It is the time of year when I usually reflect, take stock of the past year, and plan for the year ahead with the best course of action for our investors, our funds and the firm in mind.
At the end of 2018, we were looking at choppy results in the equity market and the bond market looked like it was ending a long bull run. This year has brought us a solid year in the domestic equity markets along with an about face in interest rates. After several rate hikes, we have now seen the Federal Reserve reverse course and lower rates. Candidly, this reversal was not a surprise to me when one considers the adoption of negative interest rates in Europe.
The lower interest rates were welcomed by much of the real estate world. Rate increases coupled with the tax law changes that impacted deductibility of state and local taxes (SALT) had a negative impact on housing sales in late 2018 in California, as well as several other markets.
Preparing for this and other factors in advance, we adjusted our strategy with regard to our residential land business with a focus on a more entry-level product, as we believe this is the segment of the market with the greatest opportunity, as well as the strongest mitigation of volatility in the event of a slowdown in the economy. We haven’t abandoned luxury housing, but we feel higher-end products need to be both well located and designed to succeed today, which limits the number of these projects we decide to take on. Our team is focused not only on achieving entitlements, but is paying more attention to product design and how it will be perceived by the consumer, as we sharpen our strategies and work to improve the probability and level of outcomes.
One of the topics of daily discussion seems to revolve around either an upcoming recession or a bubble. With regards to a real estate bubble, our general consensus is that as a whole real estate is not in a bubble environment and overall is well balanced with regards to supply and demand. Even with that generalized assessment, we need to remind everyone that real estate is a local business and we have to focus on specific submarkets and how we forecast them to behave in the coming years.
We also don’t believe a recession is on the horizon for 2020, but we remain vigilant as there are many external factors that could derail a long running economic expansion. We are at historically low unemployment levels and are seeing income growth, yet inflation is in check. The world stage of trade wars with China and other nations, the volatility of North Korea and the Mideast, and the unrest in Hong Kong could unnerve the market at any time. Fortunately the economy seems to be moving along at a steady state. Growth is still well below the long-term trend line, so it isn’t surprising to expect a longer economic expansion.
The other item of note, that has pleasantly surprised me, is the ability of businesses and the consumers to detach somewhat from the volatility in Washington, D.C. We seem willing to go about our business and allow the impeachment hearings and other political drama to run its course. I have no prediction of an outcome (or least not one I will share), but I feel confident the republic will survive. We remain a great nation and a place that attracts capital from across the globe.
Bringing the focus back to California for a moment, there are several factors that will impact our business and we are working diligently to adjust our thinking based on the political and business climate. There remains a real shortage of housing in California and Governor Newson has made it a focus of his agenda. The State recently announced its housing goals by community for the next decade. It will be our job at SRI to determine how best to capitalize on this potential growth opportunity2.
Another Issue we have had to incorporate in our analysis is climate change. This is important across all our projects as greenhouse gases are a part of our project analysis, but it is especially true for our coastal projects. For these sites, we are now required to assess the site with regards to potential for sea level rise in the year 2100. This is daunting task, but I am proud to report that our team of professionals are on the forefront of this science and its impact of potential sites.
This year has been active, as we had several successful dispositions, and we are diligently priming a number of our assets for a potential sale in the coming year. Although there is no guaranty we will get everything sold that we plan to in 2020, we believe that it will be a record year for us with regards to dispositions.
At the same time, our team is locating interesting opportunities to deploy new capital. It is a highly selective process to find the right properties, but we find we are well rewarded by patience (something I am still learning). We expect to announce several more acquisitions in the early part of 2020, but are being very selective at this stage.
Once again I would like to thank everyone for your confidence and support of our business. I can assure our team is working diligently to continue to earn your business.