2016 has been an interesting year for the investment community, with a major stock market swoon and rapid recovery accompanied by debt markets tightening. All the while investors have been wondering how the political landscape will impact us. Nonetheless, despite the often dire headlines touting economic decline in China or the impending end of our lengthy economic recovery, the real world looks quite bright to me. Fortunately, as one of those tasked with touring properties both nationally and internationally, I get to experience the activity in a variety of markets from major international cities to regional hubs — Newsflash: things look pretty good out there!
Having recently toured assets in Eastern Germany, Italy, regional UK cities, Charlotte, North Carolina and Madison, Wisconsin, I can say that economic activity is uniformly good. There are cranes in the skylines and patrons in the restaurants. The airports are busy and traffic snarls are universal. I would not say that “business is booming” everywhere, but solid recoveries are evident where I have traveled recently. Moreover, as I think purely about the hotel space, worries about new hotel supply coming on line, though valid, are overblown. In fact, the “backup” in lending for development is providing a natural brake on the traditional over-exuberance that typically foreshadows an impending decline in hotel performance.
From having lived through a number of business cycle highs and lows, I am quite content with the GDP slogging along at 2% with the “threat” of Fed-induced recession around the corner. Today, we have strong employment and low cost of capital, both provide solid fuel for continued growth. Moreover, if there are pockets of “overexpansion” in cities like New York and London, the key here is pockets! In many markets around the globe, particularly in Europe and secondary markets in the US, properties are still performing well below peaks, offering investors attractive risk-adjusted returns. The key, as always, is knowing where to look! Fortunately, with the REIT’s licking their wounds from depressed stock prices and many institutional investors pulling back in anticipation of an economic decline, bid processes are less competitive today, resulting in more compelling valuations for buyers.
Unlike Alfred E. Newman, I do worry about the future, but I have often felt that “climbing a wall of worry” is a great time to invest. Although the FED may still have the punch bowl of low rates available, the lending community has headed home early this time, for the most part keeping bad projects on the shelf. Lastly, I’ve heard it said that courage is not the absence of fear, but rather the willingness to proceed in the face of fear. I heartily concur, as courageous investors typically enjoy their results. Wishing you all a continued cautious but prosperous 2016!