Comments (25)

Dec 19, 2016

I reckon the next crisis could stem from emerging markets with large public and private sector USD denominated debt. If the Fed continues to raise rates, Trump manages to encourage companies to invest in the US/repatriate their profits, that should continue to put upwards pressure on the USD. Some countries that I think could be vulnerable are China, India, Indonesia, Turkey, Brazil, Russia. Given that most, if not all of those countries have some pretty big structural problems in their economies, I'd bet that such a shock would expose some pretty serious malinvestment that's taken place over the last decade or so. I wouldn't be able to predict when exactly this would occur; I guess it depends on the rate at which the USD appreciates.

Just my $0.02 anyway. People far more informed than me have completely missed the mark with these sort of predictions.

    • 5
Dec 19, 2016

hello

    • 1
    • 17
Dec 19, 2016

A hostile fed could be the catalyst. Lowering or elimination of QE and raising rates disproportionately could wreak havoc.

We may in fact have a strong economy for a few more years. Maybe more. If rates go up to 6% (nearing 5% on long term debt already), you are going to see some blood in the water on CRE. Those ballooning CMBS deals are easy to refi or sell in a 4 cap market. Try a 6 cap and see how many are able to pay off on time.

I do however feel the Trump Bump will slow tremendously. Rates would come down but not to the lows we saw earlier this year and in the summer. But how does treasuries come back in line affect interest rates when countering the Fed???

We shall see.

    • 2
    • 1
Dec 19, 2016

I do not think very likely, but there are some interesting trends emerging. The real estate landscape could look much different in a couple years. Keep in mind this is purely focused on the Denver market, which I feel is a bit insulated from the coastal markets and CRE volatility in general.

Tax Reform - Part of Trump's tax reform involves drastically lowering the capital gains tax. One means of doing this is by abolishing the 1031 exchange. It is my view that this would be devastating for the CRE profession (brokerage especially) as almost every deal that takes place outside of new construction is an exchange. Even with low cap gains taxes, I think REITs and other institutional owners would be much less likely to ever exit a cash flowing building.

Rents decelerating for first time in years (declining in tertiary markets)

Vacancies creeping upward

Interest and mortgage rates increasing

Lenders tightening up on apartment development; unless a developer has a prior relationship or it's affordable housing, I wouldn't expect to be able to get a loan for multifamily development in Colorado.

Over 2000 Class A units coming online over next year or two

All of these point to a sort of doomsday scenario, but people have been saying the sky is falling since 2011. It is my opinion that retail / commercial is the new spot to be. We've exhausted our appreciation potential - time to chase those higher caps and cash flows.

If your question was about the economy as a whole, I have nothing and sorry for rambling

    • 3
Dec 19, 2016

Regarding a overall recession, I don't think its very likely. There is not much of a reason for a recession to happen right now. Unemployment rate has dropped significantly. Although the Fed is raising rates throughout the next couple years, they will obviously be cautious, things are still fragile and they won't risk doing anything that will undermine growth. I think over the next few years the US will be fine.

Regarding a downturn in CRE. I am thinking more around 2020-2021. Variety of reasons for this. First on the financing side, CRE became really active after 2010-2011. Institutions and funds were using cheap 10 year CMBS money. Most of this will be due 2020-2021ish. The cap rates they bought at were real low and by the time we hit 2020, there is a chance we could be in the 6% range for interest rates. Yellen plans to do 3-4 raises per year over just the next two years. Imagine what it will be in 2020. These guys will not be able to refinance. Especially if these are heavy interest only deals where no principal was paid down they are screwed. In addition, rents are falling, but supply seems to still be coming in on almost every asset class. Some markets have seen vacancy flat line or actually increase. Currently there is too much liquidity and people are forced to invest. When rates continue to rise, cap rates will have to increase and the valuations will be crapp. I imagine you'll be seeing deals that can't be refinanced simply because LTV is in the 80%+ range.

    • 5
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Jul 14, 2017

That's assuming Yeller is around for two more years - its pretty unlikely Trump gives her a second term so she'll probably be out next year.

Dec 19, 2016

Whatever happens, blaming Trump is comical. We've had 8 years of unprecedented deficit spending and fed action. The seeds of collapse have been sown.

Hopefully Republicans can push through tax reform, get money repatriated and have 4 years of unabashed pro business policy.

Jul 11, 2017
TNA:

Whatever happens, blaming Trump is comical. We've had 8 years of unprecedented deficit spending and fed action. The seeds of collapse have been sown.

Hopefully Republicans can push through tax reform, get money repatriated and have 4 years of unabashed pro business policy.

What would there be to blame trump for?

Jul 13, 2017
UFOinsider:
TNA:

Whatever happens, blaming Trump is comical. We've had 8 years of unprecedented deficit spending and fed action. The seeds of collapse have been sown.

Hopefully Republicans can push through tax reform, get money repatriated and have 4 years of unabashed pro business policy.

What would there be to blame trump for?

For defeating the infallible Empress Clinton whose childhood dream of becoming the first female President was shattered by a big meanie /s

Presidents live or die based on the economy. Hoover was a President I respect and he was crucified because of the crash. I see the same potentially happening for Trump.

