Ready, set, go – dive into summer activities and celebrate the 2018 graduates - the economy is still healthy! 

Thank you for your patience while I took a few weeks off from this column due to end of UA’s spring semester, my daughter Grace’s high school graduation (University of Alabama bound in August!), travel from coast-to-coast for a plethora of spring conferences and events involving the ACRE Board of Trustees, Birmingham Association of Realtors, Alabama Economics Club and CBRE, Counselors of Real Estate, CCIM, CoreNet,  and an excellent logistics & transportation conference in San Francisco hosted by Colliers International. It was a most eventful May! Luke has had no difficulty diving into Summer. 

 

I am now hunkered down in research mode to publish another joint paper between CCIM and ACRE on the topic of Adaptive Reuse – as well as a new signature ports & logisitics paper by ACRE that will delve into more than just the evolution of our ports two years after the opening of the expanded Panama Canal locks. Stay tuned later this summer and early this fall for both these research papers.

The Bulls & Bears Scoreboard: Enough about fun life events, how are the real estate markets and economy performing? As my late father would say in the good times, things are “finer than frog’s hair.” And he would know having been born in 1917 and living through the onset of the horseless-carriage age to the space age - with a lot in between, such as: i) the Great Depression; ii) WWII where he served as a Captain in the then Army-AirCorps (predecessor to the Air Force); iii) the boom-bust of being one of Vail ski resorts four founders in 1962 (he was the land guy); iv) the 1970s and the Volcker Fed when the Prime Lending Rate rose to 21 percent and it crushed the real estate economy; v) my teenage driving years that helped the Detroit auto industry survive the 1980s – especially FORD; and vi) much health adversity at the end of his life.  So what is so fine, you may ask?  As the late Jerry Lewis would call for each time he raised another $1.0 million for Muscular Dystrophy on the Labor Day MDA Telethon, let’s have a Timpani Drum Roll and run through May’s economic and real estate highlights:

Housing: Homebuilders remain bullish overall, but are still slow to add new inventory, especially at the much needed entry and under $300,000 price levels. The latest NAHB HMI is still registering in the 70 territory – a sustained level that we haven’t seen since the 1998-1999 period. A reading above 50 is accretive to new home building activity. The all-time low in this data series occurred in 2008-2009 when the HMI feel below 10 to an 8-9 range for nearly 6 months. The NAHB HMI rose back above 50 in June 2013 but struggled to rise into a 60-range until after the 2016 presidential election. Since December 2016, the NAHB HMI has been above 65 surpassing 70 in Q1 2017 - and recording the index’ second highest reading of 74 in December 2017.  The index has consistently been above 70 thus far in 2018 except a blip in April resulting from uncertainty of Fed interest rate hikes and the 10-Year Treasury rising to the pivotal 3.0 percent level. Despite interest rates for a 30-year mortgage being approximately 60 basis points higher than a year ago at 4.56 percent (Freddie Mac close of Friday, June 1), demand for new homes remains high. The month’s supply of available housing stock remains below the 6.0 months threshold for equilibrium - and less than 4 months in many primary and secondary markets such as Atlanta, Austin, Birmingham, Boston, Charlotte, Dallas, Denver, Huntsville, Miami, Nashville, Orlando, Raleigh, San Francisco, Seattle, Tampa and Washington DC.  So the critical question remains: why aren’t builders constructing more homes to meet demand – especially with home prices rising nearly 7 percent on an annualized basis according to both the latest Case-Shiller and FHFA home price indices? The answer is the basis of much debate and probably future research, but without question, builders are still recovering from the 2007-2009 housing crisis and reluctant to add speculative inventory. Capital for land acquisition and development is also still constrained by banks due to punitive bank regulations on capital. Construction costs are up as much as 25 to 40 percent since 2007, and margins are too thin (less than 10 percent) to incentivize the construction risk for less profitable entry-level and affordable housing. Maybe the recently passed Dodd-Frank bank reform legislation will assist with the bank lending aspect of the problem. Time will tell.

