MJG Gas Station Specialists LLC

NEWS




October 17, 2018
MONEY IS MOBILE


Under the Fed’s ZIRP and QE beginning Q4-08, the U.S. investment markets have been awash with money and created bubbles (inflated asset values) in about any market you care to discuss. The primary focus for most has been the stock market, although supported (some would say lead) by the bond market. Once started domestically, it blossomed some time ago into a global phenomenon. Then a few years ago the Fed pronounced the economy well enough to stand on its own GDP without Fed support, and began raising interest rates. But this was in fact a little too late – it missed the window and had to play catch-up. Elsewise, how could they get rates high enough to then reduce them again to stave off the next recession? Rates enough wouldn’t do to halt the-then raising economy, especially in light of the “Trump Effect”.


“We have to do more”, they lamented. So let’s whittle down our balance sheet. After all it grew from about $900 billion to over $4 trillion in the last 7-8 years. We could “normalize” it to, say, $1 trillion or so. That would reduce liquidity in the market and cool the economy, giving us more time to raise rates higher. (Tricky stuff this managing of the economy, especially in a free market capitalization society.)


But what about the effect on the markets, particularly the stock market? They concern themselves with the stock market because, I muse, it is the most transparent for even the most casual observer, and the bulk of working society has some equity participation exposed to its values.
And so all the problems, disruptions, global conflicts and false starts, of the last couple years that here-to-date have been absorbed by market practioners in keeping the bull alive, now appear to be starting to have relavence – the market is responding!


The market has several stages of exuberance when changing direction … depending. But how is an investor to know when volatility turns into a correction, and a correction becomes a bear market? It’s easy! Volatility is when your broker goes home early and doesn’t call you back for several days.
A correction is when you broker starts vomiting in his waste basket. A bear market is when your broker quits and starts selling used cars, and you start vomiting in your waste basket.


But to the point, money is mobile. It migrates from market to market, and indeed from country to country, to find the optimum trade-off between risk and reward. Easy to see for the stock market - the investors perfect gold fish bowl. What investors call the most efficient market. And now thanks to the internet, all players have all the information immediately – theoretically.


But what about our market? Commercial real estate and privately held (small) businesses. Not at all transparent, seemingly limited information, and marginally efficient by comparison. The difference in nomenclature is enough to keep investors out of these markets. We don’t talk about bull and bear markets. We talk about market cycles. Longer and slower, and without the recognized volatility and corrections. And talk about timing. Traders talk about timing with 5 and 15 minute curves. It’s inhuman! But … no problem – we have computers! We’ll just update the algorithm.


Many will complain that commercial real estate ties up their money too long. (To not do so takes planning, as opposed to buying a hot stock.) Some would say they can’t reliably determine the price of a privately held business – it’s like having to read the annual report for the stock you buy. (Maybe reading the annual report is a good thing to do before you buy your next target stock.) Buying your own company has risk! What if you fail? If you have a job you’ve already accepted that risk – what if your company fails? (Sears just declared BK last Friday! Who else is on the skids?) What about the structurally unemployed who can’t qualify for a job in todays economy?


Exchanging your time and talents for a paycheck has become more complicated today than it was 10 or 15, or 20, 30, or 40 years ago. And hanging on to your investable nest egg is more challenging than in the 1990s, a mere 18 years ago. Do you think it will get easier going outbound?
MJG Gas Station Specialists is a commercial real estate and business brokerage firm specializing is gas station properties & businesses throughout AZ.


Direct comments to Mike@MJGSpecialistsAZ.com





October 15, 2018

What can Derail the Economy?  Let me Count the Ways - 10

Economic downturns in recent decades have generally started with a bang – bubbles bursting in the housing or technology markets or oil price shocks come to mind – but the next one is more likely to arrive as a whimper.  (So says Yardi Matrix, a commercial real estate intelligence resource.)

Problems that caused previous recessions seem relatively controlled. For example:

  • Commercial mortgage lending has grown through the cycle, but leverage levels seem under control.

  • Consumer debt is at an all-time high, but consumer debt-to-income ratios and household balance sheets are healthy.

  • The stock market could be overpriced, and subject to a correction, but it’s hard to predict a major bear market when corporate profits are at record levels. (It should be noted that the stock market is one of the leading economic indicators – a discounting mechanism that historically leads economic events by about 6 months.)
  • Oil price shocks have been a major factor in virtually every recession of the last half-century, and while oil prices have risen lately, but they remain nowhere near all-time highs while oil’s impact on the economy is diminishing.


 
There are many potential trouble spots – just that none identified to date, they argue, have the capacity to create major waves by themselves. Consequently, the next downturn might be caused not so much by the pop of a major bubble, but by the cumulative effect of a series of economic events.

So what are the identifiable areas of concern?  Read on …

  • Corporate debt bubble.  Total corporate debt tops $9 trillion, nearly 50% above the peak during the last bubble.

  • Weaker global growth. Economies in most of the world have picked up in recent years, but trouble spots are on the horizon. Consider Japan (aging population), China (attempt to control rising debt levels), and Europe (Brexit fallout and anti-immigration movements), EMs (emerging markets) such as Argentina, Venezuela and Turkey.
  • Slowing housing market.  Rising interest rates are making it difficult for buyers to afford homes, and construction will get more expensive due to tariffs.
  • Rising oil prices. Crude oil prices have risen steadily to the mid-$70 range and prices could go up further for several reasons.

  • Auto production.  An increase in gasoline prices could eat into sales of popular vehicles, while higher interest rates could reduce credit available for loans to purchase vehicles.

  • Immigration. Economists largely agree on the benefit of skilled immigrant workers to the economy, and policies that make it harder to bring workers to the U.S. are a headwind to growth.

  • Fiscal policy reversal. Corporate and personal income tax cuts impact diminish in 2019 and turns into a negative drag on growth in 2020 and beyond.

  • Rising interest rates. The federal funds rate is up to 2% and the Fed is expected to raise policy rates by 25 bps per quarter for the next 4 quarters. The 10-yr Treasury rate climbed to 3.2% in early October, the highest level since May 2011. The Fed’s over exuberance in fighting inflation could wind up choking off growth.

  • Yield curve. A related concern to the rising short-term rate is that the short-term rate will increase above the 10-yr Treasury rate producing an inverted yield curve, a phenomenon that frequently has forecasted recessions. The inverted curve itself would not be a cause of a recession, but a leading indicator of one.  In previous boom-bust scenarios is was often seen as a self-fulfilling prophecy.

  • Tariffs.  So far President Trump’s trade tariff policy the impact on global growth has been minor, but that could worsen if other countries such as China and Canada retaliate, and the number of tariffs escalate.


 
For all the worrying, however, the near-term outlook is positive. The median GDP forecast of economists surveyed by the National Association of Business Economists (NABE) is 2.9 percent in 2018 and 2.7 percent in 2019. The biggest concern expressed by economists is on the issue of trade, as tariffs could lead to an increase in inflation and decrease economic growth.

With growth solidly near 3%, and the unemployment rate at 3.7%, the lowest since 1969, Yardi postulates, it must be said that none of the potential headwinds identified could produce enough of a downside to turn into a recession on their own. Whenever it comes, recession scenarios are unlikely to occur before 2020 or 2021 and the resulting downturn will probably be shallow.

 
Direct comments to Mike@MJGSpecialistsAZ.com




October 12, 2018
CAUSE & EFFECT


Last Friday Argus Media reported that U.S. crude exports to China dropped to zero in August, down from about 384,000 b/d in the previous month amid the escalating trade war between the two countries. Are we surprised?


The drop contributed to an overall decline of U.S. crude exports in August to 1.75mn b/d, down from 2.14mn b/d in July, according to Census Bureau trade data released today. Exports had reached a record high of 2.2mn b/d in June. What’s that going to due to our trade deficit Mr. President? (Short term discomfort, long to gain.)


Canada was the top destination for U.S. crude in August, taking in 343,000 b/d. South Korea was second, importing 267,000 b/d and Taiwan was third with 198,000 b/d.


China took an average of 377,000 b/d of U.S. crude in the first seven months of 2018 and was consistently the first or second top destination for U.S. crude.
But Chinese state-controlled trading firm Unipec stopped buying U.S. crude in August as relations with Washington deteriorated.
China had planned to impose a 25% import tax on U.S. crude as part of retaliatory tariffs on $16 billion/yr. of imports in August. But crude was unexpectedly removed from the final list.


The latest 3rd round of U.S. tariffs and Chinese counter-tariffs went into effect on 24 September. The U.S. tariffs now cover about half of overall imports from China, and the U.S. administration has a 4th round of tariffs "ready to go" on the remaining $267 billion/yr. of imports. China has imposed tariffs on around $110 billion/yr. of products from the U.S., equivalent to 70% of total imports from the country.


Unipec said last month it is not ready to resume securing U.S. crude cargoes for its refining system in China, but continues to buy U.S. crude for trading purposes. It planned to resell U.S. crude to various refiners outside China, including in India, Taiwan, Thailand and Europe.
Since the U.S. lifted the 40-year-old restrictions on most oil exports in December 2015, domestic crude has been exported to countries around the globe. The top two destinations for U.S. crude in 2017 were Canada and China.


This highlights only the effect of our tariffs with China. We undoubtedly sold the oil somewhere, or added it to domestic feedstocks. The trade dispute (war) with China is singular between the 2 countries, but its impact is global involving all the trading partners of the 2 largest economies in the world, i.e., all countries! By artificially skewing supply & demand among nations, it upsets the global economic apple cart. We should expect the short term-to-intermediate term effect to be a reduction in the global economy and inflation to one degree or another in some countries, and perhaps deflation in others, depending.
Some countries will weather the storm better than others. Look for the emerging market (EM) countries to suffer first and most – some already are.
Additionally, U.S. sanctions imposed for political gain, e.g., Iran, complicate the arena further and tend to foster unnatural alliances.


Apply all this to domestic and global economics with historically high and unhealthy debt as a result of a decade of ZIRP, at least among the G-20 members, and we face at the very best a bumpy road ahead… at worst …?


As I’ve been fond of saying for some time, making history ain’t all it’s cracked up to be.


Direct comments to Mike@MJGSpecialistsAZ.com






October 10, 2018

Opportunity

Define:      

1. an appropriate or favorable time or occasion.

2. a situation or condition favorable for attainment of a goal.

3. a good position, chance, or prospect.

In my business – commercial real estate, business and mortgage brokerage – we talk often and at length of opportunities.  But it has occurred to me that the buyer, seller, and borrower and I have different perspectives, or understandings, of just what this means.  So this discussion is offered under the banner of “words mean things”.

Of the definitions offered above the term that pops up for me is “chance”.  And chance offers up not just reward, but risk.  Many of those seeking an opportunity are focused on the reward of the opp, but are resistant to the idea of risk … they want a guarantee.

However, a guarantee against risk (loss) also guarantees against the reward, i.e., there is no possibility of reward beyond that known (guaranteed) at the onset of accepting the opportunity.

By definition in financial/investment circles the only investment of zero risk is accepted to be the 30-day T-bill. Since the Government can always issue more for refinancing the principal and interest is guaranteed by the U.S. Government.  And since the investment term is 30-days, it will (in theory) always be updated in line with inflation.  And, barring acts of Congress (literally) the tax consequences of the investment are known.  So this is what a guaranteed investment looks like.  All other investments, including your banks CDs, the house you fix-n-flip, your long term Government or corporate bond, or bond fund, and the most conservative stocks, have risk.  Not to hallow myself out, it also includes commercial real estate and privately held businesses, e.g., the gas station you may think you want to buy, and the mortgage debt you might place on the business or property.

The difficulty in evaluating risk is that it’s hard to quantify.  Reward on the other hand has numerous methodologies to quantify, e.g., net profit, EBITDA, SDE, ROI, ROE, IRR, cash-on-cash, cap rate.  All these can be applied depending on the situation to evaluate historically, and/or project into the future, the financial performance of the investment. 

For evaluating risk, however, not so easy.  The focus is usually how much money I can lose. As a starting point of entry most default to comps (comparable sales).  Real estate comps, however, don’t work for businesses. Business comps are available, and almost without exception, however, to business brokers and professional intermediaries. So in both cases, it’s not the lack of information; it’s the lack of general availability and transparency for the buyer/borrower.

More formalized buyers for larger transactions will have a business appraisal done. This is not the same as a real estate appraisal including the business on an on-going business concern basis, and generally will produce a different value.

There is some arithmetic that can be done from the historical financials in concert with debt service coverage requirements of lenders to gauge the financial feasibility, but this takes some practice and experience to apply.  (In my case coming on 20 years.)

What many buyers end up doing is making a hail Mary discounted offer to the asking price, believing that if they buy cheap enough that will protect them from what they don’t know.  These show up in the market as spreads between the bid and ask of as much as 25-50%!!  (Interestingly enough, lenders will typically finance these depending on the qualifications of the buyer/borrower.) This usually has something to do with why most businesses, with or without real estate included, are not sold.  (In evaluating businesses those that include the real estate as is typically the case with gas stations in AZ, the real estate component adds another level of complexity to the valuation and opportunity.

Direct comments to Mike@MJGSpecialistsAZ.com





October 8, 2018

They’re a Com’in They’re a Com’in

Maricopa County, which contains about 90 percent of metropolitan Phoenix’s residents, was the fastest-growing county (percentage) in the U.S. last year. Strong domestic in-migration continued to drive population growth that more than doubled the national average.  In-migration vs. out-migration netted about 60,000 residents last year.  Add to that the natural population growth (births vs. deaths) a net of 23,000, and you get the total.

What’s the attraction?  Phoenix’s robust job market. Hiring sprees in the tech, financial, healthcare and manufacturing industries have been large contributors to the area’s impressive employment growth, which has been nearly twice the national average since 2016.

