Finding the Signal through the Noise

In this day and age, new information is coming at us from all directions with incredible speed.

Just opening the daily newspaper exposes us to a dizzying array of facts, figures, truths and fictions (disguised as facts) about any number of global, national and local topics. As we do our best to keep current on the things that are important to you, we sometimes get confused about what to count as important and what to discard as irrelevant. That can bog us down and keep us from seeing the underlying real estate trends that we need to identify and communicate to you so that you can make informed decisions. 

Shifts in the supply/demand equation, the rising cost of capital, persistent inflation, labor shortages and supply chain disruptions, among other economic factors, all figure into the equation, but we must admit that no matter how much we study up, we still can’t figure out why the market has not moved sharply into correction territory. 

We are reminded of comments made on the state of economics by economist John Mauldin that closely describe what we have been feeling lately. With reference to George Gilder’s Information Theory outlined his book Knowledge and Power, John had this to say:  

“Information theory, at its root, is about distinguishing signal from noise. A signal is broadcast into the air or goes down a telephone line or through a fiber-optic cable, and the challenge is to sort out the actual signal from the noise that accompanies it.”

We think that explains what we have been struggling with quite well, and sometimes just knowing what confuses us helps to fine-tune our listening skills. 

Mr. Mauldin went on to say:

“In the world of economics, an entrepreneur has to distinguish amidst the market noise a signal that a particular good or service is needed. But if some force – a government or a central bank, for instance – distorts or corrupts the transmission of the signal by adding noise to the system, the entrepreneur may have difficulty interpreting the signal and may potentially respond to the wrong message.”

If that is true, then it’s no wonder why the entire business community is so focused on the actions of the world’s central bankers and political leaders. Monetary, fiscal and political policies dominate the headlines and each of us is left to figure out how we will be effected in the short term as well as in the long run.

Take US Treasury yields as an example. The yield on the 10-Year US Treasury note, the primary benchmark for commercial property loans, shot up by over 100 basis points in just the last several weeks, breaking the 5% threshold for the first time since June of 2007. Hundreds of articles have covered the reasons why, but nobody has all the answers. 

What should it mean for commercial property values?

Logic tells us that values would decrease to compensate for the higher cost of capital, but it is just one of many factors to consider. Lack of supply is one of them. There just isn’t much out there to buy and that has mitigated the impact of the decrease in demand that has come with higher interest rates. The result? A slowdown in market velocity and the end of price increases, but no significant correction. The market is in a sort of stasis after a 12-year bull run. Is it just taking a well-deserved rest before moving up again, or is this the calm before the storm? There are believable arguments for either outcome, though history points to the latter as more likely. 

Mr. Mauldin’s message is a good one. Find a way to separate the signal from the noise and choose the path that reflects your unique circumstances, your personal appetite for risk and your vision of a fulfilling life going forward. Once you do, listen carefully and act accordingly. 

We will keep listening for you and let you know what we hear.