The other housing bright spots are twofold: i) home prices are rising, and that will stimulate more existing home owners to sell providing some relief to the dearth of new home inventory; and ii) construction starts and permits have both risen to the 1.3 million level this spring (1.287 million starts and 1.382 million permits in the latest May 16 ^th data). The May HPA reports by FHFA and Case-Shiller for the March period revealed home prices are rising even faster than CY 2017’s 6 percent rate toward the 7.0 percent level (+6.7% according to FHFA May 24 ^th report and +6.8% in Case-Shiller’s 20-City MSA measure released May 29th). In Alabama, the rate of home price increases is higher than the national average according to ACRE’s May housing reports. Thank you ACRE colleague Stuart Norton for great work this spring overhauling ACRE’s housing reports and adding the new construction housing report. Check out how this activity translates to Alabama at ACRE Residential Construction Activity Report .

GDP: 

On May 29 ^th the BEA provided us with its first revision to Q1 GDP. It slipped 10 basis points from +2.3% to +2.2%. Regardless, the revision still makes Q1 2018 GDP the best Q1 period since the Great Recession. Remember that the Q1 period is typically the weakest of all quarters due to conclusion of holiday sales in Q4, onset of winter, and important industries like housing going into hibernation. Spring has sprung and I forecast we will see Q2 GDP well above 3 percent and knocking at the door of 4.0 percent. Q3 2018 GDP is the one at risk with the likely onset of Trump tariffs and a Trade War with our NAFTA and European allies. For some broader historical perspective on U.S. GDP, the GDP growth rate in the United States has averaged 3.21 percent from 1947 until Q1 2018, reaching an all time high of 16.9 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.

Small Business Optimism – NFIB Small Business Index:

The optimism by small businesses has been the unheralded economic story of the past 18 months. The NFIB has characterized the transformation as follows: “The Small Business economy is heating up after years on the sideline held back by excess taxes and a stifling regualtory environment.” That has all changed. “Optimism, capital spending, job creation and profits are all up,” according to the NFIB Small Business Economic Trends Survey. Three weeks ago the updated reading to this data series evoked the following from the NFIB’s President and CEO Juanita Duggan: “Never in the history of this survey have we seen profit trends so high. The optimism business owners have about the economy is turning into new job creation, increased wages and investment.” And the two key indices – Optimism Index and Outlook for General Business Conditions – tell the story. The Optimism Index shot above 100 a month after the 2016 Presidential election and has remained in a 103-107 range for the past 17 months, The Outlook for General Conditions rose sharply after the November 2016 presidential election and has been in a range of +30 to +50 over the past 17 months. However, the Outlook has tempered with the prospect of higher interest rates and threat of a Trade War from tariffs. The fallout from Trump tariffs on steel and autos will play out over the summer. Toyota stands to be the most impacted with all RAV4 small SUV production outside the US in Canada (400,000+ units per year and a new model to be introduced this fall), followed by Honda and then BMW and Mercedes with a lot of production in Mexico. These tariffs stand to impact AL and SC with their German and Japanese auto assembly. The recently announced Toyota-Mazda plant in Huntsville, AL could become a pawn in a Trade War. AL and SC need to be monitoring these tariffs and fallout from a Trade War carefully over the summer and fall.

Jobs:

