Why not be optimistic about 2011? Admittedly, those who know me say that if I’m deeply pessimistic it’s time to buy guns, gold and canned food and dig a hole. But why not be optimistic about next year? Let’s tout it up.
To the good:
- Corporate profits are smashing and cash on the balance sheet in corporate America is at an all time high.
- There is, by any measure, a massive amount of money looking to invest, which is unbelievably frustrated by risk-free returns of only 2.5% for ten year money.
- Employment is stabilizing and probably will get better. I tend to think that we may have to learn a new normal for full employment, and it will be materially higher than the 5% unemployment rate they taught us in Econ 101, but that’s another story.
- Commercial real estate vacancy rates and rack rates are sort of stabilized and probably not going down a lot further.
- Fiscal policy is trending towards quantitative easing. Somewhere out there, some place, is more than a whiff of inflation.
- Legacy CMBS pricing has come way in. The appetite for new issue bonds is strong. A banker can now engineer a reasonable mortgage constant from bond prices and make several points in the process.
- Cap rates are slinking back in. They’re not going to get to where they were in ’07, heaven forefend, but they’ve come way back.
- As cap rates come in and incomes stabilize, borrowers can see a way to finance buildings that were underwater on a value basis as little as six months ago. Then was then, now is now. Give me cheap 10 year money, top it up with a bit of mezz, and I’ll put some capital in and off we go.
- Banks have capital. Balance sheets are being exposed to commercial real estate once again, and there’s an appetite for commercial mortgages. Warehouses are back.
- The Street and the banks are reflating their platforms and hiring aggressively.
To my mind, that’s a winning cocktail for the reflation of our market. The last factor alone may be the most telling. When you hire bucket loads of people to make and securitize loans and give them a balance sheet, they will, everything else being equal, make and securitize loans. The nattering nabobs of our market seem to think all those factors plus a pinch of optimism gets us to $30-$35 billion of CMBS issuance next year. Perhaps that’s a little rosy, but directionally it’s right. 2011 is beginning to look like a true recovery year where there is sufficient directional conviction that we’ll all have something to do.
OK, so there are still problems on the horizon (I’m practicing understatement). Interest rates could go up too fast, while the threat of huge tax increases next year still looms large. An unexpected Democratic victory in the House would reshuffle the deck. Regulatory shenanigans still haunt the market and regulatory uncertainty is still a very good reason to not be optimistic. I often write in this column about how our elected leaders and appointed officials seem to be tone deaf to unintended consequences as we blunder from regulatory initiative to initiative, watch the market react badly and take the lesson that only more regulatory intrusion will right the ship. I think doctors used to bleed patients on much the same theory.
But, on balance, I think the fundamentals, the momentum and the fact that it has thoroughly sucked for three years and it’s time to get back to business will overwhelm any regulatory and political headwinds. For my money, if tax rates don’t go up, and the R’s gain control of Congress, we’re in for a good 2011. That’s my story and I’m sticking to it.
By Rick Jones.