Market Comments, Jan 6, 2020
The U.S.-Iran situation brought about over month when President Trump ordered an air (drone) strike on Iran’s top general has faded into obscurity. Now we’re informed daily of the coronavirus, the various state caucuses, the continuous litany of Trump’s impeachment (we suspect the Dem’s won’t let it die easily), and the day-by-day blows to the monetary system by the Fed. Notable, all this turmoil has had little impact on the CRE or private business markets. (The outbreak of the coronavirus is a black swan event and has the potential to cause meaningful difficulty for global markets of all categories. This, however, will take time to evolve.)
Consumer data shows we Americans are remarkable resilient in the face of all the bad news.
Confidence shows us waffling a bit over the last few months, in reaction I suspect to the various global events. Consumer expectations should get a nice bounce after the impeachment proceedings conclude, at least until the Democrats roll out the next kabuki theater. We’ve also had reasons to recover from the dips: Trump got the new Mexican-Canadian trade agreement signed. Economically this will be more impactful that all the tariff bargaining with China that has been going on. Speaking of which Trump got a “Phase 1” of a China deal inked.
The collusion-with-Russia debacle has been put to bed, and the impeachment proceeds will soon be put behind us with the outcome forecasted many months ago – although not formally pronounced at this writing.
So, scraping away the headlines we find our markets (CRE and private business) largely unchanged.
We keep our eye on Fed activity regularly, and its policies impact to capital markets. We don’t expect major movements here through the end of the year (which is also post-election).
You may recall the Fed started a repo liquidity injection program last Sept … quietly. They resist calling it QE-anything, but the result has been to expand the Fed’s balance sheet back to over $4 trillion. They’ve announced they expect to phase this out in April, but don’t count on it. If they start to taper this as they’ve tried in the past, and the stock market throws a hissy-fit, it will likely be liquidity back on.
Even with the extreme liquidity available banks have raised the bar on underwriting … not all assets, not all type of loans, but where they feel exposed. While the Fed’s balance sheet has expanded, excess reserves at the Fed are also at record levels. The Fed seems to be trying mightily to head off a recession. Unfortunately, the money they’re pumping into the system isn’t finding its way into loans, but is turning around to be a deposit at the Fed. (Law passed coming out of the 2009 recession allows the Fed to pay interest on these deposits!) Short term use of these funds find their way into the public markets (stocks, etc.) which is why these markets are so sensitive to Fed activity.
Those lenders (banks & private) in the market are aggressively in the market. Loans can be done on generally favorable rates & terms, both conventional & SBA. The still low interest rate environment provides excellent investment returns on a leveraged basis. For an investor, a 6% cap (available in single tenant net leased property) works out well for a 10 year loan at 4.5% (also available) and 60% down. Cap rate equivalents for owner-occupied properties (the business owner who also owns the real estate) can be found in the mid-teens.
Gas station/c-store Buyer activity particularly from CA remains brisk. Since the social and political motivators for this interest to change, I don’t expect the demand to abate anytime soon.
Against this demand, inventory remains slight and of generally poor quality (yet priced as if it weren’t).
One final comment regarding business on-line marketing. BizBuySell announced in the last couple weeks that it is adding all its business listings to Loopnet. You may recall that both are owned by CoStar – cozy! Buyer’s looking for businesses on BizBuySell won’t get much out of this, but buyer’s using Loopnet will now see these. (Loopnet only discontinued listing businesses a couple years ago after CoStar bought BizBuySell – at that time they already owned Loopnet. This will expand our business listing exposure for gas station businesses that are offered without real estate. Businesses offered with real estate were on Loopnet already. This may result in a slight uptick in inquiries from Loopnet, but I don’t expect all that much.
Market Comments, Jan 6, 2020
The primary market influence today is the U.S.-Iran situation brought about over last weekend when President Trump ordered an air (drone) strike on Iran’s top general, taking not only him out, but also the head of Iraq’s Militia, an Iran proxy operating in Iraq. The media and Tweets have been flying from both sides in threats and counter-threats saying who’s going to do what to who and how soon. Needless to say markets – all markets – that don’t like uncertainty will likely pull back on decisions for at least the near future until more certainty is known.
Where we were last Friday is not where we are today (Monday).
Subsequent events may happen fast … at least the war of words can be expected to continue. If this situation evolves into just that, a war of words, markets may stabilize in a matter of weeks.
The price of oil spiked over the weekend, but supplies have yet to be interrupted. U.S. strategic reserves (crude in the salt basins) are estimated to be worth about 2 months of volume. But don’t underestimate up-stream suppliers raising prices in anticipation of what they perceive the public will expect and tolerate.
The U.S. economy’s exposure to rising crude oil prices is relatively low. The nation’s oil intensity (oil consumed per unit of GDP) has declined significantly in recent decades. And U.S. net imports of crude are at the lowest level in years.
Going into the weekend, small business optimism rose solidly in November, with the overall index rising 2.3 points to 104.7, just slightly below its cycle high.
Seven of the 10 index components rose during the month, with earnings trends jumping 10 points. Business owners appear to have a clearer view of the business environment. The NFIB Uncertainty Index fell six points in November, following a four-point drop the prior month, and is now at its lowest level since May 2018. The drop in uncertainty may reflect some rising optimism that trade deals will be reached with Mexico and China.
The consumer sentiment index from the University of Michigan surprised to the upside in Dec. Strong labor markets continue to boosts households’ confidence.
We have found that small business and consumer indices correlate closely with market activity of buyers and sellers of small businesses and investment real estate – these are the same people wearing a different hat.
We assume that last weekend’s U.S.-Iran activity has had a negative influence on these data, we just don’t know how much. Most market participants adopt a wait-n-see posture until greater clarity is known. Incidentally, this also applies to lenders – they’re people too!
News and research sources can be expected to produce rapid-fire, up-to-the-minute information and analysis on the topic, and in this regard broaden the focus and offer down-stream suspected implications.
December’s macro data ran to the high side in most cases, although the phones & emails got quiet from Christmas week through last week (ending Jan. 3rd). We’ll get an early grass roots pulse on buyer sentiment this week and next.
Market Comments, Nov 1, 2019
Few market observers were surprised yesterday when the Fed dropped the Fed Funds Rate by ¼ point making it 3 reductions in as many meetings. When you woke up this morning the Prime Rate dropped to 4.75%. In and of itself, good news for leverage seeking CRE and business buyers.
But on closer observation, this would seem to contradict the economic data that the Fed avidly professes to follow (not lead!) If the economy is so good, at least stable, why the rate drop?
Ah-haa! Read on.
Personal consumption, which comprises roughly 70% of overall U.S. GDP, has proven remarkably resilient under the cloud of trade uncertainty and the darkening economic picture overseas. However, retail sales fell in September for the first time in seven months. The 0.3% decline in headline sales was dragged down by a sharp drop in auto sales, but the flat reading for control group sales (versus consensus expectations of a 0.3% increase) is one of the first concrete signs of a crack in the consumer sector. Leading indicators of consumer spending have been pointing to a slowdown—the Conference Board and University of Michigan surveys of consumer confidence have stalled and the pace of job growth has slowed—and we may finally be seeing it borne out in the hard data. Still, PCE (the successor metric to CPI) is on track for a solid 2.4% rise in Q3, but we expect the deterioration in fundamentals will pull growth below 2% by Q4.
If nervousness and doubt weigh on the psyche of the consumer, can that lead to outright declines in consumer spending? Teddy Roosevelt once offered the encouragement: “Believe in yourself and you’re halfway there.” Is the inverse also true? Analysis of prior cycles suggests that confidence leads discretionary spending and does tend to peak just prior to a downturn. But critically, if we wait for the tide to fully turn, it may be too late. What we are seeing with confidence at this stage is only consistent with a slowing, but not yet an outright decline in consumer spending. It’s said that lack of consumer confidence ahead of a recession is a self-fulfilling prophecy.
Essentially matching the YTD average, consumer sentiment – as measured by the University of Michigan–remains elevated at a level of 95.5. While recent news headlines highlight risks to the outlook, consumers remain largely focused on their income and job prospects. Recent moves in consumer confidence have been only incrementally lower, but this third straight decline puts this barometer 12 points lower than where it was in October last year.
U.S. real GDP grew at an annualized rate of 1.9% in the third quarter, which was better than the 1.6% consensus forecast. The year-over-year growth rate, however, moderated to 2.0% in the third quarter from the 2.3% pace in the second quarter and marks the slowest annual pace since Q4-2016. Overall GDP growth in the third quarter was largely driven by real personal consumption expenditures, which increased at a 2.9% annualized rate.
Enough with all the numbers … what does it all mean for the gas station market in AZ?
Day-to-day conversations with both buyers and sellers (not of this audience), suggest as a group they are either unaware of the above trends, or are not considering them in their buy/sell behavior. Buyers as a group don’t reflect a concern that they are buying at the top, and sellers are still trying to price as if it’s a seller’s market. Most are encouraged by the Fed’s actions seeing only that it represents a lower rate to borrow. Lenders, by the way, are feeding this with aggressively trying to place new money, also a result of Fed activity generating liquidity.
All this implies that the Fed is indeed not setting policy based on historical data, but trying to get in front of a pending decline in the economy – call it a recession if you like. At this point it’s too soon to tell, but a rose by any other name …
We attempt to keep the focus of these Comments to 1-3 months – a short term horizon. Today this takes us through the Holiday Season. Current expectations for consumer spending are up, and UP. We’ll have the results of this in late Dec/early Jan. This may well be the consumer’s last hurrah. Much depends on Trumps trade success with China, and Europe’s digestion of Great Brittan’s exit, or lack thereof, from the Euro Union. (The Brexit vote was to have been yesterday, but if not a clean separation, the entanglement will continue dragging down that economic unit. I haven’t seen definite results as of this writing.) Germany, the largest GDP in Europe, is already in a recession. The impact of trade disruptions between Great Brittan and the Euro Union, and the Euro Union and China, will trickle upon our shores.
Hopefully, Powell is proven wrong and the economy will surprise to the up-side. (Although Wells Fargo is projecting another ¼ rate drop in Q1-20 – not good news if we get it.) The market (stock – our most visible financial indicator, and an economic leading indicator traditionally by about 6 months) will rally going into the get-down-to-it campaign summer (political), and we have a robust CRE and private business market for the next 12 months. The 2020 election is (only) a year from Sunday, Nov. 3.
But today, buyers are active, sellers are active, and lenders are active. What’s not to like?
Market Comments, Oct 16, 2019
Most consider market updates as a snapshot of the condition of the market today, evidenced by empirical data, e.g., number of listings, locations, quality of the listing, quality of the business or property, etc. That’s the easy part … regurgitating history. We take a little bit different tact with Market Comments, and attempt to take a peek over tomorrow’s horizon into the short term void where other mortal men fear to tread. There’s risk in that – we might be wrong!! Nevertheless, we proceed.
Without a doubt, the US economy is sending mixed messages about its health. On one hand, the job market remains robust despite September’s lackluster numbers. (U.S. payrolls only added 136,000 jobs, underperforming economists’ expectations, but the unemployment rate fell to fell to 3.5%, a 50-year low). On the other hand, US manufacturing has sunk into a recession, according to the Federal Reserve, which reports that output has shrunk in the past two quarters this year. Then there is the yield curve, which has been inverting over the past year. However on Friday one portion of it—the spread between three-month and 10-year US Treasury bonds—turned positive last week for the first time since the summer.
And retail sales fell in September for the first time in 7 months, stoking new fears that a recession is building after the manufacturing sector also contracted for the first time several years. It was the first time retail sales had slowed since February, and the timing is odd with the holidays coming up soon. While this is by no means conclusive evidence that the consumer is wavering it nonetheless reinforces the ongoing concern that a spending retrenchment will ultimately trigger a more durable slowdown.
