Last month, I spoke with Steve Blank in an interview for the annual ULI-sponsored Emerging Trends report. I prepared a little cheat sheet to help focus my thoughts, and thought I’d share some of what I’m thinking about:
- The economic and real estate market recovery cycles have been delayed, but appear to be following a predictable pattern.
- Institutional capital flows continue to rise at a predictable pace.
- Institutional investors’ risk appetites continue to grow: Suburban and second-tier city investing once again is on the rise.
- Oil patches — Bakken, Permian, Eagleford Shale — are all booming. The question is the sustainability of these fields.
- Development is beginning again in many urban markets, but funding still appears to be a bit constrained.
- The multifamily sector continues to perform.
- The Federal Reserve has created asset inflation. It doesn’t appear to be a bubble yet, but money supply growth still continues, despite Fed tapering. (M2 is up 6.8 percent since July 15, 2013.)
- Consumer credit is also on the rise, up 6.6 percent since May 2013. Personal savings rates are at 4.8 percent — not far off the bottom of June 2005, when it was hovering around 2 percent.
- Consumer spending is up 3 percent since May 2013, at around $11.8 trillion. And it has been on a steady rise since it bottomed in 2009 around $9.8 trillion.
- CPI is up 2.1 percent from June 2013. One dollar today buys 42 cents in goods and services when expressed in1982 dollars.
- The U.S. economy still has room to grow. The housing sector is still in early stages of recovery. Industrial capacity utilization is still below 80 percent.
- We are facing a labor shortage threat if the economy heats up dramatically. Unemployment is at 6.1 percent and the median duration of unemployment has fallen dramatically, but it still has room to drop to pre-GFC levels.
- Federal debt levels are still a concern, up 13.2 percent since 2011. The deficit had been shrinking as a result of the GFC, but has been on he rise again since 2009.
- The banking system appears as sound as it was going into the GFC, if not sounder, according to the St. Louis stress index. Fed funds rate is at 9 basis points — free money for banks continues.
- Corporate profits after tax are up 6.8 percent since first quarter 2013.
- An area of economic vulnerability: a dramatic uptick in inflation or interest rates.
- One more area of vulnerability: the equities markets. A strong market correction would place some institutional investors who are already at or above their target real estate and infrastructure targets into a seriously over-invested position (the denominator effect). This could and almost certainly would put the brakes on institutional capital flows to the real estate equity and infrastructure equity markets.
- Treasuries are around 2.49 percent right now. Most people predict an uptick, but no one expects a dramatic uptick.
- Corporate AAA is at around 4.25 percent right now, some 375 basis points away from 8 percent. If rates rise dramatically, that will reshuffle the asset allocation deck, steering capital back to the bond market.
- Despite a continuing trade deficit, the dollar remains strong against most foreign currencies. This does not bode well for correcting trade imbalances. Americans are addicted to cheaper foreign manufactured goods.
- Other threats include bio-terror or an Ebola breakout, though the strength of the U.S. healthcare system helps insulate us a bit.
The bottom line: Barring a major disruption, the current real estate recovery has six to eight years or more to go.
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Geoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.
