A Tale of Two Worlds?

Commercial_RE27

My predictive powers are proving to be as astute as your local palm reader (gas price predictions), but I am not paid to predict, so no harm no foul.  However, gas prices plummeted within 7 days of my blog, so perhaps there is a play there?

Nevertheless, I remain puzzled about the state of our economy, especially as it pertains to commercial real estate.  Here are the positives:

  1. Investment sales activity is red hot in Nashville; we are seeing excellent activity with Terrazzo and Carothers offerings.  WHY?
  • Debt yields are very low and institutional investors must place their money somewhere.  I watched an interview with the head of fixed income of Blackrock and he basically confessed of no investment strategy for his bond holdings and Blackrock was using bonds to simply “hold” money.  Alternatively, the stock market is frightening to everyone (market dropped 2% on Friday).  High yield bonds carry entirely too much risk.  SO…where do you go?
  • We closed on an office portfolio that is throwing off an 8.5% to 9.5% cash on cash return, that is looking genius right now and the investors have a tangible asset.
  1. Leasing activity is very robust in Nashville and alternatives for space are limited.
  2. Corporate relocations are targeting Nashville and other comparable cities (Austin and Raleigh/Durham)
  3. Consumer credit is starting to loosen (how many credit card offers do you get in the mail on a weekly basis?)

Here are the negatives:

  1. China growth is slowing, more rapidly than anticipated
  2. Europe scares the *&^%^ out of everyone, at least the current administration has something to blame for US growth.
  3. Job growth in US is slowing…well, no one ever anticipated a rapid recovery, but this type of news has a grinding effect on everyone.

Several things on job growth:

  1. I recently tweeted an article titled, “These are the Reasons US Companies are Terrified of Hiring Right Now”, great article with a wide range of company outlooks/opinions.
  2. I had dinner with a friend who runs a manufacturing company in the Southeast.  He hires workers on a low end of the wage scale ($10 to $12 per hour) and the work is hard.  He has to interview 200 people to get 4 “keepers”.  His problem, drug testing is necessary for safety and applicants can “game the welfare system” and make 75% of his wage and get health care.
  3. This same friend is seeing acceleration in business, but the cloud of uncertainty keeps them reigned in and ever cautious of overhead.

As I started this blog, I will refrain from some prediction, but as commercial real estate brokers and investment advisors, we must focus on the concerns and fears of our clients, yet direct them to alternatives that bridge the fear and provide flexibility.  In addition, investors should “go long” commercial real estate.

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About Cornerstone Index

Cushman & Wakefield | Cornerstone Nashville | Chattanooga | Knoxville

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