Video Transcription
All right. Welcome everybody. Paul Esajian here. I, uh, got good responses when I shared a little bit of current market information and data. Um, so I’m doing that again. Uh, quick 15 minute or so share on financial news as, as it’s related to our real estate industry sector. And then, um, with some specifics on the commercial real estate, uh, but all tied into, of course, some shares on the Federal Reserve of previous meeting last week, the future meeting coming up.
So let’s just jump right into it and kind of topic today is framing to ourselves right now. This is an internal question. I know we’ve been asking personally here at uh, our office. You know, when is the right time for us to be more aggressive to start buying properties right in our commercial real estate?
And, uh, you know, our residential real estate business is not as sensitive to timing because you know your local market, you know your local neighborhoods. It’s just buying something that you can improve. Commercial real estate has a few more macroeconomic components to pay attention to. So, we’ve been asking yourself, is now the right time to invest in commercial real estate?
Let’s look at the Fed data, the dates that have happened and meetings and the dates that are coming up that we’re focused on. And talk a little bit about the interpretation of those dates. Let’s talk first, uh, showed this, I believe on some previous TR trainings and shares. The Federal Reserve has.
Raised rates since February of 2022 for a total so far of 10 times. So, we went from a near zero Federal Reserve interest rate, right, uh, in the federal funds target rate in which the banks, uh, overnight funds borrow and. Exchange money using that rate. And we went from basically zero to where we’re at today, which is a range five and a half, 5% to 5.25%.
As of the, uh, last meeting that just happened in May of 2023, the Fed raised rates a a quarter of a basin. Uh, basis point or 0.25%. So that’s what we’ve been all watching. That’s what has been affecting transactions, the market deal flow, pricing, lending, financing, capital markets, all that good stuff.
That’s what’s happened. So, let’s talk a little bit here. The major takeaway from the Med Fed, the, the major takeaway from the May Fed meeting that just occurred. When the Federal Reserve met and decided, are they going to, you know, there’s three choices. When the Fed meets in their meetings, do they raise rates?
Do they pause or not change the rate, you know, do a meeting and say, we’re not changing the rate, or do they cut rates? Right. There are three choices it, the last meeting here in May, 2023, the Fed went ahead and raised rates by quarter point. However, this is the big takeaway that if I had one thing to share with you in a short time period, and that’s what this is all about, right?
What you need to know in a short time period is this, the formal fed meeting and the statement they released, they eliminated the phrase. They eliminated the phrase on their formal statement that they released to, uh, the public and the media. They eliminated. And I quote, the committee anticipates that some additional policy firming may be appropriate.
So I’m gonna tell you right now, that’s a big deal, that they eliminated that sentence from their formal statement that they send to the press that’s in print. They eliminated it. That would indicate that they are very much deciding for the next June meeting if they should raise or not touch it. So the current market sediment, and if you take in the elimination of that sentence, it is very likely that the Fed, starting with the last meeting to the next meeting in June, is looking for reasons why they don’t have to raise rates.
Because again, we’ve all been watching, we’ve all been sharing, this has been the most aggressive Federal Reserve interest rate hike, uh, in the last, you know, 20 plus years. So they have aggressively moved rates up to fight inflation. We know inflation is bad. We know we don’t want inflation to be stubborn.
And the Fed’s main tool to fight inflation, inflation and restrict the economy as we’ve discussed, is to increase the rate at which people borrow money to tamp down and, uh, slow down business borrowing activity and. Frankly that’s, that’s happening. We’re starting to see that. Right? Not, and, and in future, in previous trainings and future trainings, I’ll, I’ll get into more details and show those statistics, but you’ve been, you’ve been reading ’em in the paper, right?
Inflation is coming down not as fast as, not as fast as they would like, but it’s coming down. Um, you know, core pce, which the Fed like polluting food and, and uh, energy costs is a little more stubborn, but, Um, that still the trend is downward. Okay. So major takeaway from the last meeting. They eliminate this sentence, which means there is more, more indication pointing to the June meeting that they will have a, have a, a big think on if they should raise rates anymore.
