Sunday Digest
Edition V

The Leadership Vacuum:

Without strong leadership, we will remain fractured and mired in confusion. It’s time for our elected officials to be superbly clear in their communication, and that starts at the top. Doctors, scientists, and disease experts all over the world are working tirelessly to limit the spread of disease, cure those who are ill, and immunize the public.  While our elected officials are doing a mighty fine job of supporting these massive efforts, now is the time to rise above politics. Set a plan, bring clarity to our nation, and rise to the leadership level that is sorely missing and needed at this moment. When this happens, we will unite, overcome this epidemic, and repair our damaged economy. In the meantime, what I know for certain is that neither hope nor dubiety are successful strategies.

Here are my insights:

1. Back to basic…shapes, letters and numbers are all the rage.
2. U, V, and W. Three letters that represent recovery forecasts that are being debated around the world by central bankers, economists, analysts, and business leaders. Will the recovery be U-shaped, V-shaped, or W-shaped? V-shaped is most optimistic. This would be a quick bounce back after science has cleared the way for a spectacularly speedy revival. U-shaped is conservative. This would be a slow and steady climb back after the “all-clear” sirens have wailed. W-shaped is a quick bounce back followed by an equally quick drop, repeated again and again over time. These are three very interesting theories with history to support their validity.
3. We are in a changed world. U, V, and W are the letters du jour, but I think we should probably be giving more credence to the letter T. More on this next time.
4. There are three phases that real estate investors and developers experience during troubled times. Phase 1 is the “we are doing just fine and we are not materially affected” period. Phase 2 is the “things are looking a bit shaky so let’s pinch our nose, cross our fingers, keep going, and everything should be fine when our projects are brought to market” period. Phase 3 is the “oh $&%!, we didn’t see this coming” period, a great re-arranging of the deck. I refer to this as the denial, pray, and panic phases of real estate investment.  I believe that we are currently in the mid-denial phase.
5. Warren Buffett spoke to his shareholders yesterday. His message was clear: “THE WORLD HAS CHANGED.” Having disclosed the sale of all airline company shares, Mr. Buffett said it would take three years for recovery of the airline industry. Interesting! Three letters, three phases, three years…seems the Oracle of Omaha is in line with my thinking or perhaps my thinking is line with his. Either way, we are aligned.

6. This month will prove to be more challenging than April for real estate operators.  Piled on delinquent rents, mortgage lenders in retreat, and failed businesses giving rise to increased vacancies are the reality, and it isn’t fun.
7. While there is no general immunity, and some projects and investments will fail, remember “location, location, location” remain the three most important ingredients when it comes to real estate investment. Three ingredients that are key and will never change. And there’s that number three again!
8. Notwithstanding the tremendous support from the Federal Reserve, and the trillions of dollars in stimulus payments and loans for individuals and businesses (and fantastic tax incentives) provided thorough the CARES Act, it is within the realm of possibility that a Phase 3 will befall many real estate developers and investors.
9. Inflation or deflation? Former Federal Reserve Chair Ben Bernanke feared deflation as the Global Financial Crisis took hold in 2008. Deflation…an entirely new concept for the baby boomer generation that had become accustomed to the fight against inflation. Printing money = inflation, simple math. What happened? We print money now with reckless abandon and adjust our monetary policy to increase inflation to at least 2%. The fight against inflation shifted to a fight against deflation. The real issue, in my opinion, is not whether or not the vast amounts of money we are printing will be inflationary or deflationary, but rather what methods we adopt to monitor, measure, and report the prices of goods, services, and assets. I may need to dedicate next Sunday exclusively to this topic. It’s quite fascinating and is critically important to understand and weave it into all future planning.

I must admit, between the practical challenges and all of the national bickering, things felt a bit gloomy this past week. But, once I took stock of all that has been achieved on the health front, as well as on the economic front, I was able to shake it off. Our team here at Christina remains sober in our outlook, committed to our objectives, and focused on maintaining and growing the value of our investments. Being aware of the danger of Phase 3 is the first step towards avoidance of failure. We are aware and we are prepared. 

Warmest regards,

Lawrence N. Taylor

President