September 18, 2019
It’s not whether the glass is half full or empty, it’s who controls the pitcher that matters. My Q3 2019 theme for presentations is focus attention more on the influences that control the flow of economic activity than on whether any one industry’s or MSA’s glass is half full, or starting to see leakage and slowing economic growth. Why? The metric “glass half-full/empty” is rear-view mirror looking - much like vacancy rate at the property level. Who controls the pitcher, though, and their respective effect on flow into the glass is going to determine the glass’ fluid level. Understanding those pitcher-influences is where our attention should be directed now to forecast duration of this record 122-month economic recovery. The graphic here is what I use to illustrate this point. It has become particularly germane from current events, such as the chaos around Brexit, peak hurricane season and near miss of the East Coast by Hurricane Dorian, this past weekend’s drone strike on Saudi Arabia oil installations, and the September 17-18 FOMC meeting. This graphic is not intended to be an all-inclusive portrayal of what is bullish (strong consumer and small business optimism, REIT returns, etc.) or bearish (tariffs, trade war, Brexit, the FED and an inverted Yield Curve, etc.); rather, the purpose is to redirect attention back up to the pitcher level and understanding the influences that will determine duration of this longest economic recovery on record - or onset of recession in 2020. Last week’s cloud analogy should have prepared you to start thinking about how to be interpreting the plethora of economic data to discern the innocuous from the more threatening cumulus type storm clouds.
“Things I thought I would never hear” update:
As has been customary this summer, let’s commence with an update to the my list of “Things I thought I would never hear.”
The Top 5 statements include:
- 1. “Bitcoin in a Safe-Haven;” July 31, 2019
- 2. “Zero is meaningless” Aug 19, 2019 former Fed Chair Greenspan re: interest rates/negative yielding bonds;
- 3. “REITs have low volatility” August 27, 2019 – CNBC Half-Time Report August 27, 2019)
- 4. 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.
- 5. “Scooter Litter” as the new property management issue to be solved. Drone terrorism will surpass “Scooter Litter” as top property management risk in 2020 in wake of Saudi Arabia oil field attacks. How safe are high profile commercial buildings to drone interference? The answer is not very safe.
This week’s WIN addition to the running list is:
- i. 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.” Agritainment moves into the Top-5 list next week!
What is Agritainment? It is another great American Capitalism Ideer that I forecast is going to be exported - and could even save Europe from Brexit. Can you imagine the British Parliament and EU shooting corn at each other as part of the final Brexit showdown? I see a new reality TV/Netflix/A&E series coming to displace Dog-the-Bounty-Hunter or even “Love It or List It.” The following from the WSJ feature encapsulates Agritainment (goat yoga and all):
"Food cannons alone can’t protect farms from depressed prices. But they are part of the growing field of agritainment—which also includes corn mazes, hayrides and goat yoga—that can serve as a hedge for farmers during tough times. Farm-linked recreation was a nearly $1 billion business in 2017, according to Claudia Schmidt, an assistant professor of agricultural economics at Penn State University.”
The Economic and Real Estate Industry News of the Week
Real Estate Finance and Interest Rates:
Last week I shared the latest FDIC report on the health of the nation’s financial institutions, and it looked pretty good. This week all attention turns its eyes again to the “most important FOMC meeting ever” – déjà vu! The Federal Reserve is likely to offer up another quarter-point cut this week as more insurance against the risks from Brexit, Saudi Arabia oil strike - and Monday’s largest single-day upward move in oil prices (+14%) since the invasion of Kuwait in the Bush Sr. administration (4 presidents ago). After this cut, anyone speculating on further cuts in the remaining two FOMC meetings set for October and December are Las Vegas gamblers. The four entities whose thoughts and outlook opinions on interest rates that I follow and recommend to you are:
- i. Jim Grant Grant's Interest Rate Observer;
- ii. Rick Santelli from CNBC;
- iii. TREPP;
- iv. Eugene Landy (founder of Monmouth REIC).
Speaking of TREPP, their latest Week In Review shows remarkable calm in CMBS new issuance underwriting and spreads across the bond hierarchy despite the inverted yield curve, rise in negative yielding bonds to $16-$17 trillion level, and uncertainty in monetary policy by the Federal Reserve. This is encouraging news for those seeking CRE debt as the CMBS market is a harbinger of what to expect in CRE finance. Calm for now with no material changes to the weighted average DSCR or LTV underwriting. Don’t tempt current events and delay if you have maturing debt. And start paying attention again to the expiration of LIBOR in 2021. The markets are not prepared - and that train is coming down the tracks quickly. I fear the lack of attention due to Brexit and U.S. 2020 elections.
