10/4/14: Tracking Trends in Commercial Real Estate and the Broader Economy

According to our expert guest David Lynn PhD., commercial real estate is recovering nicely and is a leading indicator of economic recoveryCommercial real estate can be a leading indicator of broader economic trends…especially employment, which is very important to real estate investors.  Because when businesses are optimistic, they lease space to house more people and accommodate growth.
Likewise, when businesses are pessimistic, they don’t add space, renew leases or accept rental increases (important if you’re the commercial landlord!).

But whether trending up or down, commercial real estate provides an indication of the sentiment of businesses.  And because rents and salaries (which pay residential rents) are derived from profits, what’s good for business is good for landlords.

So to find out which way the wind is blowing, we visit with not one, but TWO super smart guys who spend lots of time tracking trends and making big money investment decisions.

Voicing their perspectives on this episode of The Real Estate Guys™ radio show:

  • Your trendy host, Robert Helms
  • His broad co-host, Russell Gray
  • Expert guest and real estate investment strategist, David Lynn PhD.
  • Returning guest, CEO and investment strategist for U.S. Global Investors, Frank Holmes

David Lynn sets the tone early noting that “the demise of retail and office real estate is greatly exaggerated.”  So right away we get the feeling this is going to be an upbeat show.

He explains that commercial real estate has been “recovering nicely” and points out there isn’t an over-supply of properties in the market relative to demand.David Lynn PhD tells us that commercial real estate is trending up

So, as the economy and employment improve, it brings a demand for commercial real estate.  And because there isn’t an over-supply, the demand (aided by cheap financing) helps push up prices.

That’s GREAT news…if you happened to buy commercial real estate when it was in the dumper.

(Note to self:  Buy stuff when it’s on sale.)

But it’s also great news now, because the increasing demand is a symptom of an improving economy.

So even if you’re a residential real estate investor, an increase in the demand for commercial space indicates businesses are are growing more confident in their future. This can mean more jobs and bigger paychecks could be on their way.

To which we say…bring it on!

David also reminds us that corporations are sitting on HUGE amounts of cash.  So unlike the rank and file consumer, businesses have war chests of capital to pour into growth…once they believe the timing is right.

David says cash on corporate balance sheets are a “coiled spring” waiting to release its energy into commercial real estate.

He also brings up another source of capital that’s starting to pile into commercial real estate:  money from overseas.

Because while many American investors are a little frustrated with the pace of economic recovery and some of the monetary policy in the good ‘ole USA, foreigners still look at the US as a safe haven….just take a look at the strength of the U.S. dollar.

More than that, foreigners like U.S. real estate.  And even though, as Americans, we like to diversify outside the U.S., it doesn’t mean we’re down on U.S. real estate…far from it!  This simply highlights how global real estate investing has become for everyone…no matter where you’re based.

And speaking of global investing…

US Global Investors CEO Frank Holmes gives us his comments on trends he sees in the the dollar, oil, precious metals, real estate and stocksNext to chime in on economic trends is returning guest, Frank Holmes.

Frank is the CEO and chief investment strategist for U.S. Global Investors, an award winning family of managed funds out of San Antonio, Texas.

Frank’s not a real estate guy (at least not in the way we think of a real estate investor), but he’s a very sharp economic mind and he closely watches global economic trends.  As we’ve already alluded to, there are important links between economic strength and real estate.

Frank believes that falling oil prices will be positive for real estate because lower energy costs mean more income is available to go into rent, whether it’s an apartment dweller or a big manufacturing plant, distribution center or office building.

As far as the dollar’s recent surge, Frank thinks the greenback is ready for “a breather”.  If that’s true, it should provide a boost for gold and silver.

In fact, we specifically ask Frank about metals (precious and otherwise), and he tells us to pay attention to China, which he describes as “the 800 pound gorilla”.

Franks says if China’s demand increases, it will push metals prices up.  If not, then just the opposite.

So why should real estate investors care about metals?

First, metals (like other commodities) go up and down in relation to the strength of the dollar, in addition to responding to basic pressures from supply and demand.   So, metals that are used in the construction of real estate (from nails, to rebar, to girders, to wiring, to appliances and HVAC), affect the cost of construction.

And for those investors who have diversified their liquid assets to include not just cash, but monetary metals as well, the last year has been a little stressful…at least if you’re prone to measuring your wealth in dollars (as opposed to number of rental units, ounces of gold, etc.).

So if China continues to build up their gold reserves (which they’ve been aggressively doing for the last couple of years), at some point the demand for physical metal will overwhelm the paper metal (derivatives) market, and put upward pressure on prices.  So if you’re holding gold, or accumulating it while the pricing is soft, then this could be welcome news.

In closing, Frank also believes interest rates will remain low for the foreseeable future.  Of course, interest rates are a topic of great interest (no pun intended…okay, it was intended) to almost all real estate investors because debt is one of our favorite tools.

Bottom line:  The overall sentiment from both of our expert guests is positive, which is a trend we’re happy to see continue. 🙂

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