January has long been the time for market predictions, for economists to put their nickel down on which way the dollar will go. But how do you do that following the most fractious three quarters in living memory?
Undaunted by the events of 2020, Dr. Mark Dotzour did exactly that, providing the keynote remarks for the 19th annual Commercial Real Estate Forecast Conference. While offering the caveat that economists are generally only right 50 percent of the time, he nonetheless expressed bullishness for the upcoming year.
The biggest factor that will impact the U.S. economy during the next 12 months is pent-up demand. Currently, Americans aren’t spending money, they are saving it. This is an untenable situation since, as Dotzour put it, “Americans don’t tolerate deferred gratification.”
COVID fatigue set in months ago for many people. Once the vaccines have been widely distributed, he foresees an explosion in spending. But instead of toilet paper and hand sanitizer, there might be a shortage of hotel rooms and airline seats. Dotzour said he is not underestimating the power of this pent-up demand for goods and services such as new clothes, vacations, conventions, gyms, live music, restaurants, weddings, theaters, business travel, going back to school and more.
The supply chain proved to be more fragile than most people would have expected once the lockdown started in March of last year. As an example, half of all toilet paper typically goes to restaurants and half goes to homes, but most domiciles don’t have the hardware for three-foot-wide wheels of toilet paper, hence the shortage of that product.
Will the supply chain fail us again once life returns to “normal”? Dotzour believes it’s hard to say. His biggest concern is that the supply chain remains robust enough to dispense the vaccines, pointing out that there are thousands of distribution job openings right now.
Another worry is that there may be runaway inflation in our future, though Dotzour downplays those concerns. Factors such as higher gas prices, hotel rates, airline tickets and tuition could lead to inflation of the U.S. dollar. However, he feels that there are enough protections in place to prevent a runaway scenario. The Federal Reserve’s control of interest rates, for example, should mitigate escalating mortgage rates as housing is going to help lead us out of this recession.
The real long-term concern is the likelihood that we will see another jobless recovery. That doesn’t mean we won’t have new jobs, but they will materialize too slowly. Historically, regardless of which political party is in office and notwithstanding tax cuts, the U.S. averages job growth at 2.5 percent.
The main factor for this is globalization. Emerging economies around the world are creating more competition for the U.S.
“We have purposely exported our jobs around the world. These are now tough competitors,” Dotzour said. “The world in which the U.S. is competing in 2021 is different than it was in 1980.”
That said, Dotzour believes that money is going to flood in again. Private equity is sitting on $204 billion of dry powder. While we are all aware of distressed sellers, Dotzour labels these funds as “distressed buyers”—they’ve raised the capital and are hungry to deploy it.
Global institutions continue to raise their allocations to real estate. The general rule of thumb used to be to spread funds 50/50 between bonds and real estate. Each year, higher CRE yields have led to more growth in institutional investment.
“If you thought there was too much money chasing deals before, there’s a lot more coming down the road,” Dotzour said.
The pandemic has impacted the U.S. just as it has other nations, though we may be taking a larger hit than most. Additionally, 2020 and even early in 2021 have proven that there is a lot of societal and political angst in our populace. Despite its problems, however, America is still going to be an attractive target for global investors.
“Money is not flowing out of U.S.,” said Dotzour. “We have our problems, but we are still the prettiest pig at the trough.”
Dotzour covered many more topics during his keynote, such as the urban to suburban migration, the future plans of the Biden administration, rising shipping costs and much more. It will be interesting to see how the next 12 months shake out; the ride hopefully won’t be as bumpy as the past 12 months.