As we all navigate these unprecedented and challenging times, we want you to know that we are working hard to maintain effective business operations and open channels of communication with all of our clients. Fortunately, we utilize and rely on technology as the backbone of operations for ABI. Our digital systems and virtual communications capabilities have allowed us to seamlessly and efficiently transition to a mostly remote working model. We are operating with our full capabilities and continue to provide the responsive and timely feedback we are known for.
Our team remains fully committed to providing our expertise in brokerage and advisory services, and serving as a resource for all relevant data and information. We will continue to help multifamily stakeholders make sound decisions in real-time, maintain maximum performance of their investment assets, and synthesize immediate, short, and long-term goals throughout this highly unusual time.
Quite simply - WE ARE HERE FOR YOU - in the best of times and the worst of times. Our seasoned advisors have been through it all. In our business, rents and occupancy are the pillars to stability. We are tracking both and can help you stay ahead of the changes in your submarkets.
It is time to think and act fast so reach out to one of our brokers over the phone or email. At the very least, you will enjoy a good conversation during these socially distant moments. We are all in this together. Here’s to strong health and rapid resolutions to the variety of challenges we collectively face. More power to all of you!
- The Team at ABI Multifamily
The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy's true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity. To help quantify the amount of stimulus, please consider the graph below.
Federal Reserve (Fed) stimulus comes in two forms as shown above. First in the form of targeting the Fed Funds interest rate at a rate below the nominal rate of economic growth (blue). Second, it stems from the large scale asset purchases (Quantitative Easing -QE) by the Fed (orange). When these two metrics are quantified, it yields an estimate of the average amount of stimulus (red) applied during each post-recession period since 1980. It has been almost ten years since the 2008 financial crisis and the Fed is applying the equivalent of 5.25% of interest rate stimulus to the economy, dwarfing that of prior periods.
The graph highlights that the Fed has been increasingly aggressive in both the amount of stimulus employed as well as the amount of time that such stimulus remains outstanding….the rise in the prices of many financial assets is not based on improving economic fundamentals but simply the stimulative effect that QE and low interest rates have on investor confidence and financial leverage.
The long economic cycle that we have been enjoying is, in part, a reflection of loose monetary conditions and low interest rates. Exhibit 17 is a simple but effective way to demonstrate this effect. Taking data back to 2009, the start of the period of extraordinary monetary policy, we can see a very big difference between ‘prices' in the real economy – measures of wages, consumer price inflation, house prices, commodities – and asset prices. Also shown here is the long-run average nominal GDP growth and nominal GDP growth over this period for the US and Europe (in red). Financial assets have significantly outstripped both nominal GDP growth and inflation in the real economy, largely as a result of rates staying low:
In the low-return world I described in the memo, the options are limited:
(1) Invest as you always have and expect your historic returns.
(2) Invest as you always have and settle for today's low returns.
(3) Reduce risk to prepare for a correction and accept still-lower returns.
(4) Go to cash at a near-zero return and wait for a better environment.
(5) Increase risk in pursuit of higher returns.
(6) Put more into special niches and special investment managers.
It would be sheer folly to expect to earn traditional returns today from investing like you've done traditionally (#1). With the risk-free rate of interest near zero and the returns on all other investments scaled based on that, I dare say few if any asset classes will return in the next few years what they've delivered historically.
Thus one of the sensible courses of action is to invest as you did in the past but accept that returns will be lower. Sensible, but not highly satisfactory. No one wants to make less than they used to, and the return needs of institutions such as pension funds and endowments are little changed. Thus #2 is difficult.
If you believe what I said in the memo about the presence of risk today, you might want to opt for #3. In the future people may demand higher prospective returns or increased prospective risk compensation, and the way investments would provide them would be through a correction that lowers their prices. If you think a correction is coming, reducing your risk makes sense. But what if it takes years for it to arrive? Since Treasuries currently offer 1-2% and high yield bonds offer 5-6%, for example, fleeing to the safety of Treasuries would cost you about 4% per year. What if it takes years to be proved right?
Going to cash (#4) is the extreme example of risk reduction. Are you willing to accept a return of zero as the price for being assured of avoiding a possible correction? Most investors can't or won't voluntarily sign on for zero returns.
All the above leads to #5: increasing risk as the way to earn high returns in a low-return world. But if the presence of elevated risk in the environment truly means a correction lies ahead at some point, risk should be increased only with care. As I said in the memo, every investment decision can be implemented in high-risk or low-risk ways, and in risk-conscious or risk-oblivious ways. High risk does not assure higher returns. It means accepting greater uncertainty with the goal of higher returns and the possibility of substantially lower (or negative) returns. I'm convinced that at this juncture it should be done with great care, if at all.
And that leaves #6. "Special niches and special people," if they can be identified, can deliver higher returns without proportionally more risk. That's what "special" means to me, and it seems like the ideal solution. But it's not easy. Pursuing this tack has to be based on the belief that (a) there are inefficient markets and (b) you or your managers have the exceptional skill needed to exploit them. Simply put, this can't be done without risk, as one's choice of market or manager can easily backfire.
As I mentioned above, none of these possibilities is attractive or a sure thing. But there are no others. What would I do? For me the answer lies in a combination of numbers 2, 3 and 6.