2017. In April 2019, Miami Central 2 and 3 sold to Shorenstein for $159.4 million, or $498 per square foot. At the time it traded, this was the highest per-square-foot price for an office asset in Miami’s Central Business District (CBD) for the preceding 24 months. Brightline is something commuters and office developers are giving thanks to here in 2019.
Also setting a record high in south Florida (the Fort Lauderdale CBD) is 1 E. Broward. The 352,000-square-foot office was built in 1984 and renovated in 2013. It subsequently sold to Pacific Coast Capital Partners for $108.5 million, or $308 per square foot. That price is the most expensive product that has traded on a per-square-foot basis in the past 24 months.
What both these Raleigh urban mixed-use and south Florida passenger rail transit projects represent is a change in where and how much investors will pay for well designed and executed urban projects that tap into the trend toward urban, transit friendly, and live-work-play without a horrible commute. Atlanta, for example, needs a Brightline transit fix; and emerging tech hubs like Salt Lake City; Nashville, Tenn.; Phoenix; and, Birmingham and Huntsville, Ala. need to be studying these projects now before they see population double in the next decade. Huntsville, Ala. is on the right track with its Town Center and Constellation projects.
Property Insurance Rates – they are rising, rising and rising! On Monday of this week, BizNow reported on this topic with a feature story titled:
CRE Owners Brace for Impact As Severe Weather Pushes Property Insurance Rates As Much As 50%
The key takeaway is if you own - or are developing commercial real estate projects for investment or delivery in 2020, you need to be revisiting your budgets for the property insurance line item – especially if located in California, along the Gulf Coast, Texas overall, Florida, and along the East coast from Savannah, Ga. and Charleston, S.C. to Virginia and New York. Some key points from this BizNow feature worth reading in its entirety are:
- Fourteen severe weather events categorized by high winds, flooding or tornadoes tormented the U.S. in 2019, according to National Weather Service data.
- These 14 storm events left billions of dollars in damages and skyrocketing commercial insurance rates in their wake.
- Marsh, a nationwide insurance broker and adviser that tracks quarterly insurance rates, is on record that U.S. commercial property owners are seeing their eighth consecutive quarter where commercial property insurance rates have been increasing – and a large acceleration of increases is ahead for 2020.
- Rates have gone up 16% on average so far in 2019 for office, industrial, multifamily and hospitality properties across the U.S. That figure goes even higher for commercial properties in high-hazard wind zones or communities commonly impacted by severe weather, such as California, Florida, Texas and the outermost coastal regions that regularly get hurricanes. Commercial real estate owners in these wind zones are facing an average insurance rate increase of 22% year to date.
- It’s not just hurricanes in the Gulf, flooding along the Mississippi Valley or fires in California. Wind is a problem too. Severe damage from wind incidents is becoming increasingly common around the U.S., and Texas in particular. Eight of the last 11 years had 10 or more billion-dollar weather disasters in the U.S., according to data from The National Centers for Environmental Information. That is a major increase in frequency — only one between 1980 and 2007 reached that level and it was 1998.
The CRE Industry and Property Type News:
Appraisal: Just when you thought it was safe to make a construction loan and you thought the acronym HVCRE was dead, it comes back to life. HVCRE stands for “High Volatility Commercial Real Estate” and is essentially code for a land development or construction loan. It holds material implications for banks regarding the amount of capital they need to hold against these type loans. An HVCRE classified loan requires the most amount of capital retention and is regarded as the riskiest type loan a bank can make. This HVCRE loan rule wreaked havoc on banks in 2014 and 2015; however, the banks thought it was slayed and/or tamed with legislation from Congress in 2018 that was promulgated by the Real Estate Roundtable and CREFC – Commercial Real Estate Finance Council in 2016 and 2017. This new final rule on HVCRE was just published Wednesday, November 19, and is a lengthy typical regulatory speak document that is not easy to discern what has changed. I will be digesting it over the Thanksgiving week and will summarize in the WIN first week of December. Based upon first reading, though, the relief sought land development, agricultural land and some appraisal matters does seem to have been achieved. If the tryptophan in your turkey doesn’t put you to sleep next Thursday, reading the 65-page document finalizing the rules on HVCRE will do the trick. Here is the link to the Federal Reserve’s press release on the bank regulatory agencies issue final rule on treatment of high volatility commercial real estate.
Housing: I have been telling you all 2019 that housing and home builders are not in recession; rather, they just aren’t building entry level housing that yield unacceptable low single-digit margins. The latest NAHB/Wells Fargo HMI Home Builder Index and survey (NAHB-HMI) bears this out. With a reading of 70 here in November, the past two months mark the highest sentiment levels in 2019. The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes. Check out the ACRE site for translation to Alabama housing conditions for sales, inventory days-on-the-market and home price appreciation perspectives. What you will find is: i) a reading of 70 is as good as things get from a historical perspective; and ii) the southeast region and Alabama housing conditions exceed the national NAHB averages.
Retail: Earnings still dominate as we round the corner on Q3 earnings season. To date, the retail earnings have ranged from blow-away by the likes of Walmart with 40%+ YOY growth in online retail (including grocery) and same store sales comps of 3%, (Th headlines in press release from Walmart Corporate earnings release Tuesday were: i) Walmart U.S. Q3 comp sales grew 3.2%; ii) Walmart U.S. eCommerce sales grew 41%; iii) Company reports Q3 FY20 GAAP EPS of $1.15 and Adjusted EPS2 of $1.16 led by strength at Walmart U.S.; iv) Walmart raises expectations for fiscal 2020 EPS.
