Mind the Gap: The Steepening Yield Curve Should Not Inspire Confidence

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Economists are infamously bad at predicting recessions. Aside from all the technical challenges, ultimately it’s just so hard to imagine conditions different than those we are living. Perhaps it should not be so surprising, then, that economists routinely ignore or explain away the closest thing we have to a sure sign.

The yield curve’s inversion in mid-2019 implies that the U.S. is due for an economic downturn by year end, notwithstanding some recent positive economic trends.

  • Despite compelling reasons that we need no longer heed its warning, the yield curve has dependably confounded skeptics and proven to be a reliable harbinger of recessions for several decades.
  • The fact that the curve has since reverted to its normal positive slope does not imply that a downturn has been averted. There is always a significant lag of at least a year between when the curve first inverts and when the economy falls into recession.
  • Investors should not take any comfort from our continued (if slower) economic growth and rising stock prices since the inversion. These are normal patterns for the 12- to 18-month period between the yield curve inversion and recession.

You may read the full report here.

The New Green Acres: CBD and Cannabis Provide Boost for Retail Sector

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Cannabis Dispensary - Colorado Harvest Company

Key idea: CBD and cannabis companies face myriad bewildering obstacles to building a national business, but the opportunities are huge – for the firms themselves and their investors, as well as for the retail property sector.

Imagine that you manage a retail apparel chain, selling identical T-shirts and sweaters in stores around the country – except that every garment you sell must be manufactured in the state in which it’s being sold – because you can’t transport T-shirts and sweaters across state lines – and in addition, you must make those clothes only from cotton grown in that state.

Now imagine that in some states you can sell only your T-shirts but not your sweaters, and in most states, you can only sell your products to people who manage to obtain special permission from the state to purchase your T-shirts. And in some states, you can only sell your products in stores that you personally operate, and no other retailers can sell your products.

And imagine that all your sales must be in cash, because you’re not allowed to accept credit cards or checks, and nor can your company get a credit card or a bank loan to cover everyday expenses – and you can’t even deduct most of those expenses on your taxes, because the federal government doesn’t consider your enterprise to a legal enterprise.

Yet despite all this, imagine you find it hard to keep up with demand because consumers love your T-shirts and sweaters so much, they’re willing to drive hundreds of miles or even take a plane ride just to buy your products because they can’t find them in their local stores. That’s a nice problem to have.

Welcome to the World of Legal Cannabis and CBD

Where is this imaginary market? These are some of the challenges and opportunities faced by the cannabis retailing sector – the legal cannabis retailing sector – and these challenges are not a fantasy. In some states, no form of cannabis products may be sold, while in an equal number virtually all types are legal for adults, and in more than half of states, only medical cannabis (for which you need some form of a doctor’s note) is legal. In most states where cannabis is legal in some form, cannabis retailers (or dispensaries) may sell products from a wide variety of manufacturers, but in some states, like Florida, retailers may only sell their own products.

And since neither marijuana flower nor cannabis products may be transported to or sold in other states, the cannabis products in every state must be derived from marijuana grown in that state. Which introduces two huge issues for a multi-state cannabis organization (MSO): attaining economies of scale in manufacturing, marketing, and distribution; and maintaining quality control across jurisdictions when otherwise identical products (like gummies or tinctures) must be manufactured with cannabis unique to each state.

And just to complicate matters further, the derivative CBD – short for cannabidiol, which is a non-psychoactive ingredient found in both cannabis and hemp plants, and is associated with many health benefits – was legalized at the federal level by the 2018 Farm Bill for wellness products, but only if it’s derived from hemp, not cannabis, with concentrations of THC – that’s the special ingredient that gets you high – of no more than 0.3%.

But that’s not all: Every state has its own regulations regarding the cultivation, distribution, packaging and labeling, and of course retailing of these products. Which means, among other things. MSOs need unique products, packaging, and even business practices in each state.

Whew! That’s a lot to keep track of.

