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!

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.

Work Ethic

4th Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

With the recent unemployment percentage rate below what it was toward the end of the Trump administration, how do we reconcile there is over 3 million fewer workers? This is in combination with over 11 million job openings that seem to never get filled. Every age demographic is failing to meet its previous Trump years in total number of jobs. Have we killed the “golden goose”?

What do you do when you purposefully destroy the WORK ETHIC? America has always prided itself on a strong work ethic and a sense of pride in the quality of the product. What has happened? Repeated US Government subsidies, rent forgiveness, student loan forgiveness, federal unemployment benefits, extended state unemployment benefits, food stamps, housing…the endless “give mees” are making the rest of the work population feel abused. A great number of studies have indicated that there is more restlessness now in the present working population than ever before about whether they might want to join the unemployment ranks.

People get used to subsidies; and, when you kill it, what happens? It is a struggle to get back to reality. Unfortunately, this is a long fight, a strategic fight. Basically, the bottom line is that they “poisoned the well’, and it is going to take a long time (if ever) for the well to purify itself. Sure, all the above was with great intentions, but the harmful side effects of this continuing lack of financial accountability has consequences. However, you see this everywhere: 1) lack of accountability in school testing; 2) always accepting mediocrity instead of exceptionalism; 3) 18 – 35 year-olds playing endless video games; 4) smoking marijuana in a number of states and its contribution to laziness; 5) over 30% of parents have an adult child living with them that is 23 years-old or older; 6) wasting time on TikTok, Instagram, and other social media platforms and making you think you are “in touch”.

This is a huge cultural change with no motivation to do anything. And now, individuals are not expected by society to make anything of themselves. I fear that this is almost a lost decade of young adults that are “coasters”. While that maybe a lifestyle they choose, the rest of us struggle to fill jobs and produce for America.

Inflation can best be solved by competition between competing products on the market. If you choke the supply chain by not letting it have enough workers and paying them to “sit at home” instead of working, do we really think inflation can best be solved by raising interest rates? No, inflation can best and most easily be stopped by competing products manufactured by people willing to work and produce at competitive prices.

It is certainly not raising interest rates to punish the remaining working population.

America needs to have policies that restore the work ethic, not destroy it.

Government for Us or Against Us?

3rd Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

This is America’s first time being faced with high inflation, coupled with a substantial supply chain problem.  So, there is no historically proven path forward.

The previous administration kept us afloat during the COVID experience.  And as we look back and more clearly understand, while there were great intentions for the multi-trillion dollar package to sustain businesses, it complicated life for these businesses by restricting materials and supplies and promoted a general attitude of “the government will look after us.”  Most of the time in life if we don’t face reality quickly, the issues magnify, then become severe problems.

As most all businesses will attest, the “work ethic” deteriorated rapidly with all the surplus of government “feel good money”.  We were all faced with making do with what labor we currently had.  The deteriorated work ethic clearly has created a supply chain problem; meaning very few businesses can get enough workers in the office or on the plant floor to produce enough products presently demanded by the market.  The result is non-existent competition for most products and extreme shortages of others.  When you have virtually no surplus of products being offered there is no competition in the daily marketplace. The basic lesson of economics teaches us a shortage of materials and supplies will drive up prices.  We have a shortage in almost every industry at present.  This inflation was induced by the government being overindulgent in progressive ideas and providing an extravagant safety net to individuals that the government should not promote.  And surprise to all you elite “‘know it alls”; the result is high inflation.

For decades, when inflation is high, you simply raise interest rates to slow demand.   But, this time “supply” is unreasonably restricted! A simple question needs to be asked.  While raising interest rates and subsequently wrecking the economy will solve the demand problem, what allows the work ethic-related supply problem to be solved?

Unless both the inflation and supply chain issues are addressed, I think there is a distinct possibility that this could be a “horrific” government-induced recession.  Demand must match supply and supply is artificially low.  If a few basic governmental policies were stiffened to get people off the couch and reintroduce them to the workforce, this would greatly lessen the potential of a “crash”.

Those of us that live in the “real world” and have to make things work are getting frustrated with those, in positions of power, that seem hell-bent on destroying our economy and work ethic with their progressive theories!

Our position on industrial real estate is it will bear an outsized “brunt” of the recession because of the wrong decisions and policies being made for the last two years. Those without “staying power,” beware!


Sometimes You Ask for Things You Don’t Want

2nd Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

There is an earthquake going on in the industrial building sector, both for manufacturing as well as distribution, that can be one of the most significant directional changes we have had in decades.  This change will affect industrial property owners from a manufacturing standpoint and distribution standpoint.   Let me build the case.

A decade ago, a few activists begin by first advocating; and then, it has led to wave after wave of “cause fighters” in the name of “climate change” to advocate for electric vehicles.  But, is this smart?

