transformation fills & empties the glass · 2019-07-16 · lending rate of 20.5% in summer of...
TRANSCRIPT
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K.C. Conway, MAI, CRE ACRE Director of Research & Corporate Engagement
CCIM Chief Economist /CCIM Joint ACRE-CCIM Research [email protected]
What is the R&O FORMULA for Transformational Periods Transformational Opportunities & Risks in the Economy & C-RE
Transformation Fills & Empties
the Glass
Recalculate Everything …
Rethink Feasibility
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K.C. Conway, MAI, CRE
Dir. of Research – ACRE R.E. Center
CCIM Chief Economist / https://www.ccim.com/resources/commercial-real-estate-insights-series/?gmSsoPc=1
[email protected] / http://www.acre.culverhouse.ua.edu/ http://www.acre.culverhouse.ua.edu/win
A.K.A “The Red-Shoe
Economist”
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http://www.acre.culverhouse.ua.edu/explore
http://www.acre.culverhouse.ua.edu/win
Navigating ACRE Website, Accessing WIN, Research, & Presentations …
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Disclaimer: Not in fine print…
This presentation consists of materials prepared exclusively by K.C. Conway, MAI,
CRE, and is provided during this event solely for informational purposes of
attendees. This presentation is not intended to constitute legal, investment or
financial advice or the rendering of legal, consulting, or other professional services of
any kind.
NAREC 2019 Annual Financial & Tax Conference Cheyenne Mountain Resort, Colorado Springs, CO – June 18, 2019
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This Presentation reflects the analysis and opinions of the author, but not necessarily
those of the faculty and staff of the Culverhouse College of Commerce, the
administrative officials of University of Alabama or Alabama Center for R.E. (ACRE).
Neither NAREC, Conference Sponsors, University of Alabama or its ACRE Real
Estate Center, CCIM Institute nor Monmouth REIC make any representations or
warranties about the accuracy or suitability of any information in this presentation. The
aforementioned do NOT guarantee, warrant, or endorse the advice or services of K.C.
Conway.
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The Best Futurist Ever! Yogi Berra had a Quote to put Anything in Perspective.
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6 © Copyright 2019, Trepp LLC
2018 Bank Symposium
Future Disruptive Technologies: Connect these dots
Source: Future Thinking Canvas Frank Diana
Understood/Disruption
Done
Transformation in Process
creating the Risks &
Opportunities
Ahead of Us that we still
need to Connect Dots
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Driverless semi-trucks could be sharing Florida highways as early as next year, and there will be no requirement that surrounding motorists know it.
Nor will autonomous driving systems need to be tested, inspected, or certified before being deployed under a new state law that takes effect July 1.
Starsky Robotics, a San Francisco-based startup company that’s been testing its driverless trucking technology in Florida and Texas, has put out a call for job applicants who one day want to pilot big rigs remotely.
Starsky envisions its remote drivers logging onto computers in an office environment to take the reins of its trucks during the first and last miles of their long hauls.
That means the trucks will be on autopilot for the vast majority of their highway journeys.
Driverless deployments should begin in Florida by the end of 2020, Starsky says.
That’s much sooner than 2027, the year consulting firm McKinsey & Company projects fully driverless trucks will be ready to hit the highway.
On Thursday, Gov. Ron DeSantis signed the bill enacting the law in a ceremony at SunTrax, the state’s new autonomous vehicle testing track in Auburndale.
Owners of autonomous commercial vehicles will be required to carry at least as much liability insurance as the state requires for commercial vehicles driven by humans. Currently, that means a minimum level of $300,000 in combined bodily liability and property damage coverage for trucks with a gross vehicle weight of 44,000 pounds or more, and lesser amounts for lighter vehicles.
Autonomous vehicles also will be required to achieve what’s called “minimal risk condition” – such as coming to a complete stop and activating their hazard lights – if their operating systems fail..
http://digital.olivesoftware.com/Olive/ODN/MiamiHerald/shared/ShowArticle.aspx?doc=TMH%2F2019%2F06%2F15&entity=Ar74E7&sk=A1FAEE28&mode=text
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What is Blockchain? Yes, there actually is a “Blockchain for Dummies” by IBM
https://public.dhe.ibm.com/common/ssi/ecm/xi/en/xim1235
4usen/ibm-blockchain_second-
edition_final_XIM12354USEN.pdf
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The Global Eco. Transformation: Global GDP
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• U.S #1 approaching $1.0 Trillion
• Japan a rising economic power
• Europe pre EU was strong
Where was Germany?
