Market Watch

Government for Us or Against Us?

3rd Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

This is America’s first time being faced with high inflation, coupled with a substantial supply chain problem.  So, there is no historically proven path forward.

The previous administration kept us afloat during the COVID experience.  And as we look back and more clearly understand, while there were great intentions for the multi-trillion dollar package to sustain businesses, it complicated life for these businesses by restricting materials and supplies and promoted a general attitude of “the government will look after us.”  Most of the time in life if we don’t face reality quickly, the issues magnify, then become severe problems.

As most all businesses will attest, the “work ethic” deteriorated rapidly with all the surplus of government “feel good money”.  We were all faced with making do with what labor we currently had.  The deteriorated work ethic clearly has created a supply chain problem; meaning very few businesses can get enough workers in the office or on the plant floor to produce enough products presently demanded by the market.  The result is non-existent competition for most products and extreme shortages of others.  When you have virtually no surplus of products being offered there is no competition in the daily marketplace. The basic lesson of economics teaches us a shortage of materials and supplies will drive up prices.  We have a shortage in almost every industry at present.  This inflation was induced by the government being overindulgent in progressive ideas and providing an extravagant safety net to individuals that the government should not promote.  And surprise to all you elite “‘know it alls”; the result is high inflation.

For decades, when inflation is high, you simply raise interest rates to slow demand.   But, this time “supply” is unreasonably restricted! A simple question needs to be asked.  While raising interest rates and subsequently wrecking the economy will solve the demand problem, what allows the work ethic-related supply problem to be solved?

Unless both the inflation and supply chain issues are addressed, I think there is a distinct possibility that this could be a “horrific” government-induced recession.  Demand must match supply and supply is artificially low.  If a few basic governmental policies were stiffened to get people off the couch and reintroduce them to the workforce, this would greatly lessen the potential of a “crash”.

Those of us that live in the “real world” and have to make things work are getting frustrated with those, in positions of power, that seem hell-bent on destroying our economy and work ethic with their progressive theories!

Our position on industrial real estate is it will bear an outsized “brunt” of the recession because of the wrong decisions and policies being made for the last two years. Those without “staying power,” beware!

 

Sometimes You Ask for Things You Don’t Want

2nd Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

There is an earthquake going on in the industrial building sector, both for manufacturing as well as distribution, that can be one of the most significant directional changes we have had in decades.  This change will affect industrial property owners from a manufacturing standpoint and distribution standpoint.   Let me build the case.

A decade ago, a few activists begin by first advocating; and then, it has led to wave after wave of “cause fighters” in the name of “climate change” to advocate for electric vehicles.  But, is this smart?

First, the simplicity of electric cars needing fewer parts manufactured and fewer parts distributed would lead us into dramatically less need for industrial space.  In fact, a great number of our present manufacturing clients would be affected by phase out or closing.  Unless the manufacturers can re-tool, they will be shortly “missing in action”, and distribution would shrink by an estimated 3% to 4%.  However, that is just the beginning of the problem.

Secondly, we have a whole economy that is tied toward the production of oil and natural gas.  These are high paying jobs and in a growth industry that has traditionally produced upward job mobility and increasing responsibility to drill oil and gas in an “environmentally sound” way.  Also, the tax structure of this local economy is based on this affecting several states’ budgets as well as counties and school systems funding.  You have lenders, service facilities, designers, contractors, etc.   This is no “small potatoes”.  When the oil industry goes away, we will become even more dependent on restaurants, theaters, etc. for our so-called livelihood (which don’t pay nearly as well).  Why would America consider this change when it was already energy self-sufficient?   When we drill for oil, you get gas in most circumstances.  Now, the price of natural gas has to go up to just drill for gas.

Thirdly, while America controls its own destiny with petroleum-based vehicles, who will control our destiny in the future if we swap to electric vehicles?  That will be primarily China, because they have virtually all the access to rare metals necessary to build batteries.  By America going to electric vehicles, this will totally subsidize China through exploration of mining resulting in high paying jobs for their citizens.

