Austin, TX Ted Jones, chief economist with Stewart Title, was the Thursday, April 12 afternoon speaker at the SIOR Spring Conference at the Fairmont Austin Hotel. He provided an economic update/forecast for commercial real estate investors and helped to identify opportunities and risks as they relate to different types of commercial real estate investments in the coming economy. He started by stating that he was bullish about 2018 even before the tax changes occurred.
Retail was his first sector review and he said that one of the top 10 retailers was Chick-fil-A and now it’s closing. Disasters and hurricanes have created a big boast to the economy. Cities are rebuilding and creating jobs. In the last 12 months, there have been fires in Montana, hurricanes in Texas and Florida and the economic impact is great. With these disasters, there is always an immediate loss of jobs and homes but it all comes back. In 4 months, he showed that the jobs came back and then accelerated beyond the old marks. In Houston, there were two million hotel rooms that were rented out creating positive economic impact.
Jobs
It’s all about jobs for the economy. A 2.5% growth rate is good but today we have 5.99% and that is phenomenal. You need two consecutive quarters of negative growth in order to be a recession. It has now been 5 quarters of consecutive growth and our economy is on fire. Consumers are bullish on U.S. leisure and hospitality. Jobs are way up. There are 2.3 million new jobs right now. In 2018, wages are up 2.72% in the last 12 months to $26.82 per hour. People are buying stuff with more money in their pocket. We had 220,000 1st time applicants filing for unemployment benefits at the end of January, 2018, the lowest in 45 years. This is a phenomenal economy. 90% of workers will see increases in their 2018 income and a wage increase of 13.6% for 25-34 year olds. This age group represented 36% of home buyers. 53% of Millennials want to work for themselves and they don’t mind working hard.
The Hot State Job Growth
Ted cited Idaho has the #1 State with 3.34% job growth due to the fires. Nevada had 3.24% job growth due to fire and floods. #10 was Georgia with 1.99% job growth. All these top #10 states, except Georgia, are west of the Mississippi and 5 of the 10 have legalized marijuana.
Tax Foundation
In terms of income tax friendly, Florida is #4 and Caterpillar just moved to Florida. Hertz moved its Global HQ to Florida. Florida is a big winner. The hottest job growth, #1 is Midland and Odessa, TX with oil and gas. Greely, CO is a big winner with oil and tech.
Residential
GMAC did a study and found that 6 months after a person buys a house, 60% of them buy a new car. So GMAC started financing homes. There were 1.16 new homes built in the last 12 months and we are undersupplied. There are 2.261 million net new jobs at the same time. We are way undersupplied. Tax reform affects residential but commercial real estate came out squeaky clean. No one touched depreciation, 1031s, etc. Retail sales are exploding due to the hurricanes.
Federal Debt
March, 2017, the Federal debt was 30% greater than March, 2018. March 2018 there was a 10.7% YOY increase.
Commercial Real Estate
Industrial is up 20.6% YOY on sales volume. Office is no longer sexy and down -14.8% YOY. Retail is down -25.8% YOY on sales volume and apartments are up 5.2%. Cap rates are too low and industrial is still the winner.
The 10 year T-Note is headed up with interest rates. Rates won’t go up as fast as in the past. Powell thinks 2006 rates went up too high and caused the recession. It will be a slower increase. Rates will increase in the next 9-15 months to 3.3-3.9%. Bitcoin will end up with a zero value and oil is on a surge. It’s cheap energy. They can drill at half the price than 4 years ago due to fracking. In 2014 there were 2100 drilling rigs and now they only need 900 rigs to produce 10.2 million barrels per day. It has been a big oil expansion.
