“There are unknown unknowns” is a phrase from a response United States Secretary of Defense Donald Rumsfeld gave to a question at a Department of Defense (DOD) news briefing on February 12, 2002, regarding the Iraq war and weapons of mass destruction. This statement subsequently became the subject of much commentary.
Known unknowns refers to “risks you are aware of such as canceled airline flights.” (Bonnie Biafore, “Project Management Fundamentals” 10/17/2015). Whereas unknown unknowns are risks that come from situations that are so unexpected that they are normally not considered. For obvious reasons, this term is often used in project management and strategic planning circles.
Subsequently, German sociologists Christopher Daase and Oliver Kessler elaborated on Rumsfeld’s theme of the relationship between “what we know, what we do not know, what we cannot know” by adding to it “what we do not like to know.” (“The Rumsfeld Matrix” Cambridge University Press 2021).
With so much, social economic and international change afoot, we posit CRE investors are well served to pause, engage in some serious strategic thinking about their property portfolios and not shy away from “what we do not like to know.” We believe this type of risk assessment is critical to investment success.
Crisis brings change in its wake. And we seem to stumble from crisis to crisis more rapidly now than in the past. Whether this is the by product of too much government and its attendant inefficiencies and waste, too much global connectivity and geopolitical instability, all-pervasive electronic media or all of the above, we don’t know.
What we do know is that as threats to stability they can radically effect asset valuations and demand. The most conspicuous example of this being the Covid-19 pandemic and how it profoundly altered the landscape of the office real estate market for the worse.
Conversely, it had a correspondingly positive impact on demand for industrial warehousing as bricks and mortar retail was shuttered by government fiat and commerce migrated on-line.
Nature hates a vacuum and as American power and influence has retreated across the globe, bad actors and their malignant influence have stepped in to fill the void. What then?
Worst case scenario is regional conflicts become global, sucking everyone and everything into the abyss.
If supply sources become less reliable and shipping lanes more unsafe, commodity prices may rise. This could easily reignite inflation particularly if our already indebted government must print/borrow more money to prosecute expanding wars while still funding the welfare state.
Higher prices could mean higher interest rates not lower. If this is indeed the case, CRE investors may be well served to own the most historically inflation resistant real property types possible.
We have noted in the past the only two CRE types with monthly lease intervals are self-storage and senior living.
In terms of disposition, these and other CRE types with multiple doors and tenants are largely priced based on rental income stream. Therefore, the more flexibility you have as landlord to increase rents over the investment interval, the greater the chance of appreciation and increased equity at time of sale.
We also feel these two property types may better protect you from government regulatory over-reach than others.
Poll after poll indicates that two thirds of American voters say the country is heading in the wrong direction (The Center Square Voters Voice Poll). This isn’t just inflation, the border, or international disorder but increasing government intrusion into all aspects of American life.
Whether it’s what you eat, what you cook with, what you drive, where and how you live, there’s the long arm of government pointing you in the direction it wants you to go. There is nothing more antithetical to Americans and the American way of life than this.
We warned CRE investors years ago that national rent control is coming. This is now part of the progressive agenda as articulated publicly by President Biden on July 16, 2024.
As a landlord, do you want government as your business partner? Ronald Reagan famously said the nine scariest words in the English language are, “I’m from the government and I’m here to help.” Therefore, when you exchange, think long and hard about government involvement in respective CRE sectors and how best to avoid it.
