At the closing session of the SIOR Spring 2023 Event in Montreal, self-described economic futurist Andrew Busch delivered compelling insights into the evolving U.S. economic landscape with his presentation, “The Future Economy: Growth Opportunities.” The rapid-fire, one-hour talk covered everything from geopolitics to AI and concluded with strategies that SIORs willing to get ahead of the trends can use to find opportunities in those economic and technological shifts.
LOOKING BACK TO LOOK AHEAD
Busch began with a primer on where we are today and how we got here. He compared the handling of the economy by the U.S. Federal Reserve since the pandemic to that of the movie Jackass Forever, with its tagline, “Some people never learn.”
When COVID-19 brought life as we know it to a standstill, the U.S. government injected $14 trillion into the U.S. economy, a stark contrast to the slow response to the Great Financial Crisis of 2007-2008 but a proportionally larger one than most developed countries. The infusion stimulated the economy, and the stock market (which lost 20% from December to March) rebounded to previous levels by the summer. But the overall economy lagged.
The covid-19 lockdowns forced people to work from home and children to be schooled on Zoom. With restaurants, bars, theaters, and vacations shut down, service spending decreased, and spending on goods (including home office and home school supplies, not to mention home renovations and hobbies) jumped from 30% of GDP spending to 35%. “And that's when we all discovered that the global supply chain could not handle it,” said Busch. The already strained trade with China was shut down, the Ukraine war and the blockage of the Suez Canal added to the mess, and manufacturing and logistics systems that had been running at maximum capacity even before the pandemic broke down.
By the spring of 2021, inflation began its ascent, rising from 1.2% at the close of 2021 to 5.0% by April, peaking in June of 2022 at 9.1% - the highest rate in 40 years. The Fed began its aggressive interest rate hikes to stem the tide, raising the rate from near zero in 2022 to 5-5.25% by May 2023. Inflation has come down steadily since its peak, with the U.S. significantly lower than Europe and Latin America at 5% but higher than many parts of Asia. Still, several other dynamics keep inflation well above the Fed’s target of 2.0%.
Wage growth (6.4% at press time, according to the Atlanta Fed's Wage Growth Tracker) continues to impact inflation, and Busch highlighted some underreported covid-19-related factors. “In terms of labor supply, we lost about four million workers in the United States during the recession,” said Busch. “Over 1,000,000 people died of COVID, half of whom were working age. About two-and-a-half million people retired who weren’t expecting to retire (something that had not occurred during previous recessions), and then we closed the border with Mexico. So there’s just a lot of pressure on the labor supply in the United States.”
Despite continued wage growth, unemployment remained low (3.4%) through April, with the U.S. economy adding a higher-than-expected 1.3 million jobs for the year. There has been a profound shift in the types of employment, however, as the manufacturing sector has steadily contracted since June of 2022, while the services sector has expanded. “What we're seeing is a rebalancing from where we were during COVID—a drop in the level of people buying goods and a rise in the level of people getting services,” said Busch.
GOVERNMENT SPENDING AND THE ECONOMY
Busch expressed surprise that the future allocation of funds from the $1.2 trillion bipartisan infrastructure plan known as the Infrastructure Investment and Jobs Act of 2021 (IIJA) has received so little media attention – even by economists. It has been overlooked due to the lengthy allocation process, but he sees it as a solid hedge against recession. “The money is just starting to get out to the states for roads and bridges and things like that. This is money well-spent, and we'll get a decent return on it,” said Busch. “But it isn't hitting the economy yet, so when you hear people say, ‘We're going to have a recession at the end of this year,’ (remember), this money is just starting to get out.”
In addition to the $335 billion in funds for roads, bridges, rail, water systems, broadband, and public transit the IIJA provides, the Inflation Reduction Act (IRA) will add another $369 billion in subsidies, including dollars for clean energy investments; offshore wind, oil, and gas; and electric-vehicle (EV) incentives. And the CHIPS Act will invest $280 billion to bolster U.S. semiconductor capacity, boost R&D, and create regional high-tech hubs. “That’s a lot of dough hitting the economy,” said Busch. “Maybe not all at the same time, but it's going to support the US economy going forward, and that's not a bad thing.”