Most of Maricopa County’s new residents came from increasingly unaffordable areas such as Los Angeles, Chicago, the San Francisco Bay Area and New York. According to CoStar subsidiary Apartments.com (a commercial real estate research service), those same cities have accounted for the bulk of out-of-state searches for Phoenix apartments in the past four quarters.

The average monthly rent in Phoenix is about $1,050, which is about 25 percent below the national average. However, the gap widens further when comparing some of the cities new Phoenix residents are leaving. The average monthly rent in Chicago is $1,360, about 30 percent higher than in Phoenix; Los Angeles’ is $1,870, nearly 80 percent higher than in Phoenix; and San Francisco’s is $3,030, almost tripling the Phoenix average.

The influx of people from major cities is also bolstering the local workforce. Last year, more than 42 percent of Maricopa County’s new residents from out-of-state possessed a bachelor’s degree or higher. Coupled with graduates from ASU and Grand Canyon University, Phoenix has the growing pool of skilled workers that continues to spur numerous corporate relocations and expansions.

If Phoenix can maintain above-average job growth, recent in-migration trends have a good chance to sustain their momentum. High-tax, high-cost coastal states such as California are unlikely to get any cheaper and will inevitably price out more residents to affordable havens such as Phoenix. As long as Phoenix can continue to provide well-paying jobs and a high quality of life, expect more growth in the Valley of the Sun.

When buying, starting up, or investing in a business there are 3 things to look for:  a proprietary product, a large and expanding market, and quality management.  That applies to Apple, Intel, or your next gas station.  Phoenix has got the large and expanding market requirement covered. If you’re coming to Phoenix to expand your current gas station business in another state, or buy your first store, management comes with you … it’s you! 

Major oil companies have been trying for years to turn a basic commodity (oil) into a proprietary product.  First came the gasoline credit cards, only to be used at the specific station issuing the card. These were nullified by banks issuing bank cards, e.g., Visa, Master Card, etc.  Then came the additives.  Chevron has Techron™, Shell has Super V™.  These are effectively detergent additives that do about the same thing as STP™ – the chemistry varies but the effect is about the same.  In fact you can buy the additives at the auto parts store or order on Amazon in a bottle like STP™, and add them directly to your gas tank mixing with the less expensive 87 octane you might get at Arco or Mike’s-Gas-For-Less. 

So turning a commodity into a proprietary product takes some doing, and it’s no less challenging in Phoenix that in L.A., Chicago, etc. And your management skills probably don’t change much when you relocate here.  So the one success advantage you pick up here is the large and expanding market, and don’t underestimate this. A large market will compensate for a variety of errors.

If you want a guide into the Phoenix (or Arizona statewide) gas station market, give us a call or email an inquiry via the link below.

Direct comments to Mike@MJGSpecialistsAZ.com




October 5, 2018

The BIS Chimes In

A decade ago the world’s major central banks reacted to the financial crisis by devaluing money around the world through record low interest rates … negative real rates in some cases. 

Major central banks gave themselves a blank check – some would say by collusion - with which to resurrect the then-problematic banks by purchasing government, mortgage and corporate bonds, and in some cases by stocks (Japan & Switzerland).

They have not had to explain to the public where those funds were going or why. Bear in mind that the Fed is a private company and not an agency of the U.S. Government. Instead, their collective policies have inflated global asset bubbles while nursing private banks and corporations under the banner of helping the economy.

The ZIRP and bond-buying central bank policies prevailing in the U.S., Europe and Japan have been part of a coordinated effort that has masked the potential financial instability in the largest countries and private banks. 

It has, in turn, created asset bubbles that could explode into an even greater crisis than 2008-2009 the next time around. Among other things, the sum of this activity has made the too-big-to-fail banks even bigger today than they were is 2007-2008.  And since the repeal of Glass-Steagall Act in 1999, the damage is not contained in the banking sector, but has also spilled over into the investment arena.  And no, Dodd-Frank didn’t help!

So today we are near the edge of another dangerous financial precipice.

Enter the Bank for International Settlements (BIS), or the “central bank of central banks”.

In its recent quarterly report, the BIS warned that the low rates of the last decade have facilitated an increase in the number of “zombie” firms, now at an all-time high.

And what are Zombie firms again?  These are companies “that are at least 10 years old, yet are unable to cover their debt service costs from profits.” Needless to say their potential for prospering, let along surviving, are doubtful.

According to the BIS, these zombies are still piling on debt and sucking money out of the real economy. Zombies “took on more debt and disposed of fewer assets after 2000.” The increased leverage in the early 2000s accelerated after the financial crisis because of low interest rates during a declining economy.

History shows that once a company becomes a “Zombie” it tends to stay a zombie – absent reorganization that wipes out the debt – through the BK courts they get a “do-over”. The Zombie phenomenon is now getting worse. The BIS disclosed that “whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016.”

Zombies created from an influx of central bank money are a continual drain on the economy.  It’s one thing for a company to take on debt to grow, but it is another to take on debt in order to pay existing debt.  Something like consumers going from 5 credit cards to 15 in order to avoid going under. You may have heard it said that you don’t solve the too-much-debt problem by taking on more debt.

Because of the collusion that continues on among the world’s main central banks, the too-much-debt/Zombie problem is now an international one. The global race is on to see if the U.S. lead global economic expansion can outdistance the continual debt build up. (You can monitor this by following Debt:GDP ratios … just Google it.) Working against a favorable outcome are the current trade wars (yes, there’s more than 1), the rise in interest rates and responsive currency exchange rates, and sanctions with retaliatory responses. 

Lest you think that this is “too far out there” and won’t affect you, please consider:  Were you effected by the economic melt-down in 2007-2009?

Direct comments to Mike@MJGSpecialistsAZ.com


October 3, 2018
RETURN TO $100 OIL?


Brent crude prices are headed for a fifth quarterly advance in London -- the longest rally since June 2008. This historical reminder comes as U.S. consumers are once again begin to eye supply disruptions and worry about the availability of backup supplies, similar to a decade ago when this benchmark hit an all-time high of $147/bbl and change.


Fears are growing that the impact of U.S. sanctions on Iranian oil supply by the U.S. and the collapse of Venezuela’s oil industry will leave a steep supply shortfall in the market. As if to confirm the obvious, these worries have only been underscored this past week as Saudi Arabia, Russia and the U.S. signaled they’re not ready to tap reserve supplies to make up the shortfall.


The step-down affect, of course, to a reduced supply and increased price is the anticipated negative blow to the global economy.
Oil has risen to its highest price in almost 4 years in London. The rally came after OPEC showed little sign of immediately boosting production despite President Donald Trump’s demand that they lower prices. The world will need additional supplies as U.S. sanctions on Iran take effect, with buyers in India and South Korea shunning purchases from the Islamic Republic before U.S. sanctions begin in early November. Brent crude for November delivery was 39 cents higher last week at $82.11 a barrel on the ICE Futures Europe exchange in London, a gain of 3.4 % in the past three months.


WTI (West Texas Intermediate) for November delivery was little changed at $72.12 a barrel on the New York MERC. It’s trading at a discount of $9.45 a barrel to Brent, slight narrowing of the spread that hit to $11.00 earlier in Sept. Total volume traded was about 24 percent below the 100-day average.
U.S. Energy Secretary Rick Perry ruled out the release of oil from the Strategic Petroleum Reserve, saying the move would have “a fairly minor and short-term impact.” Earlier last week, the president accused the OPEC of “ripping off the rest of the world” after the group stopped short of promising specific extra volumes of crude.


The CBOE/Nymex Oil Volatility Index increased 2.1 percent on Thursday, on course for a 2.5% gain last week. The sanctions on Iran’s crude are likely to spur volatility for the rest of the year.


Direct comments to Mike@MJGSpecialistsAZ.com

October 1, 2018

Fed-Speak:  Interpreting the Federal Open Market Committee?

As widely expected, the Federal Open Market Committee (FOMC) decided by unanimous vote last Wednesday to raise its target range for the fed funds rate 25 bps (basis points… ¼%). The range now spans 2.00% to 2.25%. Since the Fed began its tightening cycle Dec. 2015, it has raised its target range 200 bps. However, the talk today is that the most interesting aspect of their policy statement released at the end of Wednesday’s meeting was its characterization of the current state of monetary policy. In previous statements, the FOMC said that “the stance of monetary policy remains accommodative.”  “Accommodative”:  that means short-term interest rates were still low enough that they were boosting the pace of economic activity. Notably, the FOMC dropped its reference to accommodative policy in today’s statement.

In recent public announcements, some Fed policymakers have expressed their opinion that the fed funds rate would soon enter “neutral” territory. That is, monetary policy would not be supportive of, nor would it be restraining, the pace of economic activity. By removing the reference to accommodative policy, the committee is implicitly acknowledging that the fed funds rate has moved into neutral territory.

In its statement Wednesday, the FOMC said that “economic activity has been rising at a strong rate.” General consensus among economic forecasters is that growth will remain solid in coming quarters, but will slow from the 4.2% annualized rate that was registered in Q2-2018 as fiscal stimulus fades and as previous monetary tightening exerts some headwinds on the economy. Looking into 2020, the expectation is that growth will slow enough to lead the Fed to reverse itself by cutting rates 25 bps at the end of 2020.

Most consumers will experience the impact of this rate hike in the credit card statements, and your mortgage payment if it happens to be a variable rate loan. If you financing, or re-financing a real estate loan over the next couple years you may want to use a variable rate loan rather than fixed rate that would lock in your payments for the life of the loan at the upper end of the credit cycle.  A major consideration, of course, is the term of the loan.  The decision for a commercial loan due in 5-7 years will possibly by different from a loan maturing in 15-20 years. A longer term loan that may lock and reset at intervals over the life of the loan may be a best “middle of the road”.

Also bear in mind that the Fed is trying to regain “control” (influence perhaps) of an economy that is the subject of their great experiment in 2008 – they’re still maneuvering in uncharted waters.  A lot can happen on the way to the forum!

Direct comments to Mike@MJGSpecialistsAZ.com


September 27, 2018
SO WHAT DID WE FIX IN THE LAST DECADE?


Ten years ago this week the Panic of 2008 was picking up steam. It turned out to be the biggest financial calamity since the Great Depression.
That summer police in California were called into maintain order as people lined up outside an IndyMac Bank to withdraw their money – the literal run on the bank. The FDIC took the bank over 10 days later.


The Government soon had to take over Freddie Mac and Fannie Mae at a cost to taxpayers of hundreds of billions of dollars. BofA was called on to take over Countrywide Mortgage … Bear Stearns failed and was taken over by JPMorgan with the help of a $29 billion bailout from the Fed.


After a run on the bank, Washington Mutual, the nation’s largest S&L, failed, followed closely by by Wachovia Bank. Lehman Brothers, which was founded in the 1840s, filed for bankruptcy in what became the largest BK in U.S. history – still is. Taxpayer money and freshly “printed” Federal Reserve dollars were bailing out one institution after another: The insurance giant AIG, Citigroup, and Merrill Lynch all bellied up to the Government trough. The Dow Industrials crashed from 14,000 to 6,600. All together $50 trillion disappeared from the world’s stock, bond, and currency markets. By one estimate, the American people lost a quarter of their total net worth. 9.3 million American homeowners lost their homes to foreclosure or in distress sales.


The Glass-Steagall Act passed by Congress in 1933 which prohibited commercial banks from participating in the investment banking business was (partially) repealed in 1999, opening the door for commercial banks to again engage in investment banking activities. In 2010, 2 years after the beginning of the Great Recession, Congress again leapt into action to save the financial system, this time with passage of the Dodd-Frank Act – possibly one of the worst pieces of legislation to come out of Washington (just my opinion). To give the financial community participants time to implement all the changes, it has an implementation timeframe of about 10 years!! With still 2 years to go for full implementation, President Trump has already begun dismantling the law.
By comparison, the essential metrics of where we were ten years ago and where we are today …


At the beginning of September 2008, total Federal debt was $9.6 trillion. Today it is $21.4 trillion. The scope of the debt problem went global – the term is contagion. Total global indebtedness has skyrocketed over the last 20 years from $40 trillion to $250 trillion. As a point of relevance, global gross world product (GWP) in 1998 was $34 trillion, and is forecasted to be $87.5 trillion for the full year 2018. Meaningfully, in 1998 world leverage was 118%; in 2018 it will be about 286%.


Too-big-to-fail banks are even bigger today.


The Federal Reserve’s Monetary Base, the amount of money it has “printed” to buy things like troubled mortgage and government securities, has quadrupled since the meltdown. Currently it’s still about $4 trillion.


What’s the corrective action? We don’t know, but it’s unlikely to emanate from Washington. It’s not that members of Congress are stupid, it’s more that they lack courage to do the right thing … that would take risking votes, and the first principal of being a politician is to get re-elected. Perhaps the Wizard could give each Congressman (and woman) a hero’s medal – that would certainly give them courage. It worked for the lion.
Direct comments to Mike@MJGSpecialistsAZ.com


September 26, 2018
HOW MANY BODY BLOWS CAN IT TAKE?


ALERT – So as not to be surprised on next Tuesday, this is to alert you (prepare you) for the FOMC’s (Federal Open Market Committee – the Fed.) next interest rate hike. The meeting will be next Tuesday and Wednesday, with the announcement probably coming Tuesday afternoon. Futures markets places the probability of this rate hike are just under 100% - “there ain’t no such thing as a sure thing”.