• China – not even $100 billion
• U.S #1 but GDP explodes $2.6Tr
• Japan #2 & grew by 7X from
1969
• Germany sprung to life
displacing France (Pre-EU)
• China doubled but <$200 billion
• U.S #1 & Doubles AGAIN to $5.5Tr
• Japan & Germany strong #2 & #3
• What happened to China?
• U.S #1 & Doubles AGAIN to $10Tr
• France & Italy slowing
• China is back and grows 5X to
>$1.0Tr in just a decade!
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• U.S #1 but only grew by 50%
1999-2009 vs doubling every
decade 1969 to 1999
• China grows 5X AGAIN 1999 to
2009 surpassing Germany.
• UK falls from Top-5 behind
France & Germany.
Wonder why Brexit?
• U.S #1 but only grew by 33% 2009
to 2017 vs 50% 1999-2009 and
doubling every decade 1969-1999
• China more than doubles AGAIN
• Germany, UK and France all
contracted in GDP 2009-2017
• China must be Survived to Thrive
in 2019-2029!
Change in GDP by Country 1962 to present.
https://mail.google.com/mail/u/0?ui=2&ik=2a73eaf0a0&att
id=0.1&permmsgid=msg-
f:1621388704591664730&th=1680546fb404565a&view=a
tt&disp=safe
2019 update:
China has
caught
Europe.
Japan &
Germany are
contracting
https://tradingeconomics.com/
Global GDP Change
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Risks to NOT Ratifying:
AG Industry Auto Industry Commodities Housing &
Lumber Electronics &
Rare Earth Minerals
GDP falls <2%
Opportunities from Ratifying: Probably a China
& EU trade deal Auto Industry GDP stays >2%
Trade Agreements may be our biggest Transformational Risk & Opportunity
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Transformational Job Growth: ADP & LinkedIn Vs. BLS-L=BS
2018 was the 8th consecutive year in which the economy creates over 2 million jobs. Will 2019? If Small Biz can find the Workforce.
LinkedIn Workforce: 190m / 3m / 50k / Q1 18 hiring 20% > Q1 17
This new “Skills-Gap” analysis in
LinkedIn Workforce jobs
report is a must-use tool!
https://economicgraph.linkedin.com/resources/link
edin-workforce-report-july-2018
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What is different between ADP and BLS March jobs reports is:
There is much more volatility to the BLS numbers bouncing around
from +312k jobs in January to just +33k in February and then back
up to +196k in March. My take is that a combination of the
Government Shutdown along with season gyrations after the holidays
and severe Winter weather are playing havoc with Government
survey data. I place more emphasis on ADP private payrolls data as
it is not a survey and it reflects what the largest sector of our
economy is doing – the private sector.
Small and Medium sized businesses are still the hiring engine.
69,000 of the 129,000 private sector jobs created in March were by
companies with less than 500 employees. Large companies –
especially in retail and manufacturing – have pulled back due to a
combination of factors
April 2019 +275,000 April 2019 +263,000 * Constr +49k * Unempl. To 3.6%
* Small Biz <500 created 80% * Feb 30k now revised by 100%
LinkedIn Skills Gap Analyses
will aid you in ID
Logistics Workforce Gaps
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Warehouse operators stepped up hiring in April as e-commerce demand drove up employment in distribution centers even as job growth across the rest of the freight-transportation sector slowed.
Warehousing and storage companies added 5,400 jobs last month, according to preliminary figures the Labor Department reported Friday, the fourth straight month of growth in a sector that includes fulfillment centers that process and ship online orders.
The sector added nearly 70,000 jobs over the past 12 months.
Courier and messenger companies that deliver packages to homes and businesses also expanded in April, adding 1,000 jobs.
