July 10, 2019
Ready, set, go … It is now the second half of 2019!
Q2 Earnings season has also started – commencing with better-than-expected results posted on July 9, 2019, by PepsiCo (lots of bubbly-water and salty snacks being consumed in smaller but more profitable packaging). Remember, I guided you to a third consecutive quarter of better-than-expected corporate earnings contrarian to the gloom & doom forecast by Bloomberg.
The "Fed does speak too much" season is also back with Fed Chair Powell testifying to Congress on July 10-11, 2019, followed by the FOMC meeting on July 30-31, 2019. Since the Fed’s July FOMC meeting precedes the start of the NCAA 2019 football season, I am still guiding to no action (no-hike, no-cut, and no clear guidance – again). That is a contrarian view to the 100% of analysts forecasting a cut. This economist is not afraid to take a contrarian view.
However, the most important season to the Southeast economy is just 45 days away. What is it? It’s the onset of 2019 NCAA College Football Season on August 24, 2019. Alabama makes its season debut on August 31, 2019, against Duke at a venue (Mercedes Stadium in Atlanta) that has been more friendly to the Crimson Tide than the home team (University of Georgia). I estimate the economic impact to the Southeast economy from the SEC football season derived from all sources (game day ticket sales, television/radio broadcast rights and media advertising, travel, merchandise sales, coaching/athletic personnel, new facility construction and renovation investments, gambling, bowl games, etc.) at one-tenth of one-percent (0.10%) the collective GDP from states with SEC teams. A now 5-year old analysis of expenditures and revenues on NCAA football programs by FORBES Expenses & Revenues for Top 25 reveals the economic impact just at the university level. The top 5 schools in revenue were Texas, Michigan, Alabama, Georgia & Florida – or 60% of top-5 schools were in SEC. The top-25 schools in the most recent Forbes analysis is as follows:
The Commercial Real Estate Impacting News – It’s all quite good!
#1: Multi-Family: CBRE reports Minimal MF Mortgage Delinquency – CBRE’s Capital Watch has a new report out on the health of Multifamily real estate by a much respected fellow CRE colleague (Jeanette Rice) that shows this sector remains quite healthy. The numbers in this new report almost defy gravity. The primary data table and key multifamily mortgage loan delinquency takeaway points from this new report are as follows:
Negligible Delinquency in Agency Holdings: Fannie Mae historical data reveals three principal trends. First, at the worst following the 2008 recession, delinquency rates were still less than 1%, peaking at 0.8% in June 2010. Second, during the early 2000s recession, delinquencies reached only 0.3% at the highest in late 2001. Third, over the past four years, delinquency levels have remained very low, averaging only 0.07% from 2014 to the present.
Bank Delinquencies Remain Stable and Low: Bank mortgages for existing multifamily assets have been very low for several years, averaging only 0.13% for the past three years. The Q1 2019 level of 0.11% is one of the lowest in at least the past three decades. Since the 2008 recession, multifamily has also experienced delinquencies lower than non-residential commercial real estate mortgages. In the last recession, bank multifamily delinquencies peaked at 1.76% in Q1 2010. In the early 2000s recession, delinquency reached a more moderate high of 0.56%.
#2: Retail: A new study out on the Dallas market shows that maybe a decade of no new retail construction and adaptive reuse of closed big-box stores results in higher occupancy rates for retail. The Commercial Property Firm Weitzman is reporting that the Dallas-Fort Worth market has seen its overall retail occupancy rate climb to 93%. Weitzman notes in their new retail report that this is only the second time in more than 10 years that retail building occupancies have been so high. And they explain the why behind the improved occupancy rate. “A major decline in shopping center construction activity has helped keep retail buildings in the area full.” ACRE and the CCIM Institute are finding this to be true in other MSAs across the U.S. It’s not a retail apocalypse - nor gloom & doom for this property type by any stretch of the imagination.
Later this summer ACRE and the CCIM Institute will be publishing a deep analysis into the Fight Vs Flight battle occurring in retail. The misconceptions – like Amazon is killing all retail – will be dissected, and the future landscape for retail by 2025 will be unveiled. As a precursor to this new white paper, I will share with you one key statistic:
Dollar General is the retailer opening the most stores in 2019 with an estimated 975 stores to open by year-end. After Dollar General, discount chains Dollar Tree, Family Dollar, Aldi & Five Below are in the top five for opening stores in 2019.
#3: Industrial Warehouses & Logistics: The design disruption continues. During REIT Week last month, Monmouth MREIC CEO Michael Landy explained some of the changes occurring in warehouses. One aspect I shared from his presentation was the change in land-to-building ratios which had risen from 3:1 to 4:1 10 years ago to now 7:1. Why the increase in amount of land area? The changing dynamic in trucking to more double trailer loads, more autonomous trucking, and need for more trailer and onsite fulfillment staff parking are the reasons.
Well, now comes a new design innovation to address land constrained markets like New York.