Okay. Um, so again, We’ll, we’ll, you know, we’ll talk about that and, uh, I wanna show you this list. Maybe take a screenshot, get your camera out, take a picture I’d like you to be aware of. Now we’ve already got the May 5th data. I’m gonna talk about that. Um, we already have the, um, well, sorry, May’s data’s come out.
I kind of, I gotta change this. I gotta change this. Don’t want you to get confused here. All right, how about that? So May 5th data has come out. This one May 8th is, uh, came out. So we’ll be able to share on that. And we’re, we’re at the time of me recording this, waiting for the May 10th Consumer price index.
That’s a big one. All right. The bolded and underlining are big ones here. I want you to be aware of. The c p print, which is basically the inflation statistic print and the June 2nd employment data, uh, print, the June 13th c p I date. Those are gonna be important numbers. Definitely pay attention and watch those before the June 13th Federal Reserve meeting.
Um, and, uh, let’s talk about what has happened so far. May 5th, the employment data. Okay, so they came out and they said the headline was Jobs Report a gain of 253,000 jobs last month versus an expected 180,000. Now what you need to know is that they have been revising the LA in two months. Uh, the last two months they have revised down the jobs gain.
So they’re kind of moving the goalpost on us here as we speak. And they, they’re coming and they’re sharing, Hey, the jobs report was still strong. But you have to understand that, you know, they kind of set some of the, the goalposts and the data, and they have been revising down that, uh, estimate the last two months.
So it is going down just not as fast, just not as strong as, as they’d like, as they’d wanna see. And I’ve said this before, the current jobs data is behaving exactly how it, how it has in every other cycle. We don’t start losing jobs, right? We don’t start losing jobs until we start cutting rates, cuz we’re now, you know, the fed usually then is at the point where they’ve done a tightening cycle, they’ve slowed down the economy.
Uh, and then there’s been some, you know, some good pressure that has, uh, restricted. The activity of deals, business financing credit, and then they start cutting rates to rev up and revive the economy. And that’s when they start cutting rates. That’s when you start to see these jobs reports come in negative.
So, uh, you know, from, from the historical data that this jobs report, its what people are focusing on. So the headlines are focusing on, but it’s not. Doing that much different, frankly, then in other cycles. It just happens to be what they’re using, which I understand of why they need to keep, you know, rates high and battling inflation and, and beating that drum.
But this is another interesting share. The unemployment rate dropped at 3.4%, however, the participation of the amount of people in the, in the employment pool is down 0.7%. So if you take 3.4% plus 0.7 unemployment is actually more like 4.1%, maybe a touch higher, right? So, so that’s significant. You gotta understand all these different data points.
So take away on the, uh, for me, to you on a straight line here, is that the employment data, the quote had a gain of 250,000 jobs last month, but they’ve been lowering this number. It’s, it’s, you know, it’s going down. Uh, I. I, from my reading and research, continue to believe that this number will continue to, um, shrink.
As you know, it takes time for these interest rate hikes to work through the plumbing of the economy. All right. And then secondly, I really think we’re at an unemployment rate. When you put these statistics together, the amount of people pre-pandemic that, uh, pre Covid that are outta the employment. Pool is closer more to four plus percent.
Okay. Now this is very interesting. On, on May 8th, the, uh, from the May meeting, which was a couple days before May 8th, the Fed Jerome Powell, uh, the chairman said, we’re gonna look at the senior loan officer opinion survey, and we’re going to, we’re gonna learn from that if the credit and lending standards have been tightened, because if that’s has been the case, Then that will take the place of us raising rates to battle inflation.
So again, said another way. The Fed specifically pointed out if the banks are tighter on their lending standards and tightening on their credit, meaning they’re lending less money to less businesses, uh, and borrowers, then we, uh, as the Fed, don’t have to do as much work to battle inflation, meaning we don’t have to use our main tool of raising rates.