Add another quarter point (25 basis points) to the Fed Funds rate, and bump the short end of the lending interest rate structure by that same ¼ point, sending Prime to 5.25%. The longer end (10-plus year maturities) will be lesser affected, thus proceeding to further flatten the yield curve.
The good part is that short term yield investments will get a raise! The bad part is that the lower tier of short term borrowers will be flushed from qualifying for their loans. In commercial real estate, that would include bridge loans, construction loans, and permanent loans with maturities shorter than about 10 years. Those of you with these loans pending should be prepared for revised commitment letters with “adjusted” terms.


Meanwhile the Fed. continues to “normalize” its balance sheet by not reinvesting proceeds of maturing loans. This process looks to be worth about $400 billion this year, and forecasted to be $600 billion next year … $1 trillion or about 33% of the adjustment needed to reach a “normalized” balance sheet of $1 trillion. (When QEs were first initiated in Dec. 2008 the Fed’s balance sheet was about $900 billion. This is given to be “normal” a decade later.)


Q) So what do these 2 processes have in common, and why should we be concerned, aside from our adjustable rate loan payments increasing?
A) They both suck liquidity out of the economic system. Normalizing directly removes cash from the economy. Raising interest rates reduces the amount of cash that would find its way into the economy by loans that would be made, but now won’t be. Smart people calculate that normalizing activities this year is the equivalent of raising interest rates about a point (1%). Meaning that if the Fed raises rates again in Dec., the 4th rate hike of ¼ point this year, the overall effect is a 2% rate hike for the year. The Fed has indicated that the rate hikes will continue quarterly at ¼ increments through 2019.
The question around the watering hole is how many rate hikes and how much more normalization will the economy absorb before it goes down. Just like Rocky landing body blow after body blow on Apollo Creed, one blow will be one blow too many, and the champ will go down. And when (not if) that happens, just like in the fight, a lot of money will change hands.


Direct comments to Mike@MJGSpecialistsAZ.com


September 24, 2018

WITH ALL THIS OIL, WHY ARE PRICES INCREASING?

Oil output from seven major shale formations in the United States is expected to rise by 79,000 barrels per day to 7.6 million bpd in October, the U.S. Energy Information Administration said Monday. Surging oil output from shale formations boosted total U.S. crude production to a record high of nearly 10.7 million barrels a day in June, the latest month for which data is available. Production is expected to rise 31,000 bpd in the Permian formation of Texas and New Mexico, the agency said in a monthly report. We noted earlier in this BLOG that the U.S. was the world’s leader in oil production in August bringing 10.9 million bpd out of the ground.

Yet with all this record production, we note this morning that the price of a barrel of oil in the commodities market surged to $70.97, the upper level of its recent range. If supply-demand matter, why the up-tick in oil pricing?

We also note that Permian producers increased their 2020 oil-basis hedge positions by (a whopping!) 431% in this year’s second quarter, according to Wood Mackenzie’s 
latest analysis of oil and gas hedging activity. (The Permian Basin – TX-OK panhandle and eastern NM – has historically been the top producing formation for WTI, and is now one of the top fracking fields in the U.S.) “It was an anomalously high trading volume for this particular hedging derivative [2020 Midland-Cushing basis-swaps]. The only reasonable conclusion one can draw from this surge is that Permian producers are concerned that key pipeline projects won’t be completed on schedule,” said Andrew McConn, corporate research analyst at WoodMac.

With oil production forecast to rise more than 400,000 b/d year-over-year on average through 2022, Permian basin oil production is running at a breakneck speed. This surge in production is overwhelming the basin’s takeaway capacity and causing oil and gas to sell inside the basin at steep discounts to national indexes.

As recently as 2015, widespread pipeline capacity constraints caused the Midland to Cushing WTI (West Texas Intermediate) discount to widen to $20/bbl. This has prompted many Permian operators to use derivatives to hedge against the risk of price differentials growing wider.

Enter into the equation President Trump’s tariffs, key to our discussion steel imported from China. This trading strategy (1) increases the price of steel pipes to the oil infrastructure currently being built, and/or (2) limits the supply available at any price. Neither is good for the oil industry.

Remember also, that in Dec. 2015 Congress scrapped the bill prohibiting export of crude oil, a law that had been in place since 1975 in response to the Saudi oil embargo. And since 2016 the U.S. has been a net exporter of oil. So even though we can, why don’t we keep more of our production at home where consumers can benefit from lower prices at the pump?

As we’ve noted on occasion, oil is a global commodity. Producers from wellhead to refinery will sell their product to the highest paying market. Tariff action has disrupted previously existing and to a degree stabilized markets. International buyer and seller reactions are in a state of disarray. Attempts to stabilize or control their business is borne out by the activity in the derivative markets (a 431% increase in hedging activity!).

Factor in the strength of the U.S. dollar, and you get why our domestic prices are going up … price competition for uncertain supply.

The dynamics driving oil prices are not likely to change over the short term, leading to continued price volatility at the pump … you might expect this to continue, and probably increase going into 2019. Gas station operators will be challenged to manage inventory and pricing – margins will probably fluctuate as they adjust to jobber and upstream pressures.

Direct comments to Mike@MJGSpecialistsAZ.com

September 21, 2018

WHAT’S MICROSOFT PLANNING IN GOODYEAR?

Guess who else is coming to town, and to the southwest Valley.

In case you missed the announcement earlier this week, tech giant Microsoft spent about $48 million for 277 acres just west of Phoenix - Arizona’s largest land deal for the month of August.

According to Scottsdale-based RL Brown Housing Reports, the purchase consists of two parcels of land in Goodyear—154 acres and 123 acres—adjacent to the Phoenix Goodyear Airport and close to I-10 in the southwest Valley.

The question is, of course, what is Microsoft planning?
The site, located at the southwest corner of MC (Maricopa County) road 85 and Lower Buckeye Road, “combines the potential for air, rail, and interstate connections coupled with a size suitable for a wide range of uses,” per the RL Brown Report.

Though Microsoft has yet to make any announcement about its intentions in Goodyear, the Phoenix Business Journal predicts “a potential data center and other unknown facilities.”

A data center seems likely. Phoenix already anchors Microsoft’s Azure Government region in the Southwest. Azure Government, the company’s dedicated cloud service for government customers, offers hyper scale computing, storage, networking, and identity management services, with world-class security.

You can pack a lot of jobs on 277 acres – especially if any of the buildings go vertical. 

With the presence of Intel, Apple, and a myriad of call & date centers, Phoenix has started showing up in print over the last year an emerging “tech-hub”.  Prior entrants to this club have clustered in the east Valley and Phoenix.  

Notable here is that Microsoft chose a west Valley location.  My guess is that the disparity in land prices had something to do with their choice, as well as differing incentives offered by the various municipalities.  

At the MJG desk we also note the relatively low density of gas stations & c-stores in the west Valley vs. the east Valley.  With existing inventory of gas stations for sale at the historic low end, and demand, particularly from CA, being quite high, it’s only a matter of time before operators start putting on their developer’s hat and begin building ground-ups.  We’ve begun identifying potential sites with land brokers to handle the expected demand … we’ll gladly accept inquiries at this time!

Direct comments to Mike@MJGSpecialistsAZ.com 


September 19, 2018
OIL INDUSTRY’S TOP TRADE GROUP OPPOSES TRUMP’S LATEST TARIFF WITH CHINA


The American Petroleum Institute (API) jumped on President Trump's Monday night announcement imposing a 10% tariff on an additional $200 billion worth of Chinese goods.


API Economic Policy V.P, Kyle Isakower, went on record as saying "We understand the need to address discriminatory trade practices, but this policy will essentially impose a new tax on $200 billion worth of products on which American families and businesses rely”.


The oil and natural gas boom the country has experienced the last several years has supplied U.S. consumers and businesses with low cost energy, which in turn has contributed to the U.S. economy breaking out of the Obama doldrums of the prior 8 years. The tariffs directly harm drillers and producers by raising the price of steel used in the upstream infrastructure of the industry. This in turn is expected to be passed on to the end users, consumers & businesses.


This would seem to fly in the face of Trump’s stated agenda of energy independence and protecting the American worker/consumer.
The U.S. became the largest oil producer in the world last week, pushing out Russia and Saudi Arabia from the top spots, according to the Energy Information Administration. A substantial portion of U.S. oil production goes to China in the form of exports. With the tariffs in place, U.S. oil will be less competitive in China’s market vs. other sources, namely Iran & Russia.


Much of the specialized steel products that industry relies upon are imported from overseas suppliers. Many U.S. foundries are not capable of producing many of the products the industry requires to continue its growth. So it may be not only a price disadvantage for U.S. production, but a matter of product availability at any price, i.e., supply shortages.


The new round of tariffs announced Monday targets an additional $200 billion worth of Chinese products, adding to the $50 billion in tariffs previously enacted. This massive escalation of the trade dispute may only be an interim continuation of tariffs, as Trump has also threatened tariffs on an additional $267 billion of goods on top of Monday's announcement.


As global trade gymnastics elongate, U.S. consumers and businesses may begin to get the idea that economically muscling our trading partners into the level playing field sought after may take a while! If/When so, consumers may be expected to tighten their billfolds and purses, and businesses become more prudent in their capex plans and hiring decisions. Put these on your GDP drawing board and it begins to look like an economic slowdown … dare I say the “R” word?


Direct comments to Mike@MJGSpecialistsAZ.com

September 17, 2018

TURN OUT THE LIGHTS, THE PARTY’S OVER … SOON … MAYBE

For real estate investors, the past two decades have been a period of dramatic and rapid cap rate compression/price increase. Cap rates, or capitalization rates, reflect the rate of return on a real estate asset (calculated by dividing property Net Operating Income (NOI) by the price or value of the property).

This is another manifestation of the Fed’s ZIRP (zero interest rate policy) instituted in Q4-08. Before that in the early 2000’s the Obama administration “encouraged” banks to lend to borrowers with “fog the mirror” qualifications and little else. This earlier policy culminated in the 2007-08 real estate meltdown that was saved by a myriad of policies & fixes that included ZIRP and quantitative easing (QE).

At the turn of the millennium, cap rates for institutional CRE assets peaked at 8.4%; today, the same portfolio of assets is appraised at an effective cap rate of 4.4%. The 400 basis points (4%) of cap rate compression has been a bonanza for investors across property types and geographies: the value of an identical cash flow stream has increased by 75% over this period even after accounting for inflation.

As ZIRP took hold, investors launched the cry “search for yield. They could no longer afford to park money in bank accounts, CDs, money market funds, etc. at less than 1% yield – before taxes! The income component of investments (CRE, bonds, stocks, etc.) drove asset values up to levels commensurate with their yields, producing artificial values of risk:reward in the markets. All by legislated, or Fed policy, demand.

These strong tailwinds, however, are dissipating, and most indicators suggest that the two decade-long era of persistent cap rate compression is at or near its end – recall that as cap rates rise, asset prices decline for the same income stream. The Fed has formally discontinued its ZIRP, and has raised rates beginning Q4-16 from 0% (Fed Funds Rate) to now 1.75% in ¼ point increments. The next ¼ point bump is expected at the Sept. FOMC meeting later this month.

So far the asset price damage has been limited to the short end of the interest rate curve … 3-5 years or shorter. This is what has produced the flattening yield curve that is actively talked about and its meaning (recession or not). Cap rates, our immediate concern, typically move in concert with the 10 yr. Treasury note. This rate has remained in the 2.75-3.00% range during this period. But for how long?

If the Fed does indeed raise the Fed Funds Rate a ¼ point this month, and another ¼ point in Dec., as is currently expected, how many more bumps will it be before the 10-yr. T-note begins to adjust in sync?

We don’t know, but we’re certainly aware … and now, so are you.

Direct comments to Mike@MJGSpecialistsAZ.com


September 14, 2018

WE'RE # 1 ... WE'RE # 1


According to the U.S. Energy Dept., the U.S. produced an estimated 10.9 million barrels of oil per day in August, narrowly surpassing Russia who came in 2nd at 10.8 million barrels. (No mention of where Saudi Arabia finished.)


So now we’re energy-independent, right? Well, maybe not quite. Why not? Read on …


There are 135 refineries operating in 37 states in the U.S. (per the Energy Information Administration – EIA) Only 5 of those have been built in the last 20 years, and 8 in the last 30 years … so 94% of our refining capacity is operating in plants over 30 years old. (Note also that 13 states have no refining capacity, AZ being 1 of them.) Mandatory and periodic maintenance being what it is, how hard is it to imagine a breakdown, fire, etc. at one of these with possible environmental as well as financial and domestic economic consequences?


Moving oil downstream from the wellhead to the refinery is a traffic jam. The sharp increase in oil production at the wellhead over the last decade has overloaded the capacity of existing pipelines, particularly in the Great Plains from North Dakota to Texas. Many of the newly developed fracking wells have ceased production and been capped until more pipelines can come online.


Meanwhile we’re also setting new records for exporting crude. This is at least partially due to sanctions on Iranian & Russian oil into Europe, and the price spread between west Texas intermediate (WTI) and Brent crude (North Sea production – heavy crude), earlier this week hitting a high of $10.00/bbl. (WTI is the U.S. pricing benchmark for light, or sweet crude.) Light crude costs less to refine that heavy crude.


All this upstream info may be nice to know, but what most of us are really concerned about is how this shows up at the pump. Pump prices have been relatively stable in the Phoenix metro market over the summer months, and wellhead prices have been sustained in the mid-to-high $60’s/bbl. But don’t kid yourself. While all this upstream activity may be invisible to the naked eye, at some point it will trickle down.


What hasn’t been discussed are currency exchange rates, global trade, political sanctions, Federal Reserve policy (not just the U.S. but at least the other G-20 central banks), and geo-political theater (aka, international negotiations). Oil is a global commodity of the nth order, and has uses far beyond, and more subtle than, just refining into consumer products. We, the U.S. consumer, are at the end of the tail of a very large dog.