Fourthly, what do you do with the batteries when the vehicle dies?  There is no easy way to properly dispose of those that is inexpensive.  Also, what about the cost of a car?  Well, it is certainly going to go up when someone else controls the rare minerals by the doubling and tripling of their prices.

And, the “nail in the coffin” is:  These “carbon exhausts” can in fact be eaten by clostridium autoethanogenum (c.auto) which is an oxygen-hating bacteria species developed by Oak Ridge National Laboratories to permanently solve the carbon exhaust problem, and the by-product of this process is using the carbon exhaust to make into plastic and other materials that can be used in manufacturing – in other words, we need it!

If America cannot see that they are destroying their own economy and their self-sufficiency, then we need to live with the result!!  This kind of reminds me of the foolishness of Germany being so dependent on Russia for its natural gas – how did that work out?  This will have devastating effects on current tenants in industrial facilities, so be prepared!  Our company is already reacting.

Taxpayer Revolt

1st Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

Well, here we go again…writing about something that does not directly pertain to industrial real estate. But, I have received so many comments from readers on similar divergent ideas that it leads me to believe that I need to say something that has been on my mind for years that may be coming to fruition.

From the constant beating of the drum for wokeness and so much energy and time being used to promote diversity, it is clear there should be no exceptions. From constant diversity training, to best hiring practices “balanced” by government rules, we should not fail to explore every diversity issue, anywhere. The government has got so many set-aside programs for minorities, hiring quotas, and ever-evolving civil rights policies that we often have to rely on the courts to settle “sensitive” issues, even when there is no ill will to begin with. Often you wonder if the prescribed solution is far more damaging than the perceived original problem.

The more you stoke up a small problem the bigger the resulting flame gets. Or, is it a new industry that gets handsomely paid based on degrees of trouble? I am not saying some of these initiatives do not begin with great intentions, but common sense gets drowned out.

It seems like most of the penalties, fines, or solutions are directed at private commercial interests and enforced by government agencies, that are supported by taxpayers. What would happen if taxpayer money, through government agencies that are paying for a desired diversity outcome, actually used its power to stop paying…like universities? Government makes sure there is a desired outcome based on student ratios, and I support that. However, what just makes me boil is the funding of student loans going to support universities, with literally NO balance of the ideological mindset of professors…REALLY… So, I am supposed to use my taxes to support such extremely liberal ideology with no offsetting balance of conservative views…BULLSHIT…Then, they tell me they have a right to be tenured…Are you tenured?

Just below the surface, things maybe changing. The US Supreme Court will shortly decide whether the State of Maine (taxpayers) can refuse to use taxpayer money to fund a “religious use” or as the government of Maine says, “an education designed to proselytize and inculcate children/students with a particular faith”, read ideology. This may begin a direction that government does not want, but the majority of voters do! I will take the liberty here and alter a few words from the Mainestated reasoning. The US Government is taking action in the Supreme Court to not use taxpayer money funding some student loans, because in some institutions it is an education designed to “proselytize and inculcate children/students with a particular faith” that I will call an ideology of socialism. We would end up with the next step after a likely favorable Supreme Court ruling with a taxpayer revolt, because indirectly the taxpayers are advocating liberal ideas and socialism, not diversity. Let there be no mistake. There will be a taxpayer revolt for the lack of diversity in conservative professors.

Responsibility, The Inconvenient Truth

4th Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

While I am supposed to be primarily writing about the industrial market, there is a much bigger challenge that faces America that indirectly affects everything, including the industrial real estate market. So, here I go…

First, let me state the problem: Never-ending political promises by both parties with never any accountability or projected risk or reward.