Economists, money managers, hedge fund managers and financial bloggers have begun re-phrasing their comments from IF a recession hits, to WHEN the recession hits. While we don’t question the inevitability of downturns given the nature of cycles in a capitalistic economy (however influenced by socialistic leaning legislatures) we do hold out doubts about the immediacy and severity of our next such episode.
With this backdrop we step into the CRE and business brokerage arena. Our day-to-day activity of both buyers and sellers indicates none of what is mentioned above is operating on the current activity of these groups. Macro data from BizBuySell and Loopnet doesn’t suggest the players are responding to the possible threats that may be looming. Although I’m certain institutional participants are making plans and contingencies reflecting the possibility of a downturn … plans they’ve been making now for 3-4 years. (Sometime they’ll be right!)
Money drives markets – all markets. And this we seem to have in abundance. This from 2 identifiable sources: (1) 10 yrs. of Fed. policy easing (QT, etc.), and (2) foreign capital flows, this courtesy of the relatively high U.S. investment interest rate markets, and also the nearly ubiquitous global “unrest”, e.g., trade wars, currency wars, and real wars! Money is mobile, and today it’s seeking the highest return consistent with safety of principal. The Fed’s bent on using policy to sustain the economy, and its unlikely mankind will find the Pollyanna solution to world peace in the near future, so both of these conditions can be expected to continue, and so the vibrancy of our markets should be expected to continue in spite of headline news.
An observation from the sell side: more sellers are indicating an interest in carrying the financing for the sale of their property and business. The recognition being, when I see my business and cash out, what do I do with the money? (This primarily from retirees.) Sellers restricting portfolios and business interests are looking more at 1031 exchanges to further shelter the tax impact.
We note that the next Fed meeting is the end of this month, and as of today the market is giving the chances of another ¼ drop is rates at 83.9%. (We interpret this as highly likely!)
Note: Several of you have asked about how, or where, do we get the percentage expectations of the Fed’s next move. To those inquiries we offer the following link:
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html . A click on this will show you following interpretation of the data: (plus the mechanics of the how-to) If this like fails to take you to the website, copy and paste this link into your browser.
Market Comments, Sept 10, 2019
For all the news bombarding the airwaves, your inbox, and social media these days you’d think our market (small business and commercial properties) would be unhinged by now. Not the case. Volatility in public markets (stock & bond) has experienced unparalleled amplitudes and durations, driving all but the sturdiest of investors to the sidelines, or at least to the “risk-off” investment vehicles.
However, in the private markets we haven’t discerned a reaction to all the noise. It’s a little bit eerie!
The yield curve remains inverted, or not, on any given day. Continually increasing debt remains the greatest (we think) macro risk to the economy, but our Government continues to run budget deficits. The trade-currency war is improving, or not, with seemingly spontaneous tweets, ceremoniously amplified and disbursed to a cell phone or handheld device of your choosing, keeping you instantly informed. Most adults I talk with, however, are too busy running their businesses to indulge in such trivial matters. An attitude of “we’ll deal with it when it comes, and can’t do anything about it anyway”.
Scaling away the theatrics noted above and focusing on the data, it would seem the economy is on a downward slide – not precipitous, but heading south. Manufacturing and transportation data particularly has been declining 4-8 months depending on the metric you choose to consider. Does this mean we’re in a recession, or headed toward one? Not necessarily. It’s also apparent that the Fed reducing interest rates won’t stop the slide – this is a structural defect in Fed policy. (Sensing this, in case you missed it, the Fed began buying Treasuries again the end of last month … precursor to QE4?)
Fed activity for most of us manifests directly in our consumer loans … credit cards, auto loans, etc. Lower rates are promoted by lenders (banks mostly) as a good thing since you can now borrow at a lower cost. While this is true, there’s such a thing as too much of a good thing. The lower interest rates go, the less margin (profit) the lender has in making loans. At some point when rates get too low lenders can’t afford to lend. We saw this in 2008-2009 when ZIRP was implemented. A lot of people wanted to borrow then to save homes & businesses, but nobody qualified! Sellers of businesses keep this in mind … seller-carryback financing may be an increasingly more important factor is getting a buyer in place.
But for now banks are lending, and buyers are applying for loans. Caution among buyers is not pronounced, although they remain prudent.
As we’ve written here for over a year now, most of our inquiries are coming from CA. It’s continually gotten worse during the last 2-3 years. (Actually since 1994 when I relocated to AZ from the Bay Area.) We’re used to seeing immigrants come here from war-torn countries. CA has been approaching similar conditions in some respects. Until the citizens there re-direct their political drivers we’re not likely to see a reduction in buyer inquiries from this market.
Labor in some geographic and industry sectors has been seen to take a hit hear & there, but not enough to statistically make a ripple in the unemployment rate.
We note a cautionary flag waving from one of our favorite metrics, e.g., consumer confidence. While other contributors of GDP have waned lately, the consumer has stayed his post – still advertised as 70% of GDP. The prominent cloud over our confidence: the trade war. At best this condition provides only uncertainty. This has yet to be around long enough to be accepted as “business as usual” … but it will. While it has been demonstrated to have a negative economic impact, it’s much more troublesome for the Chinese (and Europeans!) than for us. (More about this in our next Blue Paper.)
Our hard data shows us that buyers are still active and sellers are willing to consider selling. Sellers of profitable businesses (or investment properties) are generally not as motivated to sell as buyers are to buy. This we’re sure because they’re making money and not looking down the track for the train that might be coming … and there’s always one coming … but probably not today!
With all the uncertainty present, structuring a purchase-sale contract calls for a bit more artistic creation, we believe, than the typical cut-n-paste that’s been seen since 2010. Being aware of it is half the battle. Being able to execute is the other half!
Market Comments, Aug. 9, 2019
A brief look of today’s gas station/c-store market: (Not all of the market outlets, but the 2 public websites that still dominate the internet for listing commercial real estate and businesses.)
BizBuySell listings in Maricopa County: 20 listings
Loopnet listings in Maricopa County: 19 listings
At first glance it might look that these are the same listings on 2 different sites … not the case.
Loopnet does not now allow businesses listed without real estate, and BizBuySell does not allow closed real estate without a business. Not perfect filters and wrought with technical difficulties, not just for the prospective buyers, but also for brokers posting and managing our listings.
In absolute numbers these haven’t changed much since about 2010-2012. In terms of quality, the ease of use, amounts of data, and overall effectiveness of sourcing for the market has diminished, primarily from technological advancements. (Diminished return from advancements – how’s that for an oxymoron.) Phoenix has been an underserved market for gas station/c-stores since before the 2008-2009 economic collapse. (Inventory available per capita compared to other metro markets.) What was supposed to increase the visibility, viability and efficiency of marketing has not turned out that way. The technological advancements, we suspect, have increased beyond the market participant’s ability to use them.
Nonetheless, buyers struggle on in pursuit of their acquisitions. We know this from the volume of inquiries we get, mostly by email, but also by phone. Driven, we believe, but the very visible and highly publicized strong economy, and also in California, by the continually declining social and business environment. CA still provides well over half of our inquiries, for reasons we discussed in earlier reports.
To wit, Main Street appears to be far less impacted by the intensifying trade frictions than Wall Street. Wells Fargo’s Small Business Optimism Survey showed business owners were more optimistic about both the present economic situation and future business conditions. Overall small business optimism rose 7 points so far in Q-3 (as of Aug. 5) to 136.
The consumer’s attitude, however, is probably on a cusp, and a cause for concern going outbound. Consumer sentiment rose only slightly in July, but at 98.4 remains high. Earlier last week we learned consumer confidence rose to 135.7 in July. Both measures suggest a consumer that has remained resilient in the face of trade uncertainty, ever increasing federal debt, uncertain Fed policies, etc.
The recent escalation in the trade war that involves levying a 10% tariff on an additional $300 billion worth of goods coming in from China, if indeed implemented Sept.1, will ultimately mean that you and I will pay more for our goods. Predictably, this was met within hours by an announcement from China that “necessary countermeasures” would be pursued. Since the public comment period has already been observed, this is not an idle threat. The announced effective date of September 1 now becomes a realistic event, and we should adjust our expectations accordingly. The higher prices that importers will pay means either higher prices for consumers or squeezed margins for businesses. Our bet is that consumer price inflation will rise slightly, and, although that will not likely derail consumer spending, the latest round of tariffs could weigh on confidence.
Not to be outdone, the Chinese earlier this week “allowed” the Yuan to weaken over the psychological barrier of $7.00. This is seen to be largely the cause of the stock market’s gyrations this week.
(Point of clarification: We hear and read in separate arguments and dialog of the trade war, and alternatively the currency war. These are interrelated, and effectively either side of the same coin. In the current situation, the Chinese weakening their currency effectively mitigates, if not completely off-sets, the effect of Trump’s tariffs.)
All this points us closer to an economic slow-down that at some time will likely be pronounced a recession. But not immediately … “closer” means we aren’t there yet. (Some of the smart people I read have been calling for a recession for 4-5 years!) Not all of the signs are domestic – this is a global situation. All of this global economic and political theater has, and will have, and effect on the AZ gas station business and real estate market. I’ll discuss this in greater detail in a Blue Paper later this year.
The drop in interest rates in late July was not really to head off an economic slowdown, contrary to popular press. The Fed making policy decisions based on economic date could not possibly justify a rate drop based on economics. Behind the scenes conjecture is that Powell led this in order to weaken the dollar, this to counter China’s then-anticipated reduction of the Yuan, which Washington thought they would do in reaction to Trump’s last 10% tariff. The result here at home, however, is to make the cost of money less, making more borrowers qualified (reduced debt service coverage), and stimulate sales of things that typically get financed, e.g., real estate and businesses. As consumers and business decision makers, it makes us feel good … gives us confidence, albeit, perhaps false. Seeing the monthly payment of a variable rate loan go down makes us feel wealthier, like getting a raise or a dividend increase from our stock.
For now, the economy is good, jobs appear secure, AZ demographics are favorable, and banks are lending. All the ingredients of a good market.
Better Than the Other 49, July 8, 2019 (Excerpted from our July Blue Paper)
In another sign of Arizona’s booming economy, the Phoenix metropolitan area led the nation for new jobs created over the last year. In a report released today from the U.S. Bureau of Labor Statistics, the Phoenix-Mesa-Scottsdale metropolitan statistical area (MSA) had the largest total nonfarm job growth of all large MSAs from May 2018 to May 2019. AZ’s economy continues to grow at one of the fastest rates in the nation, ranking 4th for GDP growth, 2nd for personal income growth, and 4th for population growth.
Market Comments, June 11, 2019
The big news for this report is that the Fed has not only announced no more rate increases for a while, but its next move may very well be to reduce rates. Early forward guidance after the stock market tanked in Dec. was to reiterate the Fed casts policy based on economic data already in, making it reactive rather than proactive. But the data it read in Jan. was market data, not economic data. Nonetheless, the market was inspired.
If you watched Main St., however, it was much ado about nothing. But the Fed was helped out last month. May new jobs data came in at 75,000 new jobs created, a far cry from the economic experts who cast their dice at 175,000 or so. Not just a miss, but literally off the charts. This bad news for the economy is good news for the (stock) market. It raises the odds (based on futures contract pricing), of a Fed drop in interest rates perhaps as soon as this month and a curtailment of QT with perhaps even a reinstatement of QE.
And what does this mean for our market, gas station businesses and real estate in AZ? Nothing discernable in and of itself. Consumer attitudes (confidence) moved little less than a hic-cup. The folks have their jobs, a modest rise in income, and perceived job security – all is well with the world.