First, the simplicity of electric cars needing fewer parts manufactured and fewer parts distributed would lead us into dramatically less need for industrial space.  In fact, a great number of our present manufacturing clients would be affected by phase out or closing.  Unless the manufacturers can re-tool, they will be shortly “missing in action”, and distribution would shrink by an estimated 3% to 4%.  However, that is just the beginning of the problem.

Secondly, we have a whole economy that is tied toward the production of oil and natural gas.  These are high paying jobs and in a growth industry that has traditionally produced upward job mobility and increasing responsibility to drill oil and gas in an “environmentally sound” way.  Also, the tax structure of this local economy is based on this affecting several states’ budgets as well as counties and school systems funding.  You have lenders, service facilities, designers, contractors, etc.   This is no “small potatoes”.  When the oil industry goes away, we will become even more dependent on restaurants, theaters, etc. for our so-called livelihood (which don’t pay nearly as well).  Why would America consider this change when it was already energy self-sufficient?   When we drill for oil, you get gas in most circumstances.  Now, the price of natural gas has to go up to just drill for gas.

Thirdly, while America controls its own destiny with petroleum-based vehicles, who will control our destiny in the future if we swap to electric vehicles?  That will be primarily China, because they have virtually all the access to rare metals necessary to build batteries.  By America going to electric vehicles, this will totally subsidize China through exploration of mining resulting in high paying jobs for their citizens.

Fourthly, what do you do with the batteries when the vehicle dies?  There is no easy way to properly dispose of those that is inexpensive.  Also, what about the cost of a car?  Well, it is certainly going to go up when someone else controls the rare minerals by the doubling and tripling of their prices.

And, the “nail in the coffin” is:  These “carbon exhausts” can in fact be eaten by clostridium autoethanogenum ( which is an oxygen-hating bacteria species developed by Oak Ridge National Laboratories to permanently solve the carbon exhaust problem, and the by-product of this process is using the carbon exhaust to make into plastic and other materials that can be used in manufacturing – in other words, we need it!

If America cannot see that they are destroying their own economy and their self-sufficiency, then we need to live with the result!!  This kind of reminds me of the foolishness of Germany being so dependent on Russia for its natural gas – how did that work out?  This will have devastating effects on current tenants in industrial facilities, so be prepared!  Our company is already reacting.

Taxpayer Revolt

1st Quarter 2022

Market Watch
by Joe A. Hollingsworth, Jr.

Well, here we go again…writing about something that does not directly pertain to industrial real estate. But, I have received so many comments from readers on similar divergent ideas that it leads me to believe that I need to say something that has been on my mind for years that may be coming to fruition.

From the constant beating of the drum for wokeness and so much energy and time being used to promote diversity, it is clear there should be no exceptions. From constant diversity training, to best hiring practices “balanced” by government rules, we should not fail to explore every diversity issue, anywhere. The government has got so many set-aside programs for minorities, hiring quotas, and ever-evolving civil rights policies that we often have to rely on the courts to settle “sensitive” issues, even when there is no ill will to begin with. Often you wonder if the prescribed solution is far more damaging than the perceived original problem.

The more you stoke up a small problem the bigger the resulting flame gets. Or, is it a new industry that gets handsomely paid based on degrees of trouble? I am not saying some of these initiatives do not begin with great intentions, but common sense gets drowned out.

It seems like most of the penalties, fines, or solutions are directed at private commercial interests and enforced by government agencies, that are supported by taxpayers. What would happen if taxpayer money, through government agencies that are paying for a desired diversity outcome, actually used its power to stop paying…like universities? Government makes sure there is a desired outcome based on student ratios, and I support that. However, what just makes me boil is the funding of student loans going to support universities, with literally NO balance of the ideological mindset of professors…REALLY… So, I am supposed to use my taxes to support such extremely liberal ideology with no offsetting balance of conservative views…BULLSHIT…Then, they tell me they have a right to be tenured…Are you tenured?

Just below the surface, things maybe changing. The US Supreme Court will shortly decide whether the State of Maine (taxpayers) can refuse to use taxpayer money to fund a “religious use” or as the government of Maine says, “an education designed to proselytize and inculcate children/students with a particular faith”, read ideology. This may begin a direction that government does not want, but the majority of voters do! I will take the liberty here and alter a few words from the Mainestated reasoning. The US Government is taking action in the Supreme Court to not use taxpayer money funding some student loans, because in some institutions it is an education designed to “proselytize and inculcate children/students with a particular faith” that I will call an ideology of socialism. We would end up with the next step after a likely favorable Supreme Court ruling with a taxpayer revolt, because indirectly the taxpayers are advocating liberal ideas and socialism, not diversity. Let there be no mistake. There will be a taxpayer revolt for the lack of diversity in conservative professors.

