U.S. Economy: Kinetic Energy Abounds

By Bruce Davis, Executive Vice President/Principal – Lee & Associates Atlanta

We have a vast disparity between the left and the right at present, exemplified in its rawest form by the fiscal cliff negotiations between the executive branch, which seems to think that we have “no spending problems” and Congress, which doesn’t know what to think, other than to fear the race card.  For now, at least the can has been kicked down the road until at least sometime in February.

Against this backdrop, however, Corporate America has been hoarding cash, as have private investors, hedge funds, private equity funds, pension funds and newly launched entrepreneurial firms who have filled the gaps left by Lehman Brothers and others, and all have tons of cash.  They have grown weary sitting the sidelines, and itch to be placed into service. From the corporate sector, share buy-backs have grown surprisingly popular, but can only go so far to increase shareholder value. These funds must be placed and engaged in order to earn a return, and more importantly on the private side, to earn fees for their handlers.

Three to four years after the crash of the housing market, and the ensuing credit crunch that reached into and devastated Commercial Real Estate across all sectors, a slow but steady and palpable recovery is taking place.  Like a forest fire sets the stage for regrowth and regeneration, the recession that began in 2008 has burned away scrub brush, inefficiently designed and planned projects and created fertile ground for new deals. And these opportunities, for those who have survived, or at least gone on the offense, are being fertilized by low interest rates. The losing of so many homes to foreclosure of loans made to people who 1) weren’t qualified borrowers in the first place, or 2) who have become ‘un’ or underemployed, and/or got caught in interest rate conversions have led to a resurgence in apartment occupancies as well as rental rates, and dramatically so.  New apartment construction, renovation and acquisition has been one of the strongest sectors in the CRE world.  The release of the Archstone/Lehman Bros. portfolio led to interest from many suitors and have not been alone in the pursuit of portfolio and billion dollar deals. Apartments are being routinely sought by institutional investors in the five cap range, and developers are busy planning and building new product, especially in urban environments. Foreclosed and repriced condominium project inventories are winding up with few units remaining (the Starwood Residential acquisition of five projects financed by Corus Bank in Atlanta as a prime example). Big money is chasing foreclosed home portfolios from lenders and for the first time ever, we have the invention of “single family as an asset class”.  In some markets, these purchased homes are being leased up smartly.  Atlanta, Phoenix, Miami, LA are targeted cities by names like Blackrock, Berhing Harvard, Colony Homes and others.

Other sectors are following suit in their recovery.  Notably included is of course hospitality and industrial. Warehousing, storage and logistics have been slow and steady, and are seeing an uptick in occupancies and investment. Outmoded properties are being scraped and redeveloped with automated systems and 30 foot clear heights. The pending re-opening of the Panama Canal with the capacity to handle Post Panamax cargo vessels has industrial developers planning and stalking key properties in the East, as this event will change the rules of shipping, storing and distributing product across the country.

The beautiful thing about capitalism is that it has an inherent energy to fuel growth and to replenish. Where one group or sector or product succumbs to market forces of economic obsolescence or technologic development, or demographic decay, another steps in to fill the void. Banks are cleaning up from their mortgage hangovers (B/A pays Fannie $11.6 Billion this month related to the Countrywide suits), and are loaning money, at rates that make deals happen.  Developers will find a need and fill it.  Like water seeking its own level.  Whether it is the local developer with a small crew building in-fill housing, or a national developer with Institutional Equity building Student Housing due to University enrollment growth, there is activity in the market.  When a national purveyor of baked goods folds up due to Union costs, a new technology entrepreneur converts an office building into incubator space for startup internet based small businesses. Manufacturers of hard goods, faced with decaying infrastructure and out-of-line labor costs relocate and invest in Billion dollar plants in the Southeast in right-to-work States.

All is not rosy.  But when Columbus discovered America, he unwittingly stumbled on a land mass that contained the richest resources imaginable. And fortunately, a system of laws was created that allowed these resources to be harvested, mined and nurtured and exploited not the most productive economy and build the strongest power on earth. It still is.  We currently are squandering such capabilities, and at an alarming rate. There is friction between the populace and the government. Underneath it all, however, despite new taxes, new regulations, and all odds, the open and free market system is where our strength lies.  Hopefully it will survive and sustain us.