Approaching the Redline. Dr. Mark G. Dotzour College Station, Texas

Transcription

1 Approaching the Redline Dr. Mark G. Dotzour College Station, Texas

2 Redline A set amount of RPMs which your engine can put out before you pretty much blow it up. This is usually where the numbers on your tachometer turn red. -Urban Dictionary

3 The Economy in 2006

4 The Economy in 2008

5 The Economy in 2009

6 A Stronger Economy Creates jobs Labor shortage Wage increases Higher inflation Higher interest rates

7 Job Openings in America Looking for Workers Total Job Openings 6,163,000 Construction 225,000 Manufacturing 388,000 Trade, Transportation, Utilities 1,040,000 Professional & Business Services 1,208,000 Education & Health Care 1,222,000 Leisure & Hospitality 819,000 Government 575,000 Source: Bureau of Labor Statistics BLS release on Aug. 8, 2017

8 Key Issues in 2017: Economic Strength Fed wants to raise the Fed Funds rate to normalize interest rates. Keep in mind that cap rates and CRE financing rates are largely determined by the 10-year treasury rate, which the Fed has no control over.

9 The Neutral Rate of Interest It is very difficult to know where that so-called neutral rate is. But we probably will know it when we are there because we will observe a certain degree of balance, which we had not perceived before, which would suggest that we are somewhere very close to where that is. Alan Greenspan, Financial Advisor News, June 9, 2005 Research suggests that the neutral real rate is probably somewhere in a 1.5 percent to 3.5 percent range. That probably takes us to a neutral nominal range of around 3.5 percent to 5.5% at this point. Janet Yellen, The International Economy Magazine (Spring 2005)

10 Black Monday October 19, 1987

11 Key Issues in 2017: Economic Strength Economy still has a lot of energy left Oil and gas industries are rebounding Single-family demand is increasing, but supply is constrained, costs are increasing and student debt is a growing problem

12 Student Loans a Big Problem Analysis of 1000 colleges and trade schools showed that at least half of the students had defaulted or failed to pay down at least $1 on their debt within the past seven years. Repayment rates are getting worse. Source: WSJ 1/19/17

13 Key Issues in 2017: Fiscal Policy Reduced regulation good for many industries Tax reform bullish for jobs, but unlikely to happen Infrastructure spending unlikely to happen either Can t pay for tax cuts or bridges without a border adjustment or getting rid of loopholes

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15 Key Issues in 2017: Interest Rates Labor shortage could create wage inflation Stronger US dollar will make all imports cheaper and offset inflation Slower apartment rent growth with reduce inflation pressure 10-Year Treasury and cap rates unlikely to increase very much in 2017

16 Average Annual CPI Inflation by Decade 1920 s 0.10 percent 1930 s percent 1940 s 5.62 percent 1950 s 2.07 percent 1960 s 2.34 percent 1970 s 7.09 percent 1980 s 5.55 percent 1990 s 3.00 percent 2000 s 2.57 percent 2010 s 1.62 percent Source: Federal Reserve Bank of St. Louis

17 CPI Inflation Since 1914 WW 1 WW2 and Korea Oil Shocks

18 Oil Prices and Inflation Oil Embargo Shah Deposed China Stockpiling Iran Back 2.07% 2.34% 7.09% 5.55% 3.00% 2.57% 1.62% Inflation Rate by Decade

19 Percent Inflation Expectation Survey 12 University of Michigan Inflation Expectation Jan-78 May-83 Sep-88 Jan-94 May-99 Sep-04 Jan-10 May-15 Source: Thomson Reuters/University of Michigan

20 Percent U.S. Leading Index of Economic Indicators 4 Lending Index for the U.S Source: Federal Reserve Bank of St. Louis - FRED

21 Change, Thousands of Persons Monthly Increase in Jobs 600 All Employees: Total Nonfarm Payrolls Source: Federal Reserve Bank of St. Louis - FRED