Responsibility, The Inconvenient Truth

4th Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

While I am supposed to be primarily writing about the industrial market, there is a much bigger challenge that faces America that indirectly affects everything, including the industrial real estate market. So, here I go…

First, let me state the problem: Never-ending political promises by both parties with never any accountability or projected risk or reward.

When corporations first began to be traded on Wall Street, there was malfeasance, corporate mistrust, and blatant disregard for fraudulent actions. However, to provide legitimacy, there was a move forward that provided some consistency in accounting rules. Otherwise, how could you ever invest in the stock or the industry without comparable choices and the facts being accurate? This became “generally accepted accounting principles” (GAAP). Without GAAP being instituted and in full force around the beginning of the 1880s, we wouldn’t be able to invest properly today. So, it brings us to a point where legitimate companies all play within the “guardrails”.

Another example might be legal reforms. While there have always been customs and known principles (since God was a little boy), Democratic countries now have a well-defined set of rules topped with legal precedence and consistency that we can all rely on. Now, when businesses or individuals overreach, the ultimate legal guardrails are with an independent board, called the Supreme Court. They provide legal sound reasoning for us to initiate any worthwhile endeavor.

How about the Federal Reserve Board? It is an independent body overseeing central bankers trading with banks; and, while it may be appointed by politicians, the terms are long and overlap. While we don’t always agree (Currently, I don’t), the Federal Reserve Board is independent enough that it does provide a specific set of goals that has been consistent in the banking system, thus the risk/reward is reliable.

What is needed is an independent board that provides estimating for political actions, promises, and projections with accountability. This board would preside over the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). It should mandate the accounting principles which are going to be factually based; and, therefore, those two institutions will turn out reliable numbers, not politically motivated numbers. This should be transformational. Instead of unrestrained promises like with the $3.5 trillion dollar proposal which have only parts of the cost/liabilities listed in the bill, it will force all costs to be recognized and resulting reactions to be considered. Political reality will become normalized.

In this era of extreme radicalism about every topic, one true healing source could be this proposed board; because, while we may argue, debate, “cuss and discuss” the ending results of political proposals, the facts will be reliably and consistently conveyed about the chosen topic.

Responsibility is a powerful force.

A Frothy Stock Market

3rd Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

I am one that thinks that the stock market is priced to “virtual perfection”.  So, if everything works out as envisioned by investors, the stock market is “likely” to stay close to where it is for a year or so.  But, a big part of me can see that we are setting the economy up for an obvious slowdown in stimulus that could create a 6,000 to 8,000 points decline in the DOW.  So, what if that happens? How is it going to affect industrial real estate, contractors, subcontractors, etc.?

We believe that the underlying economy is amazingly strong; and generally, the fundamentals are in good shape (minus labor).  Therefore, we have taken the investment stance that the demand for new space will continue at nearly the same rate through the end of the year.  However, if the stock market selloff occurs, does it damage the underlying fundamentals? The answer is a resounding “No”.  However, great damage can be done by the new administration to those fundamentals.  Strains the new administration are causing or proposing are:  1) starving us for labor so they can finally get the $15.00 per hour by bidding up scarce labor prices; 2) executive actions that the court system has roughly already overturned 1/6 of all the actions and another six are in process of being overturned with another 1/6 of them being attacked by various groups; 3) giveaways – encouraging the Russia pipeline completion (Nord Stream 2) and starving out Keystone (our pipeline); 4) give Iran nuclear weapons over a period of time; 5) “act” like you are being tough on the biggest American threat (which is China); 6) a borderless nation and resulting in massive illegal immigration; 7) real estate 1031s elimination; 8) doubling the long-term capital gain tax rate; and, 9) ignoring obvious inflation that is ridiculous when compared to two years ago (take out the COVID year).  All of the above factors and more can add up and greatly affect the economics of many potential expansions or new locations industrial in real estate.  As difficult as the above factors are, they are not likely to “kill” the golden goose.

While the immediate future for our industry is strong, the many potential speed bumps are seemingly getting more numerous.  Business hates variables.  However, in spite of so many factors being present, the amount of investment capital has to go somewhere, and too much of it is sitting on the sidelines.  This coupled with the fact that the federal reserve seemingly thinks that the continuous stimulus of some form will keep recessions (the natural selection of good companies over bad) from occurring.  In fact, as unpopular as it is, recessions always make a stronger economy comeback and reteach us the lessons of healthy capitalism.

I know today’s industrial real estate gets a gold star; but, a year from now, we will be very happy to settle with a silver star and a stable economy.

Unintended Consequences

2nd Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

As far as industrial real estate goes, what is the biggest challenge today?

• One challenge is certainly not the economy with the GDP (in spite of COVID) continuing to provide reasonable growth. The economy seems unlikely to fail.

