Terry Montesi

Two weeks ago, our company’s president, Tommy Miller, and I had a conversation with economist Dr. Peter Linneman about what he has seen in the retail and real estate economy over the past six months, and what the future will hold. Here is a brief recap of our discussion. I hope you get as much out of our conversation with Dr. Linneman as we did.

Terry Montesi: What are the key economic data that are affecting the consumer and retail real estate today? What has changed in the last six months and what do you see out there?

Peter Linneman: The main thing that has changed in the last six months is that we have about 900,000 more jobs. And although that is not stunning, that is kind of a normal pace. At least it means that 900,000 people that were previously unemployed that got their jobs back. The other way to view it is this: Nobody who used to have a job who’s unemployed got a job back, but everybody who newly entered the labor force because of population expansion over that six months got a job. Essentially, it says that we are at least adding jobs fast enough to keep up with the natural expansion of employment that should occur if our population grows.

Tommy Miller: Is that fast enough to keep the unemployment rate from increasing?

Linneman: Basically, yes. The reason the unemployment rate dropped as much as it did…it should have dropped about 10 base points over the last six months if all it was were the jobs we added. The reason it dropped by more than that was until this last month, we had a lot of discouraged workers that said “Nope, I’m not looking. I’m just unemployed.” So that is what makes the unemployment rate odd is that it is a numerator and a denominator. It’s a little like an exchange rate in that regard. The bad news is the dollar should get weaker, it should be much weaker today than it was five years ago because of our problems. Then you say, “We’ve got more problems than we did give years ago,” but Europe has way more problems than they did five years ago. So the exchange rate strengthened. When you have ratios, it can be harder to understand. The thing that has really driven down the unemployment rate until the past month was the discouraged worker.

The only thing to point out is that the skewness of jobs, in terms of who and where, has continued. So you have some areas, like Texas, San Francisco, New York, Washington, D.C., and Pittsburgh that have not only regained all the jobs lost in the recession, they have added net new jobs. In some of the Texas cases, they have regained 100 percent of the jobs lost and then another 80 percent of those they lost. They have had big expansion in retail markets, office absorption, and housing markets. Show me a place that has regained all their lost jobs and then some, they are quite healthy right now.

Of the areas I just mentioned, Pittsburgh is the oddity. It’s getting a big spillover from the shale play. They are fracking in surrounding communities and hiring Pittsburgh engineers and lawyers. On the other end, Las Vegas is around 10 percent of the lost jobs recovered. They have miles to go. The United States, as a whole, has recovered about 40 percent of lost jobs. So, we as a country have a long way to go.

If you net out Texas, D.C., New York, San Francisco, and Pittsburgh, the rest of the country is only about a third of the way back. The place that has picked up the most momentum in the last four months is Atlanta. It was basically about 15 percent five or six months ago, and now is about 40 percent of the jobs recovered. It has picked up a lot of momentum. The reason I point that out is some of this feeds on itself. Mainly because, if I have a job then I can buy something from you and that means you can hire someone else. Southern California and Vegas have shown the least strength and almost no momentum.

Montesi: Can you comment on Texas’ future?

Linneman: I think Texas became Texas as we know it because Florida and California refused to stay the lands of opportunity. California used to be the heart of entrepreneurship, had the best infrastructure in the country, the best highways in the country, the best this, the best that, and its public schools were as good as anybody’s, their state university system was probably the best in the country, and they had a balanced budget.

Today, I don’t know if they have killed the golden goose but they have certainly wounded it. Except for Silicon Valley and maybe in Hollywood, if you are an entrepreneur you are the enemy. Taxes are extraordinary, the infrastructure is dated, the state’s schools are miserable, and it has a budget deficit. Florida, to a lesser degree did the same things.

You guys are in the real estate business and remember when you could get zoning in Florida with a library card, kind of like you do in Texas, right? Well, Florida isn’t California from a permits and approval standpoint, but it has become what California was 15-­20 years ago. Texas is still Texas; you can still do things with a library card. My point being that I think businesses and people prefer to live in California and Florida, but they both got much more difficult to do business in, while Texas stayed just as easy to do business in and boomed.

The question from my point of view is: Does Texas ultimately become California and Florida in terms of its views on growth and entrepreneurship? So far the answer has been a resounding “No.” We are Texas by God, not California or Florida.

But by the way, I would have never guessed Florida became as close to California as it is and it has. It controls its own fate. It has a lot going for it but it is not beyond the realm that the land of entrepreneurship could someday tax itself into oblivion.

If you’d like to read the entire conversation with Dr. Linneman, click here.

Terry Montesi is chairman and CEO of Trademark Property Co., which he founded in 1992. Contact him at tmontesi@trademarkproperty.com.