New Rules, New Realities | Welcome to the New Age

Author

Ken Wimberly

Over my past 20 years in the commercial real estate industry, I have seen Dr. Mark Dotzour speak no less than 15 times. This week I had the opportunity to hear him speak at a packed room in Fort Worth.

Given the uncertainty of the economy, inflation, housing prices, supply chain issues, rising interest rates, and more, this was a very timely and needed presentation.  Dr. Dotzour did not disappoint. In my humble opinion, this was one of the best and most informative sessions I have attended.

Rather than give a synopsis of my takeaways, I will give you my entire notes from the event. I am certain you will find many nuggets of value that you can use over the coming months/years.

• We are getting back to NORMAL
  • House prices don’t always go up 20% per year!
• MD started presentations in 1997
  • Since then he has not been predicting rising inflation or rising interest rates
  • That has now changed
• We Are Not In Ordinary Times

• How did mortgage rates get to 2.65%? 
  • Fed Reserve engineered and manipulated them 
• Next time we have a recession (maybe more than one?) 
  • 30-yr fixed rate mortgage will go down to 2.00% 
  • If that is not low enough, Fed will drop it even more 
  • THIS IS THEIR TOOL to fight recession (they control the 10-year treasury) 
  • Don’t believe it, research Denmark 0% interest rates 
• Because of this tool and the Fed’s propensity to use it, home prices will continue to rise (over time) 
• What happens when they eventually drop rates down to 0.5% or 0.00% 
  • Don’t Ask – you won’t want to know the answer  
• Grand Social Experiments in the Past that had Sever Consequences  
  • 1981 Tax Reform 
  • 1986 S&L tax treatment 
  • 2005 No Doc loans 
  • 2008 ARM’s flood the market 
• Tectonic Experiments TODAY 
  • Massive monetary policy and fiscal stimulus at same time (while the economy is rapidly recovering) 
  • Defunding the oil and gas industry 
    • Guess what, everyone will NOT own an electric car next year 
    • HIGH OIL PRICES will be here for quite a while! 
  • Unprecedented labor shortage 
    • No one wants to work; and we continue to screw up immigration reform and create legal immigration 
    • Labor shortage causes wages to RISE; this creates LONG-TERM inflation 
    • 12 Million open jobs today 
    • 92% of business owners report FEW or NO qualified applicants for open positions 
    • Changing desires for the future from young people; many don’t want to work like their parents 
  • China in a secular decline 
    • Work and manufacturing will eventually come back to US and Mexico 
    • NAFTA corridor will benefit 
    • Opportunity in industrial?? 
  • Working from home 
    • Value of an office building is UNKNOWN 
    • What will be the demand for office? 
    • 60% of people do not want to go back to the office 
    • CPA firms (accountants) no longer want to come and work in an office  
  • Changing community policing strategies 
    • Social experiment happening (Portland, OR; NYC; San Francisco) 
      • 1.9M have left NYC 
      • 1.6M have left Chicago 
    • This will benefit Texas, but it really SUCKS for our country 
      • Other beneficiaries include UT, FL, NC 
  • Fed will raise long and short-term rates rapidly 
    • Fed only has 2 tools 
      • Raising/lowering ST interest rates 
      • Raising/lowering LT mortgage rates 
    • Fed must slow the economy (because it is on fire) 
• If ONE failed experiment can dramatically affect the economy, what could happen if we have 7 (see above) failed experiments?????? 
• How do you make prices go down when you have a limited supply of things? 
  • DEMAND DESTRUCTION (lower demand) 
    • Ie: a whole bunch of people will become unemployed 
• Household net worth has increased from $110T to $150T in past 24 months 

• In past 12 months, amount of money in household checking accounts has risen from $1T to $4T 
• John Deere labor contract settlement (last year) 
  • Wages go up 29% over the next 6 years 
• Globalization is Deflationary  
  • The tide is now turning 
  • Production is beginning to return to the US and Mexico 
• China is now our ENEMY 
  • People (countries) are rapidly pulling production out of the country 
  • China controls many (70%) of the raw materials needed for phones and EV 
  • China controls 80% of global battery chemical refinement  
• Farmland up 22% in 2021 
• CRE up 24% in 2021 
• Quarterly total return on CRE was 6.15% in Q42021; the highest appreciation in the history of the NPI, which began in the first quarter of 1978 
• Calipers and New York pension fund are increasing allocations to real estate 

• MD expects prices to continue to increase over next 3-5 years 
• How long will it take to stabilize the economy?? 
  • 1970s it took 4 Recessions in 12 Years to slow down inflation to 2% 

• What will Fed Funds rate need to be to slow down/cause recession? 
  • Fed has announced they will raise it to 3.5% 
• NOTE: Recessions are not the end of the world; they are a necessary fact 
• Dotzour’s Key RE Investment Criteria 
  • Employment Growth 
  • Moderate Supply Growth 
  • SPA Quotient 
    • Safety for residents living in area 
    • Protection of businesses located in the area 
    • Positive local business Attitude toward employers 
• Cities Facing Huge Challenges (ORC = Organized Retail Crime) 

• Circa 2010 – Congress passed Dodd-Frank 
  • This has put restrictions on community banks from lending to developers to build lots 
  • No lots = housing supply shortage 
• Normal market should see around 2.0% increase in home prices each year 
  • BEWARE of the coming media stories about housing demand falling 
  • Our appreciation was around 20% last year 
• Prediction on cap rates for CRE? 
  • MD does not think CRE prices are going to fall, thus cap rates are not likely to significantly rise 
  • They (cap rates) are SOMEWHAT tied to 10-year Treasury 
  • There have been times in the past 40 years when the 10-yr Treasury increased significantly with NO impact on cap rates 
  • 2013, rates went up almost 2%, cap rates did not rise 
  • RISK could be a factor that cap rates increase, rather than Treasury rates 
  • Industrial and MF are two darlings of global investors 
    • Amazon just announced they have over-built and will have to sub-lease some of their facilities 
    • Highlighting some of the RISK in the market 
• What is the TRUE inflation rate? 
  • In 1982, government pegged Social Security to inflation rate 
  • Over next 10-12 years, CPI was changed about 9 times 
  • Every time it was change, it was to LOWER the reported inflation rate 
  • So what is the TRUE inflation rate? Significantly more than is being reported. 

Download Dr. Dotzour’s PowerPoint presentation here

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