I’ve always believed it’s better to have an opinion and later be found wrong than to be a person who has no convictions, or courage to state one’s opinion, and be safe from the criticism that naturally follows from missing the mark. As the saying goes, “Fools rush in where angels fear to tread” applies to me.
So where are we headed in 2015? Before I give my thoughts on this topic, let me start by saying that the most important events in 2014 were not anticipated.
- No one expected a 40% drop in crude oil prices.
- The consensus at the beginning of the year was that U.S. Treasury rates would increase. Instead 10-year Treasury yields have substantially declined from 3.01% in January 2014 down to 1.95% as of January 6, 2015.
- No one anticipated that Russia would mettle in the sovereign affairs of Ukraine and the economic consequences that would result from Europe and U.S. sanctions.
And I’m confident there will be other important events that will occur in 2015 that no one, not even the most seasoned experts, will have anticipated. Let’s just hope these surprises are mostly favorable. That said, these are my predictions for 2015:
- Despite the slowdown in the world economy, chiefly in Europe and Japan, I am optimistic about the U.S. economy. Most of the economic indicators are pointing in the right direction.
- Job growth and the unemployment rate are steadily improving.
- Employees are quitting their jobs in larger numbers indicating they have confidence they can find a better job elsewhere.
- Auto sales are showing solid progress.
- U.S Home prices have increased 6% in 2014 and 8% in Oregon and Washington.
- The American middle class has been severely squeezed since the Great Recession as wages, adjusted for inflation, have declined by about 3% since 2009. I believe this year that trend will slowly reverse itself and positive real wage growth in wages will begin happening.
- Crude oil prices will begin to rebound in 2015 but before they do, the U.S. consumer will feel the positive influences of lower gas prices. It is estimated that the average American consumer will save $725 annually in lower gas prices! That’s like receiving a huge tax cut which consumers can spend on other things further spurring the economy.
- Russia will not be able to correct the downward economic spiral caused by the dual impact of the decline in oil prices and the sanctions imposed by the West for their imperialistic Ukrainian adventure. And even though I believe oil prices will rebound in 2015 it will not be fast enough to prevent Russia’s default on the European debt obligations. A Russian default will have little or no direct impact on the U.S. economy. But with any default there could be unintended consequences that no one can predict. Stay tuned.
- With an improving economy The Federal Reserve will deliver its first rate hike since well before The Great Recession. By mid-2015 labor conditions will have improved such that they feel they can raise rates without negatively impacting the economy.
- This year about $100 billion in CMBS loans will mature and 20% of these loans will be on properties located along the Pacific coastline. Trepp researcher Susan Persin predicts that refinancing of some office, industrial and retail properties could prove problematic. The LTV ratio for many of these loans are considerably higher than those loans recently originated. This will require some owners to add additional equity in order to refinance at current LTVs.
- On the flip side many of these CMBS financed properties over the years could not be sold or refinanced because of huge yield maintenance prepayment penalties. Now freed from this prepayment penalty I expect to see many of these properties listed for sale. This will help improve the equilibrium of the commercial real estate market which has tilted way too much toward sellers in recent years. A little more product on the market will benefit us all.
In summary, I expect both the U.S. economy and the commercial real estate market to be healthy, perhaps the best we’ve seen in a long, long time.
Have a need for financing? Call me today to discuss at (503) 614-1808
Sources: As $1.4 Trillion comes due, what the outlook for refinancing? by Susan Persin, Trepp, Real Estate Weekly, January 8, 2014; Why Lower Gasoline Prices Are Like A Tax Cut, by Segment Wealth Management, Seeking Alpha, December 8, 2014; Economy Clearly Gaining Momentum by Tim Duy, Seeking Alpha, December 7, 2014; A Russian Default? By Shareholders Unite, Seeking Alpha, December 8, 2014; Wage growth is missing from job resurgence by Chico Harlan, The Oregonian, November 30, 2014; Businomics Newsletter, December 2014: More Economic Growth by Bill Connerly; Marc Chandler Positions for 2015: It’s Not The Things We Know That Get Us Into Trouble, Marc Chandler, Seeking Alpha, December 29, 2014.