Over on the small business side, the NFIB small firm confidence index rose 1.5 points in May to 105.0. Despite trade uncertainty, owners are confident about future prospects. Notably, 30% of firms plan to increase capital spending outlays, a historically high level and up three points during the month. The NFIB noted some further moderation in inflation. The share expecting to raise selling prices, however, fell to only 20%, suggesting slowing demand may be curbing pricing power.
The impact of the trade wars is just starting to be felt, mostly with China. We dodged the bullet with Mexico for the time being – now all they have to do is follow through on performance. Oil that took a run to the high $60s-low $70’s/bbl has come to reality with fundamentals and now trades in the mid-$50’s. By prices at the pump you’d never know the past few month’s volatility. At some point in the not-to-distant future the global supply chain will start to reflect the impact of tariffs in pricing … perhaps not in the U.S. first. Some slow-down in global trade indicators are showing up, but this is staying below the radar in most U.S. reporting services. It will become more apparent by fall. This economic activity will be history before the Fed will move on it – bear in mind theirs is a trailing activity. They have to see the house on fire before they buy the insurance!
Bankers (lenders) however reading tea leaves will be more proactive in their lending criteria – some of them on the edges for specific types of loans already are. This will show up for us in buyers having more trouble getting loans, even SBA loans. Gas stations will be one of those specific types of properties and businesses first to be flagged for tighter underwriting. Buyer activity will be the last element to contract – it hasn’t yet. To hold asking prices through contract a more conservative lender may leave a hole in the deal structure between buyer’s equity and their primary loan … this to be filled by a seller carryback. I term this filler or gap financing. If handled properly, not the worst thing to happen.
For now buyer activity doesn’t seem hampered by the theatrics out of Washington. That should be expected to become less tolerable as the medium term effects of the tariffs take hold. Tariffs are a tax anyway you look at it. When it begins to affect consumption due to price increases and economic data begins to show slow-down (dare I say the “r” word?), the Fed will be justified in dropping interest rates or increasing the money supply via QE (again. But this is beyond the short term horizon of this report. Smart money prognosticators are clustered around 9-18 month timeframes for these events to show.
Market Comments, May 11, 2019
Will the economy continue to support a vibrant & active CRE and business brokerage market?
Let’s see …
Our most likely forecast for 2019 U.S. real (after adjusting for inflation) GDP growth is 2.8%. Real GDP growth topped out at 3.2% in Q1. While this is a good number and great for headlines, it ain’t all it’s cracked up to be. Pull out an overly abundant inventory build-up and GDP slides to 2.55%. Still a healthy number, but this will weigh on future GDP figures as inventory is worked off in the future. Slice off Government spending and GDP falls further to a not-to-impressive 1.3% (not a typo!). (Gov’t spending is tantamount to salting the mine – with our money!) Wells Fargo is expecting growth to slow to 2.5% in Q2 – this may be optimistic!
We still expect the Fed Funds rate to remain unchanged (currently 2.25-2.5%) for the foreseeable (short term) future, our target year-end range for the 10-year Treasury is 2.6-2.8%. (Is that a flat yield curve or what?)
Although we expect core inflation to bottom out and rise from here, we do not expect core PCE inflation (the Fed’s preferred metric on the subject) to return to 2% in this year. (Let’s see … 3.2% in the bag for Q1, 2.5% (or so) expected for Q2, and 2% for the entire year … arithmetically for this to pencil, we would need a really soft H2 economy. We’ll see.)
WILD CARD: Trump’s recent and widely advertised increase in the tariff rate on Chinese goods will have inflationary consequences. If this resolves quickly (judgement call), the Fed will see it as transient and not worthy of a rate increase. If not and rates increase in H2, this plus tariff-driven inflation could put the economy into end-of-cycle mode.
Employers continue to add jobs at an impressive rate. Year-to-date, job growth has averaged 205K per month. Solid jobs gains, steady wage growth and slower inflation bode well for personal consumption growth in the months ahead. Run-away wages are being held in check by a continuing increase in the participation rate. As long as wages increase gradually they won’t be seen as forcing inflation.
Will the Fed continue policies supportive of an expanding economy, buoyant markets, and a feel-good consumer/investor?
Given the short-term time horizon of these comments, of course they will … barring any of a number of black swan events.
Note that the Fed is reactive and not proactive in exercising policies. By their own admission, they absorb economic data, analyze it, then react. Elapsed time from actual economic events to Fed policy changes? Hard to say. In Dec. 2008 it was a matter of days … but that “to save the world”. In more normal circumstances, probably 5-9 months is a norm.
And what does the consumer/saver/tax payer (you and me) think and feel about their position, and propensity to spend/save?
At 129.2, the present level (as of April 30) of consumer confidence is in-line with its 12-month average of 130.1 and essentially splits the difference between the euphoria in October when the index hit a 17-year high of 137.9 and the lows in January when it fell to 121.7. All-in-all, we’re good!
And how about the small business owner (you and me again)?
Optimism remains relatively high, and recent weakness was likely due to transitory factors such as the government shutdown and stock market volatility. Expectations for future economic improvement partially rebounded after dropping last month. More owners believe now is a good time to expand and plan to increase capital spending.
Closer to home, everything seems rosy. Spring is upon us, the saguaros are in bloom … sunny days, light breezes, low-to-no humidity. The great state of CA continues their oppressive policies driving the exodus of citizens – many looking for gas station/c-stores in AZ. Inventory of stores available continues to wane. Bank/lender BDOs continue to burn the phones looking for loans. But underwriting has begun to get picky with what they’ll put on the books. The outcome will be a lot of loans applied for but relatively few actually getting done, particularly in difficult-to-finance asset classes with inexperienced brokers. (A shameless plug for MJG.) This is typical of mature cycles.
Market Comments, Apr. 2, 2019
How’s our market? Not “the market”, or “a market”, but our market … gas station businesses & properties in AZ. Activity is brisk – both buyer and seller. Buyers are breaking loose and looking for ways to do deals.
Banks are staying the course for the most part, particularly SBA Preferred Lenders. Some are starting, however, to add restrictions to where they’ll lend, the type of businesses they lend to, and other “bar-raising” criteria for underwriting. Not all, but the tightening of lending parameters is consistent with an end-of-cycle environment.
Also, for your correlation, note:
The NFIB Small Business Index rose in Feb. The topline index rose 0.5 points to 101.7 in February, stemming the five-month string of declines. Optimism remains relatively high, and recent weakness was likely due to transitory factors such as the government shutdown and stock market volatility. Expectations for future economic improvement partially rebounded after dropping last month. More owners “cautiously” believe now is a good time to expand and plan to increase capital spending.
The University of Michigan Consumer Sentiment Index rose to 98.4 (as of Mar. 29), the highest since October before the government shutdown and stock-selloff spooked consumers.
I’ve been an advocate for some time of using these small business and consumer indices as forecasts of behavior from these groups over the short term, e.g., 3-6 months. While not a perfect correlation, they seem to be as reliable as other sources available.
With the Government shutdown behind us (for now) and the Fed taking their foot off the rate-tightening gas pedal, small business and consumer optimism are back in vogue. While not with the reckless abandon that characterized the 2002-2007 era, but with a willingness to spend a dollar and reflect a risk-on investment attitude. (This may come back to bite if the public markets get a black swan event that crunches stock market averages.)
Also, however, household debt data suggests that the consumer may be about tapped out. (Macro data of debt vs. income data.) The Fed stabilizing their interest rate climb, advertised through the end of 2019 and only 1 increase in 2020, may give an extension to consumer credit uses. Closely aligned to this dynamic is the small business buyer/investor’s willingness to take on debt to acquire or expand their business.
Gas station market inventory still languishes behind demand, both in quantity and quality. This continues to be a frustration to buyers. Our discussions with brokers in other markets outside of AZ tells us this is not an isolated condition to AZ. This would suggest that buyers should be flocking to acquisition candidates, and they are. Our buyer inquiries are remaining firm. But a couple key qualifiers come into play here … the business needs to be profitable (actually EBITDA or Seller’s Discretionary Earnings, not so much taxable income) and be able to document this (accountant prepared income statements and balance sheets). Without these 2 characteristics, we have a much harder row to hoe in selling the business.
Some of you have commented with interest about a CA listing I offered for comparison in an earlier Market Activity Report. And so, here’s another recent listing sent to me by a Southern CA broker I know … FYI.
This is a Chevron branded station on about .8 ac. presumably (by Brokers location) in the San Diego metro market.
Asking $2,850,000 for Business and Land, plus Inventory
SBA approved only 15% down to financially qualified buyer!
Good books and records for financing! $300K EBITDA per annum
9 mos. 2018 - avg. 38K gals p/m @ $.55 pool & $50.2K c-store sales
1620 s/f “Island Marketer” C -Store – with ABC (beer-n-wine) license
Chevron fuel supply agreement until July 2025
Buyer Must be Approved by Chevron Jobber & Assume Contracts
4 Fuel Dispensers with 8 Fueling Positions including Diesel
3 – UST tanks, 2-12K & 1- 10K
Veeder root tank and monitoring system - EVR 2 compliant
The notable data is that it’s being offered at a 9.5 multiple ($2,850,000 / $300,000). Fuel volume and store sales are low (extremely low by CA standards), and the “island marketer” configuration suggest it’s an older build.
Incidentally, a quick run at debt service for the 85% SBA loan shows monthly payments of $17,510, or $210,120 annually. This leaves about $90k of the EBITDA for the buyer.
So why do CA buyers continue to call and want to relocate, aside from the social and political climate across the river? Hum-m-m-m-m-m?
Market Comments, Mar. 11, 2019
There’s a supposition in the money/investment business that when we talk about “the market” we talk about our slice of all the markets, and close to home, e.g., the gas station segment of CRE and closely held (private) businesses in AZ, or perhaps Phoenix metro. With the advent of the internet and search engines there is more than enough data to pour statistical justification to support (spin it) about any posture you would care to take on the matter.
I believe it’s more instructive to consider short term activity as a precurser for future expectations.
The big market shaker out last week was the February jobs report. The U.S. Bureau of Labor Statistics reported total non-farm payroll employment changed little in February, with just 20,000 jobs created, the smallest in well over a year. The unemployment rate, however, declined to 3.8%, and year-over-year wage growth was 3.4%, the largest increase in nearly a decade.
By comparison, employment increased by 311,000 in January and in 2018, job growth averaged 223,000 per month.
The unemployment rate declined by 0.2 percentage point in February, and the number of unemployed persons decreased by 300,000 to 6.2 million. Among the unemployed, the number of job losers and persons who completed temporary jobs (including people on temporary layoff) declined by 225,000. This decline reflects, in part, the return of federal workers who were furloughed in January due to the partial government shutdown.
In February, the number of long-term unemployed was essentially unchanged at 1.3 million, and accounted for 20.4% of the unemployed. The labor force participation rate held at 63.2% in February, and has changed little over the year.
This gives Fed Chairman Jerome Powell permission to take his foot off the gas for additional interest rate increases. Financial markets breathed easier, banks breathed easier, a whole lot of people breathed easier. Personally, I expect this to be an anomaly, quit possibly to be revised next month back toward the norm. However, today we have buyers and lenders back in the acquisition and lending mode.
Several end-of-year polls of the CRE industry show that the top concern for cause of the end-of-cycle to materialize in rising interest rates. The Feb. jobs report will go a long way in easing that concern. (That also happens to be THE major concern when considering the longevity of the bull market in stocks.)
The 2nd, or sometimes 3rd, concern is economic growth. With that in mind, continued low unemployment rates, sustained population growth and surges in key industries, Arizona’s economy continues its positive trajectory. These were the findings presented last month by prominent economist Dr. Christopher Thornberg of Beacon Economics at the Alliance Bank of Arizona 2019 Economic Forum.