Well, in my opinion, now I’m gonna talk firsthand in my opinion. Uh, we have absolutely seen restrictive lending, tightening of credit, and le and, and much harder, uh, bank lending standards across the board businesses and personal businesses and small businesses, and you name it, regional, small banks.
Absolutely. And really the report that came in, said as much, maybe not as strong as I just said it, but bank said factors including an uncertain out economic outlook, reduced tolerance of risk and concerns about liquidity, prompted them to tighten standards on loans to businesses. The survey also said standards tightened and demand weakened for credit card, auto, and other consumer loans.
46.1% of banks reported tightening lending standards for large and medium size firms. That’s up from the last report by, by, uh, a couple percentage points. 65 domestic banks, 19 US branches and agencies of foreign banks responded to this survey. Okay, so it’s not every bank in the world. Uh, this is an interesting point here.
Banks received the survey on March 27th. Their responses were due by April 7th. Well, folks, since that time, we’ve already had, uh, a couple other bank. Shuffles, right? We have First Republic Bank, basically kaput, the government approved and you got JP Morgan Bank, you know, too big to fail bank, which is not a bank the government loves to support because they are so big.
But the government said, Hey, you can go ahead and take them over. So now First Republic Banks out and don’t forget, right? This is all in the context of. And it’s just funny to, to repeat the lines of the Fed and talk here when they say, Hey, uh, we’re gonna look to see if banks have done, have gotten worse, have done less lending, because if that’s the case, we don’t need to ra raise rates.
Well, here’s my share. Don’t forget three of the four biggest bank failures in our history, in our history. Occurred in the last two months. So we’re, we’re in history right now, right? Three of the four biggest bank failures occurred in the last two months. So there is no doubt in my mind that banks, and, and I’m experiencing it, I’m sure all of you have, have tightened lending standards, tightened credit, have done less lending, and it’s more restrictive.
That’s gonna help slow down the economy. There is no doubt about it. Alright. And then the two dates that, uh, I left on here cuz they’re, again, really important. May 10th consumer price, uh, index and print. And then our June Federal Reserve meeting, right? So, um, and also the June 13th c p I print. Okay, so really important, uh, I did wanna show this, actually check this out.
This is, uh, if you wanna go to cmegroup.com. This is a, a website. That does the kind of market data of what they think is going to happen. So what you’re reading here is that the current Federal reserve rate is five 5% of 5.25%. Okay? 81% believe in this, in this poll and target 81% from this website research study.
This is current right now. This is right now today, as I’m talking, right, which is, uh, uh, US sitting here. Where are we at? May, May 8th. This is 81%. Believe that in June, the target rate after the June meeting is gonna stay the same. 81% of people believe that, uh, from the, from this. Fed Watch tool, 18% believe that they will raise a quarter of a basis point.
Okay? So currently the market sediment is very high that they’ll pause. Very low that they’ll continue to hike. Okay. Again, what really matters is, uh, some of these, some of these, uh, statistics that will come out before the June meeting. But here’s, here’s my last thing I wanna say on whether or not the Fed raises rates, I don’t think data and statistics will be the main decision factor for the Fed.
I think they have done enough. I think they ha, I think they know. And have seen enough of the trajectory, uh, the bank, uh, banking, whether you want to call it a crisis or teetering on crisis or sensitivity, I think there is enough going on at this stage where the lending standards, uh, of what’s been happening, uh, what the Fed is watching.
I think even with these, with these statistics that’ll come out on these dates, it’ll have to be. It’ll have to be the economy saying it’s just doing super, super, super fantastic, I believe for the Fed to raise rates in the next June meeting, but we shall see. Okay, so, you know, here’s an important point.
You know, I, I posed the question, right? Is now a good time to invest in my opinion with that, with that short share, folks, with that short share, in my opinion, Now is a great time to be looking at an opportunity to get back in the game, because once they pause, everybody’s gonna know they paused? Okay. And everybody’s gonna start coming in off the sideline and everybody’s gonna get a little more active.