Last week we received updated views on the labor markets from ADP, Challenger, LinkedIn, and BLS. If you think the employment picture became any more clear you would be wrong. ADP showed private payroll hiring slowed to less than 200,000 per month to just 178,000 as Small Businesses found it difficult to find or afford the labor they need to expand.  Challenger’s Job Cuts report reinforced the impact from retailers closing stores and shedding labor, as well as the impact of “AI-cation” (KC term for the application of Artificial Intelligence to virtually every industy from agriculture and banking to manufacturing and warehousing).  LinkedIn continues to tell us we have large gaps in skilled labor from coast-to-coast (Seattle and San Francisco to Boston, New York and DC) and Great Lakes to Great Gulf of Mexico.  Seattle, San Francisco, Boston, DC, Chicago, Atlanta, the Carolinas, most of Florida and all of Texas have shortages of skilled labor from pipe welders to coding engineers. So last Friday - June 1, when we received the BLS monthly Employment Situation Report that showed >200,000 new jobs (223,000), many scratched their heads.  The head scratching increased when we dug into the BLS data and saw that all measures of unemployment dropped (U-3 to 3.8 percent and U-1 to a historic low of just 1.3 percent ), but the Labor Participation Rate remained below 63 percent and that workers over age 60 continue to leave the workforce.  The question became: Where is the BLS finding these new workers that ADP, LinkedIn and small businesses can’t find?  I proffered a brief email Friday morning to many of you commenting on the Government’s jobs report last Friday that stated: “The 3.8 percent Unemployment rate, 2.7 percent annual wage inflation rate, <63 percent Labor Participation Rate and inability of Small Businesses to find and afford labor for expansion (latest NFIB Small Business Optimism Index report - labor shortage displacing taxes and regulation burden as top challenge) are worth monitoring.  One-third of the decline in the U-3 Unemployment rate below 4 percent to 3.8 percent is the above 60 leaving the Workforce. Why? They lack savings to retire and we need them - or do we with technology doing more and more work?”

What the incongruent labor reports are telling us is that business is turning to technology to solve the labor shortage and cost challenges - technology like Flippy the robotic hamburger flipper, self-service kiosks at McDonald's, AI-software to perform credit approval decisions at banks for business and real estate lending and perform retail banking activities formerly done at branch banks, autonomous truck driving, etc.   The takeaway from last week’s respective jobs reports is not that: i) the U.S. is out of prospective labor to fill the workforce needs of our “3 percent growth economy;” nor ii) inflationary wage increases are ahead that will cause the Fed heartburn and more rate hikes in 2018 and beyond. Rather the takeaway should be that the next few years are going to be the most transformative period for our labor markets that we have seen since GIs returned home from WWII and we converted to a peacetime economy. The skills gap will grow exacerbating the wage and wealth gap. And all this will radically impact the real estate industry - especially with the application of Blockchain technology. If you are an intermediary in the real estate industry (any industry), like an appraiser, title company, banker, broker, etc., you need to be thinking ahead as to how Blockchain will disrupt your business and labor composition. Reduction of labor across all industries - not just manufacturing - is the promise technology holds for businesses facing labor challenges. 3D-printed homes, robotic chefs at fast food restaurants like "Flippy" the hamburger flipper, expansion of e-commerce to auto sales, grocery, etc., aquaponics and vertical farming via companies like Plenty, drones performing AG functions, property inspections, insurance claim validation in storm-impacted areas inaccessible due by vehicle, photography, and maybe package delivery, etc. are all examples. And we are even seeing deployment of brick laying robots in construction industry. No industry is immune. The lack of efficiency improvement that the Fed points to as a concern for the labor markets and future wage inflation is about to be turned upside down. Just as Densification - and now "AI-cation" (a KC term describing application of Artificial Intelligence to office jobs and all aspects of the economy) - turned upside down demand for office space, application of technology to Workforce is going to turn upside down every traditional labor metric and the traditional BLS reports. That is why I am such a fan of what entities like LinkedIn are doing around Workforce analytics with its new Workforce report and analyses like it's "Skills-Gap" analytics - MSA by MSA and industry by industry.

Other Economic Indicators:

There was a plethora of other economic and real estate indicators in May that I could add several more pages to this column to cover – but I won’t. A few that I suggest you keep an eye on over the summer are:

·        Housing Starts and Permits: Do builders deliver on the prospect of 1.3 million new units to provide relief to prospective home buyers? If they don’t, we will certainly see annual home prices rise more than 7 percent in 2018.

