New Rules, New Realities | Welcome to the New Age

Over my past 20 years in the commercial real estate industry, I have seen Dr. Mark Dotzour speak no less than 15 times. This week I had the opportunity to hear him speak at a packed room in Fort Worth.
 
Given the uncertainty of the economy, inflation, housing prices, supply chain issues, rising interest rates, and more, this was a very timely and needed presentation.  Dr. Dotzour did not disappoint. In my humble opinion, this was one of the best and most informative sessions I have attended.
 
Rather than give a synopsis of my takeaways, I will give you my entire notes from the event. I am certain you will find many nuggets of value that you can use over the coming months/years.
 

  • We are getting back to NORMAL
    • House prices don’t always go up 20% per year!
  • MD started presentations in 1997
    • Since then he has not been predicting rising inflation or rising interest rates
    • That has now changed
  • We Are Not In Ordinary Times

  • How did mortgage rates get to 2.65%? 
    • Fed Reserve engineered and manipulated them 
  • Next time we have a recession (maybe more than one?) 
    • 30-yr fixed rate mortgage will go down to 2.00% 
    • If that is not low enough, Fed will drop it even more 
    • THIS IS THEIR TOOL to fight recession (they control the 10-year treasury) 
    • Don’t believe it, research Denmark 0% interest rates 
  • Because of this tool and the Fed’s propensity to use it, home prices will continue to rise (over time) 
  • What happens when they eventually drop rates down to 0.5% or 0.00% 
    • Don’t Ask – you won’t want to know the answer  
  • Grand Social Experiments in the Past that had Sever Consequences  
    • 1981 Tax Reform 
    • 1986 S&L tax treatment 
    • 2005 No Doc loans 
    • 2008 ARM’s flood the market 
  • Tectonic Experiments TODAY 
    • Massive monetary policy and fiscal stimulus at same time (while the economy is rapidly recovering) 
    • Defunding the oil and gas industry 
      • Guess what, everyone will NOT own an electric car next year 
      • HIGH OIL PRICES will be here for quite a while! 
    • Unprecedented labor shortage 
      • No one wants to work; and we continue to screw up immigration reform and create legal immigration 
      • Labor shortage causes wages to RISE; this creates LONG-TERM inflation 
      • 12 Million open jobs today 
      • 92% of business owners report FEW or NO qualified applicants for open positions 
      • Changing desires for the future from young people; many don’t want to work like their parents 
    • China in a secular decline 
      • Work and manufacturing will eventually come back to US and Mexico 
      • NAFTA corridor will benefit 
      • Opportunity in industrial?? 
    • Working from home 
      • Value of an office building is UNKNOWN 
      • What will be the demand for office? 
      • 60% of people do not want to go back to the office 
      • CPA firms (accountants) no longer want to come and work in an office  
    • Changing community policing strategies 
      • Social experiment happening (Portland, OR; NYC; San Francisco) 
        • 1.9M have left NYC 
        • 1.6M have left Chicago 
      • This will benefit Texas, but it really SUCKS for our country 
        • Other beneficiaries include UT, FL, NC 
    • Fed will raise long and short-term rates rapidly 
      • Fed only has 2 tools 
        • Raising/lowering ST interest rates 
        • Raising/lowering LT mortgage rates 
      • Fed must slow the economy (because it is on fire) 
  • If ONE failed experiment can dramatically affect the economy, what could happen if we have 7 (see above) failed experiments?????? 
  • How do you make prices go down when you have a limited supply of things? 
    • DEMAND DESTRUCTION (lower demand) 
      • Ie: a whole bunch of people will become unemployed 
  • Household net worth has increased from $110T to $150T in past 24 months 

  • In past 12 months, amount of money in household checking accounts has risen from $1T to $4T 
  • John Deere labor contract settlement (last year) 
    • Wages go up 29% over the next 6 years 
  • Globalization is Deflationary  
    • The tide is now turning 
    • Production is beginning to return to the US and Mexico 
  • China is now our ENEMY 
    • People (countries) are rapidly pulling production out of the country 
    • China controls many (70%) of the raw materials needed for phones and EV 
    • China controls 80% of global battery chemical refinement  
  • Farmland up 22% in 2021 
  • CRE up 24% in 2021 
  • Quarterly total return on CRE was 6.15% in Q42021; the highest appreciation in the history of the NPI, which began in the first quarter of 1978 
  • Calipers and New York pension fund are increasing allocations to real estate 

  • MD expects prices to continue to increase over next 3-5 years 
  • How long will it take to stabilize the economy?? 
    • 1970s it took 4 Recessions in 12 Years to slow down inflation to 2% 

  • What will Fed Funds rate need to be to slow down/cause recession? 
    • Fed has announced they will raise it to 3.5% 
  • NOTE: Recessions are not the end of the world; they are a necessary fact 
  • Dotzour’s Key RE Investment Criteria 
    • Employment Growth 
    • Moderate Supply Growth 
    • SPA Quotient 
      • Safety for residents living in area 
      • Protection of businesses located in the area 
      • Positive local business Attitude toward employers 
  • Cities Facing Huge Challenges (ORC = Organized Retail Crime) 

  • Circa 2010 – Congress passed Dodd-Frank 
    • This has put restrictions on community banks from lending to developers to build lots 
    • No lots = housing supply shortage 
  • Normal market should see around 2.0% increase in home prices each year 
    • BEWARE of the coming media stories about housing demand falling 
    • Our appreciation was around 20% last year 
  • Prediction on cap rates for CRE? 
    • MD does not think CRE prices are going to fall, thus cap rates are not likely to significantly rise 
    • They (cap rates) are SOMEWHAT tied to 10-year Treasury 
    • There have been times in the past 40 years when the 10-yr Treasury increased significantly with NO impact on cap rates 
    • 2013, rates went up almost 2%, cap rates did not rise 
    • RISK could be a factor that cap rates increase, rather than Treasury rates 
    • Industrial and MF are two darlings of global investors 
      • Amazon just announced they have over-built and will have to sub-lease some of their facilities 
      • Highlighting some of the RISK in the market 
  • What is the TRUE inflation rate? 
    • In 1982, government pegged Social Security to inflation rate 
    • Over next 10-12 years, CPI was changed about 9 times 
    • Every time it was change, it was to LOWER the reported inflation rate 
    • So what is the TRUE inflation rate? Significantly more than is being reported. 
KW Net Lease Advisors