Delaware Statutory Trusts And Happy Talk

With year over year core inflation numbers collapsing from 9.1% to around 3.00%, there has been lots of “happy talk” about an economic soft landing.  You know, a glide-path back down to the Fed’s officially desired 2% inflation rate without a recession.  A return to ‘normal’ without any great pain.  

Of course, this wishful thinking is consistent with the demotion of personal responsibility in American life.  This is part and parcel of the ‘progressive’ vision of a world in which responsibility for your own actions is passe’ and anything goes.

Why work when government says you don’t have to and sends you checks as proof of its good intentions?  Why not steal when “woke” district attorneys won’t prosecute?  Why not borrow and spend until you’re upside down?  The government will bail you out.  Why not print helicopter money and sprinkle it on all and sundry?  The Fed will bring us in for a soft landing and we’ll avoid real pain.

We’re not buying.  This time the piper must be paid.  Cracks are already appearing in the Fed’s elaborately constructed façade.  Our ‘hot’ economy is growing at an anemic 1% rate.  This is half the rate it grew at under Biden’s mentor Obama.  The latter’s eight years were the slowest post recession recovery in history (Financial Intelligence Report, September 2022).

The current U.S. growth rate “has now fallen below the nominal federal funds rate, a sign that has proven very ominous” in the past ( 9/14/2023).  At the same time corporate profits are diminishing and “corporate bankruptcy filings pushed the country past the total number of bankruptcies in 2022.” ( 9/14/2023)

This may be why Walmart and other major retailers appear to be cutting back given that 68% of GDP is consumer spending, this should give investors pause.

Prudent CRE (Commercial Real Estate) investors should take a second look at the investment landscape and reconsider how safe things really are.

To quote BlackRock global fixed income chief investment officer Rick Rieder, “We had been pretty enthusiastic about the economy.  But now, ironically, when I think people have written off a recession…now I actually think we are seeing some tangible signs of a slowdown.  I don’t think you can write off a recession.”

The probability of a recession for us is still very high.  Therefore, we think CRE investors should remain as defensive as possible.

At the risk of sounding like a broken record, self-storage has historically been one of the most defensive property type available.  It’s demand drivers, death, divorce, downsizing and dislocation traditionally go up when the economy goes down.

It is also one of the simplest CRE types.  Everything from leasing to security is now being done online.  As such, it is arguably the least labor intensive property type available.

One of the biggest headwinds many CRE types face today is increasing costs.  Labor and insurance have gone up dramatically.  There is very little labor involved in day-to-day self-storage operation.  While insurance costs are commensurate with construction (low).  In a slow rent growth environment, these small economies are significant.

We also remain a fan of senior living.  The Japanification of the U.S. means the possibility of more retirees, less workers, and lower productivity.  This could result in greater economic stasis with much wealth remaining in older hands.

Having the means to do so, these individuals may demand a significantly higher level of service at end of life.

This population is growing.  Due to the pandemic, little new supply has come on-line (unlike multi-family).  Demand now exceeds pre-Covid 19 levels (Inspired Healthcare Capital).  Finally new construction is constrained by significantly higher material and financing costs.  It appears the stars are aligning for private-pay senior living investors.


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