Stay tuned!


Direct comments to Mike@MJGSpecialistsAZ.com

September 12, 2018
WHEN BUYING A BUSINESS, DON’T FORGET THE “INCIDENTALS”


Prospective gas station/c-store buyers regularly inquire with me to buy a business (typically including the real estate) with a specific amount of cash available that they consider will be the down payment, usually in the 15-25% of the acquisition price they expect to pay.


What is often-as-not overlooked is the additional costs to buying and operating the business.


Those costs in addition to the purchase price include transaction closing costs, working capital and inventory. (For gas station/c-store businesses the value of inventory is traditionally not included in the asking price of the business.) If financing is done using an SBA 7(a) loan, these costs qualify for use of proceeds and are financeable, but doing so increases the loan amount and puts an additional burden on debt service. If paid for by the buyer in cash, they’ll put a significant dent in the cash available as a down payment.


Inventory today may be expected to run $75k-100k, depending on the size of the store and the price of fuel at the time. Buyer’s closing costs might be 3-4% of the acquisition price. (The SBA guarantee fee varies with the size of the loan, but usually falls in the 2.5-3% range of the loan size. We suggest a comfortable level of working capital (cash available to begin operations) be 2 months of operating expenses. (Check the seller’s historical income statement for reference.)


The above ranges are for general consideration. These items should be fine-tuned for determining the feasibility of any particular acquisition.


Direct comments to Mike@MJGSpecialistsAZ.com


September 10, 2018
BREAK OUT THE PIGSKINS AND THROW A TARP OVER THE ECONOMY


The 2017 Super Bowl champion Philadelphia Eagles won their season opener last Thursday night defeating Atlanta with the game not decided until the final second.


Nice to know … a brief departure from our own reality, but in the end not too meaningful.
What should be more meaningful to us is President Trump’s announcement yesterday that he’s ready to impose another $267 billion in tariffs on Chinese imports. This would be on top of the original $50 billion that started the now-described war, and the earlier announced $250 billion on everything from soup-to-nuts AND the kitchen sink!


Trump wants to reduce the United States’ gaping trade imbalance with an ascendant Chinese economy. The president says he believes that narrowing the trade gap will bring jobs to the United States, even though it could spark higher inflation.


So, how are we doing so far?


Employers added 201,000 new jobs in August. The prior two months of additions were revised down 50,000, bringing the three-month average to 185,000. The unemployment rate was unchanged at 3.9%. Wage growth continues to trend higher. Average hourly earnings increased 0.4% for the month and 2.9% on a year-over-year basis, a new cycle high. There was a surge in exports in Q2 as some businesses rushed to get merchandise out the door ahead of retaliatory tariffs, this will likely be reversed in Q3. Total exports fell 1.0% in July, bringing the trade deficit to $50.1 billion. The dip in exports follows a 0.7% drop in June. Net exports are poised to be a drag on overall GDP growth in the third quarter, and outbound depending on “how goes the war”.
On the inflation front, the headline CPI rose 0.2% in July, putting the year-over-year increase at 2.9% for the fastest pace in six years. Core inflation rose 2.4% year-over-year to reach a new cycle high. Given the steady rise in core CPI that has kept track with the pace of PCE inflation, it looks to be full steam ahead for the FOMC to raise rates twice more this year, once later this month and again in Dec. (This barring a black swan event that could come from a variety of sources.)


Great, right? All this is good news, right? I mean new cycle highs & everything. What’s to worry, besides its football season again – Go Cards!


Direct comments to Mike@MJGSpecialistsAZ.com


September 7, 2018

​WHY DON’T GAS STATIONS/C-STORES ATTRACT STNL INVESTORS?

Single tenant net lease (STNL investment real estate arguably has been, and continues to be, the most sought after segment of CRE investing.  The reason – the search for yield!  STNL investments are seen as having more risk, hence reward (more basis points), since they only have 1 tenant.  Occupancy is either 100% of 0% - no in between.  Investors tend to congregate to favored sub-sectors, e.g., fast food restaurants (QSRs), auto after parts stores, drug stores, banks, etc.  Typically missing from the sub-sector categories is gas stations/c-stores. A reasonable question might by why.

The obvious and misinformed/uninformed answer is too much risk, typically related to environmental concerns.  For most, these are unquantifiable, and so are unable to be priced, i.e., how many basis points to mark up the cap rate.  And besides, there are too many other favored sub-sectors that don’t have this risk, at least to the same degree.

STNL investors come in a couple identifiable groups:  institutional and private.  Institutional investors favor portfolios of properties, typically a pricing point consideration.  They want minimum investments of about $25mm or more.  To get to this point in STNL properties they need 8-10 properties at a time.  They also want credit tenants.  These are company owned stores w/the corporate guarantee where the credit can be priced similar to a corporate bond, perhaps a CVS or Pep-Boys.  Since the early 2000’s most of the major oil companies (MOJs) (Shell, Chevron, etc.) have vacated the retail level of the oil industry.  So finding credit tenants that operate their own stations is a thin market.  Oftentimes an institutional investor will take large franchisors of properties, e.g., McDonalds.  In the gas station business the branded stations are typically not franchises, but only branded by fuel agreements, and most of the larger independent multi-site operators are private companies presenting a pricing difficulty for assessing credit risk.

While the STNL market is national in scope, individual investors typically like to have their CRE investments close to home. This is a thin market nationally, and here in AZ it’s no exception.  We (MJG) has a line on several existing net leased properties, but bringing them to market presents some challenges.  Another avenue is to create STNL investments by sale-leaseback transactions.  This is largely an untapped venue of potential in AZ, so 1031 transaction buyers won’t find these particularly attractive.

That leaves the potential investor pool to the private investor. I’ve talked with some of these folks in the past who thought they wanted to venture into the gas patch, but upon preliminary exploration decided they’d rather have a QSR, drug store, or perhaps a shopping center (not a STNL property).

So why re-visit this today? The search for yield!!  Investors willing to do the work for an independent operator can price their cap rate up to as much as 50-100 bps (1%) over other sub-sector properties.  But what does that take, and how do you start?

May I suggest you find a good broker who knows the gas station/c-store business (shameless plug!)?  You can start with my email address below.  

Direct comments to Mike@MJGSpecialistsAZ.com 


September 5, 2018
HOW ARE THINGS WHERE YOU LIVE?


Arizona’s economy is growing at the fastest pace in more than 11 years, according to a report by BMO Capital Markets Economics* in Toronto. The state averaged 3.2% real growth (after correcting for inflation) last year, and 2018 should do even better. BMO forecasts Arizona’s economy will expand by 3.4% this year and 3.2% in 2019. Manufacturing is leading the charge (with those high-paying jobs!), with output up an annualized 8.5%. Other strong industries include real estate, retailing, construction and finance/insurance.


Nonfarm payrolls have expanded more than 2% for 15 straight quarters. Job growth is helping to push up demand for housing. Both housing starts and building permits are trending up. Personal income in Arizona rose 4.1% in 2017 and could average 5% this year and 4.9% in 2019. BMO reported that wage increases have been sustained by a tight job market and recent increases in the state’s minimum wage. Federal fiscal stimulus from income-tax cuts and spending hikes is fueling a “late-cycle lift” to the national economy and those of most states, BMO said. *Who’s BMO Capital Markets?


BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), one of the largest diversified financial services providers in North America with offices worldwide. In the U.S. you may be familiar with BMO Harris Bank.


Direct comments to Mike@MJGSpecialistsAZ.com

September 3, 2018
IS OR IS NOT THE YIELD CURVE FORECASTING A RECESSION?


The yield curve is looking more and more like a recession is coming. Unless, of course, we’ve been reading its signs wrong all along. This comment directed to you in an economic letter released Monday by the Federal Reserve Bank of San Francisco’s Michael D. Bauer and Thomas M. Mertens that was then cited by Bank of America Merrill Lynch, proposing that the 2- and 10-year yield curves aren’t as great an indicator as many experts might think.
NOTE: The San Francisco Fed is 1 of 12 Federal Reserve Banks, and Bank America (BofA) is one of the Fed Member Banks. BofA owns Merrill Lynch a stock brokerage firm. (We mourn the demise of Glass Steagell.)


Essentially, when yields for long-term bonds dip lower than short-term bond yields — when short-term interest rates are higher than long-term rates — economists call that an “inverted yield curve.” Investors often look at this as a sign of a weaker economy and inflation in the coming years. Each recession of the past 60 years has been preceded by an inverted yield curve (other “experts” refute this), though sometimes it could be as far as a year out.
The current yield curve isn’t quite inverted yet, but it’s the closest it’s been since just before the Great Recession that began in 2008. “When interpreting the yield curve evidence, it is important to remember that the predictive relationship in the data leaves open important questions about cause and effect,” Bauer and Mertens said in the paper.


The report notes the relationship between the three-month and 10-year Treasurys is a more accurate predictor of a recession than the two- and 10-year yields, with the three-month 10-year curve being further from inverting. Historically the 3mo.-10yr. was the yield curve gauge. Sometime over the past 30 years the market migrated to the 2yr.-10yr. The cynical side of me says this was because the 2yr.-10yr. will invert before the 3mo.-10yr., consequently leading to more market activity sooner. Why might Wall St. want this, I ask? “However, we also show that the traditional 10yr.-3mo. spread is the most reliable predictor, and we do not find any evidence that would support discarding this long-standing benchmark as a measure of the shape of the yield curve,” Bauer and Mertens wrote. I agree, but at this time they’re trying to put the toothpaste back into the tube.


Bauer and Mertens conclude the yield curve has been a reliable predictor of recession, and the best summary measure is the 10y-3m yields, not the 10y-2y.
“Although this particular spread has narrowed recently like most other measures, it is still a comfortable distance from a yield curve inversion. In this Letter, we do not find an empirical basis for adjustments based on the term premium, especially in light of uncertainties about the possible effects of quantitative easing (now quantitative tightening - QT). Finally, when interpreting the yield curve evidence, it is important to remember that the predictive relationship in the data leaves open important questions about cause and effect.”


Regarding the report, Business Insider conducted an interview with Aditya Bhave, a global economist at Bank of America Merrill Lynch, who says he isn’t alarmed by the 10yr-2yr curve being at its lowest point since 2007 — right before the Great Recession.
For one, he’s not in the camp that believes an inverted yield curve causes a recession. Rather, he said, it’s the other way around: Fears of a recession cause the curve to invert. In the business called a self-fulfilling prophecy. “The point is that the yield curve is better viewed in the context of the macroeconomic and policy environment than as a leading economic indicator,” Bhave said in a client note on Wednesday. Bhave, a global economist at BofA, would have you treat the yield curve as a coincidental indicator, rather than a leading indicator. The difference, of course, is timing.


NOTE: Why might BofA and the Fed be interested in not having investors take action ahead of a recession? What might they do? When financial assets (stocks & bonds) grossly outperform real assets (gold, commodities, fine art, Persian rugs, and yes, real estate) as they have for a decade due to the Feds easy money policies, at some point this imbalance will correct. That’s being catalyzed now, I believe, by the Fed “normalizing” its balance sheet and fair market pricing of money (raising interest rates).


Business Insider notes that the yield curve is being pushed closer to inversion in part due to the Federal Reserve raising interest rates, with another hike planned for September and the fourth hike of the year likely coming in December. Bhave said an inverted yield curve shouldn’t disrupt the Fed’s plans to keep raising the interest rate, and that only bad economic data should be the cause for backing off rate hikes.


“Although the curve will probably invert at some stage in this cycle, and there will eventually be a recession, we do not expect yield curve inversion due to excessive Fed tightening to cause a recession,” Bhave said. “Rather, reverse causality will likely be at play.”


Direct comments to Mike@MJGSpecialistsAZ.com

August 31, 2018
CHINA ADVERTISING IT WILL HOLD IT’S GROUND – REAL OR PUFFING?


China will make economic changes at its own pace regardless of U.S. pressure, and their worsening dispute over tariffs and technology policy can only be solved through negotiations as equals, a Chinese Commerce Ministry spokesman said earlier today.
The comments reinforced Beijing’s rejection of U.S. demands to scale back technology plans Washington says violate China’s free-trade commitments and might erode American industrial leadership.
The spokesman, Gao Feng, gave no indication of plans for more negotiations over the conflict, which threatens to chill global trade and economic growth. “No matter what measures the United States takes to exert pressure, China will proceed with reform and opening up at its own pace,” Gao said.
The two sides have raised tariffs on $50 billion of each other’s products - so far - in the battle over Chinese plans to rule the global market in robotics, electric cars and other technologies.
The Trump administration is poised to add penalties on an additional $200 billion of Chinese goods, and Beijing has threatened to retaliate.
Talks last week in Washington ended with no indication of progress. “Dialogue and consultation based on equality and good faith is the only correct choice (they hope) for resolving Chinese-U.S. trade frictions,” Gao said. He said the two sides “maintain contact” but gave no details.
On Aug. 23 — while the two sides were negotiating in Washington — Trump kicked the trade war up another notch, imposing 25 percent tariffs on an additional $16 billion in Chinese goods.
In this global game of anti-up, China will run out of chips long before the U.S. – this determined by it’s long-running trade imbalance with the U.S. (In 2017 about $421 billion.) When China has added tariffs to everything it can receive from the U.S., the U.S. can add still more to their exports. Then what? China’s expected (by the smart money folks) last gambit is expected to be a “maxi devaluation” of the Yuan. If that occurs, Katie bar the door! (And watch the global markets “adjust”!)
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August 29, 2018

SMALL BUSINESSES ARE RUNNING HOT

Small business owners’ optimism touched a 35-year high in July, with businesses setting records in terms of job creation and hiring, but cited the availability of qualified workers as their biggest challenge. Records were set for job creation plans – not for jobs, but the plans! A seasonally-adjusted net 23% of businesses are planning to create new jobs, while 37% of business owners said they had job openings that they could not fill in July. Structural unemployment is alive and well. Ostensibly the plans for new jobs will include training.