Steady growth was seen across all areas of Arizona, as every major metropolitan area in the state experienced solid job growth and consistently low unemployment rates. Looking from the second quarter of 2017 to the second quarter in 2018, Arizona’s economy grew 6.8 percent compared to 5.4 percent nationwide. Employment increased by 93,900 workers, a 3.3 percent increase from Dec. 2017 to Dec. 2018, while population growth was at 2.2 percent, which was significantly higher than the 0.4 percent experienced nationwide. Similarly, during the same period, the state’s unemployment rate sits at 4.8 percent, which is higher than the 3.9 percent national rate.
So it would seem that here in AZ we have good market fundamentals, a vibrant economic environment, energy independence (we’re meeting demand with declining imports from OPEC nations) and reason to be optimistic about the near future (6-12 months). If we could filter out the drama from Washington, we’d probably even feel pretty good about it.
Current buyer gas station demand hasn’t changed. Our listings for businesses showing a profit (net income, positive cash flow, EBITDA or seller’s discretionary earnings) garner 2-3X the views that stations get with break-evens or losses at the (adjusted) bottom line. Our buying inquiries remain strong, and we continue to have the large majority of them coming from CA. (The worse the social environment gets across the river (Colorado) the stronger this demand will get.)
Lastly, one of best market indicators, consumer confidence, bounced back following January’s brief dip. With financial market volatility and the government shutdown firmly in the rearview mirror, consumer confidence partially reversed its recent three month string of declines and rose to 131.4. The index currently sits below the peak of 137.9 hit last October, yet remains elevated. February’s reading is consistent with my view that December’s plunge in retail sales was a fluke and consumer spending will likely moderate, yet remain firm, through H1-19.
Market Comments, Feb. 5, 2019
Consumer sentiment fell to 91.2 in January, the lowest level in two years. Declines were nearly balanced between the present situation and expectations components of the index. The partial government shutdown has weighed on optimism. Given that the tentative resolution only provides funding until February 15, uncertainty here may continue to weigh on confidence. The resolution did nudge sentiment higher than initially reported.
Despite the shutdown, consumer sentiment appears to be moderating. In a separately released report this week from the Conference Board, we learned consumer confidence slipped for the third straight month in January. The more measured level of optimism demonstrated by these two indicators is likely to weigh on the pace of consumer spending this year.
The Federal Reserve held its benchmark interest rate steady at its January meeting and sent its strongest signal to date that it sees no need to raise rates anytime soon. Its message ignited a rally on Wall Street, which cheered the prospect of continued modest borrowing rates for the near future.
The Fed and its chairman, Jerome Powell, pointed to global economic pressures and consistently mild inflation as reasons to keep rates steady. The policymakers also said they’re prepared to slow the reduction of their bond holdings if needed to help the economy – a pause in “normalizing”.
In a statement after its latest policy meeting, the Fed said it would be “patient” about future rate hikes. Its benchmark short-term rate will remain in a range of 2.25 - 2.5 % after having been raised 4 times last year.
The picture sketched by Powell and the Fed was of a U.S. economy that remains on firm footing with low inflation but that faces risks from a global slowdown and a U.S. trade war with China.
Before raising rates again, Powell said, he would need to see rising inflation. The Fed’s preferred inflation gauge has risen to 1.8 % in the past 12 months, below its 2 % annual target.
“I think he got an education by the markets and got burned,” said Kathy Bostjancic, chief U.S. financial market economist at Oxford Economics. “Now, they’re bending over backward to show they’re sensitive to the market.” The Fed’s behavior since 2015 clearly indicates that it’s taken a role in protecting the nation’s wealth in the public markets, as well as maintaining full employment and stable prices – this, by the way, without Congressional approval and no repercussion from the Congressional Oversight Committee. With their balance sheet held hostage by the bond market vigilantes, who can blame them?
Aside from, or in spite of, global political theatrics and inside-the-beltway, CRE investors and small (gas station) business buyers are active – more so than their selling counter-parts. Demand remains brisk – the appetite is for metro stations with real estate and a turnkey business for profitability. Supply on the other hand is dismal, particularly in the Phoenix metro market. A recent search through Loopnet for operating gas stations turned up 11 listings! … And several of those were ex-stations (tanks pulled or land only – the station demo’ed), carwashes, and mechanical repair shops.
We can see the short term bumps in the road that will keep the trip to the horizon uneasy …
Executive-Congressional agreement on border security that includes a “wall” (or other suitable barrier). Lack of such agreement threatens: (1) reinstatement of a government shutdown, or (2) Executive action to build it (the wall) anyway. Investors/buyers will like neither.
Failure of China-U.S. to reach a trade agreement by March, leading to a rise in U.S. tariffs on additional Chinese goods to 25%, from the current 10%. While this is seen to damage China more than the U.S., the ripples in the pond will impact global trade and economy(ies). (If you want to track global trade and economic developments, try Googling the IMF for news & updates.) This may seem far-fetched and otherwise exotic, but it reaches home.
Brexit – how this plays out will also be a plus or minus for global trade.
Fed response to any of the above. They’ll try hard to remain in the background, but the spotlight is on them … too much visibility. They hic-cup and the markets get indigestion.
And why, you may ask, should buyers be on the hunt with such uncertainty, so much risk? Many buyers believe that the worse the environment is the more sellers will be ready to throw in the towel and give the business or property away to get out from under. In my experience, in some cases they’re right. The term is capitulation. In the stock market you see it in trading patterns. Human behavior is the same in all markets. The stock market just happens to be the perfect gold fish bowl to observe this – if you know how to read it. Its where bear markets bottom – this by the way is a process, not an event.
So far, lenders are still in the game. SBA loans are best insulated from direct market reaction to negative news. It’s not so much rates, but the terms and conditions that are being effected. We’re working harder – which means buyers and sellers are working harder - to tweak the transactions for loan approval.
I expect a dicey few months leading into the summer. How the global markets work will influence if and when we hit our downturn, the magnitude of it, and the suspected duration.
Market Comments, Dec. 5, 2018
There’s so much “stuff” hitting the fan out there that it’s tough to sort it out, connect the dots, and focus on the good, the bad, & the ugly. The bad and the ugly is what you hear on the evening news, or read in the morning paper. Here we’ll focus on the missing part – the good.
Our MJG website had a record number of hits last Oct … 1643. In this day and age of having a million or so “friends” on social media sites, this may seem to be a small number. But considering the selectivity of our audience, it’s respectable. When considering our average number of monthly hits over the last year of 1156, it’s absolutely outstanding … a 42% increase. Whether shopping for information or checking out listings, the buyer and seller activity was notably up last Oct. Whether this sustains into next year remains to be seen.
FROM THE OIL PATCH: Oil cratered more than 7% Nov. 13 for a record 12th straight declining sessions. You could then buy a barrel of crude for less than $56 as oil slides to new 52-week lows.
As for the cause of this nasty crash, there’s plenty of blame to go around. U.S. production is up 2 million barrels a day. OPEC has raised its production to one-year highs. Trump has repeatedly tried to talk down prices. Meanwhile, the global supply glut continues to increase, outstripping demand and prompting wave after wave of selling.
The U.S. is close to energy independent. A few months ago we became the world’s largest producer. The shortages in the fracking fields, pipeline infrastructure and labor, are expected to be reduced or eliminated next year. Last month we became a net exporter of oil, first time in the last 45 years. In the aftermath of GM and Fords announcements to close plants and lay or a combined 40,000 workers, Trump announced plans to eliminate electric car tax subsidies – more petro powered vehicles coming if the threat holds. (This will need congressional approval.)
The Saudi’s still need about $80/bbl to balance their budget, even though it only costs them about $10/bbl to produce. And frackers from North Dakota to the Permian Basin wrestle with costs when WTI falls below $50/bbl. So there is supply, but geo-global events, domestic policies, Fed activities (the cost of money), and time lags for the time it takes to cap a producing well or bring an idle well back on line, all go the keep volatility a built-in characteristic of the industry. Volatility notwithstanding, expect sweet spot pricing to be $50-70/bbl – adventure-pricing above and below this range should not be a surprise, but also should not be sustainable.
Manage inventory and cash flow accordingly.
We note that since the per-barrel price has dumped the price at the pump has not budged, this over a 5-6 week timeframe. I suspect this translates into higher margins at your station.
HOW’S ARIZONA DOING? In 2019, most of the state’s economic clout will remain concentrated in metropolitan Phoenix, which has accounted for 88 percent of all jobs created in Arizona so far in ‘18. After several sluggish years coming out of the recession, Arizona appears to have reclaimed its economic swagger.
So far this year, Arizona ranks 5th among the states for personal income gains, 6th for gross state product or output and 7th for job creation, Arizona ranked 6th in 2017 for population growth and 5th for domestic in-migration.
Despite the improvement, Arizona still has catching up to do in some respects. The state’s per capita personal income of $42,280 in 2017 ranked 43rd highest among the states and Washington, D.C. (Ouch!)
Job growth has accelerated in recent months, with Arizona likely to add about 72,000 net jobs in 2018, up from 63,900 last year, and 71,000 in 2019. Arizona’s population, now at 7 million, is expected to grow 1.6 percent in 2018 and 1.5 percent 2019, adding a bit more than 100,000 residents both years, as also happened in 2017.
“People want to move to Arizona, they want to move to Phoenix, and they need housing,” per Lee McPheters, an economics professor in the W.P. Carey School of Business. He neglected to add that they’ll also need gasoline! (Data from W.P. Carey School of Business, ASU)
Nestled in among the new residents will be buyers for gas stations and c-stores.
WHAT ABOUT THE MONEY? It took just a single sentence a week to change the sentiment that had gripped the markets for the last 2 months. In a speech last month Fed Chairman Jay Powell said that interest rates are "just below" where they are likely to settle for an extended period of time. Investors, previously stung by a comment made by Chairman Powell in October that interest rates at that time were a "long way" from their "neutral point," jumped to the conclusion that the Fed may have only one more rate hike to go (occurring December 19) before stopping. Judging from U.S. Treasury futures pricing, the Dec. hike is a 99% (or so) certainty.
The Dec. rate hike will cut off a certain amount of prospective buyers from the pool for affordability. It will also raise the bar on historical cash flow/seller’s discretionary earnings for debt service coverage. Fortunately, the public markets (stock & bond) have gouged investors to the point where they’ll exchange the market risk of public markets for the liquidity risk of private companies. If you’re financing, re-financing, we suggest you structure a variable rate deal. You don’t want to lock up a fixed rate if we’re at the top of the credit cycle. If you’re offering a seller-carryback as part of your offering, try to get a fixed rate for the term (typically 5 years.)
IN CONCLUSION: The day-to-day market is brisk, and chaotic - representative of the environment, and continually catalyzed by the bad and the ugly. Getting buyers to shut out the noise and focus on a transaction is a challenge. Fear and greed are either peaked, or peaking! This may settle out some over the Holidays, but we expect it to re-surface in January.
Market Comments, Nov. 20, 2018
Well, the election’s over. While your favorite candidate or local referendum may have won or lost, the macro outcome was apparently expected. Market participants should begin to return to their normalized activity of buying & selling. With the uncertainty of the election outcomes to be out of the way, maybe the markets – all markets – will settle down … reduce volatility, but don’t count on it. There’s still plenty of uncertainty in a number of other areas. Public markets will probably continue to exhibit a high degree of volatility.
