Market Watch

Kiss Low Interest Rates Goodbye

1st Quarter 2023

Market Watch by Joe A. Hollingsworth, Jr.

As the “treasury elites” discuss the taming of inflation there should be a loud rebuttal. Their stated long-term goal is 2% (slightly above or below) inflation. It should be recognized their Consumer Price Index basket of items they track to set rate increases doesn’t reflect what Americans actually buy, and so the conjecture is that CPI is 1%-1 ¾% understated. Americans feel real cost increases more than the stated government CPI.

Here are a few of the long run problems with returning back to 2% target for this decade.

• The infrastructure bill is to be phased in over the next 5 years. This is the Federal government force-feeding state and local governments on largely unproductive investments but stroking the ego of the Woke movement and the climate and equality activists. But it stokes the increases in building material prices.
• The evaporating work ethic has more people thinking “stay at home” or not be so heavily engaged and passionate about their position. The Democrats have fed this work ethic problem in paying people to stay at home and those incentives and resulting attitudes are not likely to go away anytime soon. This increases labor pricing.
• With all this new technology, why hasn’t productivity increased dramatically? Without a change in productivity per man hour it will tend to feed inflation.
• There are built-in expectations in business after enjoying a period of inflation and resulting pricing power. This might recede some from extreme pricing, but the increased profit margin will substantially remain.
• The government has not been our friend in allowing so many mergers and acquisitions to be competition killing in nature. As example, far fewer airlines, far fewer banks, but now every industry is being allowed to consolidate. This, coupled with fewer new startups occurring (that provide competitive pricing) therefore supporting the healthier profit margins as mentioned above.
• The federal regulations as imposed on states, localities, and business have driven the hard cost up substantially and they continue to expand requirements. This ever-increasing cost has got to be passed on to the end user.
• ETC, ETC,…

While the “treasury elites” continue to live in their fantasy world, we’re predicting and allowing for the rest of this decade to be between 4%-5 ½ % inflation no matter what they do, because its already built in.

How does this effect industrial real estate? Well, those that are long term holders are going to be greatly benefiting (as in the last year) with dramatically rising rental rates. Those that have built in their leases an annual CPI increase (such as we have) are going to be very blessed going forward. Those that are on annual or 5-year term adjustments are also going to be blessed. Truly, I do feel bad for those who are at a fixed lease rate for long periods of time. Inflation always has an extremely helpful or devastating effect on real estate, but the outcome is determined by the lease that you sign. Those that aren’t using annual CPI increases won’t stand much of a chance to sell their property in the next few years.