When corporations first began to be traded on Wall Street, there was malfeasance, corporate mistrust, and blatant disregard for fraudulent actions. However, to provide legitimacy, there was a move forward that provided some consistency in accounting rules. Otherwise, how could you ever invest in the stock or the industry without comparable choices and the facts being accurate? This became “generally accepted accounting principles” (GAAP). Without GAAP being instituted and in full force around the beginning of the 1880s, we wouldn’t be able to invest properly today. So, it brings us to a point where legitimate companies all play within the “guardrails”.

Another example might be legal reforms. While there have always been customs and known principles (since God was a little boy), Democratic countries now have a well-defined set of rules topped with legal precedence and consistency that we can all rely on. Now, when businesses or individuals overreach, the ultimate legal guardrails are with an independent board, called the Supreme Court. They provide legal sound reasoning for us to initiate any worthwhile endeavor.

How about the Federal Reserve Board? It is an independent body overseeing central bankers trading with banks; and, while it may be appointed by politicians, the terms are long and overlap. While we don’t always agree (Currently, I don’t), the Federal Reserve Board is independent enough that it does provide a specific set of goals that has been consistent in the banking system, thus the risk/reward is reliable.

What is needed is an independent board that provides estimating for political actions, promises, and projections with accountability. This board would preside over the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). It should mandate the accounting principles which are going to be factually based; and, therefore, those two institutions will turn out reliable numbers, not politically motivated numbers. This should be transformational. Instead of unrestrained promises like with the $3.5 trillion dollar proposal which have only parts of the cost/liabilities listed in the bill, it will force all costs to be recognized and resulting reactions to be considered. Political reality will become normalized.

In this era of extreme radicalism about every topic, one true healing source could be this proposed board; because, while we may argue, debate, “cuss and discuss” the ending results of political proposals, the facts will be reliably and consistently conveyed about the chosen topic.

Responsibility is a powerful force.

A Frothy Stock Market

3rd Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

I am one that thinks that the stock market is priced to “virtual perfection”.  So, if everything works out as envisioned by investors, the stock market is “likely” to stay close to where it is for a year or so.  But, a big part of me can see that we are setting the economy up for an obvious slowdown in stimulus that could create a 6,000 to 8,000 points decline in the DOW.  So, what if that happens? How is it going to affect industrial real estate, contractors, subcontractors, etc.?

We believe that the underlying economy is amazingly strong; and generally, the fundamentals are in good shape (minus labor).  Therefore, we have taken the investment stance that the demand for new space will continue at nearly the same rate through the end of the year.  However, if the stock market selloff occurs, does it damage the underlying fundamentals? The answer is a resounding “No”.  However, great damage can be done by the new administration to those fundamentals.  Strains the new administration are causing or proposing are:  1) starving us for labor so they can finally get the $15.00 per hour by bidding up scarce labor prices; 2) executive actions that the court system has roughly already overturned 1/6 of all the actions and another six are in process of being overturned with another 1/6 of them being attacked by various groups; 3) giveaways – encouraging the Russia pipeline completion (Nord Stream 2) and starving out Keystone (our pipeline); 4) give Iran nuclear weapons over a period of time; 5) “act” like you are being tough on the biggest American threat (which is China); 6) a borderless nation and resulting in massive illegal immigration; 7) real estate 1031s elimination; 8) doubling the long-term capital gain tax rate; and, 9) ignoring obvious inflation that is ridiculous when compared to two years ago (take out the COVID year).  All of the above factors and more can add up and greatly affect the economics of many potential expansions or new locations industrial in real estate.  As difficult as the above factors are, they are not likely to “kill” the golden goose.

While the immediate future for our industry is strong, the many potential speed bumps are seemingly getting more numerous.  Business hates variables.  However, in spite of so many factors being present, the amount of investment capital has to go somewhere, and too much of it is sitting on the sidelines.  This coupled with the fact that the federal reserve seemingly thinks that the continuous stimulus of some form will keep recessions (the natural selection of good companies over bad) from occurring.  In fact, as unpopular as it is, recessions always make a stronger economy comeback and reteach us the lessons of healthy capitalism.