·        E-Commerce Sales: They are up +3.9% May ’17 to May ’18 and keep growing. Can the non-Amazon retailer world catch up and not surrender more market share and industry segments – like grocery, auto sales, and pharmacy – to Amazon? And what is the casualty tally to traditional retailers after all are “e-Commerced and done?” Last week’s announced 63 more store closings by Sears and Kmart is not the end. It’s not a “Retail Apocalypse,” but things are a-changing! The new retail formula for successful and expanding retailers like Arthur Blank’s PGA Superstore is: 1-part selling goofs and 9-parts services and experiences.

·        The Fed, Interest Rates, the 10-Year Treasury and Italy: Unwinding the QE experiment is proving to be tricky. As the U.S. economy hits 3 percent growth and requires a move to QN (Quantitative Normal), that requires rate hikes by the Fed. Those rate hikes impact European nations with unresolved debt to GDP ratios – like the PIGS nations (remember them from the Greek debt crisis – Portugal, Italy, Greece and Spain). Not much has changed and as the U.S. raise rates it puts pressure on the EU Central Bank to wean itself from QE too and that means countries like Italy have to divert more of their GDP to service higher interest rate debt than tend to entitlement and infrastructure needs to grow their economy out of debt. Over a cold libation at the beach on summer vacation, ponder the following that I am presenting to various bank regulatory and banking audiences this month:

Imports/Exports and containerized goods at our ports: The Trump tariffs appear set and our NAFTA and European allies and trading partners are not humored. They are retaliating quickly and a Trade War appears on the horizon by end of summer. The Southeast, Midwest and “Golden Triangle” are integrally snared in trade with this area’s AG and auto manufacturing industries. The East and Gulf coast ports will be an early bellwether as to the severity of impact. ACRE will be publishing its inaugural ports, logisitcs and transportation report early this fall and it will be a material resource to 3M (measure, monitor and manage) the impact of tariffs and a Trade War.

Conclusion:

I am going to close on an up note that has been decades in the making and which makes a dad of two talented daughters ages 18 and 23 hopeful for their futures.  The concluding item is the firsts that are being achieved by women in the workforce and across all sectors of the economy. Two of the world’s largest stock exchanges are now headed by women, and 21 ^st Century Fox/Fox News has promoted its first female to the post of CEO.

In January of last year, Adina Friedman became CEO of the NASDAQ and this past month Stacey Cunningham became the 67 ^th president of the NYSE (aka “The Big Board”). And pre the disgust of Roseanne Barr’s tweet of a week ago, 21 ^st Century Fox named Suzanne Scott its first female CEO. Whether its dean of the prestigous Culverhouse College of Business at the University of Alabama, CEO of a national media company like 21 ^st Century Fox, or head of the NYSE and NASDAQ stock exchanges, women are ascending to the top ranks of every industry. And the ascension is occurring increasingly in the commercial real estate industry as well. Earlier this year AnneMarie DiCola ascended for the second time to Chair of the CREFC – Commercial Real Estate Finance Council and leading organization for CMBS. Later this year two women will ascend to the top ranks of two other leading commercial real estate industry organizations. Barbara Crane will become the CCIM Institute’s global president this fall in Chicago, and Julie Melander will succeed Joe Nahas as the chair of The Counselors of Real Estate Board of Directors in Charleston, SC - also in October.  With all the challenges ahead regarding workforce skills gap, it is encouraging to see that maybe the gender gap has finally been closed in key industries and commercial real estate organizations. Congratulations to Culverhouse College of Business’ Dean Kay Palan, 2018 CREFC Chair AnnMarie DiCola, 2019 CCIM President Barbara Crane, and 2019 Counselors of Real Estate Board Chair Julie Melander in particular – as well as all the other professional women ascending to positions of leadership across our real estate industry, the University of Alabama, and our economy at large. Lots of role models for my millennial daughters to identify with as they make their way in a dynamic workforce. I am proud to be affiliated with institutions where the gender gap has been closed – University of Alabama, CREFC, CCIM Institute, and Counselors of Real Estate!

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