Here is wishing everyone a healthy and happy 2023. Here are my thoughts on what happened in 2022 and what we might expect this year:
2023 Challenges and Opportunities
2022 will be remembered in economic history as the year high inflation returned after 40- or 50-years hiatus from more than a 2 per cent annual rise in prices. Inflation may be defined as too many dollars chasing too few goods. The FED ‘s go to cure for inflation is raising interest rates. One of the ramifications for this is normally higher unemployment. Unemployment usually results in people having to cut back on spending or sadly going without the neccessitites. However, this cycle resulted in people getting more for working less or not at all.
Under guise of COVID relief both former President Trump and President Biden poured about $5 Trillion into the economy to offset the closure of businesses due to lockdowns to hibernate Americans from the virus. The money was supposed to provide funds to pay for staples, like food, shelter, and fuel. Instead, the stimulus bills were license to steal. People bought cars, watches, second homes, and other luxuries. Fraud was rampant.
The free money allowed workers to stay at home to binge watch TV and take dogs for multi nature walks. The result has been a lack of workers to operate restuarants, retail stores, and work the docks, drive trucks, pilot commercial aircraft and deliver goods in brown and blue, and red and white trucks. Consequently, with the decline in the number of people in logistics, manufacturing and services, the supply side of the equation could not keep up with peoples’ insatiable appetite for goods.
Mr. Biden and many other progressives have long wanted to raise the minimum wage to $15/hr and higher. They could not do this legislatively. So by paying people $60,000 a year and more to stay home, employers would have to pay much more than government to get them off the couch. Even today after the country has been reopen for a year most people can still get $70,000 a year from the US and states. That equates to a minimum wage of between $35 and $40 per hour. In Washington state the annual amount of cash benefits is $100,000. California passed a minimum wage for fast food workers at $22/hr; but the courts have put a stay on that bill.
BFK's Position
The BFK Co. portfolio begins the year with an overall occupancy rate of 98% out of nearly 500,000 square feet of leasable space. In 2022 we sold Vaughn Plaza Shopping Center in Montgomery, Alabama, and also sold an office distribution facility in Alpharetta GA. We acquired two flex space properties. One is in Alpharetta and another in Cumming, GA. We have managed to make it through the ongoing Covid crisis, rising inflation, staff and supply shortages suffered by many.
I am proud of BFK Co’s current circumstances. It is due to the incredible work of our small but formidable staff of Calvin Stephenson EVP, in charge of leasing and management, and our administrative duo, Theresa Quesnel and Pam Patterson. Watching over everything like the Eye in the Sky at Casinos is my wife, Connie Kushner.
Our portfolio is smaller than years ago when we operated over 2 million square feet. We have sold most of our properties outside of the Atlanta area in the past few years and took advantage of the pre 2008 boom by selling many of our shopping centers in Georgia and elsewhere. We are in an era now where selectivity is key and tight management with an emphasis on costs controls is vital.
2023 Challenges and Opportunities
The challenge in commercial real estate in 2023 is to beat the bite of 8% inflation, the tripling of loan interest rates, supply shortages and fewer workers. Unfortunately, we can not raise rents to offset inflation. But we are somewhat partially protected by our right under the leases to pass on increases in operation costs, taxes and insurance to the tenants. Our tenants have benefitted greatly by government handout money that has been spent in our stores and restaurants (albeit the tenants can service the demand with enough labor and inventory).
Values of commercial properties have been affected by the rise in interest rates. The value of properties being bought and sold must account for the decrease in cash flows arising out of increased mortgage payments due to higher interest rates. We are seeing buyers wanting to buy on familiar cap rates while sellers want the same prices pre inflation. So, there is a wider gap between ask and bid meaning fewer transactions.
The slowing down of transactions has reduced the demand for loans, but if one can adjust to higher rates that are higher now than a year or so ago, it would be a good time to seek refinancing because the banks have money to lend but less takers. There it is again: more supply than demand.
What do I see may happen in 2023?
Many prognosticators predict a recession in 2023. What would a recession look like? Technically a recession is two consecutive quarters of non growth. Often recessions are characterized by job lay-offs leading to higher unemployment, tight money, falling stocks, and slower sales particularly in housing and autos.
Its hard to imagine people being unemployed in the next 12 months. We are under employed currently. If a person loses her job or quits there is a plethora of job openings now. Everybody is hiring. The FED would need to put a chokehold on the economy to put people out of work. One of the two obligations of the FED is to keep the employment figures up, the other: to control inflation.
A slowdown seems more likely. One sector of real estate that is adversely affected by the slowdown is industrial. Industrial real estate has for the past several years boomed as huge “fufillment centers” were built across the country, but recently we are seeing companies like Amazon, Google and Meta cancel large leases and began layoffs. Amazon just announced a layoff of 25,000 workers. Residential and muti family have been white hot for the past decade due to low rates. The live, work and play development has also been a favorite of developers and investors. The question here is can they maintain the same momentum given the hig rents and changing lifestyles. Today's 20's and 30's singles will soon be in their 40’s and 50's. Will they want to continue to live in a shopping center? If they have been renting, can they afford a half million dollars for a starter house?
I haven’t mentioned malls. It seems few will survive due to the decline of full price stores and crime. Many are being repurposed into lifestyle centers as noted abve. The aging population needs more medical resources so some malls are being used for healthcare.
So that leaves the open-air shopping center to discuss. Big Box stores are in a fight in the survival of the fittest. Large grocery anchored centers continue to flourish in the investment community and small service shopping centers with resturants and salons and fitness continue to do well provided the tenants can staff and manage their businesses.
I will be surprised if there is a painful recession this year where people are out of work and many businesses have trouble surviving. There will be probably a cool down in the markets as stock prices reflect more reality than hope.
The ultimate question is without government assistance to buy discretionary goods will people be motivated enough to go to work, or will parents’ basements continue to be a domicile to mature Americans?