Delaware Statutory Trusts And Investor Complacency

Are you still waiting for that ‘soft landing’ predicted by our omniscient Fed?  Remember, this is the same gang that said there would be no inflation.  When consumer prices soaring to 9.1 percent finally got their attention, they dismissed it as ‘transitory.’  Surprise, it’s still here!  It’s comforting to know such smart people are in charge of things.  

Now luminaries like Alan Binder, Vice Chairman of the Federal Reserve, 1994-96 are telling us “The economy is great.” (WSJ 10/19/2023).  I guess he missed the fact that since July the Fed’s belated response to this inflationary spiral has resulted in the worst bond market rout in U. S. history:  ten year U.S. Treasury prices having declined almost 23% from August of 2020 (WSJ 10/23/2023).

It is guesstimated that global bond losses are now approaching $4 trillion.  The biggest risk here is “banks stuck with deteriorating bonds.  At the end of June there were $500 billion of unrealized bond losses at 289 U.S. banks.  More than $100 billion of that may be at Bank of America.” (WSJ 10/16/23).  Yikes!

Additionally, 30 year home mortgages are over 8 percent.  The last time mortgage rates were this high was in 2000.  This has resulted in the slowest pace of home sales since 2011.  Great economy Alan.

This may have a ripple-out effect on the rest of the economy as well by limiting spending on items such as appliances, furniture, etc.  As home sales slow, builders may also pull back on construction, negatively impacting income levels in the residential construction industry.

What about all those new hires in September (336,000) you might ask?  Surely the economy must be booming?  Mark Twain famously said, “There are three kinds of lies:  Lies, Damned Lies, and Statistics.”  Drilling down on these numbers finds that “116,000 of the jobs added were in leisure, hospitality and retail, the same folks our genius government paid not to work. (WSJ 10/16/23)   Now the money is gone, and it’s back to work.

Another 73,000 government jobs were added to deal out green pork from Biden’s egregiously misnamed Inflation Reduction Act.  No wonder the Federal government has grown 43% in the last 3 years.  Think these folks are productive?  It’s government that’s growing, not the economy stupid.

Then there’s the United Auto Workers strike, whose picket line Mr. Biden conspicuously joined.  They only want to raise labor costs 40%, when Ford, among others, loses $32,000 on every electric vehicle it sells.  If this is the progressive idea of sustainability, good luck!

Throw in an escalating war in the Mideast and the uncertainties this brings in its wake and the potential for recession increases dramatically.

We think the Federal Reserve’s policies threaten the American economy and financial markets.  Another Black Friday could be in the offing.  In light of this, DST investors should consider a defensive approach.  We continue to think the self-storage sector is worth looking into given its history of recession resistance.  During the Great Recession of 2007-2009 the “Self-storage sector did not see a significant drop in the number of people leasing storage units.” ( 4/20/2023).

If we have a recession this year, we do not expect many people to give up their storage space.   In fact, the exigencies of divorce, dislocation and downsizing may increase demand.

As budgets tighten, people may also opt for smaller apartment units, ending up requiring more storage space.  If you are forced to downsize from a three bedroom to a two-bedroom apartment, people typically put more stuff in storage.

Finally, according to NAREITs Annual Returns by Property Sector and Sub Sector:  1994 – 2022, self-storage has outperformed all other real estate sectors over the last 25 years.

As a commercial real estate investor, now is not the time to be complacent.  Consider integrating self-storage into your income property portfolio.  With Delaware Statutory Trusts, this may be easily done.


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