    • 2
    • 2
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Best Response
Jul 11, 2017

Recession in 2018 is 100% going to happen. I was taking a serious, serious nap this weekend, and it came to me in a vision. No data or facts, just my .02 cents...

    • 16
Jul 12, 2017

0%

Companies have record levels of capital not deployed. US will make slow growth because our risk free rate is so low. Why would anyone expect huge growth from a bond like investment.

We will be in a bull market for the next 5-years unless a political event happens. Wages will stagnate for most of the country, people will further migrate toward cities to where the opporunities are. Big companies who are able to gobble up other companies and assets for 2-3% cost of capital will have destroyed any competition in the markets. You can't squeeze water from a stone, but neither will the stone collapse from pressure. Everyone better pray for inflation only way to dilute the capital of the 1%

Jul 11, 2017
C.R.E. Shervin:

Everyone better pray for inflation only way to dilute the capital of the 1%

Yes I'm wondering if that's the actual plan, and the Obama administration deliberately created an environment where inflation was the only way forward: asset price inflation will come crashing down if wages DON'T go up....same thing across the board in corporate America, especially when you consider cash reserves are at all time highs. Literally the only way forward is to pay people more.

It may not even be by design that this is the case, more of a "hey here's the smart thing to do given the circumstances" kind of decision.

This is just one possibility but you're basically the only other person here who even considers it. This is perhaps scary to a generation of supply siders who see demand as a being off limits for govt but the simple fact is that they don't know anything else.

If interest rates spike, well then yeah different story. From my point of view, the more blood in the streets the better, but we have to consider the possibility there will be long term stability. No matter what happens, we have to make a buck :)

    • 2
Jul 12, 2017

Absolutely agree with "it's the smart thing to do" comment. Ray Dalio seems to think we are on a long term down debt cycle and a few other economists agree we have to delever our economy quite a bit.

I think interest rates need to rise but not spike, I'm not smart enough to say by how much. But regardless desperately need wage inflation and asset inflation because the course we have taken in the past 20+ years would have us in a delflationary period now without outside help(monetary policy).

Personally I agree with you, stability would be great....people might have to actually work to make money and alpha. I just don't see a real dip being possible when so many people expect a buying dip the opportunity won't present itself.

Jul 12, 2017

Entirely possible in my opinion. Look at how much debt central banks and governments have, and what their leverage is on said debt. When people start to realize that there isn't any way possible to pay it all back, I think things will take a turn for a worse. This has been in progress for decades though, so it wouldn't necessarily be any one person's fault, just irresponsible habits getting a reality check.

    • 1
Jul 13, 2017

Remember, some WSO user predicted the last one, so it could totally happen again.

I'll take my crack and predict the market crashes on December 4th, 2017

Jul 13, 2017

Blame the Russians

Jul 13, 2017

2020
interest rate policy

    • 1
Jul 14, 2017

Fuck off, spammer.

[EDIT: Sorry, this was directed at that "Free ATM card" spammer bitch who was posting messages on every post this morning. It appears all of the messages were deleted]

    • 2
Jul 14, 2017

Soon, but not too soon: let's say July 2019.

I base my guess that we will have to wait a bit for a recession on the fact that the student loan debt bubble is one that cannot pop, since usually you can't default on it. Instead, the buying power of the US younger population will be diminished, as this lingering debt is coupled with stagnant wage growth. This probably won't happen over night, even though this has been an ongoing problem. Meanwhile, this factor plays into the decreasing ratio of old/young people, which is leading to the so called "Pension Timebomb".

Finally, real estate prices are rising in the US and other places in the world. For example, there were recently 100ds of people marching down the streets of Shanghai in response to the government limiting home purchases by raising mortgage rates. Further, debt in China is 164% of GDP and the sovereign debt rating was downgraded by Moody a few months ago. I don't know too much about China, but that does not sound like a good mix.

When housing prices rise, young people can't take on mortgages due to their high debt and relatively low wages, retired people can't pay their property taxes, China has a crisis and drags the rest of the world with them, and there is no more room for QE, we will have a big recession...but we probably have a bit of time before that happens.

Jul 14, 2017

Yeah I agree about the China statement. They keep building and building and have a huge surplus of homes, especially in tier 2 and 3 cities. I'm in China 4-5x a year and I've gotten to know a handful of HNWI's who've started quietly unloading their assets and are parking their money because they think it's going to happen sooner than later.

Once that happens in China no doubt it'll have a major global impact

Jul 14, 2017

Sovereign debt crisis, some major domestic municipal/state blow ups. I don't think a recession is likely.

Jul 14, 2017

There's a ton of debt floating around. Credit card debt just hit $1T and student debt is $1.3T. When consumers start getting indebted, i think it's worrisome.

But here's an interesting chart that should speak to where we are in the cycle. There's weakness showing in the most recent months. We've noticed a slight increase in our loan portfolio beginning to weaken with some multifamily oversupply causing some of our projects to lease up slower at lower than borrower projected rents.

    • 2
Aug 8, 2017
Comment

Working hard? Hardly working. Just kidding.. I'm smashing it!
PREP QUESTIONS -FIND THEM HERE

Jul 14, 2017