Puppy Dogs, Rainbows and Three Caps

A nation’s overall happiness is not necessarily based on the strength of its economy.

Take Japan, for example. Its economy hasn’t grown much in almost 30 years, but it has one of the highest standards of living in the world and, according to a recent study by the CATO Institute, is the third “least miserable” country on earth. The U.S. is the 28th least miserable out of 95 countries ranked by CATO, which derives the rankings by the sum of each nation’s unemployment, inflation and bank lending rates minus the percentage change in real GDP per capita.

As I turn 50 this year, I’ve begun to think a lot more about things money can’t buy: more time with my kids, a decent first baseman on the Baltimore Orioles and the pursuit of happiness. I also wonder what’s happiness worth? While happiness is great, it may be a bit overrated. Based on seven independent studies, happiness peaks at the ages of 16 to 18 and 86 to 88. Everyone else—and this means you—is pretty much at the nadir of miserable for most of their lives.    

So, what is happiness worth? The eternal sunshine of the spotless mind, ignorance is bliss and happiness is a warm gun (thank you John Lennon) all sound pretty good to me and sound even better as I get closer to my 86-year-old fountain of new happiness! And if happiness is measured by cheap stuff (i.e., a $500, 68-inch smart TV) and more free time, then 2019 is a good year. Technology and innovation have made all stuff cheaper (though services costs have skyrocketed) and many big employers are experimenting with four- and even three-day work weeks as knowledge-worker productivity has increased.

The problem is that the same forces that are increasing our happiness—particularly innovation that, due to efficiencies in things like electric cars, makes us use less stuff—are also slowing economic growth. These four forces are too much cheap money, cheap labor, cheap energy and innovation itself. So we may be happier, but we are in for slow growth, low inflation and low interest rates for a long time. Big deal you say, at least we are happy! Well, I like puppy dogs and rainbows as much as the next guy, but I can’t put them in my 401(k), which requires growth and cold hard cash.

The silver lining to lousy growth is lower cap rates for commercial real estate. In short, because growth has slowed globally, we are in a seemingly permanent environment of lower interest rates and inflation. This lowered cost of debt capital, combined with the increasingly lower cost of equity capital as both international investors and large U.S. domestic institutions increase their allocations to U.S. commercial real estate, means that cap rates can and likely will get lower. U.S. growth may be slowing, but the country’s relatively high-yielding (compared to bonds) commercial real estate is the cleanest dirty shirt in the global investment laundry.

“I can’t believe I’m paying a four cap.” Just wait. European inflation is falling, and the U.S. is following suit. EU cap rates are typically 50 to 100 basis points lower than U.S. cap rates for comparable assets because of lower inflation. Lower inflation ahead means lower cap rates are the latest luxury European export that will line the pockets of U.S. commercial real estate investors in the form of declining cap rates across the board in core markets like New York, Los Angeles, San Francisco and Washington, D.C.   Don’t be surprised when the three cap becomes the new four cap in the U.S.

Jamie Dimon, Alan Greenspan and a lot of other smart folks believe that the 10-year Treasury rate could go to zero to match the $17 trillion of zero or negative interest rate bonds globally. This means commercial real estate investors investors will do well in the years to come. With slower growth, my 401 (k) may be a disappointment in my golden years, but at least I’ll be happy (particularly if I buy a puppy)!

By Spencer Levy, Chairman, Americas Research & Senior Economic Advisor, CBRE.

Keep on Trucking?

Much of the industrial market’s growth is attributable to the evolution of the supply chain network, as businesses seek to distribute goods ever more quickly and efficiently. A structural issue has emerged, however, that threatens to disrupt the flow of goods through the supply chain: a nationwide shortage of truck drivers.

Now five years old, the present expansion of the U.S. economy has been driven by forces closely tied to the industrial real estate market—production, trade, inventories, and consumption—so it’s not surprising that the industrial market is in the midst of its own expansion.

