2013 Predictions

Making annual business predictions is like completing your NCAA basketball pool sheet once we are to the “Sweet  Sixteen”. But since we are still dealing with a federal budget mess that was to have been accomplished by the end of 2012, let us begin…

 

1. Reg A to $50 Million Great concept; oh, it was passed in the JOBS Act last year? Don’t hold your breath. The SEC has been openly opposed to Regulation A, and just about anything else which would help capital formation. Will there be new regulations? Absolutely. Will they work smoothly? Not a chance in 2013. There is no one with clout consistently  pushing the process.

 

2. Reg D General Solicitation Another great concept. The JOBS Act said yes and our friends at the SEC promulgated regulations along the lines of “just do it; we will tell you later if what you did was ok.” Another endorsement by the SEC to help capital formation! And this  is the group which guides FINRA on how to help the industry? Does it surprise anyone that FINRA’s budget is dependent on the fines it has brought against 30% of the broker dealers still surviving? Don’t look for progress in 2013.

 

3. NTREITs are the Answer Less than 20% of the NTREITs garner over 80% of the capital. This does not bode well for those NTREITs which, even if substantially better structured, don’t make the selling agreement cut with the handful of “do or die” insurance company broker dealers. Do look for the demise this year of ten of the “all or nothing” smaller NTREITs (where they have no other income source to feed their expensive overhead).

 

4. Interest Rates Creep Ok, the Fed promised that interest rates would remain at historic lows  through 2014. There is no Congressional elections this year, so there will be a small but telling increase in the Fed rate in the second half of the year (and you thought politics had no impact on the Fed; how foolish).

 

5. Stock Market Correction   There will be a 10% sell off correction in the second quarter, and then we will hit historic highs later in the year. Is this rational? Do you believe the stock market, in the short term, is a rational vehicle? It sure has been over a rolling 5 years, but in the short term, emotions rule and the traders only make money when the market moves.

 

6. Housing Will be Hot We want what we want and we want it now, actually yesterday would have  been better. Housing demand did not waver but our ability to fund the new/better home was on hold for 4 – 5 years. At least for the next two years, single family home construction and sales will be very strong. Apartments, which held up well during the recession, due to being the only commercial real estate where debt was available, will remain strong as in their favor are demographics (strong growth in the 20 – 30 year old group), limits on buying (student loans) and delayed need for single family housing (marriage happening later).

 

7. Registered Representatives Find New Ways One of the many great things about RRs is that the good survive and the creative find ways around the rules. After the collapse of 1031 TICs, many who sold those products got their real estate license or moved to the RIA side of  the business. The RRs are still raising capital; it just may be a little more difficult for sponsors to access their attention.

 

8. EB 5 No, this is not another rock band from England. EB 5, a green card for $500,000 investment creating 10 jobs, has been around since the mid-1990s, but did not take off until a few years back. Necessity is the mother of invention. Capital markets were dead; EB 5 to the rescue! After numerous lawsuits against Immigration, which runs EB 5, they have finally hired a competent leader for the EB program and are improving the staffing and decision process. Look for substantially more equity to be raised from EB 5 over the next 18 months than we will see in the DST 1031 market.

 

9. Federal Budget If not now, when? Next year is an  election year, so it is now or never.  Both parties seem to have accepted that sequestration is a good thing. They can make cuts and blame the other party. There is little chance of a grand solution, but some movement around the edges will occur. The hope is that the economy will help drive additional tax revenue which will help slow the financial bleeding. America will get healthier, despite the lack of leadership by either party.

 

10. Development The lenders will not suddenly get stupid (ok, maybe over time they will). Substantial pre-leasing will continue to be required for office and retail developments, which will limit  overbuilding. Not so in apartments, where some cities are already being red lined by institutional equity funds. There are HUGE needs for infrastructure improvements, but other than with public private partnerships, there is little in local or state funds available for the next several years.

 

Conclusion  This is a return to basics year.  There is demand for most real estate sectors, if for no other reason that nothing has happened for five years except with apartments, and lenders are returning to doing business. Happy days are not yet here again, but the fog has lifted and many firms are finding ways to be successful. What will 2013 mean for you? Let us know your thoughts.