22 Percent Change from Year Ago Rate of Growth in Average Hourly Earnings of All Employees 4.0 Average Hourly Earnings of All Employees: Total Private Source: Federal Reserve Bank of St. Louis/US Bureau of Labor Statistics

23 Source: The Conference Board Consumer Confidence Index Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17

24 Oct-45 Jan-55 Apr-64 Jul-73 Oct-82 Jan-92 Apr-01 Jul-10 Billions of Dollars Household Net Worth Households and Nonprofit Organizations; Net Worth, Level 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: Board of Governors of the Federal Reserve System

25 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Billions of Dollars Corporate Profits 1,800 1,600 1,400 Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment 1,200 1, Source: U.S.Dept. of Commerce: Bureau of Economic Analysis

26 Oct-98 Aug-99 Jun-00 Apr-01 Feb-02 Dec-02 Oct-03 Aug-04 Jun-05 Apr-06 Feb-07 Dec-07 Oct-08 Aug-09 Jun-10 Apr-11 Feb-12 Dec-12 Oct-13 Aug-14 Jun-15 Apr-16 Feb-17 Net % of Respondents Small Business Planning To Hire People In Next Three Months 25 Planning to Hire People in the Next Three Months Source: National Federation of Independent Business

27 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 % of Respondents Small Business Now Is A Good Time To Expand 30 Now Is A Good Time to Expand Source: National Federation of Independent Business

28 Large Corporate Hiring Plans: Next 6 Months Q2-17 Q1-17 Q4-16 Q3-16 More Jobs 36% 41% 35% 27% Less Jobs 16% 18% 30% 36% Source: Business Roundtable

29 New Private RE Funds Raised in Second Quarter of 2017 A record 557 funds are in the market raising money at the end of June, They are targeting $177 billion in capital commitments. Source: Preqin

30 New Private RE Funds Raised in Second Quarter of 2017 $29 billion in closed-in private RE funds closed in 2Q17. $13.00 billion for N. America $15.60 billion for Europe $.74 billion for rest of the world 74% was for opportunistic and value add Source: Preqin

31 CRE Prices The value-weighted U.S. composite price index tracked by research firm CoStar registered a 2.8 percent decline for the first quarter of The value-weighted index tracks sales of larger assets in core markets. On the other hand, CoStar s equal-weighted composite price index, which looks at lower-priced sales in secondary and tertiary markets, went up by 4.8 percent during the same period. The recent divergence likely reflects a maturing cycle for commercial real estate investment, especially for the high-value properties in core markets that initially led the recovery, CoStar researchers wrote in their report. Source: National Real Estate Investor 5/16/17

32 Investment sales in the first four months of 2017 were down 17% from the same period in They still see multifamily as strong. HNWIs will stay in multifamily They do like triple net lease (NNN) investments so are looking at retail and office NNN assets. Industrial single-tenant net lease is also popular with them, but demand for multifamily seems strongest. Source: NREI 6/1/2017

33 Source: Bloomberg 5/16/17 Bloomberg) Blackstone Group LP, the world s biggest private equity fund, told investors to dial back their expectations for property returns as the great run of the past five years becomes harder to replicate. Lee Kok Sun, GIC s managing director and chief investment officer for real estate, told the Singapore forum that about 7 percent of GIC s portfolio had been in real estate, less than the targeted allocation of 9 percent to 13 percent. As a disciplined investor, GIC sold some assets that increased in value. But selling properties while trying to raise the allocation was like running faster and faster on a treadmill, he told the Asia Pacific Real Estate Association event.