In another signal of just how good this economy is, the small business owners also noted that they were able to increase prices. Along with this, owners also reported that they were increasing the compensation they offered workers.

In July 2018, the NFIB’s Small Business Optimism Index marked its second highest level in the survey’s 45-year history, at 107.9 – just shy of the July 1983 record-high of 108.

Despite challenges in finding qualified workers small businesses are taking advantage of this economy to pursue growth.

Direct comments to Mike@MJGSpecialistsAZ.com


August 27, 2018

ARE WE PREPARING FOR AN ECONOMIC DECLINE, OR INCREASE?

Oxford Economics is forecasting a decline in business, machinery & equipment investment going forward (see corresponding chart).

How can they do that with the economy running full speed ahead?  Maybe a better question is what leads them to this conclusion?  

We can think of several things … rising interest rates, increased Federal spending, U.S. tax cuts (along with rising interest rates and increased spending increases U.S. deficits and overall debt), global trade tariffs, Fed-policy-driven financial engineering by private corporations,  U.S. foreign policy sanctions against “bad actors”, e.g., N. Korea & Iran.  

With these obvious headwinds to the domestic and global economy, calculating a decline in private sector investment shouldn’t be a surprise.  But if companies are making a profit now, what are they doing with the money?  Their choices are: pay down debt (Now that zero interest rates are gone, this isn’t a bad choice.), keep it in a war chest for acquisitions/mergers, pay out dividends to shareholders, pay executive bonuses!  If they’re not investing in their business to grow it organically, they’re strengthening their balance sheet to better survive the economic decline they may anticipate is ahead of them.  If they’re doing this, what should you be doing?

Side note – the other side of the coin:  Much of business investment today is in technology.  One of the advantages of investing in technology is that it’s less expensive than traditional plant & equipment for the same or better productive output.  While statistically it all shows up as money spent, businesses in fact may be investing in machinery & equipment while upgrading productivity with smarter (fewer) dollars.  If this is the case, they’re also setting up to reduce their labor expense for the same or increased productivity.  This doesn’t necessarily reduce jobs, but it does change the skill set of the jobs to be done.

Direct comments to Mike@MJGSpecialistsAZ.com 


August 24, 2018

WILL MUSCLE CARS NOW MAKE A COMEBACK?


Per a President Trump policy memo last month (to little public fanfare), conserving oil is no longer an economic imperative for the U.S., a policy shift that will likely undermine decades of government campaigns for gas-thrifty vehicles and other conservation programs.


Growth of natural gas and other alternatives to petroleum have reduced the need for imported oil, which “in turn affects the need of the nation to conserve energy,” the Energy Department said. It also credits the now decade-old fracking revolution that has added shale oil to U.S. reserves, giving “the United States more flexibility than in the past to use our oil resources with less concern.”


President Trump had questioned the existence of climate change back on the campaign trail prior to being elected, and embraced the notion of energy dominance as a national goal. An added step to this goal has been the easing of what he calls burdensome regulation of oil, gas and coal, including repealing the Obama Clean Power Plan.


Current administration proposals include one that would freeze mileage standards for cars and light trucks after 2020, instead of continuing to make them tougher. Administration support has been tepid-to-null on some other long-running government programs for alternatives to petro powered vehicles. Bill Wehrum, administration assistant in the EPA’s Office of Air and Radiation, spoke dismissively of electric cars — a young industry supported financially by the federal government and many states — this month in a call with reporters announcing the mileage freeze proposal. “People just don’t want to buy them,” the EPA official said.


And therein lies the policy attraction. Governments may debate & pass policy ostensibly for the public good, but ultimately the consumer/citizen will dictate the success of the policy. Consider how long electric vehicles may remain viable in the marketplace without government support (subsidies, tax incentives, etc.). As consumer demand dictates, so manufacturers will build – at least in a capitalistic society. Fears of oil scarcity used to be a driver of U.S. energy policy, per Frank Macchiarola, Group Director at API. Thanks partly to increased production, “that pillar has really been rendered essentially moot,” he said.
We pause to consider … will the 3,000 lb. muscle car getting 12 miles/gal. now make a comeback?


So all you gas station owners out there can be less concerned about where on your property you’re going to position the CNG and LNG tanks, the electric power hook-ups, etc. The viability of your existing UST configuration just got a new breath of life, courtesy of the White House.


Direct comments to Mike@MJGSpecialistsAZ.com


August 22, 2018

ARIZONA FORECASTED TO LEAD THE NATIONAL GROWTH PARADE


Based on a 10-year estimate from the state Office of Economic Opportunity, Arizona’s job growth is expected to outpace the nation over the next several years, and most of the gains will occur in metropolitan Phoenix.


The state’s population also is expected to grow by 1 million residents over the same time period.


Arizona will add nearly 543,000 net new jobs through 2026, that includes this year and last. The 1.7 percent annual growth rate for the state is higher than the projected 0.7 percent average annual job additions for the United States through 2026.


Arizona’s population, estimated at 7.1 million this year, is projected to increase to 8.1 million by 2026, with metropolitan Phoenix rising from around 4.8 million to 5.5 million by 2026.


Other key findings from the report:
• Maricopa County, especially in suburban areas, could see the fastest growth, with employment increases estimated at 2.1 percent annually.
• Yavapai County also is projected to grow employment by 2.1 percent annually, matching the fastest pace within the state.
• Maricopa County could account for 75 percent of all Arizona job gains through 2026, with the rest of the state accounting for the remaining 25 percent.
When buying or starting a gas station/c-store business one of the characteristics you look for is a large and expanding market, e.g., Arizona, and more particularly, Phoenix. Far-and-away the vast majority of our calls from buyers are coming from California. Public policy makers over there seems to be working overtime to work against the interests of the tax paying business owner.


If you happen to be considering a relocation from CA, or about any other state for that matter, give AZ a look. And if that business happens to be a gas station/c-store, give us a call. Or you can check us out at www.MJGSpecialistsAZ.com .


Direct comments to Mike@MJGSpecialistsAZ.com


August 15, 2018

TARIFFS, THE TRADE WAR, AND THE GLOBAL ECONOMY

The above chart is a snapshot as of about a week ago of the tit-for-tat progression of President Trump’s jousting with the Chinese in an attempt to level the playing field (as he calls it) of foreign trade between the 2 countries. It’s significant to note that China and the U.S. are only 2 of the G-20 nations, and that the G-20 provides about 63% of total global GDP.    

Note also what tariffs have currently been levied, how much is pending, and how much is threatened.  In a game using table stakes, the aggressive rate of increase by the U.S. will rapidly cause the Chinese to fold … in 2017 the Chinese exported $506 billion to the U.S., whereas they imported only $130 billion from the U.S. – hence the $376 billion trade deficit that President Trump is attempting to “level”.  In absolute terms, the Chinese will run out of tariff room before the U.S. … then what?  Strategists speculate that the Chinese are considering a “maxi devaluation” of the Yuan.  If executed, the USD will soar, nearly everything in WalMart will be priced like a swap meet, and the ripple effect will swamp other G-20 currencies on a proportional basis.
Back to the USD increasing, our exports will be immediately more expensive in other countries, with the effect being to reduce our exports and threaten a domestic slowdown in GDP growth.

Timing is everything!  The rollout of this scenario seems like a 2019-2020 process, IF it occurs at all.  This being an election year, China’s maxi devaluation before Nov. seems unlikely with negotiations affecting this the best that can be.  However, if and when this string of events begins to get traction, talk of a recession won’t be far behind.

If, however, Turkey joins Venezuela as a failed nation state, winding down of global trade and a potential global financial meltdown may preempt an extended trade war.

So how do you manage your CRE going forward?  Review your existing lease terms for conditions that might be vulnerable to the above events, and if possible amend them accordingly.  If buying or selling, consider specifying all price/value amounts in USDs.  If the Chinese execute a maxi devaluation, foreign currencies will migrate rapidly into the U.S. looking for a “risk-off” home – this in fact has been going on for some time in anticipation. Historically, U.S. CRE has been a favored asset class in times of global crises.

Direct comments to Mike@MJGSpecialistsAZ.com 

#MJG #GasStationSpecialistsAZ #Arizona #tariff #tradewar #economy #CommercialBrokerage #RealEstateAZ


August 13, 2018
Economics – the Dark Science


Economics in simplest terms is the measurement of what you and I do with our money. Given money, we can only do 2 things with it: spend it or not. By not spending we are saving or investing. After this it gets complicated.


Economists collect data, today macro data (because there’s so much of it), and analyze it in an attempt to forecast our future behavior as consumers and saver/investors. Therein lies the problem. Unlike gravity which is measurable and predictable at 32.17 ft. per second per second, or other physical phenomena, human behavior is less predictable. Extrapolating our future behavior based on our past is at best a crap shoot. Nonetheless, economists persevere.


In that endeavor, the Wells Fargo (WF) Economics Group developed and index in 1967 suggested to reflect our current leanings, and thought to be a valid predictor of our behavior at least into the short term future. WF named this index the Animal Spirits Index in honor of John Maynard Keynes, noted British economist who in his 1936 book, The General Theory of Employment, Interest and Money, described the instincts, proclivities and emotions that ostensibly influence and guide human behavior as “animal spirits”. (By the way, Keynes book became the ideological bases for President FDR’s New Deal – who knew!)


The Animal Spirits Index is constructed from five variables: (1) the S&P 500 index, (2) the Conference Board’s consumer confidence index, (3) the yield spread, (4) the VIX (VIX – also called the fear index - is a stock market index that trades on the Chicago Board of Trade (CBOE) that implies anxiety among traders by the nature of their trading patterns.) and (5) the economic policy uncertainty index (This is an index developed by several universities to measure the uncertainty/predictability of economic policies for the world's major economies. These variables were selected to capture actions of major economic agents of key sectors of the economy, and have the ability to shed light on economic agents’ expectations about the near-term economic outlook. WF utilizes a dynamic factor modeling approach in constructing their index.
So what?!


All this, and more, goes into assessing the likely behavior of CRE (commercial real estate) and small business buyers and sellers. No more than that … but maybe that’s enough.


Direct comments to Mike@MJGSpecialistsAZ.com

August 10, 2018

Net Lease Retail Market Finally Responding to Higher Interest Rates


The average retail cap rate for net lease properties during the second quarter of 2018 firmed up with cap rates in some sub-segments adding fractions of a percent. Additionally, a check of some of the major CRE listing websites shows an increase in the number of STNL properties on the market – suggesting sellers are actively seeking to dispose of seasoned properties before prices start what some would call an end-of-cycle decline. (Reminder: when cap rates increase, prices decrease.)
Some market indicators would forecast that while this CRE cycle is old, it may be awhile yet before meaningful declines come to the surface. If the Fed were to skip a rate increase in either Sept. or Dec., this might suggest to some that they’re reversing course and would possibly begin a rate reduction cycle in 2019. This would then firm cap rates in CRE, and extend this cycle further. This would also suggest that the Fed is worried about the economy faltering – not a good thing for CRE.
Also, at this time banks and non-bank CRE lenders remain in an accommodative mode, actively seeking loans. Competition, particularly among local and regional banks, remains strong. Asked-for terms and conditions remain soft (open to negotiation!) as they had been coming out of the Great Recession. Favored tenant types are those with multiple sites, experienced operators, and those businesses seen as e-commerce resistant. Desired asset classes include restaurants, grocery stores, discount stores (dollar stores), fitness centers, and convenience stores.
H2-18 volume may be flat-to-down vs. 2017, but is still to maintain well vs. other investment alternatives. If public markets begin to struggle in light of the myriad of risks in the markets and investors migrate to “risk-off” mode, CRE, and particularly STNL may be expected to be a beneficiary of the money migration.
Direct comments to Mike@MJGSpecialistsAZ.com
#MJG #GasStationSpecialistsAZ #Arizona #retail #STNL #CommercialBrokerage #RealEstateAZ #interest


August 8, 2018

                
It’s the DEBT Stupid !


Present Government budgeting estimates a fiscal deficit of a $trillion or so for the next 10 years.  At the same time – at least 5 years of it as currently scheduled – the Fed will be “normalizing” it’s balance sheet by not re-investing Treasury securities that mature.  This to the tune of $3.5-4.0 trillion. On top of that, we’re all enjoying the Q4-17 tax cut.

Add it up and what do we have?  A Government needing to borrow more money and a Treasury not going to buy (lend) it.  Meaning the load will (we hope) be picked up by private investors.  And this in an environment of rising interest rates, meaning the Government will have to pay more for its debt service.  (“The system won’t hold Captain, she’s coming apart!” by Scotty aboard the Starship Enterprise to Captain Kirk.)

At what point will Steve Mnuchin, Sect. of the Treasury, be echoing Scotty’s observation to the Captain?

We of course don’t know.  But not to be disadvantaged, neither does anyone else.  There are numerous events that can skew the path and outcome of our scenario. Not all of which are we, the U.S., in control of.  Consider globalization.  There are 18 other countries plus the EU (together with the U.S. the G20) that are dealing with similar domestic economic issues.  How well we all play together in the sandbox will determine if we can grow our way out of debt (meaning GDP expands faster than debt and we’re successful putting the toothpaste back into the tube), or we do a global reset.

While the participants of this situation are in some ways joined at the hip, we are in no way synchronized.  We got here over 50-60 years; economic recovery may be expected to be multi-generational also.