Trucking company payrolls shrank by 500, the first decline in 11 months, a sign of caution as carriers that recruited aggressively during last year’s hot freight market adjust to softening conditions.
The gains in warehousing and delivery come as rapid e-commerce growth pushes companies to open more fulfillment centers near major population centers to speed up delivery to customers.
U.S. online sales jumped 14.2% in 2018, generating an estimated $513.6 billion, according to the U.S. Census Bureau.
BLS/NAICS Job Counting is Dated & Hiding Opportunities!
https://www.wsj.com/articles/warehouse-hiring-surges-on-rising-e-commerce-demand-11556910546?mod=djemlogistics_h
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http://www.usdebtclock.org/?mod=article_inline
The Debt Clock: The Elephant in the Room!
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Think Yield Curve
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Receipts up 2.2% / Outlays up 5.8% … BUT Interest on Debt up 15.6% & Total Spending up 5.8%
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Tax Inflows vs Spending – Yr 2018:
The 2017 Tax Act didn’t bust the Budget – Spending, Net Interest on Debt did!
https://www.cbo.gov/system/files/2019-06/55329-MBR.pdf
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Source: Fed Reserve and TREPP
The FED: The Spread btw 2-Yr & 10-Yr Treasuries is a RISK: Widest spread Feb 2010 @ 2.83bps. What is it in June 2019? Approx. 24bps. Pay attention to Yield Curve!
The spread between the 10- and 2-
year has averaged about 120 basis
points since 1998, with the 10-year
rate typically higher than the 2-year
rate as investors are compensated
for the higher risk of holding a longer-
term bond.
Over the past two years, this spread
has dropped, reaching a 24 basis
points June 14th
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Fed Tool that may get
Dusted Off
in lieu of a
Rate Cut or Hike:
IOER
Interest Paid to Banks
on Excess Reserves
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CRE Finance Disruption: Déjà vu or New? The 1970s: The Great Inflation. Interest rates rose
sharply from 5.25% in 1972 to a Prime
lending rate of 20.5% in summer of 1980.
The 1980s: Savings & Loan Crisis The 1981
Economic Recovery Tax Act and the change in the tax
law in 1986 triggered the implosion of a critical CRE
finance source, S&Ls.
The 1990s: The Not-So-Great Recession. United
States’ restrictive monetary policy in response to
inflation concerns and the Fed raising rates were
among the causes.
The 2000s The Great Recession. Leading into the
2007-2009 crisis, the Federal Reserve raised interest
rates 16 times between 1Q2004 and 2Q2006, pushing
the 10-year Treasury rate back to 5.0 percent.
The 2010s The $20,000 Bitcoin question
Commercial real estate finance has come a long way
since 1955, when total debt capital invested was
$250 billion. By 1H2018, outstanding commercial
and multifamily debt totaled $4.1 trillion — a
staggering 1,500-plus percent increase in less
than seven decades.1
https://www.ccim.com/uploadedfiles/content/newscenter
/commercial_real_estate_insights_report/ccim_insights
%20report_4q_web.pdf
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CRE Finance: Risk or Opportunity? Lease Accntg / Constr. Loans
https://www.cre.org/the-counselor/fall-2018/its-like-deja-vu-all-over-again/
https://www.ccim.com/commercial-real-estate-insights-
report/deja-vu-or-something-new/?gmSsoPc=1
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Lease Accounting: NOT just a Retail CRE thing
https://www.cricpa.com/retailers-new-lease-accounting-standards/
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Inventory of Leases: Most large Industrial Warehouses are on L-Term leases. Understand Debt Covenants. A tenant’s debt downgrade post Lease Accounting could trigger issues with Bank or Perm Debt and REITs.
