“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”
George Bernard Shaw.
Painted by the auditorily notorious Vincent van Gogh at Arles in June 1888, I ‘get’ “Cabanes Blanches aux Saintes-Maries,” or “Three White Cottages in Saintes-Maries.” With blinding blues and orange hues, this oeuvre marked a turning point in van Gogh’s career following his leaving Paris and Impressionism behind. Another unreasonable man is self-described as such. In Eli Broad’s autobiography, The Art of Being Unreasonable, we learn that the sole person to ever found two Fortune 500 companies in twodistinct industries became entwined with van Gogh upon learning that his masterpiece was too fragile to be widely exhibited. And so, the billionaire philanthropist’s 1972 acquisition, one of his first, was exchanged for “Red Painting,” a blood-red panel by Robert Rauschenberg. Broad and his wife Edyth would never again buy 19th century art. That’s a shame. I was almost two-for-two on the edifying imbibement front. Two weekends ago was the Degas/Manet exhibit at New York’s Met, a visual feast. Tragically, my taste proved too pedestrian for the Broad’s modernity.
Downtown Los Angeles’ breathtaking Art District architecture, however, more than compensated for my lack of cultural refinement. As we clear out the cobwebs to get our trading day game back on after the third of four stock market holidays in three months (it’s all uphill to Memorial Day after President’s Day next month), I find myself pondering the latest ‘60 Minutes’ moment. On the air since 1968, by the time a story breaks on this national icon, the real news has typically already been made. Such is likely the case with this past Sunday’s Commercial Real Estate feature, “How Empty Office Buildings Are Setting Cities on a Doom Loop.”
As much as I enjoyed my annual jaunt to LA, I could not help but notice how quiet downtown is…in the middle of the workweek. Per KRBA, of the $2.6 trillion in commercial mortgage-backed securities (CMBS) debt maturing in the next 15 years, at roughly $500 billion, 2024 will see the biggest annual slug of required refinancings. Specific to Los Angeles and Orange County, nearly 60% of the $21 billion in balances coming due are already in distress, according to Morningstar.
While Office, typical suspect sector, is conspicuous in its presence, one of the most high-profile California properties going bad is a $2.7-billion Blackstone-owned portfolio of 138 warehouses. According to TheRealDeal, the debt scheduled to mature in August was placed on a watch list last November. Though unthinkable a year ago, even Industrial CRE is at risk as the mighty U.S. consumer stumbles into recession. Looking out a few months, given how rapidly household debt charge-offs at banks are rising, one can only imagine what retailers will have to say when they close out the fourth-quarter earnings season.
According to LinkUp, which tracks job postings on 60,000 U.S. corporate employer websites, the slowdown worsened into yearend. The average number of days job listings were posted before being removed rose in each of the three months ended December. The longer listings linger, the less demand there is for labor. At 50.2 days, last month is up from 46.0 in November, and the first time a reading north of 50 has been observed since early 2020 (upper left chart). And while December postings contracted for 91% of tracked industries, the most notable related to Industrial CRE: Within the Warehouse sector, Couriers – a subsector that saw the strongest growth in 2023 — ended the year -34.3% month-over-month.
Weak consumer demand isn’t the only drag on warehouses. According to December’s GEP/S&P Global December Global Supply Chain Volatility Index, global supply chain capacity was underutilized to the greatest extent since July – the index fell to -0.44 from November’s -0.34, marking a ninth straight month of decline (upper right chart). Overall slack at producers is one of the highest since early 2020. So deep is Europe’s recession, manufacturers’ purchasing is at a two-decade low in the region. Order books for suppliers to North America and Asia also faltered in December leaving Asian supply chains the most underutilized in 3 ½ years. Defying the financial media’s shipping cost hysteria, GEP’s David Doran explained that “Rising spare capacity at suppliers worldwide means that the end to the global manufacturing recession is still some way off. …orders at intermediate and capital goods manufacturers are still slowing, which indicates stronger headwinds ahead, providing companies with greater leverage to drive down prices in 2024.”
Given the whiplash induced in 2023 by the New York Federal Reserve’s Empire manufacturing survey, we’ll be more closely attuned to what Fed Chair’s chief lieutenant Christopher Waller has to say about inflation’s prospects later this morning and Alcoa’s earnings, which hit tomorrow. The largest U.S. producer of aluminum could be poised to disappoint anew having given it halted production at one of its three Western Australian refineries to contend with cost-cutting measures. With how earnings season has kicked off, with a handful of banks widely missing their marks, investors would be none too surprised (lower left chart). Fourteen months ago, Amazon set off a wave of white-collar workers, laying off 10,000 workers in “corporate positions and technology roles.” A third such white-collar layoff wave has rolled onshore threatening stocks’ most steadfast source of support – passive inflows via professional’ allocations to their 401ks (bottom right chart).