Direct comments to Mike@MJGSpecialistsAZ.com 

#MJG #GasStationSpecialistsAZ #Arizona #economy #CommercialBrokerage #RealEstateAZ #G20


August 6, 2018

Observance 
 
On August 6, 1945, during World War II (1939-45), an American B-29 bomber dropped the world’s first deployed atomic bomb over the Japanese city of Hiroshima.  Please observe with me today a moment of silence in observance and commemoration of this event. 
There’ll be no other comment today.
Thank You.
Direct comments to Mike@MJGSpecialistsAZ.com 
Image Source: nihonalt.wordpress.com


August 3, 2018
DISSECTING THE GDP NUMBER


Quiet the drums and put the cork back in the bottle, and take a brief glance at the chart above. In a nutshell, this shows that excluding non-recurring items, the economy expanded at an improved and respectable 2.7%, but a far distance short of 4.1% currently being bandied about. The extraordinary items can be expected to beneficially linger about, but a continued 4+% or even upper-3s GDP is probably a long shot at best.
There are other factors afoot not shown above that may even restrain future growth, but that is likely a few quarters off in effect, and will not loudly be broadcasted in advance. We’ll see. So for now, uncork the champagne and party hardy, but keep a close eye to the horizon for the “unexpected” results of economic policies.

Direct comments to Mike@MJGSpecialistsAZ.com

August 1, 2018
The Whitehouse at Odds with the Fed


Over the last weekend President Trump issued a statement criticizing the Feds continued increasing of interest rates. Since the Fed is supposed to operate independently of the Government, this was at best a political over-step, substance notwithstanding. The impact of higher interest rates is counter-supportive of Trump’s efforts in negotiating trade deals, in that higher rates in any country tends to increase the value of that country’s currency vs. any other country that doesn’t increase their rates proportionately. Trade wars and tariffs historically have migrated into currency wars, and then oscillated between the two in economic strategies. (China is in this position today.)
What’s it mean to us in the commercial real estate industry? Simply that a rising dollar has attracted foreign funds to invest in U.S. real estate. The rising dollar vs. the foreign currency acts as a hedge to the fundamental performance of the U.S. CRE investment. If the Fed were to lower rates, over perhaps even skip the next assumed ¼% rate hike in Sept., foreign funds may reverse, or at least stagnate, resulting is properties being put of the market for sale that otherwise may not be listed.
These of course are not overnight events. Forward planning and execution play out in months and years. But much of the investment arena is driven if not dictated by public policy, and ultimately filters out in buy-sell decisions. To be strategically positioned, you must be strategically aware and informed.

Direct comments to Mike@MJGSpecialistsAZ.com


July 30, 2018

GAS STATIONS DEAL WITH A GLOBAL COMMODITY

US crude oil shipments to China fell from a record of 14.65 million barrels in June to just 6.9 million barrels in July; August exports are expected to further decrease to about 
6 million barrels. The decline comes as China prepares to implement retaliatory tariffs on US crude imports.

On July 6, the US imposed a 25% tariff on Chinese imports worth $34 billion to which China imposed proportional retaliatory tariffs. The next action would be 25% tariffs on another $16 billion of goods, and China has included US crude oil in this batch.

The decline is reflected in changing trade patterns of oil tankers loaded with US crude headed to Asia and in the procurement activity of state-run Unipec, the trading arm of China Petroleum & Chemical Corp or Sinopec, the world's largest refiner by capacity.  "Sinopec will continue to take deliveries of crude from the US in August, but will reduce buying from the producer for the rest of the year," said an executive at a Sinopec refinery.

Oil tankers w/US crude headed for China are now being diverted to other Asian refineries. This activity just beginning is expected to become a trend over the next few months (a betterment in trade negotiations notwithstanding).   The US Trade Representative's office held public hearings for the tariffs on July 24-25, and has set July 31 as the deadline for rebuttals. The tariffs could take another month to be implemented, and China's response will be immediate.

What’s this mean to you and me?  Disruptions in flows, inefficient market pricing, supply shortages then excesses, all translate into product volatility.  Volatility not only in availability of fuel, but in the price.  Financial markets (futures) have not been overly responsive to this activity yet, but when they do they’ll have a contribution to make to the pricing component.  We’ll see more of the downstream effects of this process in Q3-18, and beyond.  

Care to talk? Give us a call.



Private Investment Surges in Net Lease CRE Investment

In 2018 YTD private investors are leading the way in STNL investment ahead of institutional investors, REITs and owner-occupiers as the leading purchasers of single tenant net-leased (STNL) real estate. In 2017 private investors took up 36 % of net lease volume. In 2018 they’re on track for doing 45% of this market segment.

There appears to be three main drivers of private investment activity. First, the ongoing desire for tax exchange (1031) transactions; second, an overall increase in capital allocation to CRE (money is mobile!); and, third, the private investors’ ability to quickly make decisions and place capital where they want (unlike institutions which are often restricted by bureaucratic and regulatory considerations).

IRC 1031 tax exchanges are a major driver of private capital purchases in the broader commercial real estate market that allow sellers to defer accrued taxable gains, subject to IRC 1031 compliance.  STNL properties are highly popular as like-kind purchases because they allow investors to efficiently reinvest capital gains in proven, creditworthy, income generating assets that require little or no hands-on management. Tax deferred exchanges tend to see higher activity volume in periods of economic expansion, line now. 

Many private investors are also reacting to a lack of comparable risk-reward yield investments in traditional investment markets, i.e., stocks & bonds. Net-leased real estate investments made in strong locations with good credit tenants in place can provide stable income over long term lease terms, in most instances.

Where are they placing capital? Private investors continue to demonstrate a preference toward the retail sector when looking for investments. Since 2017, over 40% of all purchases by private investors have been retail properties. Institutional investors are much more selective when pursuing retail assets, preferring to focus on larger deals and portfolio (multi-property) opportunities.

Private investors continue to be nimbler in their strategies, and can leverage opportunities across a wider swath of the retail sector, including assets that are less vulnerable to disruption caused by e-commerce, such as gas stations/convenience stores, quick service restaurants and pharmacies.

Over the last 24 months, increased competition for high-quality assets in primary markets has resulted in significant cap rate compression (lower interest rates) and increased pricing for STNL properties. This has forced many institutions to secondary and tertiary markets (not their preferred markets) where competition has historically been less intense and yields are generally more attractive.
Since private investors do not have to adhere to rigid underwriting guidelines or acquisition criteria, they have continued to pursue opportunities in secondary and tertiary markets on a case by case basis.  

Care to talk? Give us a call.


July 25, 2018

Consumers Still Marching Forward

Consumers continued their spending spree in June, a move that contributed to the 5th consecutive month of retail sales gains.
Retail sales increased 0.07% seasonally adjusted over May, and 4.2% unadjusted year-over-year, according to the National Retail Federation (NRF). The NRF numbers exclude automobiles, gasoline stations and restaurants.

Overall June sales including automobiles, gasoline, and restaurants were up 0.5% over May. Overall sales rose 6.6% year-over-year.

These retail sales data reflect the underlying economic momentum that has fueled a steady run of retail sales increases, and in turn, an expanding GDP.

Looking outbound, however, the recently launched trade war could have a negative impact on consumer confidence. Timing being what it is, we shouldn’t expect to see too much from this until Q4-18 … keep an eye out for Christmas sales forecasts which start coming out in early Nov.

Escalating prices from tariffs could slow consumer spending and in turn lead to an economic slowdown.

Stay tuned.


July 25, 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.


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.

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.)   

Stay tuned.  The next surprise may be in Sept. or Dec. when the Fed DOESN’T raise Fed Funds by another 1/4 point.



July 20, 2018
· 
FOREIGN TRADE PLAYING FIELD

China has been a major U.S. oil importer since 2015 when then-President Obama lifted a 40-year ban on exports to China.

China most recently imports about 18 million barrels (bbls) of oil a month. In attempting to level the foreign trade playing field, President Trump’s new tariffs threaten to put this volume back into the global market … increasing supply.

This will surely be picked up by another country, but in the process, especially over time, can be expected to put downward pressure on prices. China's plans to levy 25% tariffs on $50 billion worth of US goods in retaliation for President Donald Trump's own tariffs on Chinese products.

This all at a time when OPEC has announced their own curbing of production. This all plays out as price volatility to the dealers (and upstream as well), Carried out far enough and overall global economic growth will be threatened.

Then what? Stay tuned.


Comments to mike@mjgspecialistsaz.com



July 18, 2018

POLITICAL DECISIONS AND SUPPLY OF OIL

Washington political decisions are intersecting with the global supply of oil. The State Department announced the week of June 25th its intention to cut off all Iranian oil exports by November 2018, i.e., driving the rogue nation's oil exports from 2.5 million barrels a day to zero.

The attempt to financially squeeze Iran will greatly test the strength of the White House relationship with China and India, the primary importers of Iranian crude. To replace Iran's oil in the global market, President Trump is pressuring Saudi Arabia to increase its oil production by 2 million barrels a day, action that OPEC's largest player could achieve within 6 months but not without additional drilling and expense. The price of oil closed at $73.80 a barrel the week of July 6, up +23% YTD (source: BTN Research).

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July 16, 2018

NATIONAL JOB AND WAGE GROWTH

The National job and wage growth slowed in June, however Arizona and Phoenix remained at the top of the charts in terms of wage growth, according to Paychex’s monthly IHS Markit Small Business Employment Watch report.

The payroll-services provider reported a 4.55 percent growth of hourly earnings in Arizona and a 5.07 percent growth of wages in Phoenix. The report provided information for wages in the 20 largest U.S. metro areas based on population.

Across the U.S., the South remains the top region for employment growth but the West remains the top region for wage growth, according to the company.

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#MJG #GasStationSpecialistsAZ #Arizona #wagegrowth #employmentreport #CommercialBrokerage #RealEstateAZ


July 13, 2018

What’s a Blue Paper?

The Fed has its beige paper. Numerous research firms, professors at universities, and think tanks produce white papers. At MJG we publish a Blue Paper. It accomplishes much the same thing – what’s in a color! I imagine somewhere, trying to find it’s footing in the market is a pink paper. We’ll stick with Blue.

Our Blue Paper is a periodical report published un-periodically (!) typically 2-3 times/year as opportunity and material dictate. Blue Papers are typically strategic in content, not so much day-to-day blow-by-blow events, although current events often form the impetus for the articles.

These are not distributed by social media, but are emailed directly to interested readers compliments of MJG. If you would like to receive a trial issue, send your request directly to me at Mike@MJGSpecialistsAZ.com . Besides your name and email address, include your company, your position at the company, your phone number, and the industry.


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July 11, 2018
Introduction to MJG Gas Station Specialists LLC


MJG Gas Station Specialists is a commercial real estate (CRE) and business

brokerage firm specializing in gas station properties & businesses in AZ.
Transportation fuels, specifically gasoline (gas) and diesel, are unique products

sold through these facilities that differentiates these businesses and properties

from their retail counterparts. Crude oil that is the feedstock for transport fuels is

a global commodity, and affected by geo-global events – nothing new here. Oil,

particularly in the middle-east and among OPEC countries, is a major contributor

to their national GDPs. Also, it’s well-known that CRE and usually business acquisitions,

mergers & divestitures, re-fi’s, LBOs, etc. utilize financial leverage (debt) in their financial structures.

Consequently an eye toward the credit markets, liquidity, capital flows and factors affecting it, play into

our research and day-to-awareness. All this goes toward bringing our clients the most comprehensive array

of considerations available for gas station capital services.
With this background it should become apparent why the content of our media

may often not seem to belong within the context of commercial real estate and business brokerage.

Let me assure you, it all matters.


Comments to mike@mjgspecialistsaz.com


July 6, 2018

IMPORT/EXPORT: TARIFF


China has been a major U.S. oil importer since 2015 when then-President Obama lifted a 40-year ban on exports to China. China most recently imports about 18 million barrels (bbls) of oil a month.

In attempting to level the foreign trade playing field, President Trump’s new tariffs threaten to put this volume back into the global market … increasing supply. This will surely be picked up by another country, but in the process, especially over time, can be expected to put downward pressure on prices. China's plans to levy 25% tariffs on $50 billion worth of US goods in retaliation for President Donald Trump's own tariffs on Chinese products.

This all at a time when OPEC has announced their own curbing of production. This all plays out as price volatility to the dealers (and upstream as well), Carried out far enough and overall global economic growth will be threatened.

Then what? Stay tuned.

Comments to mike@mjgspecialistsaz.com


July 4, 2018

"EXPERT" DESIGNATION BY BUSINESS BROKERAGE PRESS

I’m pleased and proud to announce that I have been approved by Business Brokerage Press(www.BBPInc.com) as a BBP Industry Expert
for the Gas Station & Convenience Store industry. This is my 11th year of being acknowledged by BBP as an industry Expert, and awarded with this designation.

BBP publishes the annual Business Reference Guide that serves the business brokerage industry as a desktop reference resource for business brokers.

As an acknowledged Expert, this year’s Guide will include my data and comment on the gas station and c-store industry. The publishing will include my name, industry specialization(s), company name (MJG), and contact information. I will also be included in BBP’s listing of Industry Experts on their website (www.industryexpert.net ).


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June 18, 2018


China's plans to levy 25% tariffs on $50 billion worth of US goods in retaliation for President Donald Trump's own tariffs on Chinese products threatens to restrict US energy exports to the Asian nation, putting at risk 18.4 million barrels of American crude and oil products.  So all of a sudden the market has more oil available than it did prior to Trump's inking the tariffs. The oil has to go somewhere, so expect this increased supply to pressure price declines.  And this while we're setting production records for U.S. oil production.  However, the increased oil production is having trouble getting to market due to infrastructure from the wellhead to the refineries.  Production is also waffling under pressure of insufficient labor available, even with improved technology.  Might this combination of factors choke off the economic expansion?  The tariffs alone threaten economic growth in China.  By the time this singular act winds its way through the global economies (globalization) no one will be unscathed. 


