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Raub Report December 2014

December 22, 2014

“To everything there is a season, turn, turn, turn …” sang the Byrds in the 1960’s.  (That is a test of your age and your memory).  It is taken from Ecclesiastes Chapter 3, which actually begins, “There is an appointed time for everything.  And there is a time for everything under heaven.”  This passage seems appropriate for the Christmas time and the turn of the New Year, and introduces the topic of economic cycles.  “Are we there yet?” is not just for kids anxious to get to grandma’s house for cookies and eggnog.  It is also the question everyone is asking about our current economic situation, “Has the real estate market peaked?  Where are we headed for the year to come?”  With so much international turmoil this Holiday Season, I think this is a question on everyone’s minds.

Let me try to provide a brief summary of the commercial real estate market as I see it in San Antonio.  First, there is a lot of capital available for deals but there is by no means a flood into the market. The last downturn in 2008 has made everyone very selective in their investment decisions. Also, I think, one important point is that the Baby Boomers control a substantial amount of the investible cash available and they (we) are “too darn old” to try to come back from another big loss, like 2008.  So, we bide time, keep our “powder dry”, and look for good deals in which to invest.

As I have mentioned in prior Reports, there has not been enough new construction in Class B apartments, office and retail to provide a liquid market.   How can a Seller sell when he has no good place to reinvest his cash?  “Pay taxes at 20%? Why?  Tax Deferred Exchange? Can I find a better property?” Thus, investment real estate is tough for deal making these days.  “All of the run-down properties have already been bought up, fixed up, and re-purposed.  If I sell it, I can’t find anything else to buy to replace that income.  So, I price it so high, I couldn’t turn down the offer.” These are the reasons that the market does not have great liquidity.

What about new construction?  Apartments have lead the way for four years and are still going strong.  It has been and always will be the favored investment class: large pool of renters, large amounts of debt available, and lots of equity, too.  Newly constructed properties are going for unbelievably high prices, such that, we wonder where the new buyers will find upside appreciation.  Are the thousands of units coming on line in San Antonio too many, overbuilding the market and leading to a crash. No. Occupancies are strong, and lenders and investors have become cautious the past year so new construction, while brisk is not crazy.  And we have to build 1,000 to 2,000 extra units every year to take up for the slower home building market.  Homes are too highly priced for first-time home buyers, so they must buy re-sales, thus, the inventory of homes is low, and a Seller’s market.

Office building is getting started anew, but it is relatively restrained.  Likewise, retail, which I discussed in November has moved into a new phase of evolution because of the internet and e-tailing. Next, industrial is doing exceptionally well across the country.   Overall, when I look

at commentaries about building cycles across the country, we are still in the mid-phase of the upswing, and no one sees over-building in any category at this point; the exception being the occasional overly aggressive apartment builder who picks a poor location.

Will the oil price decline impact the Eagle Ford?  We may see some job reductions, but no one knows how long or deep this will be.  Since so much of the drilling infrastructure has already been put in place, drilling costs are actually declining in the Eagle Ford. However, the possible collapse of emerging markets that are heavily dependent on oil, like Russia, Venezuela, Nigeria and others, drives their wealthy citizens to buy U.S. Treasuries, the world’s reserve currency. This drives down our interest rates, which will make mortgages cheaper.  Cheaper interest rates and the proposed lowering of home mortgage down payments will be a positive driver of the U.S. housing market.  I doubt the Saudis were thinking about juicing the U.S. Home building market with their oil price lowering strategy.