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Construction Costs Rising >10%/yr (5 Hurricanes Impacting)
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https://www.agc.org/sites/default/files/Files/Communications/2019_Outlook_Survey_National.pdf
79% of Contractors Expect to Hire in 2019
59% of Contractors Expect to
pay more for labor in 2019
67% of Contractors project costs are
higher than budgeted and taking longer
78% of Contractors say its hard finding labor
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Construction Costs Rising – Worst in CA, West Coast & NE
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https://www.connect.media/california-cities-among-construction-costs-leaders/?pid=f1fba91b-5166-4155-a78a-
bfd119a54748&utm_source=mlCalifornia&utm_campaign=mlCalifornia-2019-05-03_17:01-
California_Cities_Among_Construction_Costs_Leaders&utm_medium=email&utm_term=news%20top-
ca%20apartments%20development%20industrial%20office%20restaurant%20retail
South least
<4%
NE & West cost
most increase
>7%
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Site Selection: Amazon, Apple, NFS, High Tax States to Low Tax
Amazon HQ2 Paper: Reset Button for Site Selection
https://www.ccim.com/newscenter/commercial-real-estate-insights-report/amazon-hq2/?gmSsoPc=1
The Amazon RFP process will be emulated. Does your community know how the new game is played?
Traditional Industries (Retail-malls & Financial-Banks) need to be replaced.
It’s all about access to Workforce – Atlas Van Lines 50-year study of Corp Relocations reinforces the key driver in decision t relocate or expand.
And increasingly its also about Housing Affordability
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Now Site
Selection is
about: 1. Affordable
Housing &
2. SALT and
High Tax Vs
Low Tax
states
3. Logistics
Infrastructure
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The analysts just can’t figure out what is staring them in the face. It’s all about Affordability, not lack of Demand!
Housing – It’s an Affordability Crisis across ALL segments, AGAIN
Low Interest Rates
Strong Demand
Job Growth
Wage Growth
Rising HPA __________________
So why so little new housing construction?
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New Subdivisions where the New Homes are 4-Rent
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Housing Opportunity or Risk? Affordable, but … NOT quite quality of a SF-Home
Affordability gone too far, but not far-fetched https://www.usatoday.com/story/money/2019/06/10/homelessness-among-
college-students-growing-
crisis/3747117002/?utm_source=Alabama+Center+for+Real+Estate&utm_
campaign=5bb6c42062-
EMAIL_CAMPAIGN_2019_05_31_03_38_COPY_01&utm_medium=email
&utm_term=0_4c31a9273e-5bb6c42062-35222455
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https://www.globest.com/2019/05/28/florida-wins-big-as-wealthy-leave-northern-states-296-207015/?kw=Florida%20Wins%20Big%20as%20Wealthy%20Leave%20Northern%20States&utm_source=email&utm_medium=enl&utm_campaign=floridaalert&utm_content=20190528&utm_term=rem
Site Selection: High Tax States Vs Low Tax: FL, TX, SC Vs NY, NJ
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Remaking the U.S. Supply-Chain: Logistics Activity elevates near markets aligned with Rail
The 7- Class I RRs (Note CN (red) & KCS (brown)
“All that happens on the ports, doesn’t
stay on the ports” – Rail, Intermodal!
http://www.intermodal.org/
AAR.org – American Assoc. of RRs
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The Big Story 2019 and Beyond will be Logistics & Convergence of Retail & Industrial R.E.
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http://www.acre.culverhouse.ua.edu/research/logisti
cs-infrastructure-research - Feb 8, 2019 Publication
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http://www.acre.culverhouse.ua.edu/research/logisti
cs-infrastructure-research - Feb 8, 2019 Publication
The Big Story 2019 and Beyond will be Logistics & Convergence of Retail & Industrial R.E.
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30 http://www.acre.culverhouse.ua.edu/research/explore-research
Feb 11, 2019 Publication
From
“Shop & Take Home”
to
“Order Online and
Deliver to me.”
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The further integration of Buffalo, New York, into the Port of New York and New Jersey’s rail network promises to deepen the top East Coast gateway’s inland reach, but it will take far more rail lifts to reduce container storage pressures at the port.
Uniland Development this month acquired a 20-acre parcel adjacent to a CSX Transportation yard in Buffalo, adding a crucial piece to the advancement of a proposed rail terminal and 80-door cross-dock facility. The project is the second inland port proposal to emerge with the goal of serving New York-New Jersey.
