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One of the advantages of a five-decade tenure in an industry is hindsight. Yes, it’s always crystal clear!
Unfortunately, looking to the future is a bit murkier. Every January we are festooned with economic forecasts from academics. Do you doubt what I’m saying? Just log on for reviews from Chapman, Cal State Fullerton, UCLA, Charles Schwab and more. Everyone will give their opinion on what the booming year will hold for our economy. Trade growth, shifts in consumer confidence, interest rate outlook, stock market trends, inflationary pressures and the impact of all of the above on house prices are expected.
But it’s August, and you might be wondering why so impatiently wait until January? Well, when you see the Christmas decorations next month, you will understand. The next four months will fly away!
I have consumed several of these Nostradamus events over the years. One of the most significant took place in February 2020. Featured is a panel of experts brought together by Northwest Mutual. One gentleman, in particular, gave a brilliant account of the forces that cause a slowdown. From my notes: “There was mentioned in the preamble a check of five factors that cause bear markets: inflation, recessions, commodity shortages, crazy stock valuations and uncertainty.”
Hmmm, does that ring a bell? For those who score at home, we’ve seen all five of them since March 2020. So where and when is the slowdown?
In particular, let’s look at inflation. Commercial real estate rents have increased 134% since 2011, a whopping 13.4% per year. If we take this further, the last eight months have produced a 12.6% increase. Annualized, it’s 18.9%!
Investors are voraciously absorbing buildings with insanely high rents and insane valuations. Take a look at the pump. We paid $ 4.89 for a gallon of gas yesterday on our way home from Arizona. I forgot to refuel before crossing the border! Wood? The price of a 2-by-4 has gone from $ 2 to $ 8. Container loads from China have also quadrupled.
Again, where is the slowdown?
Now let’s talk about the uncertainty. One thing that can kill a rally faster than anything is uncertainty. You see, when companies or investors are unsure of the future, they postpone buying decisions. This “break” crosses our world.
During the 2008-2011 financial crisis, our real estate market stalled for almost a year. The prices have fallen. Buyers and renters alike have benefited from incredible deals once they saw a clear path for improvement.
We also experienced such a deadlock in industrial activity between March and June 2020. But then something quite unforeseen happened. Industrial demand accelerated for the remainder of 2020 and the first seven months of 2021. As shopping habits shifted from trips to the mall to clicks on the keyboard, commerce s is adjusted, the space has been consumed and record profits have been generated.
So where is the slowdown?
Then look at the commodity shortages. These raw materials used to make things such as copper, wood, oil, and steel. As we rely on our neighbors in the Far East for much of this production, and with the noted disruption in container loading, we are again in short supply. Certainly, this adds upward pressure on prices. Plus, you just can’t get it right. If your refrigerator is flashing, good luck replacing it. Roofing for industrial buildings – steel trusses? You will be waiting at least 13 months!
But where is the slowdown?
Hope you understand the idea. We survived a ‘black swan’ event – a pandemic every 100 years and the resulting five factors – inflation, recession, commodity shortages, crazy stock valuations, which should have done so. crack real estate. And the opposite has happened.
So where is the slowdown? It’s coming, dear readers. He must. Will it be a spike in interest rates, another round of lockdowns, a grid-wiping power surge, a bursting of the price bubble, an attack on our soil, a decade of zero interest and zero growth, something else, or a combination of all of that? I only wish my crystal ball wasn’t so cloudy.
Allen C. Buchanan, SIOR, is Principal at Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714-564-7104.
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