One of the benefits of fifty years of industry experience is a look into the past. Yes, it’s always crystal clear!
Unfortunately, looking ahead is a little darker. Every January we receive economic forecasts from scientists. Doubt what I’m saying? Just tune in to reviews from Chapman, Cal State Fullerton, UCLA, Charles Schwab, and more. Everyone will express their opinion about what awaits our economy a flourishing year. Trade growth, changes in consumer confidence, forecasts for interest rates, stock market trends, inflationary pressures and the impact of all of the above on property prices are forecast.
But now it’s August, and you might be thinking, why wait for January? Well, when you see New Year’s decorations next month, you will understand. These next four months will fly by!
I have participated in several Nostradamus events over the years. One of the most significant events took place in February 2020. It featured a panel of experts assembled by Northwest Mutual. One gentleman, in particular, spoke brilliantly about the forces causing recession. From my notes: “The preamble mentioned testing five factors causing bear markets: inflation, recession, commodity shortages, crazy market valuations and uncertainty.”
Hmmm, familiar? For those who score at home, we’ve seen all five since March 2020. So where and when is the recession?
In particular, let’s look at inflation. Since 2011, commercial property rents have grown by 134%, or a whopping 13.4% per year. If we analyze this further, in the last eight months the growth was 12.6%. On an annualized basis, this is 18.9%!
Investors are hungry for insanely high rents at insanely high valuations. Take a look at the pump. We paid $ 4.89 a gallon for gas yesterday on our way home from Arizona. Silly, I forgot to refuel before we crossed the border! Lumber? The price of the 2×4 went up from $ 2 to $ 8. Container cargo from China also quadrupled.
Again, where is the recession?
Now let’s talk about uncertainty. One thing that can kill a rally faster than anything is uncertainty. You see, when businesses or investors are unsure about the future, they postpone buying decisions. This “pause” seeps into our world.
During the financial crisis of 2008-2011, our real estate market was at a standstill for almost a year. Prices have dropped. Buyers and tenants were excited about amazing deals when they saw a clear path for improvement.
In the period from March to June 2020, we also faced such a decline in production activity. But then something completely unexpected happened. Industrial demand shifted to turbocharging by the end of 2020 and the first seven months of 2021. As shopping habits transformed from going to the mall to clicking on the keyboard, trade adjusted, space was consumed, and this led to record profits.
So where is the recession?
Then pay attention to the shortage of goods. This raw material is used for the production of copper, lumber, oil and steel. As we rely on our neighbors in the Far East to produce most of these products, as well as with the reported interruptions in container loading, we are again in short supply. This certainly increases the pressure on prices. Plus, you just can’t get things. If your refrigerator is blinking, good luck with a replacement. Industrial roofs – steel trusses? You will have to wait at least 13 months!
But where is the decline?
Hope you get the idea. We survived the black swan event – a pandemic once every 100 years and five related factors – inflation, recession, shortages of goods, crazy market valuations that were supposed to undermine real estate. But the opposite happened.
So where is the recession? Soon, dear readers. It must. Will it be a jump in interest rates, another round of lockdowns, a power surge that destroys the network, a price bubble burst, an attack on our earth, a decade of zero interest and growth, something else, or a combination of all of these? I just want my crystal ball not to be so cloudy.
Allen S. Buchanan, SIOR, is a director of Lee & Associates Commercial Real Estate Services in Orange. You can reach him at email@example.com or 714-564-7104.