Market Watch

The Speculative Question

2nd Quarter 2023

Market Watch by Joe A. Hollingsworth, Jr.

“To Build or Not to Build” Speculative Warehouse and Manufacturing space…that is the question.

It’s a complex question. In the economies of the past it had to be decided by industrial developers based on the variables of geography, competing supply, estimated costs, needs of tenants. But the normal factors like economic conditions, regulations, and interest rates are being further complicated by additional variables. Let me just mention a few:

• While the Federal Reserve is always late to the party, have you ever seen such poor management by the Reserve and the Treasury, specifically Powell and Yellen? A series of missteps.
• When the Fed fails to react to normalize the economy for a sustained period of time then it almost universally overreacts. How much needless heartache does that lead to in the future?
• The failure of three banks to date (and possibly several more) leads us to ask the question which banking institution is not upside down with bonds or treasuries in a rising interest rate environment and how does that effect CRE?
• Does a failure to properly supervise particular banks, on the government’s part, lead to even more ridiculous regulation? Which was apparently not the solution before…
• With all this chaos, does this mean local banking will be further reduced to only the mega banks with limited competition?
• It seems like the odds are definitely increasing for recession and can we escape it?
• As we increase Federal debt, are we not inviting crises more frequently and what will the next one look like?
• Do the seemingly safe banks, relying on fully servicing wealthy clients, seem safe anymore when all the wealthy people are so willing to move their deposits so quickly?
• Is any bank allowed to fail or are all depositors covered for any amount even if over $250,000?
• In the history of the Fed, it has never lost money because it prints money but for the first time ever its now losing money.
• How can any project successfully wrap up without paying premiums for supplies necessary? Is all this ESG pursuit related to “woke issues” dramatically effecting hard financial decisions?

The current stack of increasingly challenging questions, in addition to the ones that we have lived with as developers, are growing ever more intimidating. After decades of falling long-term interest rates and ever-increasing building codes and requirements, the numbers seemed to work to speculate in even marginal geographic areas or where you might be forced to compete with substantial more product. But as I’ve said in previous articles those days are gone, at least for the remaining years of this decade.

Without more clarity to the above questions Only the Boldest of Developers Proceed at this Point!