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Raub Report: Interruption or Disruption

May 25, 2021

You will recall, with perhaps a little effort, the past ten years was the longest economic expansion in U.S. history, which came to an abrupt end when the Pandemic brought us the Recession that we had been waiting for. Then, thanks to the Federal Reserve’s quick and shockingly awesome response the economic system was so flooded with money that the usual economic contraction took place at lightning speed. Then, we developed a novel vaccine to fix the novel virus at truly “warp speed.” And now we are bouncing back at such an amazing rate, it’s hard to comprehend.  Thankfully, we had such a strong and vibrant economy going into the Pandemic Recession, we are recovering quickly.  So, now what?  I think we are all a little “sick” from this roller coaster and welcome a return to normal, but we are very uncertain on what the New Normal will actually look like.

 

It appears that the Pandemic was an Interruption and not a Disruption.  For example, the iphone disrupted not only our means of using a telephone as the cell phone did, but it actually became a pocket computer, too.  That changed everything.  Google became an encyclopedia on steroids, and that changed everything.  Facebook became a way for people across the globe to communicate instantly and that changed everything.  The Pandemic?  It certainly disrupted how drugs are invented and approved. The Federal Reserve adopted Modern Monetary Theory, which takes the position that government indebtedness mean nothing, just print more and more money, because it won’t create inflation, debase your currency or destroy your economy. Hmm. Jury’s still out on that one but if the verdict comes back “wrong” the Financial Crisis of 2008 may look like mere child’s play.  For now, its interruption, but it could become disruption and more.

 

So how does this impact commercial real estate in San Antonio? Interruption only. The retail occupancy rate remains unchanged at 94.2%.  Retail construction totals just under one million square feet, when it was just over one million square feet a year ago, according to NAI Partners. Unbelievable. Don’t buy the “retail apocalypse” story.  Our unemployment rate fell in April to 6%, according to the Fed Reserve Bank Dallas, while payrolls grew by an annual rate of 7.1%, 18,050 jobs; compare to 3.1% in February and 13.8% in May last year. This would be much higher, except many workers are not returning because stimulus checks make the low wage workers better off than taking a job.  I am constantly hearing and seeing employers, like restaurants and car repair shops, begging to get workers to fill empty slots.

 

The office market has been hard hit by social distancing. WFH used to mean Work Force Housing but now it means Work From Home.  Occupancy dropped from 14.3% to 15.8%, according to San Antonio Real Estate Data Alliance, and we have nearly 1-million square feet under construction.  Annual full service gross rents rose 31cents to just over $25 per SF.  The industrial market has transitioned from ugly duckling to the darling of real estate, thanks to Amazon and other last mile delivery companies.  However, the vacancy rate remains at 13.6% compared to 11% last year, according to SACREDA.

 

Investment sales have been interesting.  There are far more buyers than sellers.  The common response is, “If I sell what would I do with my money?  The stock market is scary, I don’t want to pay capital gains taxes, and buying another property means I am trading a property I know well for one I don’t know.  With real estate appreciating at 7-10% per year, I think I will just stay put.”  It may become a sellers’ strike.  The housing market is experiencing a similar episode as available supply declines to all-time lows.

 

We will have to say for commercial real estate in San Antonio the Pandemic has been more interruption than disruption, but only time will tell for sure.