My Predictions for 2024 – This is Alarming

My outlook on future trends is bleak. But I focus on the things I can control with my skills and knowledge.? The success of any project depends on the team. If you need an experienced receiver or property manager, I am here to help.

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The evidence shows that the decline of the U.S. economy has begun, contrary to what we hear from the political elite.? If you invest in commercial or residential real estate, you need to read this to the end. You will find that these are issues that come up again and again and cannot be ignored. They are clearly top of mind issues for real estate professionals.

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Soft Landing - It is very unlikely that the economy will come roaring back in 2024. My research indicates that any notion of a mystical "soft landing" is out the door and the demise of the U.S. economy is imminent:

• According to Bloomberg, spot container shipping rates jump 173% on Red Sea threats. Suez traffic is down 28%. This may be a short-term problem, but it will have long-term consequences. When shipping rates go up, the cost of goods goes up, and that feeds back into inflation.? Consumers in the United States and around the world are really struggling to make ends meet. Wage growth is not keeping up with prices, and people cannot afford the standard of living they want.
• FED rate hikes have brought down inflation along with the entire economy. The FED has inverted the yield curves to the greatest extent since the 1980's and to the longest extent. What happens in a debt based economy, when you pull back on the credit creation mechanism, then you run through all the money in the system and liquidity crises begin. Banks usually borrow short term and lend long term, but when long term rates are lower than short term rates, banks lose money and the landing stops. Also, when banks tighten landing standards, it restricts the creation of new credit in the monetary system and growth stops. But if you have a lot of debt, you need money created by new debt to pay off the old debt.? When access to new debt dries up, you start to see delinquencies, defaults, and banking problems.
• Consumer demand is not there. American consumers are maxing out their credit cards. Disappointing holiday retail numbers were helped by "pay now and pay later" loans. According to the Federal Reserve Bank of New York's latest Quarterly Report on Household Debt and Credit, total household debt rose 1.3% to $17.29 trillion in the third quarter. Mortgage balances increased to $12.14 trillion, credit card balances increased to $1.08 trillion, and student loan balances increased to $1.6 trillion. Auto loan balances rose to $1.6 trillion.
• The U.S. labor market is weakening; more jobs will disappear soon. Employers are not hiring. The worst case scenario for a U.S. worker comes in 2024. Manufacturing PMI is at 47.4% in December 2023 according to ISM. 50% indicates no change, anything below 50% is a contraction. This continued contraction shows lower demand as new orders and backlogs continue to fall. When new orders and backlogs go down and you have workers standing around with nothing to do, employers will eventually send them to the unemployment lines.? Retail and service jobs always follow manufacturing job trends.? Job postings are a leading indicator of future employment rates. According to Avison Young, job postings are down: Engineering, architecture and construction, down -14.1%; Consulting, research, accounting and staffing, down -33.6%; Media, PR, telecommunications and entertainment, down -35.1%; Banking, finance, insurance and real estate, down -35.6%; Law firms, down -41.6%; Technology, down -49.2%.
• The FED is always behind the curve. Buckle up, we know the FED is going to cut rates in 2024. The problem is that we have been to zero twice now, and if we go to zero again, it may not have a stimulative effect on the U.S. or global economy. Historically, every time the FED has cut rates, it has been just before or during a recession.? To illustrate this, see the attached chart of FED economic data showing the relationship between U.S. recessions and Federal Fund rates.
• Banks are facing liquidity problems; we could be on the verge of the next global financial crisis. Something serious went wrong in the banking system on Friday, December 29, 2023, setting the stage for what could happen in 2024. The Secured Overnight Financing Rate (SOFR) suddenly spiked to a record high. By regulation, banks rely on collateral such as Treasury bills and there was not enough to go around. This problem was temporary, but when everyone is running for collateral at the same time, it could be the first sign of cracks in the plumbing of the banking system.
• The catalyst for the next global financial crisis could also be a commercial real estate crisis. According to the St. Louis FED, there are approximately $2.9 trillion of commercial real estate loans in the U.S. (50% more than at the beginning of 2008), of which nearly $1.5 trillion will mature before the end of 2025. In the Chicago market, approximately 26.4% of commercial loan volume, representing approximately $10.1 billion, will mature by the end of 2024. As of December 2023, office occupancy remained at 50% to 60% of pre-pandemic levels. Office occupancy rates no longer support asset values and the underlying debt. Higher interest rates, lower asset values, increasing taxes, insurance and operating expenses while operating income shrinks will leave borrowers with few options. According to the National Bureau of Economic Research, approximately 14% of all commercial real estate loans and 44% of office building loans now have negative equity. As money runs out, borrowers will default. A 10% to 20% default rate on commercial real estate loans would result in approximately $80 billion to $160 billion in additional bank losses.? The National Bureau of Economic Research shows that anywhere from dozens to 300 mostly smaller regional banks are at risk of runs.
• Here are some highlights from the commercial real estate market:

o?? Aon Center, the third tallest office tower in Los Angeles, sold for approximately 45% less than its last purchase price in 2014.

o?? Corporate landlords such as Blackstone are making strategic defaults on commercial properties across the U.S. For example, Blackstone's 1.4 million-square-foot Hughes Center in Las Vegas with 42% vacancy went into special servicing. Blackstone stopped making payments on the $325 million loan. Blackstone wrote off the Playa District office campus in Los Angeles, CA, which has a $483 million loan held by Deutsche Bank. Blackstone defaulted on a $274 million loan tied to Club Quarters hotels in Chicago, San Francisco, Boston and Philadelphia and is negotiating a deed-in-lieu of foreclosure.

o?? According to the Green Street CPPI, the value of multifamily properties across the U.S. declined -30%. Office buildings fell -35%. Industrial buildings fell -16%. Malls went down -20%. Strip Retail was down -18%. Healthcare went down -20%. Lodging declined -7%. Mobile Home Parks declined -15%. Net Lease was down -19%. Self Storage was down -21%.

o?? According to the Green Street CPPI, office building values declined in all 10 top U.S. markets: San Francisco, down -58.9%; Chicago, down -48.3%; San Jose, down -48.0%; Philadelphia, down -45.1%; Los Angeles, down -44.6%; Orange County, down -38.4%; Dallas/Fort Worth, down -37.6%; New York, down -37.3%; Austin, down -31.5%; and Boston, down -24.2%.

• According to the National Federation of Independent Businesses (NFIB), small businesses have been hit hard by the slowing economy. Their revenues are collapsing. Small business revenues reported in November 2023 were -32% less than the previous year.? Also according to the NFIB, since March 2023, small businesses have been shedding jobs, not adding them, which is contrary to what you see and hear in the media.
• U.S. home-purchase applications fall to record lows despite interest rates dropping from about 8% to 6.5%, suggesting lock of demand. The Fannie Mae (FNMA/OTCQB) Home Purchase Sentiment Index? (HPSI) fell 0.6 points in November. Consumers’ perceptions of home buying conditions remain overwhelmingly pessimistic, as only 14% of consumers believe it’s a good time to buy a home, a new survey low.

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As I look for answers, I see signs that the retail sector is in trouble, the housing market is in trouble, the commercial real estate market is in trouble, the manufacturing sector is in trouble, the banking sector is in trouble, and the labor market is in trouble.? This is going to send the U.S. economy into a tailspin. We are heading into a global synchronized recession.

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