Since last November’s election, the speed at which new economic policies have been coming at us has accelerated. Just a quick scan of the daily headlines exposes us to a dizzying array of facts, figures, truths and fictions (disguised as facts depending on the media source) about any number of global, national and local topics.
As we do our best to keep current on the things that are important to you, we sometimes get confused on what to count as important and what to discard as irrelevant. That can bog us down and keep us from seeing the underlying real estate trends that we need to identify and communicate to you so that you can make informed decisions.
Shifts in the supply/demand equation, the sustained rise in the cost of capital, persistent inflation and uncertainty over future tax policy, among other economic factors, all figure into the equation, but things are moving so fast that we must admit that no matter how much we study, we remain perplexed as to why the market has not moved sharply into correction territory, though a downward trend in valuations is now at least measurable.
We are reminded of comments made on the state of economics by economist John Mauldin that closely describe what we have been feeling lately. With reference to George Gilder’s Information Theory, Mr. Mauldin had this to say:
“Information theory, at its root, is about distinguishing signal from noise. A signal is broadcast into the air or goes down a telephone line or through a fiber-optic cable, and the challenge is to sort out the actual signal from the noise that accompanies it.”
We think that explains what we have been struggling with quite well, and sometimes just knowing what confuses us helps to fine tune our listening skills and filter out the noise enough to hear the signal. Tariff talk is one good example. The fur is flying back and forth across international borders and threats of retaliatory tariffs are front and center in the media. Are those threats noise or signal? Are they just part of the negotiations to re-balance trade agreements or a genuine attempt to raise needed tax revenue from outside our borders? More importantly, as it relates to your business, which is the signal and which is the noise? Would an extra 10% tariff on Chinese imports impact your bottom line? If you’re the CEO of Walmart, the answer is probably yes. If you run a service business that sources needed supplies made domestically, maybe not.
Mr. Mauldin goes on to say:
“In the world of economics, an entrepreneur has to distinguish amidst the market noise a signal that a particular good or service is needed. But if some force – a government or a central bank, for instance – distorts or corrupts the transmission of the signal by adding noise to the system, the entrepreneur may have difficulty interpreting the signal and may potentially respond to the wrong message.”
US Treasury yields are another good example. The yield on the 10-Year note, the primary benchmark for commercial property loans, has been all over the place of late. It fell to 3.63% late last September, then shot up to 4.79% in January before falling again to its current level of approximately 4.3%. In July of 2022, when industrial property values peaked, the 10-year yield was just 2.9%.
What should that mean for commercial property values? Logic tells us that values would decrease to compensate for the rise in the cost of capital, but supply fell at the same time. There just wasn’t much out there to buy and that mitigated the impact of the decrease in demand that came with higher interest rates. The result? A slowdown in market velocity and the end of price increases, but no significant correction. The market was and remains in a sort of stasis after a 12-year bull run. Is it just taking a well-deserved rest before moving up again, or is this the calm before the storm? There are believable arguments for either outcome, though history points to the latter as more likely.
Mr. Mauldin’s message is a good one. Find a way to separate the signal from the noise and choose the path that reflects your unique circumstances, your personal appetite for risk and your vision of a fulfilling life going forward. Once you do, listen carefully and act accordingly.
We will keep listening for you and let you know what we hear.
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