TRENDS
Busch touched on four trends that are significantly impacting the CRE industry: work-from-home (WFH); Migration of population from higher-tax (blue) states to lower-tax (red) states; weather volatility; and global realignment. On the subject of WFH, Busch cited data from WFH Research*5 that indicates that while the practice is here to stay, it is declining. As of February 2023, 12% of full-time employees were fully remote, 60% were full-time on-site, and 28% were in a hybrid arrangement, with the highest percentages of WFH workers employed in tech, finance, and professional services.
Busch did not speculate as to when the return-to-office may or may not occur but noted that younger workers “really miss being in the office, being mentored, and the decorum of the office,” as well as the socialization aspects.
According to the U.S. Census Bureau, there was a massive internal migration from July 2021 to July 2022 from higher-tax states like California (-343,230) and New York (-299,557) to lower-tax states like Texas (318,855) and Florida (230,961) and other South/Southwestern states. Why? “Yes, they all have lower tax rates than those northern states, but I'm sorry to say, they're mismanaged,” Busch opined.
What we're seeing is a rebalancing from where we were during COVID – a drop in the level of people buying goods and a rise in the level of people getting services.
OPPORTUNITIES
“(Climate change) cuts across everything,” asserted Busch. “It’s not just the buildings, but where are your supply chains (originating) from? Where are your workers coming from? How are they going to be impacted?” To assist with site selection for development projects, he recommended websites like Risk Factor, which allows users to put in an address to determine the property's risk from flooding, wildfire, heat, and wind and to access economic incentives and subsidies offered by the government. “Here’s my reading on climate change – it's the real deal. Just look at the weather volatility, and it’s insane,” Busch told the gathering. “And I want everybody in this room to take advantage of that and get those (IRA) subsidies, and I also want you to protect yourself.”
Chief Executive/IEDC, 58 percent of CEOs whose companies have had recent operations outside of the United States are now considering reshoring, with almost 40% considering bringing assembly operations home and another nearly 30% re-shoring parts manufacturing. It is especially true of companies with operations in China. “The supply chains have become unstable because the relationship with China is unstable because of the threat of a war with Taiwan,” said Busch. “It’s why you’re seeing Apple move operations out of China and into India.”
- Electric Vehicles (EVs) and Battery Plants
The move to EVs is accelerating, with Goldman Sachs forecasting that EVs will make up half of global sales by 2035. This presents opportunities on two fronts, the first being development centered around charging stations, such as a café experience. The explosion of battery plant investment is creating a second opportunity. The Atlas Public Policy report estimates that in November 2022, there was $128 billion of announced investments into electric vehicle plants, battery plants, and battery recycling. The IRA, through the Department of Energy (DOE) Loan Programs Office, will soon provide up to $250 billion in loans for new clean energy uses, “so what we want to focus on is where the money is going because that’s where the growth is.”
- Artificial Intelligence (AI)
Busch closed the session with a segment on AI. “This thing is powerful. It's amazing, and it will change the world very shortly, ladies and gentlemen,” Busch asserted. “I'll make this prediction: There will be two kinds of companies. Those that use AI and those that are out of business.” Busch also added a chilling caveat, “It’s dangerous because of this: The people who write the code creating AI – don't know how it works.” The U.S. and other governments are trying to rein in the potential dangers (Italy has banned ChatGPT already), but the technology creates a world of opportunity for those willing to take advantage.
Because of the volume of information shared in a short period, Busch made his slides available to SIORs. The slides offer a wealth of information on AI, including general information on the topic and where VC dollars for building materials, AI Smart Buildings, and AI Cyber startups are going. The slides can be found here.
“The world is really chaotic right now—whether it’s the war in Ukraine, upcoming elections, interactions with China, what's going to happen with that interest rates—it all seems a little bit crazy right now,” concluded Busch. “But wow, are there opportunities coming for you.