Property Type News:
Adaptive Reuse: Believe it or not, it has been a year since ACRE and CCIM Institute published its watershed paper on Adaptive Reuse titled: "Turning Blight into Bright". Subsequently, our forecasts of AdRu growth have been surpassed, and Opportunity Zone investing has become an important driver for adaptive reuse activity. This past week I had the opportunity to visit the largest adaptive reuse project in the U.S. nearing completion involving the former 2.0msf Bell Labs facility in Holmdel, NJ. I visited the reborn Bell Works project as part of Monmouth MREIC’s move into this massive AdRu for the quarterly board of directors meeting. If you are am Adaptive Reuse fanatic like CCIM, ACRE and I, you need to check out the AdRu of the former Bell Labs facility in Holmdel, NJ. Aside from its size (2.0msf), its history is most impressive. It has the world’s largest photovoltaic roof generating much of Bell Works’ needed electricity - and was home to eleven Bell Labs, Noble-Prize-winning scientists. The iconic water tower (lower right picture in the following collage) was modeled to emulate a transistor. Monmouth joins WeWork, iCISM, pop-up retailers, a conference center, multiple gyms, and other office users, and a coming Hilton branded hotel. From a scale perspective, Bell Works is the largest AdRu I have experienced. Monmouth’s head of investor relations gets credit for my historical knowledge of this AdRu project as she actually spent the first two-decades of her career working at Bell Labs. Thank you Susan Jordan at MREIC for these insights.
I also had the pleasure this past week of participating in Globe Street’s annual Adaptive Reuse awards program September 16th that recognized outstanding adaptive reuse projects across the country – large and small and in primary and secondary MSAs from Miami to Seattle, and Birmingham, Ala., to Columbia S.C. and Knoxville, Tenn. Selfishly, I want to acknowledge Bayer Properties and their Pizitz project in downtown Birmingham as one of the honorees for the Historical Preservation category and the award for “Best Realization of Upside Potential in a Historical Building.” Bayer Properties has been a long-time supporter of the Alabama Center for Real Estate, and this project was a pioneering one undertaken before all the tech growth now underway in Birmingham. It was also one of the first food halls to be developed. It is a remarkable preservation of an iconic turn-of-the-century department store into a live-work-play centerpiece in downtown Birmingham. Be sure to check out Globe Street’s coverage of all the honorees in the online issue – as well as the new September edition of Real Estate Forum with a Globe Street’s feature on Opportunity Zones.
Multifamily – Senior Housing on College Campuses:
Finally, NY Times published a recent must-read feature for all involved with student or senior housing titled: “At Colleges, What’s Old Is New: Retirees Living on Campus.” The gist of the article is a focus on how universities and colleges are sponsoring retirement communities on their grounds, hoping that young and old can enrich each other’s lives while filling the school’s coffers. At the University of Alabama, we have observed on-campus development of the growing trend on college campuses — to place retirement homes near the dorms. There is more to this than adding grandma and grandpa as new fixtures to the quad.
A number of colleges are now sponsoring retirement communities on campus. It is a university alumni fundraising dream in which colleges can monetize spare land, while tapping the baby boom generation’s affluence by appealing to their needs that go well beyond healthcare to lifestyle, continued learning, and entertainment. Officially, most colleges will publicly state that their motive is more educational and social — encouraging intergenerational mixing — than financial. But the on-campus senior housing communities promise a new revenue stream for institutions that are coping with reduced state operating support and declining college enrollment in many parts of the country. They are bringing a new generation (or old generation) to campus to fill classes, eat in dining halls, attend student performances and become mentors. The NY Times article concludes as follows:
“Look at the whole demographic issue, tuition debt and how states have defunded higher education,” said Tom Schwarz, who recently retired as president of Purchase College. “So the result of that is tuition is going up, the need for scholarships is going up. So it’s like well-working gears. It sort of fits together.”
Here is the 1-2-3 on retail for this past week.
First – Retail Sales: U.S. retail sales remain strong from another data point. The Commerce Department reported last Friday that US retail sales rose by a higher-than-expected 0.4% in August, boosted by strong consumer spending on motor vehicles, building supplies, and healthcare goods. Excluding auto sales, overall retail sales are relatively flat. The GM auto workers strike could really skew the September retail sales numbers down if the 49,000 idled workers disrupting operations at 33 plants and 22 parts and distribution centers is a prolonged strike. Keep an eye on this “Pitcher” item.
