Raub Report: Are We in the Late Stage of the Economic Cycle?

March 12, 2019

The broad consensus among commercial real estate investors, far and wide, is that we are in the very late stages of this current expansion, yet, the markets still remain surprisingly stable and durable. Now that the worries about more interest increases have calmed, and the stock market’s December tantrum has been mostly erased, IRC has seen a pick-up in activity since the turn of the year. One of my business friends is in the jewelry business, which has been suffering for several years, primarily because customers’ buying habits have changed a lot recently. However, he said, while December was slow, business has been very brisk since the beginning of the year. A local home builder told me that January and February have been very strong months for sales for his company. Are you echoing these sentiments, too?

The lingering memories of the terrible financial crisis ten years ago still impact us all. I believe that to some extent this has now inoculated investors, developers and lenders today against making the same mistakes, as there appears to be more discipline in the market now. It was rabid irrationality that caused the financial crisis. While many like to blame greedy banks and capitalism in general, please remember that the nub of the 2008 crisis began in the 1990’s when the administration sought to juice the economy by requiring mortgage lenders to make more loans to low income families. A noble gesture, however, the only way that banks could do this was to invent a way to make risky loans look less risky. The safest asset class in the world, U.S. mortgages, was turned into the most dangerous asset class. The administration in the 2000’s repeatedly asked Congress to reform Fannie Mae, which became notoriously corrupt, but Congress refused, even telling the President he was too worried about safety. Their “experiment” blew up and nearly took down the whole world’s economy and you know the rest. Sadly, capitalism is solely blamed for this debacle, when terrible government policy intervention in the free markets shares a great deal of the blame.

Everyone believes we are late in this economic cycle, and everyone thinks that the next recession will be in 2020. Why? We are about to enter the longest expansion period in history, and well, all good things come to an end – eventually. That’s not really a compelling argument. The Year 2020 will be an election year, and generally the serving administration does all it can to have the economy in good shape to improve its re-election chances, and I don’t think this time will be different. If the FED stays accommodative, it will help. No one really knows the future, and uncertainty will always be our companion. However, Texas and San Antonio remain robust economically, and I think any down turn, when it eventually comes, will be mild. Commercial real estate is generally highly priced at this point, and does not offer the generous appreciation potential we find in major downturns. And, there is a lot of money on the sidelines, waiting to pounce on opportunities whenever one should appear. I think this will be a moderating influence on market downswings for the next several years. Certainly, we will face a big decline in values in the future, but I just don’t see it for the next several years.

Properties get bought by the guy who will pay the most, not by the guy who is trying to steal it for a song. So, I recommend investing in property types you know and understand, and where you will get a reliable return with reasonable annual appreciation. If you can find a value-add property that you like, move fast, because there are a half dozen other buyers right behind you who will move on it when they have the chance. Or your money remains in cash, at a low yield. You can be confident that San Antonio is in a really good growth phase that will likely last for decades. Slow and steady wins the race.