I know today’s industrial real estate gets a gold star; but, a year from now, we will be very happy to settle with a silver star and a stable economy.

Unintended Consequences

2nd Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

As far as industrial real estate goes, what is the biggest challenge today?

• One challenge is certainly not the economy with the GDP (in spite of COVID) continuing to provide reasonable growth. The economy seems unlikely to fail.

• Another challenge is industrial building codes or related problems such as construction shortages? While construction costs and inspections always seem ridiculously high and we continue to experience a high level of frustration over shortages and delays, it does not seem that construction will be a big impediment. Also, another challenge for development are lenders…But, they are everywhere, so let’s not consider that to be a problem.

• The biggest challenge is an “administration induced labor shortage”. This is consequential because of several factors. The workforce is being coddled to the point where their attitudes about working (as being a requirement for life) is resulting in the workforce being less committed to actually working. It seems like the ones that want to work and fulfill a psychological need by working are very committed. However, the very sizable market of workers on the margins have had their work ethic greatly diluted to the point of the comment, “It just doesn’t make sense.” However, this is not the whole story. The globalist theory that there “are no borders” is being experimented, again, with an onslaught of illegal immigrants. While there is still a way to legally become a citizen, the vast majority are simply skipping that step, because there is no penalty for doing so. This is forcing America to “dumb down” the manufacturing or distribution floor, introducing several new languages, accommodating several new religions (or other forms of worship), and tolerating the additional company burdens of communication and culture.

Included in the recent stimulus bill that was just passed is to extend additional funds for unemployment to September 2021. This is paying those in the workforce to stay at home instead of them even applying for a job. Why would they look for a job when the majority of them are making as much money (and in some cases more money) by staying at home instead of working, putting them totally out of the labor market? Small businesses are experiencing a huge drop in job applicants, and they are having to contend with existing rebellious workers and their demands instead of firing them. This is because employers do not have a labor market to replace those rebellious and insubordinate workers.

The above-mentioned trends are solidly in place. At least through September 2021, this could be the most difficult time for companies wanting to “fulfill their growth patterns”. Good, easy-to-train, and qualified workers are being paid to stay at home and exchanged for a set of challenges to accommodate illegal or unqualified workers. The “I am getting paid to sit at home” mentality is a huge nanny state problem instead of each individual being a contributing member to society and enjoying their individual success.

However, more importantly, it is contributing to a totally “unemployed qualified workforce”. Most industries have to adjust to the new reality and pay the cost associated with it, but some cannot “afford the freight”. I think this will show up in our larger cities and metro areas before it shows up in semi-rural areas. It is clearly a concerning pattern that affects our industrial partners’ abilities to grow the economy for all.

Three Random Thoughts That May Affect Today’s Real Estate Values/Economic Outlook

1st Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

• The hot topic of the moment is vaccines and how they are going to solve our pandemic.  I must say, I am a skeptic on this as more of the honesty and side effects come to be known. Coupled with people who don’t naturally prefer to take vaccines, I think the consensus is wrong; and, vaccines will not be the absolute economic solution.  While much is at risk, a great deal of the economy will not be returning even if vaccines are 100% successful (restaurants, concerts, office buildings, etc.).

I believe over a period of time people will come to adjust to COVID and its perpetual threat just like we have cars.  Obviously, we must find a way to mitigate car crashes, because we like the use of cars.  First, we implemented seat belts, then air bags, then assistance from AI such as back up assistant cameras.  More and more, people will realize that this is a virus (or some variation thereof) we will have to live with.

• After being appointed to her position at NASDAQ, the President and CEO Adena Freidman announced a new social requirement for capitalistic companies to meet NASDAQ requirements and possibly be eliminated from the NASDAQ index.  Diversity, not profit, has become the topic of the day for her.  Instead of making it easier, less costly and with less regulation being the mantra of the day to be on the NASDAQ, Ms. Freidman’s demand that Board Members self-identify by race, gender, and sexual orientation which is not only problematic, but hilarious.  Have we really come to that?  Surely, we realize that these are not socialistic companies with socialistic tendencies, but their job is to return dividends or equity appreciation for their clients.  It sounds like the book “Atlas Shrugged”.