While any additional inland capacity would help the growing storage needs of New York-New Jersey, where cargo volumes grew by 6.5 percent in 2018
With a 14 percent rise in rail lifts in 2018 over the year before, to 645,760 lifts, and the opening of its fourth rail terminal in January, New York-New Jersey has placed a top priority on driving rail growth, especially by attracting discretionary rail cargo bound for the Midwest.
Looking inland Given the port’s limited geographical footprint, the rising volume likely will continue to put pressure on landside infrastructure and prompt the port to store more containerized cargo inland. To date, shippers and logistics providers have responded by taking warehouse space in the Meadowlands, New Jersey, a 15 minute drive away; Central New Jersey, about 30 minutes’ drive away; and Lehigh Valley, a 90 minute drive away across the Pennsylvania border.
With vacancy rates dropping and rental rates rising in all three areas, as well as the port itself, and the two New Jersey locations close to being overdeveloped, shippers and logistics providers are being forced to look further afield. In the first quarter of 2019, the Meadowlands vacancy rate fell to 3.2 percent from 4 percent a year earlier, and the average rent rose from $10.51 per square foot to $11.01 per square foot
https://www.joc.com/port-news/us-ports/port-new-york-and-new-jersey/buffalo-inland-port-provide-ny-nj-relief-valve_20190424.html
The Inland Port model: The East & Gulf Coast Opportunity
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Commercial R.E. Performance: Green Street CPPI – Risk or Opportunity
Property Price Appreciation is flattening.
Manufactured Housing and Industrial lead CPPI, while Retail and Office are still contracting.
How does this data and CPPI trend with appraisals in banks?
https://www.greenstreetadvisors.com/insights/CPPI
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Commercial Real Estate Performance: Green Street CPPI
Manufactured Housing and Industrial lead: +16% & +9%
https://www.greenstreetadvisors.com/insights/CPPI
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The Changing Design for an Industrial Warehouse Think of an Amazon “Tent Warehouse” pioneered by Iowa Company
Real Estate Design – It is a Changin! Building design is adapting to meet with the challenges of rising
construction costs while simultaneously evolving to meet e-Commerce’s need for more efficiency.
https://www.memphisdailynews.com/news/2018/aug/2/digest/
Amazon’s development of a warehouse made of a taut fabric supported by steel-tube trusses and cables
with no columns is underway in Memphis. The design, engineering and construction is not too
dissimilar to that used to construct the Denver International airport main terminal. This first-of-its-kind
warehouse for Memphis, TN (home to FedEx) and the building’s tenant (Amazon - the world’s largest
retailer and likely next trillion dollar company) is going to be a disruptor for industrial warehouse space.
The building design and components are being provided by ClearSpan Fabric Structures HQ in
Dyersville, Iowa for a cost of $595,000 - or just under $36 per SF 35
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http://www.developadvisors.com/opportunity-zones-index/
Opportunity Zone Resource – OZ Index! Of the 8,700 O-Zs, less than 10% will be viable – Not all are created equal!
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Adaptive Reuse: Turning Blight Bright again?
https://www.ccim.com/newscenter/commercial-real-estate-insights-
report/ccim_cre_insights_report_3q18_web/ 37
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A True Colorado Transformational Opportunity & Risk Ski Industry in 1960s, 1970s (Volcker Fed) 1980s …
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Transformational Risks & Opps:
A new industry & sport to Colorado Tourism Opportunity
No Ski or Transport Infrastructure ( I-70 & Eisenhower tunnel visions)
ASPEN – The 1st experiment Gondolas Vs Ski Lifts - Secretariat
Original Price of Vail Valley Ranches (55,000 for 500 acres or $110/acre)
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The difference between a RISK and OPPORTUNITY
during periods of TRANSFORMATION
is ability to Connect-The-Dots &
Connect the Relationships!
For Example: • E-commerce & Retail • Co-working & Office • Air BnB & Hospitality • 2017 Tax Act and SALT
on Site Selection (migration from High-Tax States to Low-Tax)
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Q&A Including next Recession. July
‘19 is 120 mos w/o one.
We have had one every
decade since 1857 (NBER)
The Risks are:
Trade, FED, Gov. Debt, Amazon
The Opportunities are:
Logistics Infr., AdRu & Ozs,
Affordable Housing The Red-Shoe Economist/Futurist