Raub Report January 2017

It’s a New Year and we have a new President.  Will this be a new age for commercial real estate?  The current expansion is 7 ½ years long, one of the longest on record, yet, remarkably we are not seeing signs of a downturn on the horizon.  The regional exception, of course, is Houston, but even with the two year oil bust, Houston’s economy slowed but never turned negative, experiencing a positive ½% job growth rate. The expansion has been famously slow nationally, a factor that helped get Donald Trump elected with his pledge to change things around.  Perhaps the slowness of the expansion is the very reason for its longevity.

In June 2009, The Raub Report said “News Flash – the new financial center of the United States has relocated from New York to Washington, D.C.” At that point, Ben Bernanke and then Janet Yellen became the CFO’s of the US Economy with the news media and Wall Street hanging on their every utterance.  As of November 8, 2016, the FED has taken a back seat to Donald J Trump who is now the center of attention of the nation and the civilized world.  So, if he delivers on his Inaugural Address, the center of gravity of the US Economy has now moved to Main Street. We shall see. And the world is watching to see what it all means.

Certainly, stocks of small cap companies have soared on the stock exchange in anticipation of the new president implementing the goals of his populist movement. Sentiment in San Antonio’s business community is brighter than it has been in a long time.  In 2015, I predicted that we would see softening in the market starting in 2017, but now I would like to revise that, as I don’t see the slowdown anytime soon, but instead a continuation of this long expansion at least through this year.  No prediction for 2018; we all need to see what this year will bring.

I think there are two factors we will have to consider for the commercial real estate market here in the Alamo City. The first factor is the pending increase in interest rates, with two or three possible this year. However, they are not certain to happen, just as four rate hikes were forecast for 2016 but then we only had one in December 2015 and one in December 2016. Because rates are coming off such a low base historically, normalizing interest rates is actually a good thing.  If you own real estate, hopefully you took full advantage by locking in low interest rates on your mortgage for as long as you could.  That leverage will pay huge dividends for you in the years to come. However, new buyers will not be that lucky as we have seen loan quotes rise by ½ to 3/4’s of a percent since last September. It is expected that the increase in the cost of funds for borrowing will lead to a rise in capitalization rates and a consequent decrease in the value of commercial real estate. However, the spread between “ultra-low” interest rates and only “low” cap rates is probably enough that the spread can narrow some before it becomes a major factor. However, that tension between buyers and sellers certainly exists and will play a factor in buying and selling investment properties in the coming year.

The second factor is inflation which has been a non-factor for years, with the fear of deflation replacing it. Now with the expected increase in economic activity and upward pressure on wages, as our local unemployment hovers in the 3.9% range, don’t be surprised if we see an acceleration in inflation in the next two years. That can be good for hard assets like commercial real estate. Bottom line, we will benefit from optimism and increased growth in business activity with more of a mild breeze in our face than headwinds.