Aside from the caravan coming up from Mexico, tariffs coming & going, Brexit and the impact on the Euro Union, Italy’s solvency, and China’s currency devaluation, we have at home the next interest rate hike to ponder in December. Continuing economic data gives the next ¼ point hike a near-100% certainty, barring one caveat: the stock market. Although not in the Fed’s charter, purview or appointment to preserve a “healthy” market, they have taken it upon themselves unilaterally since the 2008 meltdown to provide sufficient liquidity through policy to see the market doesn’t crash! (One more example of quasi-government over-reach.) If the market corrects more than 15% from its most recent high, you can expect the Fed to hold off the Dec. hike. If a bear market ensues (more than a 20% decline), look for a reinstatement of QE and a “temporary” curtailment of balance sheet normalization actions, i.e., they’ll start rolling their government maturities again. Coincidently, if that happens, it will facilitate Trump’s pursuit of a lower/weaker dollar. Expect volatility to sustain until this all plays out.
As we approach Thanksgiving we’ll begin to hear more about retail sales and Holiday spending. I haven’t seen forecasts yet, but I suspect it will be a good year for retailers … consumer confidence is still high. This may be tempered somewhat by the higher prices found on the shelves courtesy of tariffs. More grumbling, but probably not much actual resistance to spending.
Markets hate uncertainty, and we have it in spades. The biggest threat to a continuing robust economy is a loss or weakening of consumer, investor and business confidence. You’ve heard me say (or write) before about the key factor that I believe confidence is in sustaining the economy. The outcome of the election will certainly affect this, but the political drama coming from Washington will also influence this also.
One of the key players in our market subject to uncertainty is lenders. Contrary to the green curtain we typically come up against when we engage with them, a look behind the curtain will show that lenders are people too. Reversal or hesitant continuance of Fed. policy may cause them to rein in the currently aggressive search for loans. They don’t stop on a dime, but they can react pretty quickly. But for now, all is good.
Data from websites shows that buyers stayed engaged in their pursuit of a gas station business or property through Oct. in spite of pre-election theatrics. Data from BizBuySell which provides both “hits” and “views” showed the average percent of views to hits as being 3.97%, i.e., for every 10 times a business or property showed up in a search, it was actually clicked on to view about 4 times.
Oct. 9, 2018
And Still More Good News!
I’ve been beating this drum for a while now and I know you’ve heard it before, but here it is again … ‘cause it’s still the case.
The NFIB Research Center has been collecting small business economic trends data and publishing quarterly surveys since 1973, and monthly surveys since 1986. The sample is drawn from NFIB members, who are sent the surveys to complete to come up with the final score.
August’s score hit 108.8, topping the previous high of 108 set under Ronald Reagan’s leadership 35 years ago. (Report released Sept 11.)
Six of the 10 Index components advanced, three declined, and one was unchanged. Job creation plans and job openings both set new records, reflecting the need for workers and the tightness of the labor supply. Capital spending plans were the highest since 2007 and inventory investment plans the strongest since 2005.
The August Index has more “muscle” than any past reading. The “hard” component of the Index (job creation plans, job openings, capital spending plans, inventory plans, and earnings) soared to a historic record reading of 107.9. This caps a change in the complexion of the Index which was previously dominated by the “soft” components (inventory satisfaction, good time to expand, expected business conditions, sales expectations, and expected credit conditions) at the beginning of the record run that started in December 2016, but is now driven by the spending and hiring components, generators of GDP growth.
In December 2016, the Index jumped 8 points to 105.7, virtually equal to its average reading since then of 105.8. At the beginning of this historic run, the Index gains were dominated by expectations: good time to expand, expected real sales, and expected business conditions. Now the Index is dominated by stuff that makes GDP grow: job creation plans, job openings, strong capital spending plans, record inventory investment plans, and, earnings. Small business is clearly helping to drive that “4 percent growth” in the domestic economy. (The IMF released a report today – Sept 9 - forecasting US GDP growth for this year to be 2.9%, and 2.5% for 2019. I believe the 4% ballyhooed for Q2 will show up to be an aberration, but we’ll see.)
Credit is not a problem, few report being unable to meet their financing needs. The 10-Yr Treasury yield did hit 3%, a rate typically used by small business lenders as the base for conventional commercial loan interest rates. And, the Federal Reserve is expected to tack on another 25 bps to the Fed Funds rate by year end.
The report concludes that “politics, rather than the strong economy and low unemployment, will continue to dominate the news. But this is not likely to have much of an impact on the level of economic activity which is on course to equal or surpass last quarter’s performance.”
What can derail the optimism? A couple things show up. The bond market has become a problem almost overnight. The 10-Yr. Treasury surged a quarter point over the last couple weeks – in the bond market this is a huge move – the wrong way! And the Fed is anticipated to bump Fed Funds ¼ point in December, with 3 more hikes in ’19. (The economy may not hold together for all the ’19 increases.) Also a couple of Trump’s tariffs points kick in between now & the end of the year. The 10-Yr Treasury range at which it threatens to trigger a stock market sell off is calculated to be 3.25-3.7%, this from smarter folks than me who model this sort of thing.
July 3, 2018
Brace yourself for some good news!
After nearly a decade of tracking executive sentiment in commercial real estate, data by top U.S. law firm Akerman LLP show industry leaders display unwavering optimism about America’s economic strength. Nearly 70 percent of executives and investors surveyed in the ninth annual Akerman U.S. Real Estate Sector Report say they are even more optimistic for 2018 market activity than in the last two years — an overwhelming 25-plus percent jump, firm records show.
(See: www.akerman.com/en/perspectives/2018-akerman-u.s.-real-estate-sector-report.html for full report available by subscription.)
T. Row Price’s Midyear Market Outlook, which was released on June 25, is predicting “favorable” economic conditions for the rest of the year, though volatility is likely to continue. High valuations across most global asset classes and a range of economic and policy risks—including the threat of trade protectionism, growing by the day—create the potential for volatility to persist moving into the second half of 2018. (See: https://seekingalpha.com/news/3366065-t-rowe-price-sees-u-s-economic-growth-continuing-also-volatility for free download of report.)
The growth outlook is most robust in the U.S., where confidence remains high on the heels of last year’s tax cut legislation for individuals and corporations, the report asserted.
Earnings growth is strong and not expected to slow dramatically over the next few quarters …. Other recent reports have offered similar findings about the longevity of the current expansion
The First Quarter 2018 SIOR Commercial Real Estate Index rose to its highest value since its creation in 2005, according to the Society of Industrial and Office Realtors. With a value of 100 on the index indicating a balanced market, the national index closed the first quarter of 2018 at an all-time high of 134, reflecting a positive expectation for the remainder of 2018 among survey respondents.
The organization calculates the index based on the results of a U.S.-based member-wide survey. With gains in business investments, exports, as well as consumer and government spending, the SIOR CRE Index points to an essentially positive environment for economic growth.
The majority of SIOR members expect conditions to improve, with 64 percent of respondents foreseeing growth.
Too much good news? There are more believers and Kool-Aid drinkers of national and higher prominence that could be quoted here, but you get the idea. With such near-unanimous optimism how could anyone remain a doubting Thomas?
The above opinions are reflected in record levels of consumer sentiment (see last month’s Market Comments), and bear out daily in our phone and email inquiries. This even spills over into lending and credit activity. We get lender calls and emails daily from loan officers wanting a shot are our next financing, all assuring us they can do the deal … more than a little unbelievable since they don’t know what the deal is! The rise in interest rates has made lending a profitable part of the banking business again.“Market Comments” typically covers a period of about 3 months past (history) and 6 months or so into the future. For the time being we’ll go with the flow. Pricing and terms for gas station/c-store businesses and real estate haven’t blow off yet (exception: CA). There’s still enough caution among buyers and lenders to provide an orderly market. There are several economic and market indicators available to provide alerts to the potential extravagance. (Many or most of these were available during the dot com bubble burst in 2000-01, and the credit melt-down in 2007-08.)
June 4, 2018
Consumers are still fairly optimistic about the economy, the Conference Board reported on Tuesday, which is decidedly good for the state of the economy and spending on such things as retail goods. The company’s Consumer Confidence Index increased in May, following a modest decline in April. The index now stands at 128.0 (1985 = 100), up from 125.6 in April. The Present Situation Index increased from 157.5 to 161.7, while the Expectations Index improved from 104.3 last month to 105.6 this month.
“Consumers’ assessment of current conditions increased to a 17-year high, suggesting that the level of economic growth in (the second quarter) is likely to have improved from (the first quarter),” said Lynn Franco, director of economic indicators at the Conference Board, in a statement.
“Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term,” she added.
Consumer confidence tends to be one of the best forecasting indicators of individuals propensity to spend and invest. Investment decisions however, also consider longer term indicators besides employment data, including wages. Interest rate movements & trends, inflation, Fed activities & policies (monetary), and federal tax (fiscal) policies are watched for reinforcement or cautionary signals beyond the short term environment. Since CRE and business acquisitions are typically leveraged, liquidity in the credit markets (banks willingness to lend) is a key to supporting, or not, what the investor may want to do.
When reviewing market data that exists today we are seeing the results of prior decisions … history-based. There is a convenience, perhaps comfort, in extrapolating yesterday’s trends into the future. Consider the graph above. The consumer confidence trend since about the middle of 2016 has been in fairly tight uptrend to its current 128 level. Headline data suggests this should be expected to continue in the near term. It’s been well documented, however, that the current economic expansion is getting long in the tooth. Public market data (stock, bond, futures) have been giving signals of cautionary behavior by participants. May unemployment fell to 3.8% - lowest since 1969 – and wages increased .3%. How much better might it get, we wonder.
Our best grass roots indicators at MJG tends to be how many phone & email inquiries we get – both buyer and seller, and how aggressive are their buying & selling signals. We get a good gauge on market liquidity by how many cold calls we get from lenders wanting to provide loans for acquisitions. These signals have been strong since the first of the year, and haven’t waivered much in light of rising interest rates, the rise in the price of oil (crude at the wellhead) or the price at the pump, or the latest Trump tweets. In fact, continuous antagonistic political behavior from Jerry Brown (CA governor) has precipitated more buying calls from his constituents.
For now, we reiterate our last month’s position that we expect support for a strong market by all the participants over the “near term” – consider this to be through Q2-19. Consider what happened to consumer confidence between 2007-2009. Leading to 2007 it was all fine until it wasn’t. The various markets have their own charts reflecting this period. We may in the CRE and private business markets extend longer, and perhaps higher, and probably will. But history advises us to not be surprised by the next “black swan” event.
Apr. 4, 2018
To start out I’d like to offer a quantitative look at our (MJG) listings from the couple websites that provide market activity feedback, Loopnet and BizBuySell. These also happen to be the dominant public websites for CRE (Loopnet), and businesses (BizBuySell). You can compare your statistics with these to get a gauge on how your business and/or property is competing with the buyer audience.
Loopnet: Average hits/mo. (excludes businesses only): 1,713
BizBuySell: Average range of hits/mo. (excludes real estate only): 1,400-3,848
Average percent of Views/Hits: 5.1%
Operating businesses that include the real estate tend to be the more popular in attracting buyer interest.
Businesses offering historical financials not older than 90 days garner more “continued interest” from initial inquiries.
Quality of the financials – appearance of being prepared by an accountant – provides confidence to the buyer that the price is justified.
Pricing based upon market multiples of Seller’s Discretionary Earnings offers buyers the best justification, absent an appraisal.
Market multiples of the business remains firm in spite of the public markets (stock markets) increase over the past several years. Increases in overall prices are attributed the increased real estate values. These are taking their lead from traditional CRE markets – these statistics, indices are not largely publicized – you’ll find these mentioned from time-to-time in the MJGBlue Paper.
Reading the Signs:
Early explorers, mountain men, and pioneers followed animal trails, rivers, and Indian paths to open up the west. They looked for signs along the way to develop expectations of what was ahead – most of the time it worked, to a degree, other times not so well.
Today the modern explorers of the markets, the financial and investment future look for their own signs to forecast expectations. Picking up signs we attempt to connect the dots that lead to expectations from which we can render decisions about the best (or at least better) course to take for our particular journey.
