Recovery is Sustainable, But Bifurcated

LOS ANGELES—Job and GDP growth are consistent, and no recession is in view for the near term, but growth is slow, spotty and not as widespread as statistics may indicate, according to speakers at RealShare Los Angeles here yesterday. While there was a generally optimistic outlook expressed on the panel “Economic Outlook: An Expert Look Ahead,” speakers cautioned that certain markets were still struggling from the recession and the recovery is taking a long time to reach the whole country.

Moderator Rick Chichester, president & CEO of Faris Lee Investments, said the real recovery will happen “north of 2020,” when Millennials begin buying homes. He asked the panel where we are today in the national economy, and Jerry Nickelsburg, adjunct professor of economics for UCLA's Anderson School of Management, said we now have consistent job and GDP growth, but the economy is slow-growing. The good news to this is that we haven't built in imbalances in commercial real estate, so he doesn't see a recession in the near term. “But it's a bifurcated recovery. We have troubled labor markets in certain areas and not as widespread job growth” as we might be led to believe by media reports.

Christopher Lee, president and CEO of CEL & Associates Inc., said the end of the current real estate cycle will likely be 2018 or 2019, and investors will need to rebalance their portfolios at that time. On the industrial side, Lang Cottrell, regional director, southwest, for Goodman Birtcher, said, “From our perspective, we have a good pipeline to work through. Most of what we bought, we bought a couple of years ago, and we're working through that. The big picture is rosy, but market specific: there are supply constraints and consistent demand. Stick in key markets and be disciplined in building—there is risk in secondary and tertiary markets.”

Bill Cumby, SVP for PIMCO, said regardless of leverage, real estate is still a good investment option, but investors “should always be aware of where interest rates are. Risks are associated with rents moving upward for the first time in a long time. Despite low cap rates, interest rates look good relative to stock or bond trading.”

Regarding pricing, Lee said acquisitions-operating platforms will be very important, as well as non-traditional ways of looking at assets as we move forward. Nickelsburg pointed out that real estate and Treasury bills are two very good opportunities in the US, and he added that the US economy compares favorably to the rest of the world so many foreign investors are putting their money into US offerings to ride out the storm.

Cumby said there are risks in every asset class, and he pointed out that you can't get in and out of real estate as quickly as some assets. Nickelsburg added that macro policies will likely not interfere with the economy at this point, that the Fed will be on the sidelines and the economy will evolve on its own.

Cottrell spoke about how e-commerce has impacted the industry, saying, “You can't rest financial decisions just on what's going on with e-commerce, but greater clear heights give all groups efficiencies in space,” so this design change is good for the whole industrial sector.

With regard to retail, Lee said there are “programmatic changes happening in retail. Retailers are realizing they need to add more in order to keep customers in stores. They need to provide customers with a reason to be there.” He added that we are moving to a renter-based society, and he recommended buying as many industrial buildings as you can because there will be legalized marijuana in California.

Lee said within the next decade, we will have 25% to 30% fewer real estate companies in the business because of consolidation, mergers and executives retiring. His concerns for the future are that the real estate industry will become the energy czar for the US, with taxes levied on non-green building owners. He also worries about acts of terrorism in shopping centers and that they will turn into TSA centers in response; that taxing and regulation will increase. “California lost 100 companies a year, most of them moving to Texas and other lower-tax states. We need to create opportunities in real estate” for companies to locate here.

Nickelsburg said he worries that the Fed has more than $2 trillion on its balance sheet that needs to be dealt with, and that so much foreign capital will create lots of speculation, which could lead to problems in the financial markets. Cumby said he worries about increased volatility in the next 12 to 18 months as the Fed begins to move on interest rates.

When asked about opportunities, Lee said grocery-anchored centers, Hispanic retail and self-storage represent great opportunity, and Cottrell talked of redevelopment in infill markets. “There's lots of obsolete product out there.”