Bill Conerly of Conerly Consulting send out a monthly newsletter that I always find insightful. He is also a regular contributor to Forbes. He helps cut through the noise and we all know there has been plenty of noise with the investment and oil markets jumpy, the presidential primaries on full tilt and let’s toss in an opening on the Supreme Court.
These are five graphics I pulled from the March newsletter. He still expects moderate growth, which the past two years came in at just above 2% increases. Employment rebounded in February. Overall steady, and we expect the paace of growth to accelerate as we move toward summer.
Charts used by permission of Bill Conerly (http://www.conerlyconsulting.com/this-months-charts).
Running out of steam? Our first note is the US economic expansion continued this past summer, but only at a 1.5% increase according to a report released by the BEA last week. Down sharply from 3.9 % growth this past spring.
Second note is Congress did extend the debt ceiling as the month closed out. This prevents another standoff between the White House and the Congress, and gives the government and additional 80 billion dollars to play with ( ooops – sorry) to be able to borrow and keep the government working. For the most part both sides of the aisle said it was a bad deal, but necessary to keep the government operating effectively.
Third note another month where the FED did not raise interest rates. After almost ten years, eight of which included speculation that an interest rate rise was right on the horizon the Fed Open Market Committee said a 0 to .25 funds rate seems appropriate . See our first note as to why they may have kicked the can again. This policy hurts the elderly, the retired, non profits who want to generate income with safety. Don’t be surprised if it continues through the end of the year, and then doesn’t go anywhere very fast.
Fourth note new home sales really fell off the cliff in September dropping 11.5 per cent. This could be from low inventories, or it could be traced back to first note again. Home prices have generally been climbing about 4 per cent in value over the past couple years.
Fifth note, Office building construction totaled $44.9 billion for the 12 months ending in August up 27.4% from one year ago. Office vacancy is declining and rents are rising. Expect this growth to peak in late 2015 and slow as we move into 2016. Commercial Real Estate industry expects another solid year in 2016.
Fed watching is a major pastime for investors at any level, but particularly the US stock market and the Commercial Real Estate market have been watching and waiting for every crumb of information they can glean from the central bank’s quarterly gatherings.
Economic news has been steadily improved all year. Unemployment numbers continue downward. This month the Fed finally decided it could reign in one of the primary monetary tools it has used to in a series of sweeping campaigns to revive the American economy, during much of the last six years purchasing trillions of dollars of bonds.
Stock market participants have seen a 131% increase in value since the first phase of the program began. The Fed hasn’t totally gotten out of the bond business. As bonds they purchased mature, they’ll replace them with new purchases to hold their current inventory levels at 4.5 billion dollars.
The impact on the rest of the economy is much harder to assess. The Fed’s goal was that the bond purchases would hold down the cost of mortgage loans and corporate debt, contributing to faster job growth. Certainly it has fueled a burst of lending in the commercial real estate world over the past two years, as property investors, and large corporations have either refinanced existing debt, acquired new properties, or launched development projects. All of these have helped provide more employment and raised overall economic activity levels.
The cessation of the bond purchases has not changed the Feds low rate policy. They clearly stated they expect no changes until mid 2015 at the earliest.
You’ll begin to see more discussion of the risks and challenges of the continuing low rates. There is ongoing risk of housing, debt, or other bubbles fueled by maintaining rates at these levels.
All this being said low rates forces those with capital to find higher yields. Commercial real estate presents a great alternative to a bank or CD. NNN single tenant investments can yield in the 5% to 6 % range, with the backing of some of America’s best companies.
When will the Fed decide it is time to let interest rates rise?
Members of the Federal Reserve Board have a very active end of summer, with a conference in Jackson Hole and then their upcoming Quarterly policy meeting September 16 and 17.
The majority on the Fed thinks the economy needs more time to heal and that a rate hike sooner than necessary would damage growth. John Williams of the Federal Reserve branch in San Francisco, which covers the Pacific Northwest was interviewed recently and says more time at these lower rates is the preferred strategy. There is a hawkish minority that thinks the Fed should act very soon to normalize monetary policy or risk higher inflation, but others have been very vocal they see the inflation risk as much less dangerous then allowing brakes to get put on the employment momentum.
One very interesting dynamic as we move into 2015, almost one third of the Fed board positions will change over which could certainly impact the policy direction.
What will be the impact on commercial real estate activity? For now we recommend as we have for the past four years. Rates are stable, and remain at historic lows. If you have borrowing needs, consider this as a good time to get with your banker. If you are ready to move from leasing to owning and want to use an SBA 504 loan, rates are still in the low 5 % range this month, but those loans often fund 6 to 9 months after you purchase a building. Move into action now.