One such dot …
Early last month President Trumps Chief Economic Advisor, Gary Cohn, resigned. He was widely considered the force behind Trump’s tax cuts. Absent Cohn’s steady rudder… many fear the economic ship will take a perilous heading.
Trump’s trade warriors like adviser Peter Navarro will rise in his place. Protectionism and a global trade war are next, they fear, another Smoot-Hawley Act in the making. (Google Smoot-Hawley Act for this event and the results that followed.)
Michael McCarthy, chief strategist at CMC Markets Asia Pacific, speaks for many, as quoted by Bloomberg:
“It’s clear at the moment the markets (public investment markets) are likely to price the worst-case scenario on tariffs”… “Markets are very concerned about the impact on global growth,” given the “potential for tit-for-tat” protectionist moves in the wake of Europe’s retaliation threat following the move on U.S. steel and aluminum tariffs.”
Michael O’Rourke, chief market strategist at Jones Trading Institutional Services, adds his voice to the rising chorus:
“Of all the Trump administration resignations, this will be the one most meaningful for markets… Cohn was the administration official financial markets had the most confidence in. This opens the environment up to a whole new wave of uncertainty. The likelihood of a trade war just jumped dramatically.”
Regardless, the happy mainstream consensus holds that coordinated global growth is jumping. But is it? (Change is hard to accommodate … accepting the potential for change.) Goldman now claims that “global economic momentum” has fallen to its lowest in two years. Seven of ten components in its proprietary “Global Leading Indicator” slipped in February. (another sign)
Is global growth at “peak bullishness”?
We noted earlier how unemployment is often lowest immediately prior to recession. If it drops below 4%… recession almost invariably follows. Unemployment is currently 4.1%. (another sign)
Meantime, the Federal Reserve has embarked upon quantitative tightening… and central banks around the world are looking to tighten. (Interest rate increases and balance sheet “normalization”.)
The global credit impulse — the rate of credit growth — has fallen recently to levels unseen since 2008. As analyst Kevin Wilson warns:
“The global credit impulse is plummeting, suggesting the imminent end of the global credit cycle and signaling (another sign) high potential for recessions and/or financial crises. All of these risks and challenges are difficult to quantify and nearly impossible to time; …”
None of this should be construed as offering investment advice, but only to share with you some of what investment, financial & economic sign readers are observing.
Dec. 4, 2017
The Wells Fargo (per their Economics Groups Special Report 11-21-17) forecast for holiday sales this year is for an increase of 4.0 percent on a seasonally adjusted basis compared to only 3.0 percent for last year. Although income measures have not been supportive of stronger consumption this year, consumers have shunned this fact and continued consuming. The most important reason for this continuous improvement, other than the low unemployment rate and the relatively strong increase in employment of late, has been the strong improvement in consumer confidence since last November. The Conference Board provided the most recent evidence that consumer confidence remains high, with its headline index registering a 17-year high in October. Therefore, we believe that the increase in consumer confidence will be enough to carry the consumer forward this year and contribute to make this holiday sales season better than what we saw last year. (Watch for a Q4 bump in household debt when published in Q1-18. This will not be good, and we expect it will be called a surprise by most economists.)
We recently received an email from one of the brokers we have communication with in Southern CA:
“Experienced, high net worth developers approved by all major brands, looking to purchase or long term lease gas station sites and car wash for development. Preferred geographic areas, San Diego, Riverside, Orange and San Bernardino counties. Ready to build pads in retail centers preferred, minimum 25,000 s/f. Will also entertain raw land acquisitions for development.”
We believe this activity is a result of scarce inventory, not just in CA, but in other SW markets where CA operators are interested in expanding. This is reminiscent of the market in the early 2000’s after many stations were closed as a result of required environmental compliance at the time. A then-expanding economy provided demand for units that weren’t there, resulting in new-builds being the solution. This activity ran from about 2000 through 2007 and the 2008-09 real estate melt-down. The situational dynamics are different this time around, but I anticipate the result to be similar. If so, this is a good time to be a seller.
Friday, Dec. 1, the PCE was announced for Nov.: 1.4%. (PCE: Personal Consumption Expenditure) As opposed to CPI or PPI that we all know, this relatively new measure of inflation is the one cooked up by the Fed several years ago to give them a benchmark more suitable to their goal, i.e., call inflation rising. This is the 2% target much talked about and sought after, but sadly, unattained so far. This bears directly on the Fed’s justification for raising the Fed Funds rate at the next FOMC meeting in mid-Dec. (the 13th sounds about right). The model that translates interest rate futures pricing into probability of the Fed raising rates, or not, gave a PCE of 1.6% or more a near certainly of raising the rate, and 1.3% or below a near certainty of not raising the rate. Between there ranges is a crap shoot – where we find ourselves. Weekly labor data will now become the focus of Fed watchers. We expect Yellen & Co. will try their mightiest to raise this rate, if for no other reason than to give Trump a head start on a recession, and her replacement, John Taylor, something to do when he takes over Feb. 1. Not to overlook, the Fed. is still QT’ing … quantitative tightening, i.e., reducing it’s balance sheet. All this has to do with market liquidity. Very simply, increasing liquidity drives markets, reducing liquidity stalls markets. Banks, and non-bank lenders, tend to be very sensitive to increases and decreases in liquidity. It’s generally not a matter of all-or-none, but more the shade of gray. In our business, CRE and business brokerage, it’s not whether a deal can be done, but more to the structure of the deal. Knowledgeable anticipation can be helpful … it helps reduce the risk of the transaction.
We recently had a couple of our properties appraised that were stabilized stations (profitable with good cash flows – SDE) with c-stores in the Phoenix metro market, from which we were able to back into the market multiple. These were branded businesses that included the real estate. These were valued at 10.34 times their SDE. This is an increase in the metro multiple from the 8-8.5 range from a year or so. Rural stations typically have a discount in multiples from the metro, and with this as a benchmark would come in at about 8.0-8.5 times SDE. In allocating the value between the business and real estate, the business enterprise value (intangible value) came in at 2.76 times SDE, and when added to the FF&E produced a business only value of 3.08 times SDE. The business-only value is well within the historic range of 3-3.5 times SDE, which means the expansion of multiple is in the value of the real estates. Notably, we sold what might be considered a comp business in a rural market almost 2 years ago now that valued at 6.4 times SDE. In our observations of rural market businesses with real estate, this range hasn’t expanded Conclusion: the Phoenix CRE market bubbled up over the last few years and has settled back, or at least has begun to, whereas the rural CRE market didn’t get the bubble. Clearly this is a small sample, but we piece together the pieces as they come to us to develop our mosaic of what we think the market is and where it’s going.
One of the structural difficulties that has been on-going in valuing gas stations throughout the state, aside from the form of ownership usually being a business that owns the real estate as one of its assets and the number of transactions provides a very thin market, is compensating for the nature of the improvements among historical sales (comps). Valuing the operating business represents a blind spot for most real estate agents & brokers, and valuing the real estate is equally challenging or omitted entirely by business brokers. The result is what we kindly call an “inefficient market”.
For years we’ve anticipated the end-of-year to be quiet, from about the middle of Dec. until the 2nd week of Jan. For years we’ve been surprised that it hasn’t been. Many of our prospective buyers aren’t big celebrants of Christmas, but use the occasion to escape the northeast and Midwest snow and cold to visit family & friends in the sunny southwest. And many who are in the gas station business back east take the opportunity to identify, explore and visit potential acquisitions in AZ. If you’re listed in the market, be ready for unannounced drop-ins. Some of these that can get traction while here actually develop into transactions the next year.
Sept. 4, 2017
THE GOOD NEWS: tax reform is back on the table; interest rates are down, including mortgage rates; GDP growth was +3.0% in the 2nd quarter, its best 3-month gain since the 1st quarter 2015.
THE BAD NEWS: only 20% of Houston homeowners with flood damage have insurance protection; North Korea continues to rattle nerves with its testing of yet another intercontinental ballistic missile that was fired over Japan; the US dollar is slumping as the Euro has gained +13% vs. the greenback YTD, causing import prices to rise (source: BTN Research).
HURRICANE HARVEY – PERSPECTIVE:
Concentrated Energy of the Gulf Coast: The shutdown of about 15% of US refining capacity in the wake of Hurricane Harvey demonstrates the nation's vulnerability to supply disruptions stemming from its dependence on fewer pieces of infrastructure that are concentrated along the Gulf Coast. (Reuters has the shutdown loss at 22% of capacity.) There are 141 oil refineries in operation today, down from 220 three decades ago, which have nearly 30% more capacity, and are being used about 90% on average, but the good news is that the market has adapted to respond more promptly to disruptions. (Source: Wall St. Journal)
Notable, however, is not just what happens to refinery interruptions, but what this done to refining product output, including gasoline & diesel fuels. An equally important closure as a result of Harvey has been the Colonial pipeline, a major distribution pipeline from the Gulf to the northeast. Within a couple days of this announcement supply limitations at the end of this pipeline sent gasoline prices soaring, as well as jet fuel to the major airports in the northeast U.S. And now we seen the Atlantic coast being threatened by another Cat 4 Hurricane, currently scheduled to hit the weekend of Sept. 9th. (The path is still uncertain, but forecaster’s odds are not good at this time (Sept. 5). Meanwhile, tankers with crude product have been holding off-shore, creating a glut of upstream product for refining. So, while the price of gas at the pump is feeling supply shortages, the price of crude has plummeted due to excess supply. So far, this dynamic has been mostly contained in the central and eastern U.S. We have seen only “sympathetic” pricing movements at this time. But keep an eye on your cash flow; resolution, when it comes, will likely be to the upside in pricing with declines in fuel volume sold.
The Houston metro economy is the 4th largest in the U.S. – see chart below. Within a few days of Harvey making landfall, estimates started out at $15b to re-build; these are now up to $40-50b (and climbing). Initially (probably starting with Q4 data) there will be a hit to GDP for lost production from the Gulf Coast market. Ironically, as the clean-up is completed and the re-building commences this will be a huge addition to GDP. (GDP measures only deal with additions to domestic production, not netting out loses.) This may be a springboard to Trumps obtaining legislative support for his infrastructure program – only sooner and for more money that originally projected. Key to the cost of recovery/re-building is not just the dollars allocated, but the timing of the funding. Estimates today are just that … the final price-tag determined when the recovery is pronounced “done” – this to be years from now.
CONSUMERS STILL CONFIDENT
While I’ve yet to find a direct metric, index, etc. quantifying the optimism/pessimism of the business buyer or real estate investor, I’ve found the consumer confidence index as reflective as any indirect gauge available - gas station buyers are consumers too.
Employers added 156,000 new jobs in August, while the unemployment rate ticked up to 4.4 percent. Average hourly earnings rose a tick and are up 2.5 percent over the past year. Manufacturing activity strengthened in August, with the ISM index rising to a six-year high of 58.8. The Consumer Confidence Index rose to 122.9 in August on improved views of current and expected conditions. Headline and core PCE inflation rose 0.1 percent in July. Core inflation is up only 1.4 percent over the past year, which is the smallest increase since late 2015.
OBSERVATIONS & CONCLUSIONS:
Macro data from our (MJG’s) own listings shows that the number of market inquiries is down, but that the percentage number of views is steady. This suggests that the absolute number of prospective buyers is down, but that the quality of the remainders is steady. This may be seasonal (vacationers in the summer) with an expectation of renewed interest beginning this month into the end of the year, or buyers being overwhelmed and burned out by Washington high-jinx, continuous global contentions, and now, Hurricane Harvey disruptions, fall-out and uncertainty.