Our economies (G20s anyway) are being further constrained by the rising tide of interest rates.   Globalization strikes again.  Just like the other G20 nations followed the Fed (U.S. central bank) in Quantitative Easing, so also are they following in attempting to "normalize" their balance sheets, e.g., Quantitative Tighting and raising of their respective national rates.


This being the recovery from Bernanke's great experiment, we're all plowing new ground here.  Making history sometimes ain't all it's cracked up to be!


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May 11, 2018

Reduced unemployment is on a terror.  The main media broadcast number for April was 3.9%, the new lowest level since 2000.  The man-in-the-street consumer who drinks this Cool Aid is feeling financially secure, and expressing this feeling in his spending-savings activities, which shows up in consumer confidence indices. Behind the curtain, however, the truer number (U-6) is was 7.8%.

Still, all-in-all, the economy is vibrant and the outlook is optimistic.  GDP has averaged 2.9% over the last 4 quarters, including a dip to 2.3% in Q1-18.  This bodes well for our buyer population. This is verified by the number of Hits recorded in BizBuySell – a generally higher level of activity than, say, a year ago.  Loopnet stats are not as reactive for businesses for sale since this is primarily a CRE listing website. The percent of Views/Hits, however, remains somewhat sluggish, indicating that while buyers are looking, they are still cautious in stepping up.  This also is good, and suggestive we won’t have a hot market soon, the results of which tend to be a blow-off and crash.

The Fed left interest rates (the Fed Funds rate) unchanged in April – this was expected.  Progressively increasing inflation (gauged the way the Fed sees it) increases the likelihood of a rate increase in June.  Barring a change in trends (unemployment and inflation), we appear to be on track to get additional increases in Sept and Dec. Rising interest rates left this year could total .75%.  Tacked onto the current 4.75% prime, this forecasts an SBA 7(a) rate in the area of 7.5% for the average borrower.  This is going to put pressure on debt service coverage coming from your historical income statements, and this at a time when your SDE is absorbing the last 2 years of minimum wage increases, and the effects of higher oil prices at the pump.  This being the case, be prepared to carry a secondary note to fill the gap on offers coming in for the balance of the year.  (Call me if you want discussion or clarification of this.)

Our own crystal ball suggests that raising rates as expected is likely to chock off the expansion before the Fed is able to get all the increases in.  The powers-that-be will want to delay calling any slowdown a recession until after the 2018 mid-term election, but we may be feeling this effect before we have our Christmas shopping done.  If President Trump’s rally in Elkhart IN last night (5-10) is any indication, he’ll have Repubs on fire going into early Nov.  A successful Republican outcome to the congressional races could re-energize the economy well into 2019.

All-in-all it looks like we’ll have a good selling environment for the rest of 2018.


We have no expectation to share about the up-coming summit with Kim Jung Un in Singapore next month.  Making history, however, is sometimes not all it’s cracked up to be!  


Comments to mike@mjgspecialistsaz.com


Dec. 13, 2017

As widely expected, the Federal Open Market Committee (FOMC) raised the Fed Funds rate today to a 1.25-1.50% target range. (Prime rate is now 4.5%.)

This is the 3rd hike in 2017, and the 5th since the end of 2015. Post-meeting forward guidance reiterated the forecast of 3 more raises in 2018 - anticipated to be 1/4 point each. Also raised was the Fed's 2018 GDP estimate from 2.1% to 2.5%.  Nov. PCE (the Fed's inflation gauge.) came in at 1.4%,  a low point trending down since the first of the year - the self-proscribed inflation target remains unattained. Unemployment is expected to fall below 4% in both 2018 and 2019. Wages, however, have hovered just over inflation for the last 2 decades! None of the forecasts factor in any results from the newly passed tax reform legislation.


Comment

It's been widely discussed for years that the Fed's model, the now-infamous Phillip's Curve, is outdated and empirically shown by Milton Friedman to be unreliable.  Yet the Fed persists in calling the monetary shots based upon relevant Curve data. Raising the Fed Funds rate most directly affects the short end of the yield curve, raising short term rates out to abut 3-5 years. Raising GDP forecasts and lowering unemployment expectations, however, affects the long end of the curve driving those rates higher also. Both of these have the affect of strengthening the dollar, making exports less competitive.  It's been thought for several years that the Fed was behind the rate curve in raising rates as the economy went through it's lethargic recovery since 2009-2010.  This late in the economic cycle, it's now discussed with some concern that the Fed is raising rates so as to be able to reduce rates once the imminent recession is upon us. The concern is that raising rates at this time will in fact catalyze the recession it hopes to mitigate!  It appears the Fed is more interested in fixing a recession it may in fact be helping to cause, than to prevent it in the first place!  The newly-passed tax reform package signed by President Trump in late December will undoubtedly have an impact on monetary policy and the behavior of the economy, but the timing and magnitude remains to be seen. 


Comments to mike@mjgspecialistsaz.com

June 3, 2016


We're pleased and proud to announce that Michael Green has been approved byBusiness Brokerage Press  (www.BBPInc.com) as a BBP Industry Expert for the Gas Station & Convenience Store industry.


This is Mike's 10th consecutive year of being acknowledged by BBP as an industry Expert, and awarded with this designation.

BBP publishes the annual Business Reference Guide that serves the business brokerage industry as a desktop reference resource for business brokers.  As an acknowledged Expert, this year’s Guide will include Mike's data and comment on the gas station and c-store industry. The publishing will include his name, industry specialization(s), company name (MJG), and contact information. Mike will also be included in BBP’s listing of Industry Experts on their website (www.IndustryExpert.net)

Michael readily acknowledges that he could not have arrived at this position without you, his associates, clients, and prospective clients who have supported him and MJG, and allowed him to develop his skills and talents in his profession.


Dec. 16, 2015


Well, it finally happened.  After 9 years since the last interest rate hike, and nearly a year in anticipation, the Federal Reserve (Fed) finally raised it's Fed Funds rate by 1/4%, from 1/4% to 1/2%.  After driving rates to essentially zero in Q4-08, they've taken the first step to alleviating financial repression and artificially disrupting the fair market value of money. To echo the popular consensus, the basis for the rise after engineering about 7 years of a muddling-along economy, is that the economy has sufficiently recovered to absorb the rise and continue the momentum to further economic progress without monetary stimulation. Although acting in anticipation of actually seeing a 2% inflation rate (a stated requirement for the increase), economic data is said to be sufficiently visible to support the increase at this time.  Also, employment data (spun or otherwise) has shown to have created sufficient jobs and reduced unemployment to calculate to the mystical 5.0% goal, which today is considered "full employment".  Continuing incremental increases in the rate are expected on a "data dependent" basis, i.e., as long as the economy continues to improve, rates will be "inched along" toward normalization.

Observations & Analysis:

Almost universally within the CRE industry, the experts are heralding the move as appropriate, expected, and of no immediate consequence to a disruption within the industry.  While CRE cap rates are low, there is sufficient spread between these and conventional market investments to absorb this increase, and possibly additional raises.  There is also an abundance of investment capital available to support any price slides that may be in the offing. Additionally, an already strong dollar will be further enhanced by the increase, thus attracting still more foreign currency into the U.S. markets. While rents typically increase with rising interest rates, the pronouncement of a strong and expanding economy is seen to be more helpful to increasing rental demand for space, even with potential rent increases. Although the Fed raised the Fed Funds rate and this will raise in sympathy other short-to intermediate rates, CRE industry experts expect the long end of the yield curve to have no effect. (Hum-m-m ... if short term rates increase and long term rates stay unchanged, this begins to invert the yield curve.  Inverted yield curves traditionally have forecasted recessions!)


Public securities markets, primarily the stock and bond markets, have been elevated beyond economic justification by the excess liquidity provided by the Fed for the last 7 years.  To suggest they are a bubble is a gross understatement.  It's widely anticipated these bubbles will burst - correct valuations; the only uncertainty is when.  Until they do (or the hold together long enough for the economy to improve sufficiently to support current values - unlikely, but possible) they'll likely continue to exhibit the volatility we've seen for the last (several) year or so.  (Gas station note:  the bubble pricing in the stock market where a share represents ownership in the underlying company has not transitioned to privately held companies.  That is, the multiples that gas station businesses with specific markets in AZ sold at prior to 2007-08 has not changed notably over this period.  The change in pricing is largely due to increases in the real estate.) 


To all this, we at MJG are skeptical. The data dependence the Fed glows over has been spun to a point past disingenuous. Globally, many if not most of the G-20 nations are in some state of recession and/or deflation, and the U.S. will not - cannot - decouple from the world.  We believe there's better than a 50/50 chance that the U.S. will be in a recession in 2016. (Recession-calling being what it is, it's likely to be 6-9 months after we actually enter a recession until it's called ... by many measures we're already in one!) The last thing you want to do in a recession, or economic downturn by any other name, is raise interest rates.  If the economy stalls (which it was already doing prior to this increase) the Fed, if it has an ounce of integrity, will have to back-peddle and loosen again.  This doesn't mean a reduction of the rate they just increased, although they may, they may instead choose some other method of monetary accommodation, e.g., the next QE program. 


At any rate (pun intended), what passes for public consumption and advertised by industry experts may contain just a tad of self-servitude. 


Q3-15, COUNSEL MORTGAGE ANNOUNCEMENT

We're pleased to announce that Counsel Mortgage is now licensed in California for the origination of both residential and commercial mortgage loans.  Requests to or through MJG for residential mortgages will be referred to a licensed residential originator at Counsel Mortgage - Counsel Mortgage Loan Officers who are also AZ real estate licensees will work only with commercial mortgages. 

(CA DBO# 60DBO43873; CA MLO# CA-DBO179539)


July 17, 2015


Completed small-business convenience store transactions declined in therms of the number of deals and median sale price in 2014 compared to the prior year, per BizBuySell in it's 2014 Insight Report.  (The data offered may be considered exclusive of multi-site mergers that were not part of the BBS listing universe, typically one-off transaction.  Note that the prices shown are exclusive of real estate, i.e., tenant-occupied businesses.  Data is national is scope.)


A total of 266 small-business c-store transactions closed in 2014 at a median sale price of $140,000, compared to 350 such transactions at an average sale price of $195,000 during 2013.  Median revenues of the c-stores sold in the most recent quarter were $540,000, with a median cash flow of $94,000.  This compares to $595,000 and $104,172 in the prior year, respectively.


Jan. 13, 2015


Yesterday the Senate voted to consider legislation that would give the go-ahead for construction of the Keystone XL pipeline.  The House passed it's measure last week. Expect the Senate to doctor it up with amendments, but ultimately get a vote - something that never happened in prior years when Harry Reed ran the Senate.  A final version is expected to pass, after which it will be sent to Obama for signing, which he won't do.  All expect a veto here, and it isn't expected that the Republican majority in both houses can persuade enough Democrats to jump ship and vote for the measure so as to over-ride the veto.


Comment:  This issue as well as many other legislative measures that have been stalled in Washington, is grist for the political mill. Seemingly it's purpose here is to demonstrate that Obama is the barrier to legislative accomplishment, and not the congress. To that end it will probably suffice


Dec. 3, 2014


The 3rd version of PCI (Payment Card Industry) policies and procedures become effective Jan. 1, 2015 (next month!). This latest version of rules initially introduced 3 years ago These newer rules focus on not just securing the server, but on the data itself.  Because more companies are now relying on 3rd party providers that receive cardholder data and store it in the cloud, the latest PCI rules expand the responsibility to all involved ... read that to be you, the merchant.  Companies show to be non-compliant risk losing their ability to process credit card transactions.


Comment:  We suggest you contact your insurance company to be sure your new exposure to this risk is adequately covered in your policy.


Dec. 1, 2014


OPEC had their annual meeting last Thursday, Thanksgiving here at home.  With crude oil prices dropping rapidly over the last several months, the expectation was that they would vote to reduce production in an effort to create a shortage (supply), thereby stabilizing or even increase prices.  Such was not the case - surprise!  They voted to keep their collective production unchanged at 30 million bbls/day, and in effect creating an oil war.  Going into the meeting WTI was about $71/bbl.  Friday after the vote was known, WTI collapsed to close at $66.15/bbl.


As mentioned before, the fracking folks break-even in the mid-to-low $70's /bbl.  If the sub-$70 price holds (which we don't expect), you can look for some reduced production from fracking producers, and a knee-jerk reaction at the wholesale & retail levels.  Reduced production will likely lead to lay-offs in the affected markets - not good for the local economies, or the national consumer attitude going into Christmas season. 


Comment:  In any event, expect more volatility in fuel pricing.  Technically, from historical pricing charts, if pricing in the low $60's fails, next longer term support is in the low $40s. 


REPORTS


Sept 7, 2018


Market Comments  


Arizona’s economy is growing at the fastest pace in more than 11 years, according to a report by BMO Capital Markets Economics* in Toronto.


*Who’s BMO Capital Markets?  BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), one of the largest diversified financial services providers in North America with offices worldwide.  In the U.S. you may be familiar with BMO Harris Bank.

The state averaged 3.2% real growth (after correcting for inflation) last year, and 2018 should do even better.  BMO forecasts Arizona’s economy will expand by 3.4% this year and 3.2% in 2019. National GDP was up a (now revised) 4.2% in Q2 – previously seen as a pie-in-the sky over the top pipe dream, but now it’s in the books.