Peering Through the Smoke

And yet the potential is enormous. The Nielsen Company – yes, that Nielsen now tracks cannabis sales – estimates that legal sales of cannabis and hemp-derived CBD products totaled $8 billion last year, and projects growth to $41 billion by 2025[1], while another study by the cannabis-focused research firm Brightfield Group forecasts the CBD market alone will reach $22 billion in sales by 2022.[2]

And yet another study estimates there are over 200,000 people working directly in this sector – up by almost 50% last year alone – and another 100,000 in related industries.[3] And for the data freaks out there, here’s an interesting factoid: none of these jobs are counted in the official job statistics by BLS – because cannabis s not a legal enterprise according to the federal government!

All of which makes cannabis a really interesting retail segment, especially because it is one of the few cateogires of retail goods that’s growing quickly and can occupy lots of retail space, as well as warehouses and farmland. I recently moderated a panel at ICSC’s research conference on this topic with a vertically-integrated cannabis retailer, an online wholesale cannabis marketplace, and a broker working with cannabis retailing clients.

Among the mainstream retailers already selling CBD products in at least some states are grocers (Kroger and Whole Foods), pharmacies (Walgreens, CVS, RiteAid), apparel retailers (American Eagle, Abercrombie & Fitch, DSW) and health and beauty retailers (Sephora, Ulta, GNC, Vitamin Shoppe) – even pet product retailers (Petco and PetSmart).

Moreover, Green Growth Brands, which sells CBD-based health and beauty products under several different brands has agreements to open hundreds of CBD shops in shopping centers owned by Simon Property Group and Brookfield Properties.

But for now, all of these retail plays by conventional retailers and landlords are only for low-THC hemp-based CBD products. Any hemp products with more than 0.3% THC, as well as all cannabis products, must be sold in licensed dispensaries. Like a pharmacy, but for marijuana. So, you won’t be seeing pot sold at Krogers or Walgreens any time soon.

But there’s no legal reason dispensaries can’t open in a shopping center to fill the void left by all those store closings by traditional retailers – provided the site satisfies the locational requirements for dispensaries (not too close to schools, for example). However, reputational and other considerations will likely limit the number of landlords and their investors who choose to accept dispensaries as tenants, particularly unless and until cannabis is legalized by the federal government.

And retail is not the only property play. All that pot must be grown, processed, and then stored somewhere, providing huge potential for farmland, processing facilities, and warehouses. Several REITs have already entered this space. But that’s another story for another blog.

[1] https://www.nielsen.com/us/en/insights/article/2019/brace-for-impact-u-s-cpg-cannabis-sales-to-rise-by-the-billions/

[2] https://www.cnbc.com/2019/06/10/green-growth-brands-to-open-over-70-cbd-shops-in-malls-with-brookfield.html

[3] https://d3atagt0rnqk7k.cloudfront.net/wp-content/uploads/2019/03/01141121/CANNABIS-JOBS-REPORT-FINAL-2.27.191.pdf

Looking for Love (and Returns) in All the Wrong Places: Why Property Investors Should Focus More on Job Growth than Consensus Outlooks

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Job growth is moderating, which will slow property leasing and reduce investment returns. For investors still in the hunt for new acquisitions, market selection becomes that much more important.

In my new analysis, I review the consensus market recommendations from several ULI’s annual Emerging Trends reports over the last decade, as well as both recent and historical job growth trends for the nation’s larger metropolitan areas. Among my key findings:

  • ULI’s Emerging Trends reports can provide valuable guidance for investors. ULI’s top-ranked markets yield consistently higher than average returns over both the short and longer term.
  • However, the herd mentality implicit in these consensus outlooks tends to draw from a relatively short list of leading markets, often relying on outdated market reputations, while neglecting markets with even greater return potential, especially when market conditions are changing.
  • Most of the investment outperformance among the top ULI metros is attributable to appreciation returns (based on investor expectations) rather than income returns (based on property performance). This suggests a certain self-fulfilling prophecy generated by the “mob mentality” of investors focusing on the consensus metros, thereby driving up values.
  • Investors can realize even greater outperformance by focusing on markets with the strongest economic drivers – especially job growth – that bolster property fundamentals and raise income returns. Relative to the ULI markets, properties in the fastest-growing metros derive a much greater share of their returns from income.
  • Accordingly, investors should always consider the economic outlook, particularly projected job growth, in addition to consensus expectations. Turning away from the herd and focusing more on economic fundamentals is especially crucial for investors more concerned with income returns than capital appreciation.

You may read the full report here.