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Infrastructure, Florida, the Fed and more with KC Conway

KC Conway is a big shot and knows a lot. He’s also a down-to-earth guy and one of our favorite guests here at Fried On Business.

KC is Director of Research and Corporate Engagement at University of Alabama, Culverhouse College of Commerce. He is also the Chief Economist for CCIM Institute.

KC came on the show recently to talk about all things economic – trade, Florida’s business climate, the Fed and more.

Now, don’t tune out just yet. This is important stuff, and KC has a unique way of making it informative and fun. Let’s go!

Government shutdown

The federal government shutdown that has just been resolved – possibly temporarily – was getting serious, KC said. There have been 19 such shutdowns since the 1970s, but this was the longest on record.

More than 300 vessels were left waiting to arrive in port because the Coast Guard wasn’t fully staffed. IPOs were delayed. Even liquor supplies were dwindling because of ATF staffing issues.

KC said government services like these, although less in the public eye, are significant nevertheless.

The trade war

The ongoing turmoil in trade relations has manifested itself noticeably in real estate construction costs, which began to increase with the most recent hurricanes.

Five Category 3 or Category 4 storms have hit the U.S. in the last 15 months, he said.

Construction costs have been rising by 10% to 15% per year, KC said, and the Associated General Contractors is reporting both labor and materials shortages.

“And it’s not just new construction. If you’re a landlord or a building owner, and you’re moving tenants around, you can’t find the labor to complete the renovations for tenant improvement,” he said.

We should be building about 1.3 million to 1.4 million homes per year right now, but we’re down about 250,000 on an annual basis, KC said.

“That quarter-million difference is all under $300,000. The lots aren’t free anymore, so we’re not putting up free single-family lots and Cracker Jack boxes after the financial crisis anymore. You actually have to go develop the land and buy the lots,” he said.

“And when you look at these construction costs, you can’t deliver a home anymore under about $300,000 bucks. It’s almost impossible.”

As a result, more multifamily is being built, which could bring another oversupply, he said.


On Feb. 1, KC is releasing a research report titled Logistics Infrastructure: Transformational Opportunities. He says we need to think more broadly about infrastructure. That is, beyond roads and bridges to intermodal, ports, rail, utilities, wifi and more.

The report will be available at the Culverhouse College of Business website –

Here’s a link to an short summary, courtesy of KC.

“We need a lot of work done,” he said. “The difference is, we look at those states that are spending on infrastructure – Florida, South Carolina, Texas – their state GDPs are growing at about twice those states that aren’t investing in logistics infrastructure.”

Industrial property trends

Sophisticated conveyor systems, KC said, are allowing industrial space to go vertical. In some cases, buildings are being developed with as much as 60-foot to 70 foot clear heights.

Five years ago, 5% of all industrial leasing was to ecommerce and logistics companies, he said. In 2018, it was 20%.

“Our forecast is we could see 30 to 40 percent of the warehouse leasing go to logistics-related companies,” he said.


Unforeseen until very recently, the burgeoning cannabis industry has been driving real estate in many parts of the country. KC said he’s been studying the impact of cannabis on real estate ever since it was legalized in Colorado.

“It took (industrial) rents from about under two bucks a square foot to over 17 bucks a square foot if the cannabis industry invaded,” he said.

More importantly, he said, we all know people who have had intractable health problems, and it has been found that cannabis oil is an effective treatment in many cases.

KC investigated cannabis himself in an effort to find relief for his own son’s seizures.

Some 33 states have approved medical marijuana, and a handful have legalized it for recreational use.

The medical implications are huge, KC said. Florida, by focusing on the finished product, bypasses many federal laws and opens the door to legal property leases for cannabis retailers.

“I think it’s a huge industry for us in real estate. And the way Florida has done it, you can lease it, you can have it in retail, you can have it in restaurants. I think Florida is going to be a big beneficiary of it,” he said.

The Fed

Now, for better or worse, President Trump has been jawboning the Federal Reserve about its recent spate of interest rate hikes. And, to add another variable, we have a change at the helm with the appointment of Jerome Powell as chairman.

Each year, four of the FOMC voting members rotate out, KC said. The ones that were raising rates last year are out, and some of the current members are signaling a pause in the rate-hike cycle.

“The members this year are much more, I think, grounded and understand the business consequences – and are not inclined to do any interest rate hikes, at least in the first quarter,” he said.

Keep your eyes on the March, June and September meetings of the FOMC, KC said. They have press conferences. If the Fed does anything, it will be at one of those meetings so they can take extra care to explain their actions.

Is China catching a cold?

Yes, KC said. China’s GDP growth has slowed to about 1% annually, he said, despite claims to the contrary. Energy consumption, the best indicator, has almost flatlined.

KC said the U.S. and China comprise about half the world’s GDP growth. When they catch a cold, you have a global economic slowdown.

“That’s why I worry. We won’t get the recession this year, but I really worry we’re heading toward a recession next year,” he said.

“We’ve had a recession every 10 years since 1857. If we make it through this first quarter, it will be the first time that we went for more than a decade without a recession.”

KC said 4Q19 could go negative, followed by 1Q20. Then, we enter a recession.

Tax cuts

We have yet to see the full impact of the recent tax cuts, KC said. Companies have been spending time figuring them out – and waiting out the government shutdown.

For real estate, the big impact is in officially designated Opportunity Zones. There are 8,700 of them, and the key word is “opportunity,” he said. You can take your capital gains out of an investment today and defer payment on them for seven years by buying a business or real estate in an Opportunity Zone.

At the end of seven years, 20% of the capital gains tax is forgiven, he said. If you stay in for another three years, you can re-calculate the basis.

Essentially, any gain in the business or the real estate during the 10-year hold period is free.

“This is going to be the biggest boon we’ve ever seen in my 35-year career in real estate,” he said.

Where do I put my money?

The P/E ratio for the stock market peaked at about 24 a year ago, KC said. It has retraced to 18. But, for value, KC likes the REITs, which are now trading at a P/E of seven to eight.

A couple to consider:

– Monmouth Real Estate Investment Corporation (MMR). Monmouth focuses on high-quality net-leased industrial properties.

– Rexford Industrial Realty (REXR). Rexford focuses on value-add, infill industrial in Southern California.

KC also likes transportation and logistics companies. And railroads, because they aren’t making any more.

This was a home-run interview, and we covered a lot more territory, including:

– How Florida ranks in terms of port activity.

– How returns of online purchases impact logistics.

Click here to listen to the full interview with KC Conway of University of Alabama, Culverhouse College of Commerce.



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