Dr. Mark Dotzour, economist on the U.S. market forecast - by Rob Nahigian

The Society of Industrial and Office Realtors (SIOR) held its Spring World Conference at the Sheraton New Orleans. On Saturday, April 29 Dr. Mark Dotzour gave his forecast of the U.S. economy and investment choices. I attended his talk and here are my take-aways and notes from his one hour discussion. He mixes a great sense of humor with his presentation. 

Dr. Dotzour started out by proclaiming that he is not a fan of the Republican or Democrat parties or either candidates that ran for office and could care less about the media. He said his only source for business is the Wall Street Journal and Reuters. He is basically a neutral economist and said to stop listening to CNN, MSNCB, Fox and the other stations if you really want to know the truth about the economy. The media is only prejudiced and can’t offer the truth. He has been traveling every week doing these economic speeches and he has never seen such uplifting morale in the business community in the U.S. 

His speech was entitled “Approaching the Redline” like when a car approaches the red line as it is about to blow the engine. He said that the U.S. has had real good growth but it’s been gradual since 2008. The business enthusiasm went from nothing to way over the top. Everyone is super hyper-optimistic and maybe it’s too much. Right now the pendulum is swinging back a little. We are approaching the redline in the car. In 2006, we had a hot rod car and a social experiment with 107% financing given to no credit people so that they could buy homes that they couldn’t afford. The social experiment blew up in 2008. In 2009, the car overheated and Bernicke said that we need fiscal policy reform from the president and congress combined. Fiscal policy has not been at the top of the agenda. It has been more about climate change, immigration and jobs. We forgot about fiscal policy. The past presidents created immigration to fill jobs but the presidents don’t create jobs. Trump has done that, he has created jobs. 

Dr. Dotzour then gave a before and after Trump election. Remember, he could care less about Trump or Obama. He is only looking at the facts. 

Before Trump we were told:

1. There was a need to create a stronger economy.

2. We needed to create jobs.

3. There was a labor shortage.

4. There were wage increases.

5. We were headed for higher interest rates and higher inflation.

The U.S. is on top of the world economy because there is nowhere else to invest in the world except in the U.S. and now we have some inflation. But if Trump spends money on bridges, infrastructure, highways, etc. then we can have inflation. But the secret is that you can’t have inflation until you have wage increases.

Key Issues in 2017
• The economy still has a lot of energy left in the tank.

• The feds want to raise interest rates in 2017 which will make the dollar stronger and foreign products will be cheaper to buy.

• Oil and gas industries are rebounding. Expect $60 per barrel.

Dr. Dotzour then expanded the discussion and predictions.

• We have 2-3 years left in this economic run and Yellin wants interest rates to increase to 2%. She would do the increase all at once if she could but they remember 1987 when it didn’t work out. In 1987, the market dropped 22% in one day from Fed fund rate increases. 

• Neutral rate is 2% and it’s the goal, no one gets hurt at 2%.

• Dr. Dotzour thinks we are in the early bull market for single family homes. We are short on housing inventory. You create jobs but no one can find housing which is why the apartment sector will continue to grow. We are in a chronic under-supply of housing. We don’t have a housing bubble in housing as the media says. There’s a lot of buyers and that environment will bid up house prices. But there’s continued demand for apartments because people can’t find housing. 

• Student loans is the next big problem. Half of students have defaulted in the last 7 years from 1,000 colleges.

• The next presidential election will be a policy to wash away the student loan crisis. 

• In the next 8 years of elections, you will see campaigns for free universal health insurance for your pets as well.

Fiscal Policy in 2017
• Reduced regulations has been good from many industries.

• Tax reform will be bullish for jobs but unlikely to happen.

• The media is wrong on their news about business. Business is great in the U.S. but the media is all negative.

• Infrastructure spending is unlikely to happen either.

• We can’t pay for tax cuts on building bridges without a border adjustment or eliminating tax loopholes. 