34 CRE Sales Volume Slowing American commercial real estate sales volume in the first half of 2017 was 9% below the same period in Deal volume was down 55% in Manhattan and down 9% in Los Angeles. WSJ July 26, 2017 The Commercial Property Price Index (CPPI) was up 7.9 percent from a year earlier. YTD sales volume is reported down percent by RCA and COSTAR. NREI September 7,2017

35 Private Real Estate Investment Large Institutions That Invest in Real Estate Public Pension Plans (CalPERS) Insurance Companies (Sun Life) Asset Managers Private Pensions Sovereign Wealth Funds (Norway) Banks

36 Private Real Estate Investment Large Institutions That Invest in Real Estate Stocks Bonds Alternative Investments Private Equity Private Debt Hedge Funds Real Estate Infrastructure Natural Resources 5-12% allocation

37 Hedge Fund Difficulties Hedge funds have performed poorly compared with the stock and bond markets since 2009, a losing streak that has led pension funds, endowments and other institutional investors to withdraw their money. Super-star Eric Mindich is closing his $7 billion hedge fund after losing 9% in 2016, compared to a 12% gain in the S&P 500. They received requests for withdrawal of $400 million in the first quarter. Source: WSJ 3/24/2017

38 Private Real Estate Investment $247 billion in dry powder at the end of March, % of funds expect to maintain or increase their allocation to real estate Source: Preqin

39 The Energy War Continues

40 OPEC Breakeven Prices to Balance Their Budgets $107 Bahrain $ 96 Saudi Arabia $ 93 Algeria $ 76 Iraq $ 70 Iran $ 58 Qatar $ 52 Kuwait Source: IMF and WSJ 1/20/16

41 Nobody Knows How Low 2014 Oct 3 Drops below $90 after Saudi price cut Oct 13 Kuwait oil minister says natural floor for prices at $76 to $77 Oct17 Saudi prince says Arabia needs $80 to $90

42 Nobody Knows How Low Nov7 At $70 there will be panic in OPEC. -OPEC official Nov7 Were prices to fall below $70, there will be action from OPEC. Nov7 OPEC doesn t expect price to fall below $75 Dec4 Saudis say oil could stabilize at around $60, a price they believe they could withstand Jan6,2015 WTI trades at $48

43 Nobody Knows How Low 2015 Apr 17 The relentless increase in US oil output appears to be at an end. WTI at $56 May 6 WTI oil price goes above $60. June Iran and the Ayatollah are new business partners August Oil price falls below $40

44 $65 is a Fair Price OPEC president Mohammed bin Saleh al-sada said a minimum price of $65 a barrel is badly needed at the moment. He cautioned that the security of future supplies is as risk because of the price slump that has squeezed oil producers since Source: Associated Press 5/24/16

45 Middle East Budget Strains The Saudi Binladin Group is the largest construction company in the Persian Gulf region. They haven t paid subcontractors and suppliers for months. The Saudi government is delaying payment for completed projects. WSJ 3/26/16

46 Middle East Budget Strains Thousands of Indian workers in Saudi Arabia haven t been paid for months, prompting India s government to hand out food to hungry workers. Assisting 10,000 Indian workers who New Delhi says are without a job, pay and food. Some workers for Saudi Oger report they haven t been paid in seven months. Source: WSJ August 1, 2016

47 Saudi Garage Sale Saudi Arabia King wants to list 5 percent of Aramco, at a valuation of around $2 trillion. Lowest estimate from bankers is $400 billion. Hopes to raise $100 billion in IPO in late 2018, and use the money to diversify the Saudi economy. There is so much emphasis in the higher levels and lower levels within the kingdom that this I.P.O. will take place, he said. Their vision is to make Saudi Aramco like Exxon Mobil, but much bigger.

48 Signs of Life in the U.S. EOG bought properties in the Permian Basin that will yield 1740 premium drilling locations. They are getting the extra buzz by drilling laterals that are twice as long. One well will produce a lot of oil! EOG defines a premium drilling location as one that will offer an after-tax IRR of at least 30% with oil at $40 per barrel. That return could be as high as 60% if oil gets to $50 per barrel.

49 US Production Picking Up US production is now up to 9 million bpd completely offsetting the cutbacks in Saudi Arabia... Costs of oil field services have risen 10 to 20 percent this winter as demand for new wells increases. -WSJ Jan 17, 2017