“I think it’s essential to remember that just about everything is cyclical. There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future,” says Howard Marks of Oaktree Capital Management.
Since the start of the millennium we have seen many markets; financial, commodity, and real estate rise, fall, and rise again. As we enter the seventeenth year of this century, the question on many of our minds is “what’s next?” Financial markets overall continue to push into positive territory, domestic crude steel production has increased nearly 6% year on year at 3.4 million tons during the first two weeks of 2017, and commercial real estate valuations, particularly on the industrial end, continue to push the past expectations on account of user and investor demand. While these factors point to a flourishing economy, and one that has crawled from the depths of nothingness back toward prosperity, I can’t help but wonder what is to come?
We live in an economy where demands are met in record time. Hailing a cab has taken a back seat to scheduling your pick up through an app on your phone. Trips to the grocery store fall behind ordering your milk, butter, eggs and case of sparkling mineral water from the comfort of your couch, on your phone or pc, for delivery to your front door. When you shop for new clothes, it is almost exclusively from your smart phone’s browser and you tend to order double what you truly need with the understanding that sending back unwanted items will cost nothing more than the ink from your printer and a quick stop to your local UPS or FedEx drop box. It is for these reasons that the valuations (or expectations) of the companies traded on our stock exchanges contribute to a rise in our financial markets, that the demand for raw materials to produce goods and infrastructure continues to provide for robust production figures, and that commercial real estate demand continues to grow.
While the Non-Farm Payroll figures continue to report positive job creation statistics, it seems evident that much of this demand has been fueled by the availability of inexpensive credit on account of low interest rates. As interest rates rise, as they will inevitably do, and our cost of credit increases, we will naturally become more selective in the goods and services we demand. Though our methods of acquisition may not change, we will cut back on excess expenditures. A cab ride may be replaced by walk if weather allows for it, the less necessary items on the grocery list may scaled back, and the new shoes may stretch into another season. Markets tend to be reactionary, and the commercial real estate sphere cannot be excluded from this phenomenon. As the demands of the consumer change, so will the demand for space of all kinds, resulting in a cyclical shift for the commercial real estate market.