Appetites among asset classes show that turnkey businesses still command primary consideration among buyers – a cautionary statement of risk-avertness. Of least interest are turnaround businesses, property for redevelopment, and raw land for development. These will wax and wane in importance over time, not because the macro environment changes, but because the buyers become accustomed to the uncertainty and learn the live with the attendant risks as the new normal. We’ve seen this adaptability manifest numerous over the last decade or so. The global and domestic environment may change, but our DNA doesn’t. Inventory continues to be stingy – not many choices for buyers. Buyers have become frustrated and impatient, but have yet to capitulate. California government policies continue to be caustic-to-punitive to business owners, both large and small, providing a continuing motivation for gas station owners in that state to look for relocation, and AZ is an obvious target. (Many who were considering TX just took them off the list.)
June 7, 2017
Welcome to summer, where in Phoenix we’re logging our 4th consecutive day with a “heat warning”. I’m not sure exactly how hot it has to be in order to call for a warning, but today is calling for 107 degrees. So today we’re going to launch the summer gas-stations-for-sale Comments with a look at what’s for sale in AZ.
Here’s what mid-westerners and Californians will find when they brave the heat for their gas station acquisition.
In Maricopa County: On Loopnet, 13 stations available, including 2 for investment only (no biz), 1 property for redevelopment, and 1 use-restricted (by QT).
On Biz Buy Sell, 14, including 1 for redevelopment and 1 w/o fuel.
In Pima County: On Loopnet, 8 stations including 2 that are closed,
On Biz Buy Sell 2 (!)
All Rural Counties: On Loopnet, 22, including 2 closed and 2 that offer land only,
On Biz Buy Sell, 19
Summarizing: In Maricopa County, 13-14 stations,
In Pima County, about 6 stations,
Throughout the rest of AZ, about 20 stations.
For all of AZ, about 40 stations. (During the 2000-2007 period, Maricopa County would typically have 50-55 stations available, most-to-
all of which were businesses with real estate.)
What’s being offered: Gas station businesses with real estate,
Gas station businesses without real estate,
The businesses offered include both turnkey and turnaround businesses … the bulk today seem to be turnaround, i.e., the buyer will have to make changes to put the business “on its feet”.
Closed stations looking for: an operator (the biz would be a startup), an investor (would have rent-up risk), a re-developer (would have both construction risk and rent-up risk).
Land only: typically judged by the listing broker to be a suitable gas station property.
Qualifiers: The overlap of listings between Loopnet and Biz Buy Sell is in the area of 90-95%. We don’t assume that all stations available are listed in either Loopnet or BizBuySell, although these 2 sites have the dominant market positions for CRE and businesses respectively (MJG opinion). Other listings show up in the gas station and c-store segments of these sites, and include mechanic shops, automotive franchises, grocery stores, and liquor stores – these have been excluded from the above data.
Feb. 7, 2017
The pulse of the commercial real estate market and business brokerage market at this time can best be described as chaotic! Is this a surprise to anyone?
Not driven exclusively by President Trump and company, but clearly influenced by post-election behavior, markets – literally all markets – reflect the uncertainty, top-to-bottom, that is highlighted on the six o’clock news.
The following comments offered up by RICS U.S. and presented in Globe Street (2-8-17) is representative of the CRE industry opinion:
“Even amid the uncertainty brought about by only the second increase in the federal funds rate in 10 years and the advent of a new presidential administration that is already proving to be disruptive on a number of fronts, a survey of US commercial real estate participants predicts a fairly strong year for the industry overall. However, respondents to the Q4 2016 RICS US Commercial Property Monitor see the New York City metro area as a possible exception. Survey respondents expect a positive outlook for rent growth throughout the coming year, with the largest gains projected in the prime office and multifamily sectors, both near 3%. They’re followed by secondary multifamily (2.3%) and prime industrial (2.0%).
Conversely, RICS says expectations for secondary office and secondary retail are a little more downbeat. But the development starts indicator continues to show a positive trend in the pipeline, led by the office sector. Meanwhile, investor demand increased across all sectors and inquiries from international investors also continued growing.
‘There’s some uncertainty due to the Fed raising interest rates and bond rates increasing substantially after several years of very low rates, which will reduce the cap rate compression experienced over the past eight years,’ says Michael Yovino-Young FRICS, president, Yovino-Young Inc., Berkeley, CA. ‘Cap rates have already increased modestly but are predicted to increase further in the next 18 months.’
‘This will be the result of the economy reacting hopefully to the anticipated changes the Trump administration has planned for the investment market, banking industry, Wall Street and other relevant areas,’ he continues. ‘The next year should be very interesting as far as appraising commercial real estate is concerned, but difficult to predict in advance.’”
The quantitative references notwithstanding, we find similar comments and opinions in all of the other relevant markets, e.g., stock and bond markets, commodities, precious metals, currencies, etc.
It’s not lack of activity, but lack of purposeful activity … false starts & stops … hesitant and then retracted decisions … guessing and then second guessing. In visible markets where this behavior is openly manifested, it shows up as volatility.
So is this environment to be considered temporary, or will it settle in to yet another “new normal”? At least for the next 4 years. Too soon to say, but we think not, at least to the current extent.
The extreme opaqueness of the horizon, the clutter that surrounds and hides previously seen signals, disconnects and dislocations of previously visible financial and economic relationships, all serve to heighten the risk of decisions.
The changes being proposed by the Executive Office are revising, modifying, reversing, or eliminating what has been accepted as status quo for somewhere between 1 and 6 decades – this is going to take some time, and “accommodation”. We’ll make headway. We’ve already made some headway. The longer we’re engaged in the process the more we, the recipients as well as participants of change, will become more comfortable with the process. We’ll begin to recognize stable elements within the volatility.
One thing entrepreneurs seem to instinctively recognize is that buried in the all the chaos is opportunity. This is a small percentage in any group being considered, i.e., buyers, sellers, lenders, etc. These people, those we call the pioneers, establish their positions early in the change cycle … get ahead of the herd when the perceived risks are still too high for the average, the norm(al), person. As the risk wanes these early birds profit from their risk acceptance – if they’re right!
All this is nice to consider, but what do we know today?
At this time market inventory of gas stations available is low; at MJG our inventory is to the high side. Quality of the inventory is average-to-poor. Many of the listings for gas stations in the various websites are not gas stations at all, or if they are they’re closed with no businesses, and if closed they’ve had the tanks pulled. Some have been scraped and are really only C-2 zoned dirt – that once was a gas station. Some offerings are by Circle K or QT and have use restrictions on the title, i.e., can’t be used by the buyer for fuel sales or a c-store. This is a particularly frustrating market for buyers who want to buy a turnkey business.
And speaking of buyers, what do they want? The same thing they’ve been after for years now, going back to beginning of the recovery from the last recession, about 2010: stable historical income (EBITDA or sellers discretionary income) with the real estate where the valuation mix justifies 25-30% of the total value from the capitalization (cap) rate of the income stream – this also presents the best bankable profile for the lender.
A brief review of the macro data available from websites indicates buyer search activity has fallen off since Q4-16, but not changed noticeably from Jan. to Feb. December had a little bit of a seasonal surge during Christmas week, but this has become normal. Gas station real estate only, properties for redevelopment, and stations offered for lease are noticeably of less interest than businesses for sale that include the real estate – the relative attractiveness of this mix hasn’t changed over the last few years.
Does this mean that if you’re not a profitable business that you can’t sell your station? Not at all. You’ll just be catering to a smaller audience. Bear in mind, however, that you only need 1 buyer. And not all buyers can afford their appetites. Some will scale down to an affordable opportunity rather than miss the boat all together. All safe havens to park money, or invest, have a risk; if you don’t see the risk where your money is, you haven’t looked hard enough!
I expect the waters to clear significantly over the next few months; I hesitate to say 100 days!
There are 2 (at least) areas of reform that are particularly meaningful to real estate and business investors: tax reform and amending Dodd-Frank. I expect these to be whittled away into new policies and regulations (or elimination thereof) over months-and-years. But I also expect some meaningful improvement with Dodd-Frank regulations in the short term. Tax policy will be more encumbered by the necessary political processes, and can be expected to take longer for changes to show up.
This is not meant to be a political commentary, but the Government has been so successful in infiltrating the public sector over the previous decades that it has opened itself to public sector observation and opinion. We, the public, feel compelled to oblige.
Aug. 1, 2016
The best predictor of future behavior is past behavior. The best influential drivers of the market – any market? Not the price of money, or the most recent terrorist attack, or the price of oil … its fear and greed. These are what drive decisions. And where can you find a “greed-fear” index if you were inclined to look? The economy, every investment industry, and now political pollsters publish data in abundance that can be used to interpret the emotion and mind-set of the sampling. However, a readily-available data point you might check out is the consumer confidence index. (indices actually – there are several of them.) The consumer, the buyer, the investor, the seller, etc. are all the same person. They just express their intent and behavior differently.
It appears that the balance of the year will be a continuation of what we have already seen, not only in the first half but throughout 2015—good, but not great, growth. It is clearly a market of mixed signals. If the driving forces of the market don’t change, is it reasonable to expect the market to change? Probably not.
The CRE market continues to trudge along, reflecting the bifurcation that was initially identified and the term becoming prevalent in 2010; this reflecting the muddle-through economy. The markets continue to reflect central bank activity, and currency translations, with perhaps the biggest structural component change the drill-down of sovereign debt to negative interest rates. The current estimated total of sovereign debt in now around $13 trillion, or about 30% of the total global market for national debt. What’s an investor to make of this? And where to from here? As the clouds clear and the future becomes clearer, I believe the pent-up demand for businesses, including gas stations, will express itself in dramatic fashion. (And make no mistake, there is pent-up demand going back 8 years now since the Fed took interest rates to ¼ point for Fed Funds.)
The price of money (interest rates) is supposed to measure the risk of lending. But with central banks the world over engineering interest rates (lower) in a search being the world’s cheapest currency, thereby becoming the more desirable exporter of goods to the global market and supporting their domestic economies (a winless situation for all of the participants), the risk-basis on interest rates is absent. The spreads between what can be received as a savings/investment return and what it costs to borrow money at historic levels. Within this context, the value of your adjusted cash flow today is some multiple higher than that same number was a year or 2 ago. Will it be as valuable a year from now? This is question I ask buyers regularly.
In the business brokerage and CRE business we sometimes forget to consider the financing piece of the transaction. We get focused on the intrinsic and organic elements of the company and the property. It’s well-known when you think about it that businesses are acquired and run on leverage … borrowed money; certainly this is true also of investment CRE. Today this is the most fickle part of the business and CRE transactions.
Money is out there, hunkered down in liquid funds are basis point returns. It’s there, but it’s becoming stickier to move. This is not only private equity, but also institutional lenders (banks). The buyer interest is there, and the lender interest is there (judging from the number of BDO calls I get about daily looking for deals to work). The issue that soon surfaces is the terms, including rate, and the qualifications of the borrower and the historic financial performance of the business being acquired. SBA lenders continue to be active and in fact are making loans. I continue to have an active 6-8 lenders any given day for gas station loans, although it’s an active pool. Underwriting can be sticky, but not un-doable.
Not to overlook the Brexit event – turns out to be a yawner! The surprise reaction lasted somewhere between a day and 2 weeks, depending on what market you looked at. Fallout, if any, is expected to be contained in Britain and Europe. (Odds, measured by currency translations and the futures market are that Britain will go into a recession in the next year or so – but they could be wrong!) Seems like the greatest intermediate (3-5 yr.) concern is who will drop out next. (My money’s on Italy – not literally!)
Inventory of stations available continues to be poor to lacking, even in Phoenix … perhaps most notably in Phoenix. (Meaning buyers have fewer choices.) Owners and buyers of gas stations keep their eye on the price of crude, knowing the trend here sets their margin. The volatility here, and of all markets, has been a structural part of the business for over a decade now … one of the unintended consequences of high technology and immediately available information … increased volatility in all markets.
