The Middle East Is Black Swan Territory
It now seems pretty likely that the immediate fiscal cliff will not happen and some sort of a little now and something real maybe later is what will happen. Translation, they will agree some revenue (tax increase) raise will happen. Likely a raise in rates for those making over $1 million, plus a cap on deductions for those making over $250,000. A sop to Obama. Then there will be a few immediate reductions in spending along the lines Obama and Boehner agreed last summer and a series of committees to work on overall tax reform, entitlement reform and one for deficit reduction. Of course we already have Simpson Bowels, Rivlin Domenici, the Gang Of Six, all having devised plans that work to one degree or another. Simpson seems to be the favored basis, so maybe they will take that and rework parts of it. Bottom line is nothing will really get resolved, and we will have more blather for six months and more uncertainty as to what taxes and entitlement reform might look like. In short, nothing will get done that really matters to us for quite awhile.
Meantime Obamacare is now in place and already costing thousands of jobs and lower incomes to lower income workers. The restaurant industry is already well underway to cut hiring, put full time workers on part time and doing other things to not have to cover these people. The same will follow for hotels who employ the same people. Then there are medical device companies already announcing layoffs due to the device tax. Others are moving to reduce full time staff, or simply not hire as many people. This is very widespread. Obamacare will be a huge job and personal income killer.
As I have written before, medical office and other related healthcare real estate will be affected by the major changes now underway in the medical profession. Already 50% of all doctors are salaried staff and the trend could go to 60% or even 70%. It is unclear what that means to medical office sine it is now a group practice business. Beware. Just because it is a group of doctors does not mean their credit is good. Some groups are doing the Dewey Ballentine routine of over borrowing and over paying some partners who are not producing enough revenue. Obamacare forces lower reimbursements to doctors so lower incomes and more borrowing by these groups as they try to maintain their personal incomes on less revenue. It will be a dangerous trend so watch the credit of your medical group tenants.
While everyone has been watching Europe and the fiscal cliff, the real black swan is Israel and Iran. As a result of the weak foreign policy of Obama and his clear effort to play up to Muslim countries and down to Israel, and as a result of the fiasco in Benghazi, the failure to lead in Libya, the failure to act in Syria, and the apology speech in Cairo in 2009, the Muslims correctly perceive weakness and that is when the bad guys move in. Gaza would not be happening if Hamas and Iran thought the US would really stand strongly behind Israel in this. Instead they think they can get Obama to push Israel to stop. The result is very possibly an Israeli invasion of Gaza and Egypt, Turkey and Qatar being in the position of maybe be pushed to support Hamas. Maybe then Hezboullah launched rockets and the full war is on. It only takes one thing to push it over the edge, and unless Obama stands very strong for Israel it can go over the edge in an instant. What most people do not understand is that Israel is the leading edge of military technology sine Lebanon four years ago. Iron Dome is just one piece of what they have developed. Israel now has technology that makes Star wars and James Bond look amateur. If Israel sends in the tanks and troops, it will be a very different outcome than four years ago. Just notice that Israel is able in Gaza to somehow find all of the underground rocket bunkers and destroy them in a few days. Magic stuff. Iron Dome is 90% effective at stopping what it shoots at, but notice it only shoots at rockets that pose a real threat. It can figure it out in an instant which rockets it needs to go after and which to ignore. More magic. Based on what I have been told by a very good source, these things are just a part of a massive technology effort by the Israeli military which will be a complete game changer. Iron Dome is already completely blunting the terror attack . Not what the Muslims figured. The other good news is the US is getting the benefit of all that technology. The coming leap in military and CIA technology is about to happen and it is amazing stuff.
So for our business, the capital markets could get spooked pretty quickly by the happenings in the mid east. It is possible the US could get dragged into a military involvement in an instant. Oil could become a problem. Europe does not need $150 oil to happen. Even without a worst case scenario in Europe the situation there is very far from getting dealt with and it is clear that ten years may be how long it takes to clean up the mess. Or it could get worse and more violent as the recessions get worse and governments topple.
On one hand more capital will flow to the US for a safe haven. Treasuries will remain at a low yield as investors seek more safety. Rates will remain low maybe into 2015. There is no way to know. Apparently Janet Yellen recently said it could be 2016. Nobody knows. What you do need to know is cap rates in 5 years will be higher and rates might be 200-300 basis points higher. When you look at exit prices make sure you assume that.
The fiscal cliff will pass and much worse crises will be on the forefront. Europe is not changing for awhile. Watch Israel and the rest of the Mideast to make an assessment of risk going forward. That is where the black swans are circling.
Where is the market heading? Get the answers at RealShare Conferences and meet the commercial real estate elite. Check out the schedule of events.