• Another challenge is industrial building codes or related problems such as construction shortages? While construction costs and inspections always seem ridiculously high and we continue to experience a high level of frustration over shortages and delays, it does not seem that construction will be a big impediment. Also, another challenge for development are lenders…But, they are everywhere, so let’s not consider that to be a problem.

• The biggest challenge is an “administration induced labor shortage”. This is consequential because of several factors. The workforce is being coddled to the point where their attitudes about working (as being a requirement for life) is resulting in the workforce being less committed to actually working. It seems like the ones that want to work and fulfill a psychological need by working are very committed. However, the very sizable market of workers on the margins have had their work ethic greatly diluted to the point of the comment, “It just doesn’t make sense.” However, this is not the whole story. The globalist theory that there “are no borders” is being experimented, again, with an onslaught of illegal immigrants. While there is still a way to legally become a citizen, the vast majority are simply skipping that step, because there is no penalty for doing so. This is forcing America to “dumb down” the manufacturing or distribution floor, introducing several new languages, accommodating several new religions (or other forms of worship), and tolerating the additional company burdens of communication and culture.

Included in the recent stimulus bill that was just passed is to extend additional funds for unemployment to September 2021. This is paying those in the workforce to stay at home instead of them even applying for a job. Why would they look for a job when the majority of them are making as much money (and in some cases more money) by staying at home instead of working, putting them totally out of the labor market? Small businesses are experiencing a huge drop in job applicants, and they are having to contend with existing rebellious workers and their demands instead of firing them. This is because employers do not have a labor market to replace those rebellious and insubordinate workers.

The above-mentioned trends are solidly in place. At least through September 2021, this could be the most difficult time for companies wanting to “fulfill their growth patterns”. Good, easy-to-train, and qualified workers are being paid to stay at home and exchanged for a set of challenges to accommodate illegal or unqualified workers. The “I am getting paid to sit at home” mentality is a huge nanny state problem instead of each individual being a contributing member to society and enjoying their individual success.

However, more importantly, it is contributing to a totally “unemployed qualified workforce”. Most industries have to adjust to the new reality and pay the cost associated with it, but some cannot “afford the freight”. I think this will show up in our larger cities and metro areas before it shows up in semi-rural areas. It is clearly a concerning pattern that affects our industrial partners’ abilities to grow the economy for all.

Three Random Thoughts That May Affect Today’s Real Estate Values/Economic Outlook

1st Quarter 2021

Market Watch
by Joe A. Hollingsworth, Jr.

• The hot topic of the moment is vaccines and how they are going to solve our pandemic.  I must say, I am a skeptic on this as more of the honesty and side effects come to be known. Coupled with people who don’t naturally prefer to take vaccines, I think the consensus is wrong; and, vaccines will not be the absolute economic solution.  While much is at risk, a great deal of the economy will not be returning even if vaccines are 100% successful (restaurants, concerts, office buildings, etc.).

I believe over a period of time people will come to adjust to COVID and its perpetual threat just like we have cars.  Obviously, we must find a way to mitigate car crashes, because we like the use of cars.  First, we implemented seat belts, then air bags, then assistance from AI such as back up assistant cameras.  More and more, people will realize that this is a virus (or some variation thereof) we will have to live with.

• After being appointed to her position at NASDAQ, the President and CEO Adena Freidman announced a new social requirement for capitalistic companies to meet NASDAQ requirements and possibly be eliminated from the NASDAQ index.  Diversity, not profit, has become the topic of the day for her.  Instead of making it easier, less costly and with less regulation being the mantra of the day to be on the NASDAQ, Ms. Freidman’s demand that Board Members self-identify by race, gender, and sexual orientation which is not only problematic, but hilarious.  Have we really come to that?  Surely, we realize that these are not socialistic companies with socialistic tendencies, but their job is to return dividends or equity appreciation for their clients.  It sounds like the book “Atlas Shrugged”.

It appears to me that this is best handled by the federal or state legislators; and, if they believe the public favors it over capitalism and at the penalty of lower returns because of less informed and knowledgeable board members, they should pass the legislation.

• Last, but not least, the world economic forum at Davos has become globalized, again. They have an idea to repackage themselves as “the great reset”, and America’s corporations are standing in line to help fund their “eliteness”.  Irresponsible and low yielding corporate actions always create the inability to govern properly.  These large companies use hard earned cash to support causes that shareholders have very little input on.  They seem to be operating by their recently released quote which is “endeavor everyday to create value for all of our stakeholders whose long-term interest are inseparable”.  When they substitute the word stakeholders, they mean customers, employees, suppliers, and communities as well as shareholders.

Our opinion is a little bit agreed goes a long way! Industrial real estate and business in general best benefits its goals when allowed to earn returns largely uninhibited.

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