Second - Walmart: The nation’s largest retailer has moved deeper into retail health care with the opening of its first-ever standalone facility devoted to health and wellness located in Dallas, Ga., directly adjacent to a remodeled Walmart supercenter. This new “Walmart Health” held its grand opening on Friday, September 13. The 10,000-sq.-ft. facility offers an array of services — primary care, laboratory tests, X-rays and diagnostics, counseling, dental, optical, hearing, health insurance information and enrollment, and community health education with online education and in-center workshops — all under one roof. Walmart Health is designed to provide “low, transparent pricing” for key health services, regardless of insurance status. Customers will be notified as to the estimated cost of their visit when they book their appointment. A second location, in Calhoun, Ga., is scheduled to open early next year. Walmart said it is using technology to streamline the clinic’s scheduling, check-in and payment processes, allowing customers to get estimates on the cost of their services and do other activities without paperwork.
Third – Store Bankruptcies and Closings: Sometimes another entity covers it best, so why attempt to restate or summarize. Trepp did just that this week in its coverage of retail store closings via their Retail Round-up:
“There were a number of noteworthy retail headlines tracking new store closures and openings that circulated over the past week, the first being word that regional discount chain Fred’s filed for Chapter 11 bankruptcy on Monday and will be liquidating all of its remaining stores in the next two months. There are nine loans with exposure to Fred’s – the largest concentration comes from the $9.7 million Fred’s Portfolio note (MSC 2016-UB11) which is backed by a portfolio of eight single-tenant Fred’s pharmacy buildings residing in the southern US.
During a Q2 earnings call, Gamestop announced that it is evaluating the potential closure of about 200 locations globally by the end of the fiscal year. The American gaming merchandise retailer, which currently operates 5,700 brick-and-mortar stores across 14 countries, revealed that the firm plans to ramp up downsizing plans over the next two years as part of cost-cutting initiatives. The other major bankruptcy story extensively covered by the rumor mill press concerned Forever 21 – several reports from Wednesday stated the retailer is preparing to file for bankruptcy as early as this Sunday and will close 100 stores. The firm later issued a statement strongly denying that a filing is forthcoming.”
This week’s “most important FOMC meeting ever” is overshadowed by the drone strikes on Saudi Arabia oil refining installations. This event is as much a wake-up call for all of us as the Iraq invasion of Kuwait during the Bush Sr. administration - and the terrorist attacks of September 11, 2001. Why? They show another vulnerability. Just as the September 11, 2001 terrorist attacks on the U.S. unleashed a new era in property insurance for terrorism and security around the vulnerability of commercial aviation, these drone attacks are unveiling another level of vulnerability that will trickle down to all vital commercial buildings and installations from airports and utility infrastructure to iconic government and commercial buildings from Amazon HQ2 to NY and Houston port authorities. Drone disruption will become the new property management and insurance issue for 2020 far surpassing the nuisance of “Scooter Litter.”
Refocus on the “Pitcher-Influences” heading into 2020.
In the interim, check your calendar for several upcoming events.
First up is the ACRE/ICSC Alabama Retail Real Estate Forum in Birmingham AL this Thursday September 19th at The Club. Check out the agenda and consider registration. You don’t want to miss Brian Lindley from Chick Fil A, Julie Melander from the Counselors of Real Estate or Lacy Beasley from Retail Strategies and her panel on what next for retail.
Then on October 2nd is the inaugural Alabama Appraisal Institute Fall Forum with a special outlook on the Alabama economy by the state’s Secretary of Labor Fitzgerald Washington. It’s not just for appraisers, but appraisers active in Alabama will not want to miss this event to get updated for your economic and market overviews in appraisals.
Finally, keep an eye out for the release of ACRE/CCIM Institute’s new Insights paper on the retail industry titled “Retail e-Volution.” It is complete and being packaged for release by the end of September. This is one comprehensive view on retail that dispels the popular myths – like Amazon has caused all the retail bankruptcies and store closings – and it lays out the view of what retail will look like by 2025. Think beyond the Big-Box and Warehouse box. The full paper releases end of September in time for the CCIM Global conference in San Diego mid-October.
Have a great week! - KC
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ACRE Industry Presentations
ICSC: Retelling the Retail Story
American Property Tax Council: 2019 Annual Client Seminar
Economic Update: Utah Chapter of CCIM Institute
Salt Lake City, UT
NALCOM: CRE and Economic Outlook
Keynote Address: St. Louis Chapter of CCIM Institute
St. Louis, MO
PERE Private Equity Conference: New York
6th Annual NAI Florida Conference