Goldman Sachs and DH Property Holdings go vertical: Goldman Sachs Asset Management and DH Property Holdings have started construction on a three-story logistics facility in Brooklyn’s Red Hook neighborhood that the developers report will allow for the fastest last-mile fulfillment possible in the nation's largest city. Spanning 336,500 square feet and designed by architecture firm Ware Malcomb, the project is touted to be the tallest distribution center on the East Coast. Located on the Red Hook waterfront, this fulfillment warehouse at 640 Columbia is within an hour’s drive of 13.5 million consumers and specifically designed to capitalize on demand for efficient warehouse space by e-commerce tenants. It is expected to be open in the fourth quarter of 2020, said Joe Sumberg, managing director of Goldman Sachs’ Private Real Estate division.
#4: Reshoring Jobs and Manufacturing: Two important studies were released since my last WIN that drive home the positive impact on the U.S. economy from the reshoring of jobs and expansion of manufacturing in the U.S. economy that are driving even more industrial warehouse demand beyond that from e-commerce on online retail.
First, reshoring: In a just released report/feature by Industry Week, it was revealed that Reshoring at Record Level in 2018. As reported by Industry Week, “Record 1,389 Companies Announce the Return of 145,000 Jobs." In 2018, the number of U.S. companies reporting new reshoring and foreign companies reporting FDI (foreign direct investment) was at the highest level in recorded history, up 38% year-over-year to 1,379 companies. Reshoring job announcements remained strong, at more than 145,000 jobs, reaching the second highest annual rate since we started tracking these numbers in 2007—second only to the over 170,000 jobs announced in 2017. An additional 36,000 revisions to the years 2010-2017 increased the total number of manufacturing jobs brought to the U.S. from offshore to over 757,000 since the manufacturing employment low of 2010.
Second, Best Locations to Work in Manufacturing: The most asked question I receive following economic outlook presentations across the U.S. relates to site selection In essence, the questions are: Where and Why do companies locate and/or expand. The question(s) were given new life after the chaos of the Amazon HQ2 search, and the interest has not been put back in the bottle – nor should it as our entire economy is being remade as it shifts from a “shop and pick-up” economy to “an order online and deliver to me” economy.
In these WINs, I frequently note credible and not-so-credible MSA ranking analyses on every metric from A (affordability) to W (workforce). What distinguishes the BBQ-Sauce rankings (like Brookings Institute and Wallet Hub) from the meat-on-the-research-bones studies is depth of analysis. I recently shared the fDI American CIties of the Future 2019-2020 report that dug into where foreign capital is investing in America and why. Both Huntsville, Ala. and Birmingham, Ala. received much overdue RESPECT as did a number of mid-sized Midwest and Southern cities.
My latest discovery to share with you is Industry Week and Smart Asset research on the best locations to work in manufacturing. The new research discovered that it was not big cities, but instead smaller metro areas that dominated the top-10 list. “The average population across the top 10 locations is about 300,000. But if you discount Greenville, N.C. and Ogden-Clearfield, Utah that figure drops in half to 150,000. Also in the study, there are some places where manufacturing jobs are growing pretty rapidly, such as Ogden-Clearfield, where the number of manufacturing jobs grew by 55% from 2010 to 2015.”
SmartAsset looked at data for 483 metro areas and came up with a list of best places to work in manufacturing which includes data on employment and income growth in manufacturing, as well as the density of manufacturing jobs and housing costs.
So what MSAs made the top-10 list?
An Alabama town that makes Honda automobiles near a famous NASCAR track was the top ranked place to work in manufacturing.
It’s time to start refocusing on your 2H2019 strategies. 1H19 was a rebound to the December-not-to-Remember and the Fed rate hike debacle; however, 1H19 is behind us.
Q2 earnings are going to beat expectations overall and contrary to Bloomberg’s dire forecast from July 2, 2019. Darden Restaurants, CarMax, Lennar and this week PepsiCo have all beaten expectations and reported growth and margin stability despite tariffs and supply-chain disruption. Next week is bank earnings. They will be fine and the Fed is not going to unwind their Net-interest-Margin gains from 2018 with a rate cut. The Fed won’t hike rates in July without an update read on GDP for Q2 (that comes days before their July 30-31, 2019 meetings), nor on heels of such a strong June jobs report and healthy corporate earnings for third consecutive quarter. I have the contrarian view here - but my track record has been perfect on FOMC rate moves since end of 2016 – not just the number of rate hikes but correct on the when/which FOMC meetings (March, June, September and December in 2018).
Multifamily is performing well with record low mortgage loan delinquencies. Retail is not an apocalypse and adaptive reuse is eating up the vacated Big-Box stores causing overall retail occupancy rates to rise into the low 90% range (93% in Dallas according to new Weitzman report).
Industrial is solid with more demand than new supply. Weather is causing some delays in new construction, but that is all manageable with interest reserves in most bank construction loan structures. Values, rents and NOI growth are also all solid. Consider the latest Green Street Advisors latest CPPI as proof.
Manufactured Housing is the top performing property type with north of 20% YOY COPPI followed by Student Housing and Industrial. Don’t short this record recovery yet.
Until next week, enjoy the beach, lake or mountains and some R&R time.
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