• Dr. Dotzour doesn’t think there will be tax reform. Every day is a crisis on CNN and we aren’t in a crisis. We all want a lot of free stuff and don’t want to pay for it so closing tax loopholes is tough.

Interest Rate Predictions
• The labor shortage could create wage inflation. We don’t have inflation now but new labor wages will be going up but the good news is that we won’t get a lot of inflation because our dollar keeps getting stronger.

• Cost of housing is moderating and it contributes to 35% of the CPI.

•The 10 year treasury and cap rates are unlikely to increase very much in 2017.

•There is slower apartment rent growth now which will reduce inflation pressure

• The 10 year treasury can’t be at 2%; it’s too low and will create global weakness.

U.S. Leading the World
• Our economy has had 75 months in a row of jobs. People buy stuff. Wages are going up and it could be inflationary.

• Consumer confidence exploded after the presidential elections and has increased in the last 4 months.

• 77% of the U.S. don’t trust the media. People are actually optimistic.

• The numbers don’t show that the U.S. is headed for a recession, jobs are up, enthusiasm is exploding, and capital expenditures are up and will be increasing in the next 6 months. Corporate profits are up.

• Total job opening available is 5.626 million and its been this way for the last 40 years. There’s always been job openings, not just today. We have a labor shortage unless we have immigration. We have people who can’t or won’t work and there will always be a shortage. 

• Interest rates aren’t going anywhere. We aren’t getting bridges or tax reform, it’s all noise and interest rates aren’t going anywhere. The dollar is stronger so imports are cheaper.

• The Fed fund rates are charged to banks who lend to other banks and that has zero influence on real estate interest rates. It has no impact.

• 10 year treasuries are going down. 10 year treasuries and cap rate spreads will keep widening. 

Dr. Dotzour then presented a table of Inflation Average by Decades:

1950s                                    1.825%

1960s                                    2.45%

1970s                                    7.25%

1980s                                    5.82%

1990s                                    3.08%

2000s                                    2.54%

2010s                                    1.86%

Basically inflation has been flat and low. Inflation came high in the 1974-82 era with oil spikes, Yum Kippur war, etc. There was a hole in the oil pipeline in Syria in 1974 and no one would fix it. In 1979, we had 6 million barrels a day of delivery and then Iran cut oil to 3 million barrels. Oil went from $14 per barrel to $40 per barrel almost overnight. 

Dr. Dotzour is still bullish on commercial real estate no matter how cap rates compress. Until someone can find a better alternative, real estate is it and right now we don’t have a better alternative. 

Margin debt has been increasing and we are in a high margin debt environment with stocks so you don’t want that choice. Our cap rates in real estate in comparison are still a bargain. People are borrowing money to buy stock and if the Feds raise rates, yes, stocks can drop because borrowing money will increase. 

Hedge Fund Difficulties and College Endowments

• Hedge funds and college endowments have both declined. 

• The best performer was:

1. Private equity real estate = 7.1% return

2. Private equity investments = 4.5% return

3. Fixed income bonds = 3.6% return

Price Increase from 12/31/00 to 12/31/16 is as follows:
All Properties        117 %

Apt.                         176 %

CBD Office               86 %

Industrial                  85 %

Retail                        80 %

Price Decline from Peak to Trough, 2007-2010
All Properties           (40%)

Apts.                         (37%)

Retail                        (39%)

Industrial                  (32%)

CBD Office               (45%)

Price Increase from Peak 2007 to 12/31/16
All Properties            23%

Apt.                            50%

Retail                         (1%)

Industrial                  14%

CBD Office               50%

From 2010 Trough to 12/31/16
All Properties          105%

Apts.                         142%

Retail                         62%

Industrial                   69%

CBD Office               175%

Clearly retail is the biggest concern as it’s the only loser of all the sectors. Foreign money however is moving into all these sectors. 

Rob Nahigian, FRICS, SIOR, CRE, MCR, is principal at Auburndale Realty Co., Newton, Mass.