Manufacturing is leading the charge (with those high-paying jobs!), with output up an annualized 8.5%. Other strong industries include real estate, retailing, construction and finance/insurance.

Nonfarm payrolls have expanded more than 2% for 15 straight quarters. Job growth is helping to push up demand for housing. Both housing starts and building permits are trending up.  Personal income in Arizona rose 4.1% in 2017 and could average 5% this year and 4.9% in 2019.  BMO reported that wage increases have been sustained by a tight job market and recent increases in the state’s minimum wage.

Federal fiscal stimulus from income-tax cuts and spending hikes is fueling a “late-cycle lift” to the national economy and those of most states, BMO said.

So what’s not to like.  The economy is functioning on all cylinders. Markets have digested geo-political turmoil.  Borrowers have turned a deaf ear to the Fed’s antics attempting to “normalize” its balance sheet (at least by raising rates).   We’ve even neglected the day-to-day drama out of Washington.

Lenders are more aggressive than I’ve seen since the early 2000’s.  Rising rates makes banks more profitable originating loans – it gives them a spread.  Rates tend to track continuing rate increases, particularly SBA loans.  But conventional loans have more flexibility in both pricing and terms – don’t overlook non-rate terms.  Underwriters haven’t begun giving money away, but when they see a loan they want, they get very aggressive and creative in getting the deal done. 


And a sub-sector of my favorite predictor, consumer confidence, small business owners’ optimism touched a 35-year high in July, with businesses setting records in terms of job creation and hiring, while they cited the availability of qualified workers as their biggest challenge. In another signal of just how good this economy is, the small business owners also noted that they were able to increase prices.

In July 2018, the NFIB’s Small Business Optimism Index marked its second highest level in the survey’s 45-year history, at 107.9 – just shy of the July 1983 record-high of 108.

So how does this translate into our market of interest, gas station businesses and real estate?

CRE investment real estate (not businesses) is maintaining momentum from the prior 8 years since breaking out of the doldrums of the 2009 recession, even though by historic comparison we’re late in the cycle. (Bear in mind we’re making history here, ever since the Fed. gave us ZIRP (zero interest rate policy) in Q4-08, and our economic recovery under Obama averaged less than 2% GDP growth for the following decade.  The outgrowth of a slow moderate recovery is that it should be expected to take longer to recover, overheat and cycle back.)

Our current problem (there’s always a problem!) is that buyers can’t find “good” inventory, i.e., operating gas stations for sale that are making an SDE supportive of the price.  Those that are making “good money” tend to have holes in their documentation (financials) verifying their representations.   The result of this is that the stations look like overpriced real estate, and the business is a turnaround situation, not a turnkey business.

We have a backlog of qualified buyers, mostly from CA, with reasonable amounts of cash and otherwise bankable.  Jerry Brown (CA governor) is doing all he can to facilitate these folks relocation from CA.  If buyers can’t find what they want here, they’ll look elsewhere.  As a testament to their frustration, I had one buyer tell me he’s considering going back to Detroit! (Nobody relocates from CA to Detroit!)

I’ve spoken to some of you about a sale-leaseback as the first of 2 steps to accomplish an exit from the business.  This opens up a new buyer pool, passive investors and business-only buyers who would be tenants.  This is not an ideal solution, but perhaps a workable one. As always, it depends upon the terms.

We should continue to have a viable market through the end of the year, notwithstanding a couple notable bumps in the road … the election in Nov. and the Fed’s anticipated rate hike in Dec. If the market continues to disregard negative outcomes to these events remains to be seen.


Aug. 17, 2018


Stand-by for UST Compliance

June 20, 2018:  The PMAA, along with the Food Marketing Institute (FMI), the National Association of Convenience Stores (NACS) and the National Association of Truck Stop Operators (NATSO), requested a “short delay” in the 2015 UST final rule compliance deadline for the testing of sumps, spill buckets and overfill prevention devices until October 13, 2024. The letter argued, “In light of the 10-year compliance period provided by OUST for the initial 1988 UST upgrade requirements, we believe a six-year deadline extension for the specific UST equipment mentioned above is both reasonable and necessary for small business UST operators to adequately comply in an orderly manner.”

“This letter represents a unified front among our associations which demonstrates that delaying the compliance deadline for these specific UST system components is necessary to help small business petroleum marketers,” said PMAA President Rob Underwood.

Earlier this month, the U.S. Senate sent a bipartisan letter to EPA Administrator Scott Pruitt requesting that the compliance deadline in the 2015 underground storage tank amendments for containment sumps, spill buckets and overfill prevention equipment operability testing be delayed until October 13, 2024. The letter was led by Senator Jerry Moran (R-KS). Meanwhile, members of the House Energy and Commerce Committee spearheaded by Rep. Tim Walberg (R-MI) also sent their own letter. PMAA supported both letters which would allow tank owners and operators adequate time to acquire the capital needed to pay for the compliance costs associated with the initial testing requirements.


Jul. 13, 2018

The average retail cap rate for single-tenant net lease (STNL) properties during the second quarter of 2018 reached 6.2 percent, an increase of 10 basis points from first quarter.  The last time the rate increased that much was in the second quarter of 2011. In addition,  the number of retail properties listed has increased, as sellers look to sell assets before cap rates increase (prices decrease) further. The number rose by more than 13.6 percent, to 4,216 properties nationally. Deal flow has slowed. Quarter-over-quarter, single-tenant retail sales volume was down about 14 percent in the first three months of 2018, while year-over-year volume decreased nearly 26 percent.

“As second quarter closes, preliminary numbers indicate that STNL retail sales volume for the first half of 2018 may show a decline vs. H1-17 totals, although the market is still seeing billions of dollars of real estate trade hands.  H1-18 transaction were led by dollar stores and drugstores as the most often-traded asset types, a trend expected to continue in the near future.

The impact of e-commerce on bricks-and-mortar retail has led investors to focus on STNL retail properties that have demonstrated or expected resistance to “e-commerce competition - these include medical facilities, fitness centers, restaurants, grocery stores, entertainment venues and (last but not least) convenience stores, 

Q2-18 are up about 10 bps, but rates on any particular transaction are going to vary depending on the terms of the lease, the location of the property, the creditworthiness of the tenant and the size of the asset - there are a lot of variables to consider.

From an investment standpoint, there’s still strong demand from private investors motivated by ease of operations and stable cash flows. Gas stations/c-stores are seen as a higher risk asset type, primarily we believe because of the environmental risk associated with the fuel tanks. While the environmental risk is present, it's been largely mitigated over the past 20 years by EPA regulations, equipment improvement, and contractual language in the lease protection both the real estate owners/investors, and the lenders.  This singular consideration has proven to be a notable barrier for both speciality net leasing brokers and investors.  To compensate investors for this risk, STNL gas station properties command about 50-75 bps of cap rate vs. traditional STNL retail properties (all else being equal, which it hardly ever is).

The new federal tax law that went into effect in December 2017 will impact STNL properties.  Since this is a relatively new consideration, it will take some time to see the full impact of the tax rule changes. Add tax risk to your due diligence risk. Ultimately, this too will be baked into the transactions. 

Dec. 16, 2015

Well, it finally happened.  After 9 years since the last interest rate hike, and nearly a year in anticipation, the Federal Reserve (Fed) finally raised it's Fed Funds rate by 1/4%, from 1/4% to 1/2%.  After driving rates to essentially zero in Q4-08, they've taken the first step to alleviating financial repression and artificially disrupting the fair market value of money. To echo the popular consensus, the basis for the rise after engineering about 7 years of a muddling-along economy, is that the economy has sufficiently recovered to absorb the rise and continue the momentum to further economic progress without monetary stimulation. Although acting in anticipation of actually seeing a 2% inflation rate (a stated requirement for the increase), economic data is said to be sufficiently visible to support the increase at this time.  Also, employment data (spun or otherwise) has shown to have created sufficient jobs and reduced unemployment to calculate to the mystical 5.0% goal, which today is considered "full employment".  Continuing incremental increases in the rate are expected on a "data dependent" basis, i.e., as long as the economy continues to improve, rates will be "inched along" toward normalization.

Observations & Analysis:

Almost universally within the CRE industry, the experts are heralding the move as appropriate, expected, and of no immediate consequence to a disruption within the industry.  While CRE cap rates are low, there is sufficient spread between these and conventional market investments to absorb this increase, and possibly additional raises.  There is also an abundance of investment capital available to support any price slides that may be in the offing. Additionally, an already strong dollar will be further enhanced by the increase, thus attracting still more foreign currency into the U.S. markets. While rents typically increase with rising interest rates, the pronouncement of a strong and expanding economy is seen to be more helpful to increasing rental demand for space, even with potential rent increases. Although the Fed raised the Fed Funds rate and this will raise in sympathy other short-to intermediate rates, CRE industry experts expect the long end of the yield curve to have no effect. (Hum-m-m ... if short term rates increase and long term rates stay unchanged, this begins to invert the yield curve.  Inverted yield curves traditionally have forecasted recessions!)

Public securities markets, primarily the stock and bond markets, have been elevated beyond economic justification by the excess liquidity provided by the Fed for the last 7 years.  To suggest they are a bubble is a gross understatement.  It's widely anticipated these bubbles will burst - correct valuations; the only uncertainty is when.  Until they do (or the hold together long enough for the economy to improve sufficiently to support current values - unlikely, but possible) they'll likely continue to exhibit the volatility we've seen for the last (several) year or so.  (Gas station note:  the bubble pricing in the stock market where a share represents ownership in the underlying company has not transitioned to privately held companies.  That is, the multiples that gas station businesses with specific markets in AZ sold at prior to 2007-08 has not changed notably over this period.  The change in pricing is largely due to increases in the real estate.) 

To all this, we at MJG are skeptical. The data dependence the Fed glows over has been spun to a point past disingenuous. Globally, many if not most of the G-20 nations are in some state of recession and/or deflation, and the U.S. will not - cannot - decouple from the world.  We believe there's better than a 50/50 chance that the U.S. will be in a recession in 2016. (Recession-calling being what it is, it's likely to be 6-9 months after we actually enter a recession until it's called ... by many measures we're already in one!) The last thing you want to do in a recession, or economic downturn by any other name, is raise interest rates.  If the economy stalls (which it was already doing prior to this increase) the Fed, if it has an ounce of integrity, will have to back-peddle and loosen again.  This doesn't mean a reduction of the rate they just increased, although they may, they may instead choose some other method of monetary accommodation, e.g., the next QE program. 

At any rate (pun intended), what passes for public consumption and advertised by industry experts may contain just a tad of self-servitude.

Oct. 29, 2014


A word about interest rates.  Popular and now conventional thinking is that the Fed will begin raising rates in Q2-15. (Some so confident/arrogant as to be forecasting the month!) We're not so sure.  Fed policy on the matter as stated by Janet Yellen is couched firmly in the employment data.  If the economy is not creating jobs and raising the real (not nominal) income level, she'll be hard-pressed to raise rates. In fact, now that the last QE program is officially terminated and that liquidity is removed from the market, the economy is more dependent on the "free economy".  In reality, the QE look-a-like programs rolling out from the EU and Japan are flowing benefits in the U.S. as capital in-flows.  When this spigot turns off, and it will, we'll look a lot like the EU and Japan today.  At that point, you might expect a re-introduction of then another QE effort ... and there we'll go again.  When you may ask?  We don't know, but some respected folks in the field suggest perhaps as early as a year or so from now ... it depends. 

May 17, 2014  (The following report is excerpted from the Spring 2014 Blue Paper, an MJG publication.)

What's my business worth?  Continuing as one of the top 3 or 4 questions that comes up in our discussions with both sellers and buyers is the value of the business, generally including the real estate.  Some helpful comments here addressing that question come indirectly from our friends at American Business Appraisers (ABA) via their May 2014 Newsletter, KC Conrad owner and appraiser.  (Space doesn't permit listing all of his credentials and qualifications.  You can check them out at www.ABAvalue.com .)

It's important to recognize that if you're selling a gas station/c-store business that includes the real estate as an asset, the real estate is valued separately, and differently, from the business.  The basis for this is that you don't need to own the real estate to be in the gas station business; you could lease the real estate, thus committing far less capital to the investment. 

The severe decline today in the business values is driven primarily by a decline in any, or all, of the financial metrics used with multipliers, percentages, etc. to derive the value.  For instance, if you priced your business at 2.58 times (actual national average) the EBIDTA (you might also use adjusted cash flow or seller's discretionary earnings) when you bought it in, say 2008, and the EBIDTA was $300,000, you paid $774,000 for the business.  If today your business has eroded to where your EBITDA is $200,000, that same multiple may apply, but the value would calculate to $516,000.  The thief here isn't the multiple, but the decline in the business performance.  In fact, data from ABA shows that today for businesses valued at less than $1,000,000 the multiple of EBITDA is 2.25 times. The differential between 2.58 and 2.25, or .33, represents a loss in value of $33,000 for every $100,000 of EBITDA.

The other, and perhaps more meaningful fly in the ointment is:  the value of real estate.  This is where most value has been lost since the 2008-2009 economic decline.  Nationally for all segments of CRE, values bottomed about 2009 with CRE industry-wide losses in value of 40-45%  depending on market segment, geographic location, quality of the property, etc. This would include gas station and c-store properties.  The dynamics of CRE value recovery is more complex that envisioning a recovery of your business as a function of improved sales and profits.  The basic relationship, however, is that the value of CRE is determined primarily by the net income it produces.  For investor/landlords, their bottom line that they capitalize (cap rate) is the rent they collect less their operating expenses, termed net operating income or NOI.  If you own the real estate where your business operates, the most direct influence you can have in increasing the value of your property is to increase your bottom line, or more properly EBIDTA or seller's discretionary earnings.