The Game of Tug-of-War

The Game of Tug-of-War

Please imagine a tug-of-war between two giants; pulling and pulling against one another, sweating and groaning; one may get an advantage over the other, then, the other pulls harder and re-centers the center marker and maybe even pulls it to his side. These two giants are named Uncertainty and Resilience and they are featured daily in the economic news. The media is rooting for Uncertainty, perhaps because they have a partisan bias, perhaps because they have a 24-hour news cycle that is fed by Uncertainty.

 

But Resilience, by its very nature never quits and always comes back. This is the American economy and all our businesses, where we are always striving to achieve, to improve, to innovate and to move forward. Some fall but others step up with a better idea and resources to replace them.

 

Pardon my simple allegory, but here is how it fits the current commercial real estate landscape. We are in a bit of a lull just now. We roared into the New Year with enthusiasm for reduced regulations and lower interest rates. But Tariff Talk, steadily high rates and international news quashed the eagerness to build and invest. Buyers, investors, banks and builders are holding back, taking a pause to see what Uncertainty brings.

 

Bringing Back Resilience

Here are the energizers that will bring Resilience back. First, interest rates will very likely be lowered by two 25BP drops this year.

 

Next, President Trump has made it very clear he will bring in a new FED Chair who will certainly lower interest rates, probably by a lot. That helps us service the gigantic national debt and it will certainly be a shot in the arm for real estate – likely the energizer that will move us out of the current doldrums and bring about a new boom in real estate.

 

Inflation is likely to remain a bit higher than in the past, but isn’t inflation good for real estate? Hard assets like gold and silver have really been appreciating recently.

 

Then, deregulation will also begin to kick-in, which will stimulate business investment and growth which always results in new real estate development. One example of deregulation is Wells Fargo Bank, the nation’s fourth largest lender. They are just released from several federal restrictions on their asset growth and now will become very aggressive at making new loans. The other banks will follow and this will also stimulate commercial and residential construction.

 

Macro Trends

In analyzing macro trends, it’s always a good idea to see what the smartest investors are doing.

 

Hines Global is one of the largest commercial real estate investors in the world with $4.9 billion in assets. It was founded by Gerald Hines of Houston, who built the Galleria Mall, Transco Tower, much of downtown Houston and is now a global powerhouse. Hines CIO, David Steinbach says he believes today’s market conditions represent a general moment for capital, similar to past cycles in US real estate. He says, “Today, global construction has fallen off compared to historic averages, yet demand has remained. That supply and demand mismatch is not hypothetical. It’s currently being baked into the back half of this decade. In the immediate moment, these forces represent an uncommon buying opportunity.

 

Blackstone, the largest real estate and private equity player in the world with $1.2 trillion assets under management, said recently, “it’s time to ‘lean in’ to seize potential buying and investment opportunities”.

 

So, we will always be caught in the unending tug-of-war between Uncertainty on the one side, and Resilience on the other. I see Resilience making a strong come back over Uncertainty in the coming year. Be prepared.