Home Depot (HD) missed top line revenues - but not bottom-line profits; and it wasn’t because of weak housing. Rather, it was attributed to CapEx spending on technology that will pay dividends long run as the transition from “shop and take home” to “order online and deliver to me” accelerates over the next few years, all-be-it over a longer time period than anticipated. Read the latest ACRE/CCIM paper Retail e-Volution for more depth.
At the ICSC Idea Exchange in Atlanta last week I shared in my opening breakfast presentation the news regarding 3,8,000 store openings YTD in 2019 - and how retailers like Old Navy and Levi’s are evolving by opening new stores.
Aside from these earnings results, there were two other interesting retail items of note.
First was that expenditures on dining out have finally come to equal those spent on groceries for the first time. It’s not just a millennial thing where they don’t cook and it’s part of their social culture; it’s also a Baby Boom generation thing where mom is tired of preparing meals and dad isn’t replacing the grill with the kids moved out. Thank you to my CRE colleague Paige Mueller for unearthing this nugget of retail spending.
Second was some sobering news on consumer debt that is problematic for millennials. There’s been a lot written lately about increased debt loads on the average U.S. consumer balance sheet. At nearly $13.5 trillion, consumers have assumed higher overall debt as the economy has recovered — but the growth has primarily stemmed from two much smaller areas of the market that impact millennials: i) student loans; and ii) subprime auto loans. Millennials are the primary consumers of both these consumer debt products. It is an ominous outlook for this younger generation’s ability to buy homes and have savings for retail spending either at the store or online. Think about how the following graph and consumer debt trends impact real estate demand from homes to retail.
Logistics & Industrial: The respective brokerages – Colliers, CBRE, JLL, CBRE, etc. are starting to release their Q3 2019 industrial market reports. I will be digesting these as well over Thanksgiving. My initial reading is that there is some anxiety building that large new speculative e-commerce warehouses are taking longer to lease in markets like Atlanta and Dallas, but not so much in key port or inland port markets. There is still strong demand, a historically low vacancy rates, over 200msf of annual absorption and rising rents now exceeding $6.00 per square foot for the first time. The tariffs and uncertainty of a China trade deal has caused some retailers and e-commerce companies to delay lease decisions that I believe will clear up in Q1 2020. We are still growing logistics and e-commerce sales by more than 10% per year and have a huge pent-up demand for space that CBRE indicates measures more than 150msf per year the past 5 years. Recent transaction by ProLogis and Nuveen acquiring portfolios in the 3.75% to 4.5% Cap Rate range and topping $100 per square foot prices suggests no need to “Reef the Sails” (reduce exposure to the headwind of new supply) for industrial warehouse space. There have been a couple of new reports or features on key ports that are recommended reading regarding the ports of Houston and Charleston SC. The links are as follows:
Port of Houston: Houston Ship Channel recognized as the largest petrochemical complex in the U.S. The following from Colliers Lisa Bridges in Houston office is why the Port of Houston is my “Most Irreplaceable Port.”
“Texas is the largest chemical-producing state, generating $172 billion in annual revenue. Houston is a global leader in manufacturing petrochemicals, with the Houston Ship Channel recognized as the largest petrochemical complex in the U.S. The Houston-The Woodlands-Sugar Land region operates the largest petrochemical plants, including Bayport Industrial District, Battleground Industrial Complex, Bayport Shipping Terminal and the Houston Ship Channel.
Today, the chemical industry employs more than 100,000 workers directly with another 500,000+ related jobs in Texas and about half of those jobs are in the Houston region. In 2018, Texas led the nation in crude oil production, with 27 petroleum refineries producing more than 36% of the nation’s crude oil production. Houston accounts for over 42% of the nation’s base petrochemical capacity.”
Port of Charleston, S.C.: In its 2019 “State of the Port,” the port and state of South Carolina celebrated the tremendous accomplishment by America’s Most Valuable Port Director over his past 10 years at Port of Charleston S.C. In 2014, I recognized what it took South Carolina another 5 years to appreciate: Jim Newsome and the SCSPA is the “Get ‘er Done” port. Check out all that has been accomplished in the past decade that is a proxy for what can be at both the Ports of Mobile in Alabama and Freeport near Houston TX.
“Things I thought I would never hear” update:
The Top statements thus far in 2019 include:
- “Bitcoin in a Safe-Haven;” July 31, 2019
- “Zero is meaningless” Aug 19, 2019 former Fed Chair Greenspan re: interest rates/negative yielding bonds;
- “REITs have low volatility” (August 27, 2019 – CNBC Half-Time Report August 27, 2019)
- Kentucky Fried Chicken’s (KFC) “plant-based” chicken sandwich. Wendy’s was ahead of its time in the 1980s with its “Where’s the Beef” advertising campaign.
- Agritainment and Goat Yoga – Sept 10, 2019 WSJ feature story titled: “How Do Farmers Make Money on Corn? By Charging to Shoot It from a Cannon.” What is Agritainment?
- A lease is not an encumbrance on property; and a leased property has the same property rights as a Fee Simple property without a lease.” (An MAI as an expert witness in a property tax case I served as a rebuttal witness for in Sept 2019)
- The Milk T-Shirt
- “Dallas Tiny House.”
- Legal Harvesting of Road Kill – California joined 27 other states in October to allow at the same time Beyond Meat reports record earnings.
- Coors is leaving Colorado and moving its HQ to Illinois.
This week’s WIN addition to the running list is “Former President Jimmy Carter at work building a Habitat Home at age 95”
My 2020 calendar is still under-construction. It is going to be a busy year again with more than 40 events and conferences already in the queue for 2020.
Have a wonderful Thanksgiving and be sure to give thanks for the Jimmy Carter type in your family, community, or company that does the heavy giving. I am truly thankful for all of you influencing my life through ACRE, CCIM Institute, Monmouth MREIC and the National Network that make these WINs possible. - K.C.
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