Although we see trucks on the highway every day, we don’t often think about their impact on the economy. Each year, nearly 9.2 billion tons, or 70% of the nation’s freight, moves over the road in more than 3 million heavy-duty trucks that naturally require more than 3 million drivers.

The American Trucking Association reports that the industry currently has 35,000 fewer drivers than it needs, and it expects the situation to worsen—to 240,000 drivers by 2020. Among the factors contributing to this acute shortfall are an improving labor market (which offers a variety of employment options that do not require long times away from home), an aging driver demographic (the average age of a driver is 55 years), and an increasing turnover rate (90% over the past nine quarters, versus 39% in 2010). In an attempt to attract and retain drivers, the industry has responded by dramatically increasing wages, which has helped to push freight’s rate per mile up by 8% on the year, with forward rates up an additional 14% by 2016.

According to CBRE Supply Chain Services, transportation costs account for approximately half of an operation’s total costs. Increase in this highly volatile and significant cost component has a significant impact on operations, and has elevated real estate’s importance in supply chain cost structures. Warehouses and distribution centers are where much of the supply chain’s action happens, but their share of the operational costs is surprisingly small—5% of the total.

Real estate’s influence on cost structure extends beyond occupancy costs. A facility’s location and how it fits into the overall network can have a real impact on the larger cost components, namely labor and transportation.

Rising transportation costs, particularly those associated with trucking, are forcing supply chain users—manufacturers, importers, and exporters—to devise blends of warehouses and distribution centers that will most efficiently service the need for port access while enabling quick delivery to end users in densely populated metropolitan areas.

While trucking plays a large role in the distribution of goods across a supply chain, the unpredictable nature of its cost is driving users to find other options for transport over land. Rail is an obvious and very cost-effective choice. The Association of American Railroads has recently been reporting increased U.S. rail traffic. The week ending October 25 registered the third-highest level of intermodal use in U.S. history, with traffic up 6.7%, year over year. The trade-off with rail is time, as it runs along a fixed route and on a fixed schedule, limiting its speed and flexibility, whereas trucks can run on a nearly infinite number of routes and on a “just-in-time” schedule, which allows for faster and more flexible service.

Demand for warehouse and distribution space in markets that feature a significant intermodal component has been a strong indicator that users are choosing access to the rail network as a solution to some portion of their long-haul transportation needs. Each of the secondary distribution markets projected to grow most quickly over the next 12 months contains a significant intermodal facility. Much of the new construction in these markets is on or near intermodal pathways, largely to take advantage of the link that rail lines provide to ports and major distribution hubs.

Recognizing the need and demand for intermodal access, market leaders are investing significantly in expanding or developing new intermodal projects. One such project is the Central Florida Intermodal Logistics Center (CFILC), which opened in April in Winter Haven, Florida. Strategically located in central Florida, the 318-acre rail facility can reach 18 million people living within a 200-mile radius, with access to major domestic markets that include Atlanta, Chicago and New York. The terminal has the capacity to move 300,000 containers annually, and is designed for scalable expansion as freight volume grows. The terminal is anchored by a 932-acre business park that will house nearly 8 million sq. ft. of warehouse distribution centers, light industrial and office facilities upon completion. The CFILC will serve as a centralized hub for transportation, logistics and distribution for Florida, and will help reduce congestion on state highways, reduce freight costs, increase shipping reliability and provide cleaner, sustainable operations.

While rail is providing supply chain users alternatives for locating their distribution centers, the role of trucking is still prominent. A supply chain can be envisioned as a series of connected wheels, with intermodal facilities and large regional distribution centers as hubs, and trucking routes as the spokes. It is along these spokes that goods move to their ultimate destinations. These routes are a necessary component to the overall supply chain and must be managed effectively. An efficient supply chain solution that reduces exposure to the highly variable cost of trucking will depend on a sound strategy of locating distribution centers, incorporating access to all modes of overland transportation, and rail in particular.

By David Egan, Director of Research and Analysis, Americas Research, and Shanna Drwiega, Research Analyst.