EC Commercial Real Estate: The King Kong Of Category Killers

Moreover, there’s no magical macroeconomic expectation of a dollar-for-dollar shift from bricks-and-mortar to eCommerce sales. Recall what set the train in motion in the first place — finding the cheapest price online with the added convenience of shopping basically anywhere, an increasingly important driver of shopper behavior.

As for households’ continued laser focus on prices, stretching your paycheck is pretty important when it refuses to keep up with the growth in the cost of living. Wage inflation has picked up a bit, to an annual 2.4-percent rate in August from the 2-percent pace that characterized much of the ‘recovery’ years. And while food inflation has cooled to a flat reading over last year, an immense relief for families coast to coast, wage growth is still running far behind that for rents, at 3.8 percent, and that of healthcare, at 4.0 percent.

That gets us back to commercial real estate and the odd prospect that retail stresses could eventually spill over into other sectors of a market that is, by any measure, riding a runaway train of heated valuations. It will not surprise you that for years now the engine driving that loco locomotive has been luxury apartments.

While it had looked as if CRE was off to a rocky start to the year, according to the latest data, price growth has perked back up. The Moody’s/Real Capital Analytics composite index rose at an annual pace of 8.4 percent in June, up from 4.9 percent in April. Granted, this is off the blistering 17.1-percent pace clocked in February of last year, but it is still plenty respectable.

New Albion Partners’ Brian Reynolds reckons there’s a good reason to expect prices to continue to gallop ahead in the coming years. It comes down to two words that send shivers up regulators’ spines: regulatory arbitrage.

“We believe that all of the new regulations of this cycle are critically flawed. Whether its Dodd-Frank, Basel III, or the SEC’s insane money market rule change, they all attempt to limit certain products and services,” laments Reynolds. “We have described these flawed measures as, ‘treating the symptoms, not the problem.’ When only the symptom is treated, the problem actually grows in size.”

The underlying problem will be familiar to loyal readers: the requirement for pensions, insurers and other large investors to hit certain return bogeys that have little to nothing to with life on Planet Earth. We’re talking 7.5 percent in the case of pensions and 6 percent for insurers.

This fundamental challenge is nothing new, but how those holding the liability bag approach the issue has, shall we say, evolved. Derivatives in some form are typically deployed to produce outsized returns; structuring an investment vehicle around an income producing asset by adding leverage produces instantaneous outsized returns….until they blow up, that is. Think of the lovelies churned out by WorldCom and Enron, followed by souped-up subprime-mortgage-backed assets and finally the mammoth structured trade that inflated the commodities bubble, the bursting of which we’re still living down.

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Robert Kientz 4 years ago Contributor's comment

Brilliant article. The only reasons to buy local (and not online) are a) niche or premium products not available online and b) convenience of I need it now. Walmart's neighborhood store concept should continue to thrive because Amazon cannot capture those who need milk for their kids for dinner tonight, not two days later. However with Amazon same-day delivery model being rolled out to a city near you, it won't stop them from trying. Eventually Amazon drones delivering goods direct to home will blot the skies of America.