Um, so rates, interest rates for lending has settled a bit. Um, they’re, they’re better than they have been in some time. Um, But I really firmly believe that on this question is now the right time to invest. Meaning to get back in the game, to start hunting, to start putting some work to play. I believe that there is this window of opportunity.
Um, and, and here is my point. I just kind of summarize it here. There’s a window of opportunity right now where there are less people in the marketplace looking to transact because every, everybody’s sitting on the sideline, right? The fed is indicating the end of a tightening cycle. I mean, if you, again, if you go back to this line right here, where am I at?
Where am I at? Oh, here. I’m gonna just go back and show you. If you go back to this point right here, the formal. Uh, fed statement that was eliminated is the committee anticipates that some additional policy firming may be appropriate. So that’s how I can tell you, uh, as a pretty strong opinion that the Fed is indicating the end of this tightening cycle, whether it’s June or the next meeting.
Uh, the point is, Now is the time to, to be a little more opportunistic, be a little more, uh, out there and aggressive to start to look to allocate funds into commercial real estate because pretty soon everybody’s gonna get back out there. Once they pause and then, you know, we already established, once they pause, they will, they’re on the clock to when they cut.
And that’s when you know the market starts picking up more competition. And it’s, and this window of opportunity close closes where you have less competition. And those with the courage and knowledge and understanding get to benefit from a unique, a unique circumstance of opportunities that are willing to take action before the market takes off.
Okay. Um. I did wanna show and share, this is really important. I did wanna show and share. We love to do, you know, in every market, obviously we’re biased. We love real estate. We’ve been investing very strongly since 2004 in, you know, through that cycle. And now here, uh, we love real estate. But what I wanna share when you’re investing and looking at opportunities, a great hedge on a market.
Where it’s down or even considered a recession, is that workforce housing does better. It performs better than Class A housing. So workforce housing is one of the secret hedges that we like. When the economy markets are cool, sorry. When the economy cycles slows or even heads into a recession, it performs better.
Okay. On their rent growth, then class A. So that’s a good hedge in a uh, cycle where, hey, if you think maybe there’s going to be some, some slower growth or even a recession, workforce housing folks. Now last thing I wanna share with you is how to, how to be identifying, looking and picking the next market you invest in.
Right. We’re always looking for an expanded and diverse economy. High growth and population, right? Demographics, where people are moving, where jobs are being created. Business friendly, environment, attractive quality of life cuz that’s why people live will move there and live there. And then of course, affordability.
That’s a big deal and we’ve seen that as people have migrated. From some of the traditional regions and hotbeds to some of the newer hotspots, right? Uh, the smile states, the southeast, uh, Florida, Texas, Arizona, right? Infrastructure and investment is another main thing. When we’re looking at, you know, should we invest in this market?
Are they investing a lot in infrastructure in, uh, improving the area and, and making investment in the location? And, you know, I’m gonna do a, um, a webinar real shortly that you can jump on that’ll be longer than this quick share cause I wanna wrap it up. And that is, um, specifically we like Arizona.
We’ve been tracking this market for three to four years, but we haven’t found the right opportunity to get in the market because it’s been. Pretty hot, actually. Pretty, uh, pretty popular and specifically in Phoenix. But if you look at the state and then, uh, on my next training, I’ll do it. Will, I’ll talk about Phoenix specifically.
Arizona’s the number one state for foreign direct investment in 2022. It’s the number three in economic performance over the last decade. Number three. Think about that in the last 10 years. Number five, best state for business in 2022. Okay, and number five for attracting talent ranking in 2022. So, uh, I’m gonna do a, again, a longer share in training on how to pick a market and then specifically the market we like, which is in Phoenix, Arizona.
And, uh, that opportunity. But folks, that’s what I wanted to share. Uh, l I hope you enjoyed this. Got it. Around 25 minutes, it looks like. Uh, quick share. Got some takeaways. We’ll keep, I’ll keep posting and sharing the, uh, headlines, the metrics and the data we are watching and feel important and we’ll talk soon.