It appears to me that this is best handled by the federal or state legislators; and, if they believe the public favors it over capitalism and at the penalty of lower returns because of less informed and knowledgeable board members, they should pass the legislation.

• Last, but not least, the world economic forum at Davos has become globalized, again. They have an idea to repackage themselves as “the great reset”, and America’s corporations are standing in line to help fund their “eliteness”.  Irresponsible and low yielding corporate actions always create the inability to govern properly.  These large companies use hard earned cash to support causes that shareholders have very little input on.  They seem to be operating by their recently released quote which is “endeavor everyday to create value for all of our stakeholders whose long-term interest are inseparable”.  When they substitute the word stakeholders, they mean customers, employees, suppliers, and communities as well as shareholders.

Our opinion is a little bit agreed goes a long way! Industrial real estate and business in general best benefits its goals when allowed to earn returns largely uninhibited.

Real Estate…Life or Death

4th Quarter 2020

Market Watch
by Joe A. Hollingsworth, Jr.

Generally, I do not care about a party’s platform, because party platforms are thrown away the moment the President gets elected. But, this time, it is unique. This time, Biden is not disclosing what his policies are; because, as a 48-year politician, he has never had stable policy positions. Plus, the Bernie and AOC wing of the party were allowed to help draft the party platform positions. Progressives control the only key Biden has to victory, so he is dependent on them. Even if Biden just passed 2/3 of these (and other) party positions, he would become more progressive than FDR; and, when you couple that with a vow to break the Senate Filibuster rule, a Biden Senate and House would have no checks or balances.

How does this platform affect real estate, construction, manufacturing, distribution, real estate lending institutions, developers, and related and dependent industries? • Like Kind Exchanges, which are the pillar of real estate, will be eliminated; • The capital gains rate would basically be doubled to 39.6%; • Right to work laws would be repealed, and labor law would be rewritten to favor the unions nationally; • The Federal Reserve ends up with a new mandate to address racial injustice; and, • The “Green New Deal” would dramatically increase every industry’s energy and regulatory cost.

Being in real estate for 54 years (yes, I am that old…but I started early, LOL), this would be the most radical change in my lifetime for real estate along with all the above-mentioned related industries. Every existing real estate deal would practically be frozen, and virtually every real estate trade would become far more difficult to justify. The result will be that, if I must pay this much capital gains tax, I will “simply just sit on it”. A great part of America’s “creative destruction” that empowers efficiency and regeneration of ideas and concepts would be greatly diminished. While new startups over the last 20 years are ½ of what they were in the 50s and 60s, per capita, I believe the above rule changes would further devastate startups; because, it raises risk and lowers potential reward. This will produce greater income inequality that they will once again want to tax and redistribute.

Unfortunately, real estate is not the only part of the economy that would be affected by this platform. Virtually every part of the economy is! However, I am trying to point out what is likely to happen to real estate as we know it.

Vote like your economic life depends on it, because it does!

Stark Reality

3rd Quarter 2020

Market Watch
by Joe A. Hollingsworth, Jr.

Wake up!  You are living in a big city in a blue state!  It is time to rethink this situation.  Whether it is Seattle, Los Angeles, San Francisco, New York City, Boston, Chicago, etc., it just doesn’t work anymore.

A few of the things you may have noticed:

  • This pandemic’s danger (as well SARS and similar to ones before and the ones to come after) is greatly heightened by living in high density areas;
  • Protests with no apparent definable reason are now unrestrained and are morphing into thieves doing harm to neighborhoods, not to mention shootings and drugs.
  • The cost of living and quality of life have greatly deteriorated, even the millennials are moving out.  Every big city is shrinking;
  • Non-sense, political progressive leadership is totally incompetent and largely incoherent; and;
  • Federal tax changes on SALT have raised your taxes to better reflect devastating local and blue state spending excesses.