Not to neglect the 800 pound gorilla – it’s an election year. This event will increasing be a driver of decisions for the next 100 days or so leading up to Nov. 8, and to a lesser, but more obvious extent through Q1-17. I’ve chosen not to comment on politics or public policy even though this is a (“the” ?) significant factor in the near term. (I also don’t discuss religion or baseball, although I will comment on the Cardinals in their time – coming soon!)
July 15, 2015
Comparative Analysis of the Gas Station Market in AZ: There are essentially 2 public domain websites that house the lion's share of gas stations for sale: Loopnet.com and BizBuySell.com (BBS). Loopnet is focused on the real estate of the station, and BBS focuses on the business on the property. (Loopnet owns BBS, and CoStar owns them both.) CoStar is primarily a research site rather than a marketplace, but carries listings for the CRE members. CoStar caters to, and is used mostly by, the CRE industry.) There are clearly other websites available, but these 2 garner the majority of the activity,a nd also offer the best metrics for activity measurement and market analysis.
The data presented should not be considered to be 100% inclusive. Some listing are not posted to either Loopnet or BBS.
Today Loopnet has 87 gas station properties listed in AZ statewide.
43 properties listed are in Maricopa county (Phoenix) ranging in asking price from $125,000 to $4,950,000. Listings include those with businesses included, closed stations, car washes with no fuel sales or c-stores at all, and investment-only properties (being sold by an investor-landlord with a tenant in place). As you might glean from the mix, valuations are not uniform!! The term used here is an "inefficient market". Valuation is not just a challenge for the buyer and seller, but also for a lender (the slient 3rd party to any transaction using debt financing) and the appraiser.
14 property are in Pima countgy (Tucson).
30 properties throughout the rest of the state.
As a point of comparison, the following metro markets have the noted number of stations listing for sale in Loopnet: (Phoenix MSA pop. is just over 4mm.)
Atlanta 37 6.1mm
Denver 16 2.9mm
Salt Lake City 9 2.4mm
Dallas-Ft. Worth 55 6.7mm
Albuquerque 8 900k
Historically since 2000 Maricopa county has typically had 45-50 stations available at any time. Inventory did fall below that range during the 2009-09 recession, but even then not by much, although the mix (quality) of type of properties and businesses varied greatly, and generally toward a poorer selection. Tucson would generally have 10-15 stations at any time, and the rest of the state (rural properties and businesses) 20-25.
BBS has 46 gas station businesses listed statewide today.
29 businesses in Maricopa County. The owners of these businesses typically own the real estate as an asset of the business.
2 businesses in Pima county. This is light for Tucson, and indicates many of the 14 Loopnet properties available in Tucson are boarded up - closed. This is in fact the case.
15 businesses in rural AZ.
The interpretation of this mix isn't as straight-forward as you might expect.
Much of the listing activity has to do with how the seller perceives his situation. Most think in terms of selling the real estate rather than a business with the real estate. Also, real estate agents and brokers are much more visible and active than business brokers, and there are simply more of them. The sad part is that many real estate agents who list gas station properties don't realize there's a business there to sell also. If you look at stations listed on Loopnet you'll see very little regarding the business - these are dedicated almost exclusive to real estate data.
You generally don't find business brokers outside of the Phoenix metro and Tucson markets, although there are a few practicing in the Prescott market. Business brokers generally don't focus too much on the real estate elements of the gas station, although all are usually real estate licensed. Most non-gas station businesses that sell through operate as tenants in the space, so selling the business only involves assigning or re-executing a lease - conveyance of the property to a new owner doesn't enter into the transaction.
Business brokers tend to list on BBS, and real estate brokers list on Loopnet - not too many cross-overs. It isn't unusual to find a station listed with an agent or broker who practices primarily residential real estate, especially in rural markets where most agents practice as generalists. These brokers typically ost their listings in the MLS rather than commercial public domain websites. A couple things to know about the MLS. Ony NAR and AAR members can use the MLS (Very few business brokers or commercial-only real estate brokers are member of the NAR and AAR in AZ, so these folks won't see commercial listings on the the MLS. Also, the MLS is county-specific, i.e., a listings in Cochise county AZ will only be found in member searches for that county. Most MLS users only subscribe tot he county where they are located.
Activity this summer has fallen off a bit from pre-Memorial Day levels. Lenders have also grown a bit hesitant ... not as aggressive. Much of this, I believe, has to do with non-industry events over the last few weeks: mass-entry of Republican candidates into the Presidential race of nomination, each with a particular resume, but all sounding very similar in what they propose to do; seemingly continuous shootings or random acts of violence by jihadists and domestically by illegal aliens, highlighted by Donald Trump's very vocal and public proposed solutions to the problem; the day-to-day Greek drama (literally) leading to a possible default on loans if they should fail to achieve yet another bail-out, and calling into question the viability of the Euro Union (Eurozone): China's economy falling into the pit, and global deflation from all of the above, and experienced daily by the very visible investment and money markets, and most recently Obama's achievement (capitulation) of a nuclear agreement with Iran. If you're aware of any or all of these it might make it difficult to focus on buying your next gas station.
And the big cloud still hanging on the horizon is when (not if) the Fed will begin to raise interest rates. The Fed has had rates pegged at 0% (.25 target Fed Funds Rate) since 2008. Most folks are aware that markets (stock, bond, commodity, investment real estate) have prospered as an effect of "free" money - whether they have in fact is debatable. Well get ready. Today Fed Chairman (Chairperson) Janet Yellen in testimony before the House Financial Services Committee said such a move is just around the corner. Couched in "Fed Speak" ... "If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy." Currently the "smart money" is betting on Sept; the next best anticipated date in Dec. Many of the global events referenced above will influence the Fed's decision here. As she said. "IF the economy evolves as we expect ...". If you've followed the Fed's forecasting tract record at all, you'll conclude they're not the sharpest knife in the drawer when it comes to economic forecasting.
All that being said we continue to have good buyer interest. We even receive cold calls from bankers now and then looking to place loans ... they all specialize in gas stations of course!!
Jun 23, 2015
C-Store Industry Composition. Single-store operators account for 63% of all c-stores in the U.S., and accounted for more than 83% of total store growth in 2014. (Source: Stagnito Business Info.) With all the middle-market mergers, mega-market spin-offs and IPOs, it's easy to lose track of the market composition. Bear in mind that when 2 companies merge or a larger company acquires a smaller company, this doesn't add to the overall c-store population. If fact, in may cases it reduces the number of stores of the combined entity through mandatory closures or divestitures for FTC transaction approval. The latter activity has been an over-riding trend in the national economy ever since the Fed has instituted its ZIRP policy. One the Fed actually begins to raise rates, and eventually it will, we will see a tapering to the M&A activity ... we always have over longer economic cycles. The follow-on activity as the economy improves toward normalization and the acquisitions have to start paying for themselves is that the lower producing stores will end up back on the market either in small batches or one-offs. A store that can't pay its way in a larger corporate structure can be an acceptably profitable store for a single, or multiple store owner that doesn't need 20% or so of sales to cover corporate overhead.
Oct. 29, 2014
Oil Prices Crashing. As you know, the big news in the gas patch is that gas prices are down. If history can be trusted, your pooled margins have expanded. A importantly, your customer's feelings about wealth and optimism are up. You can read this in consumer confidence numbers. The pricing market for crude tell the story (see chart at right - courtesy of the DailyReckoning.com and StockCharts.com).
Most of us are curious-to-anxious about the causes driving the price spike to the bottom,
if only to guess about how low it will go, and how long this price reprieve can be expected to
last. The whys and wherefores will have to wait for the next Blue Paper (not published on
this website - if you'd like to receive the most recent Blue Paper, contact us.), but we believe
we're about as low (market crude pricing) as we're going to go. For a number of reasons we
anticipate we'll trade WTI between $75-85/bbl for some time, perhaps years. There will be
volatility to be sure within the range, but there should be production market support in the
mid-$70's. This comes from a couple primary producer's costs: Shale oil from fracking -
Continental Oil that owns or controls much of the Bakken production is said not to be able to
bring oil out of the ground for less than$70-75/bbl. And secondly, Saudi Arabia and Russia
(even if you overlook the sanctions) need about $75-80/bbl to break even on their production
costs - a bit higher if exporting. This is in U.S. dollars, before considering currency exchange
rates. Factor in currency translations - the ruble has been getting hammered for the last year
or so, down about 24% since just last June - and the price rises.
After the U.S. (!!) these are the numbers 1 and 2 producers in the world. Saudi is possibly more important since they have global sway with OPEC. which among the member states produces about 40% of global oil production. Russia's economic isolation makes it difficult for her to withhold production in order to raise prices, and the strength of the U.S. dollar poses its own difficulties for global exporters (OPEC). As long as we have the global turmoil that we currently have, international capital flows will continue to strengthen the dollar, and hence keep oil prices (priced in dollars) low.
The dynamics giving us the conditions noted above will likely prevail a year-to-3, depending on the outcome of the mid-term elections (now known). If Republicans are successful in becoming the majority in both houses of Congress, they may be effective in legislating changes in some domestic policies, but they'll not be able to make Obama a leader in foreign policy such that global events may calm and capital flows reverse. If Congress and the Executive Office arrive at a stalemate on foreign policies, the current oil pricing conditions can be expected to be maintained. For Congress to override Executive vetoes of policy takes 60 votes ... meaning if Repubs don't get 60 seats in the Senate (they didn't) they'll need Democrat support on any measure needing a veto. The risk in pricing, then, can be seen as political risk - well outside MJG's area of expertise!
So for current sellers of stations, what to expect ... what to do? Be happy with the improved business you should be experiencing now, and be sure to keep your financials up to day. Recognize the current business climate is likely to be a short-to-intermediate term condition. Longer term, there are many domestic and global economic issues to resolve including deflation-to-inflation conditions, currency exchange adjustments, international and possibly domestic social upheaval, and political policies affecting U.S. energy production dominance. Clarity and settlement, or progress, of these issues will occupy the latter part of this decade. As a seller, you want to sell into the strength of your business and the business environment in general. Leave some anticipated upside in your business to the buyer ... if you don't, you won't find a buyer.
Closer to the bone, day-to-day market activity has slowed a bit within the last few weeks. We suspect in reaction to the upcoming election, the uncertainty surrounding Ebola, and the increase in local terrorist activity (Canada & New York) - it's terrorist activity as usual in Israel ! The election will overshadow the other two areas of interest shortly, and these will be digested to minimal surprise potential by the first of the year. Look for good retail numbers ahead of the Christmas season - fuel prices will still be low and consumers will feel financially better off and spend more freely. Gas station buyer interest should be brisk in Q1-15, and continuing into the new year. Sellers on the sidelines can be expected to be encouraged by favorable economic (and political?) news and try selling into the "good news" ... increased competition among sellers - we're expecting listings to be up. Buyers will still be buying cash flow as opposed to nice looking properties but underperforming businesses. Keep your financial statements up to date.
INTRODUCTION - The following comments are offered to keep you abreast of the market for gas station and c-store sales in Arizona. At MJG, we identify 3 geographic markets statewide: the Phoenix metro area (an MSA), Tucson, and the rest of the state which we identify as "rural". By type of market, we follow and will discuss both the business and real estate markets, in as much as many if not most small business owners of gas stations and c-stores own both the business and the real estate that the business occupies. Our Market Pulse updates will be more frequent and less strategically detailed (dealing with shorter timeframes) than reports found in the News and Reports section of this website. As your read down the Market Pulse, you'll be reading the most recent comments first, progressing to older publishings, which if read in order, will allow you to develop an historical reference to the market. We will general keep 12-36 months of comments online, but will archive older comments. You can request archieved comments by contacting us directly with your request.