When the correction comes, how long will it last?

It’s unclear from this vantage point, but New England faces headwinds

I had a long list of house and yard projects this summer and I got most of them done, including splitting three cords of firewood from two big black cherry trees taken down last year, so I will be warm regardless of the economy and what the political funny season may bring.

Bill Norton

At last, the pundits have reached some kind of consensus that there will be some level of economic slowdown/correction in 2020. I concur. How much and for how long are yet to be determined. Especially given that President Trump is anything but predictable.

I have been reading more economic and geopolitical history this year, including the period of the 20s, 30s and the onset of World War II.

I am not a fatalist and do not see World War III around the corner, but it is very difficult to be optimistic about where we are and where we are heading. As a commercial real estate guy (40 years and counting), I look around and ponder the fundamentals. The most recent drop in the Federal Reserve funds rate confounds me. With a strong consensus view that a slowdown is imminent, why are we reducing rates now? It feels like the classic ready, fire, aim!

One of the young folks in our shop came in the other morning excited to share the news that a community bank had committed on a real estate loan at 3.2% fixed with a 30-year amortization and 15-year term! How can that be, he asked? Well, if the bank is accessing 20-year funds at less than 3.2%, there is still a margin there. And as important, they may be betting the borrower sells or refinances before the 15 years are up.

While we are not seeing many synthetic financializations, it is very, very competitive out there.

I will be honest, my understanding of economic theory regarding tariffs is wanting. We live in a world of globalism and globalization. Money for lending is a commodity and there is plenty of it out there. I am working with a client on a large brownfield redevelopment project. The construction budget is huge! But with relatively cheap financing, it appears to pencil out. The underlying premise is that while things may slow down, they will not crash. That is a reasonable, but not certain viewpoint.

Two of our partnerships have been sitting on cash for over two years. The strategy is to wait for the correction and have capital to deploy through this “opportunity fund.” It is the classic buy low/sell high premise. Frankly, I thought it would have occurred by now, and I am more convinced than ever that the slowdown/correction is imminent. But how slow and for how long eludes me.

Here in New England, I see three main challenges: the aging and graying of the population; the very high utility costs; and an understaffed construction sector where all fields are looking for productive workers but cannot find them.

All three of these will be headwinds to the post-correction recovery in New England. With current levels of debt (both public and private), if the recovery is tepid or very slow to materialize, it will put a lot of stress on housing, consumers, auto sales. Only time will tell. Hopefully by next Labor Day we can see light at the end of the tunnel and things are on the mend.

Bill Norton, president of Norton Asset Management and an honorary member of AIANH, is a Counselor of Real Estate (CRE) and a Facilities Management Administrator (FMA). He can be reached at wbn@nortonnewengland.com.

Categories: Opinion, Real Estate & Construction