New York Governor Cuomo said when addressing the street protests, “You don’t need to protest.  You won.”   Then, he added, “What reform do you want?  What do you want?”

All the media and the TV talking heads are in big cities, furthering the myopic progressivism that fuels the unrest.  Would their agenda be any different if they were all based in towns like Cookeville, Tennessee?

As you may know, I wrote a book twenty years ago called The Southern Advantage, and it chronicled the South’s rise to economic prominence from abject poverty.  While there is some truth that air-conditioners changed people’s feelings about the South, the migration of “can do” people to the South has made it the largest population region as well as the economic engine of the United States.

How does this affect industrial real estate?  We constantly are talking about reconfiguration of supply chains, or more recently the onshoring of jobs.  Those are powerful trends, specifically helping the South.  However, unfortunately, another trend is overtaking both of those; and, that is the dramatic increase of migration from the blue state big cities by “can do” people with affluence escaping, taxation and lifestyle meltdowns, and bringing their companies with them.  While I don’t support state vs state recruiting battles, that is clearly not what is happening.  It is the realization of over-taxation, over-regulation, bowing to powerful unions and their pensions, and other short-term “politically-correct” decisions that are frightening the people that remain in these areas to the point where they are now having to re-evaluate the lifestyle they want for their families.

In open candor, I have been accused of being the “Mouth for the South”; however, I prefer to say that I am delivering a reality message that says the South is still blessed with common sense, workable policies, reasonable taxation, and empowering individual success.  Come on down!  The weather is wonderful!

Comments:  jah@hollingsworthcos.com

Current Perspectives

2nd Quarter 2020

Market Watch
by Joe A. Hollingsworth, Jr.

Our articles are written to better guide industrial real estate developers, investors, and professionals; but, there is never a point when investing decisions are not affected by outside events. Those events range from regulations, taxation, right to work laws, GDP growth, etc.; and, occasionally, there is a “tsunami”.

A few thoughts on our virus/tsunamis: • The virus has proven the fallacy of globalism and elitism, and believing that all countries have mankind’s best interest at heart. “Blind Globalism” has forever been blown apart with some countries openly lying to great harm and hoarding supplies of “single source material”. • Companies in America must reassess their “global supply chains”, because the complications of different governmental interactions halting a crucial part is immense, especially if it is sole source. • American companies’ products that are produced overseas for marginal savings have begun the evaluation of coming home to produce, thus accelerating of America’s manufacturing resurgence. • America’s realization that being without rare-earth metals (which are totally controlled by China) will bring Silicon Valley and the building of computers and electronics to a halt, which must immediately change. • Oil is no longer the ultimate economic weapon; it is food. America is blessed with agricultural capacity. • This “tsunami” is accelerating the demise of the $40K annual tuition to universities. Why not just study from home and not mortgage the house or have student loan debt? • The realization that not grouping college students on campus together will allow them to think more freely and have less liberal “group think”. By staying at home, they interact with their local community population instead of liberal university professors and radical “on campus groups”. • This problem forces us to recognize, as a community, how our economy is dependent on all our interactions with good consistent policies and regulations that apply wisdom with the small price you must pay for preparing for devastating events, thus promoting nationalism. • How important it is for the “hysteria-driven” media to use just facts to help educate the population? • The words “fake news” have become more real as inaccuracies in news, by intention or lack of research, constantly are proven wrong. • Downtown office towers are at risk, because people have learned to work at home. • Recognition by 2/3 of Americans that some of the big city/urban problems are unsolvable.

The above list goes on and on. The seismic effects will be felt for years. It will be uncomfortable and a little frightening. As to industrial real estate, while some developers are putting new projects on hold, we believe that by the time a facility is finished there will be a scarcity – build baby build!

Comments:  jah@hollingsworthcos.com

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