4th Quarter 2024
Market Watch
by Joe A. Hollingsworth, Jr.
In the industrial real estate business, there is a term that we all contend with called overhang. When the tenant has a lease that extends considerably beyond the beginning of the new lease where they intend to move, it creates an overhang of a lease and is generally resolved to everybody’s satisfaction.
However, the Biden Administration and the Federal Reserve have created such an overhang for the last three years of federal spending; and, a large part of that is still unspent which creates a “huge ongoing overhang” for its citizens that will be to nobody’s satisfaction. The resulting inflation that we had from previous federal binge spending got close to 8% with a correspondingly large jump in interest rates, which stifled small and medium-sized companies. The high interest rates continuing (in spite of the 50 basis points drop recently) has been a true choke collar on the economy. While larger public companies don’t typically have so much restraint from higher interest rates, the smaller companies tend to have a higher leverage base (coupled with tighter bank lending rates and lending percentages) and have struggled.
A most recent consumer sentiment survey highlights what we have been seeing for the last 90 days which is price sensitivity and almost a refusal to make business decisions with so many variables up in the air. Yes, gloomy feeds gloomy; but, the bottom 30% of the population has spent all their stimulus money and then some, and are now struggling with extremely high credit card debt at “Jesse James” interest rates. However, this dramatic drop in positive consumer sentiment is finally verifying the above factors.
This overhang is further compounded by a huge increase in federal regulations, although a small part of this has now been mitigated by the Supreme Court rulings. These are a huge drag at a crucial time, and now dramatically affecting useable cash flows to use toward companies’ costs. Frankly, for 40 years, the interest rates have been generally falling, while we piled on more and more federal regulations. However, we did not feel the full effects of these regulations; because, companies could borrow for lower rates, thus they could offset costs. Now, those days are behind us. The “new” government going forward is just what we have seen in the last 3 years which is more regulations and spending. Under the Harris economic proposals with the new taxes being proposed as well as the tax on unrealized gains and her proposed regulations (based on her past actions and not her recent “come to Jesus” positions) will greatly prolong this overhang. Therefore, we would not expect practically any industrial demand. On the other hand, although Trump is also pandering for votes, I believe there is much more security in his economic program; because, the recent regulations will be repealed, and Trump would impound previous authorized but unspent federal money making our overhang much shorter.
