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Real Estate Investments/Economic Forecasts Baen’s 5-year Sign Posts to the Future

2017-2021 By: John S. Baen Ph.D.

Professor of Real Estate

Texas Apartment Association Professor of Residential Property Management

Department of Finance, Insurance, Real Estate and Law - UNT College of Business

PO Box: 310410, Denton Texas 76203

Email: Baen@unt.edu

Cell: 940.507.0312

Website: www.cob.unt.edu/firel/baen

Perspectives and Trying to Connect the Dots: Science, Art or Hopeless Opinion?

Annual CCIM Dallas Presentation 2016 – Dedicated and in Honor to UNT Real Estate Alumni Jim Lake 1930-2003

“No Man Knows the Future”

“Good things take a long time!”

“Bad things happen in a hurry!”

“Even the ants plan”

Thursday, November 17, 2016

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BAEN’S 5-YEAR SIGN POSTS TO THE FUTURE

2017 – 2021

Overview of Presentation Perspectives

By John S. Baen PhD.

UNT College of Business (Baen@unt.edu)

Classes of Real Estate Investments

V. Houses

VI. Land Rural/Urban Fringe

VII. Apartments

VIII. Retail, Banks, Governing Works, etc.

IX. Office/Medical and ER Clinics

X. Industrial

XI. Conclusions/Action Plans

I. Introduction/World Overview Influences

II. $ - Capital – Currencies - Markets Overview: Economy and Markets

III. Texas Oil: Economy/ Royalties/etc.

VI. United States, Texas, and North Texas

Real Estate and Corporate

Moves

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I. World Overview in Regard to Risks and Opportunities in America and Real Estate Investments 2017-2021 By John S. Baen PhD. (Baen@unt.edu)

• *** Real Estate is Important (50% of USA GDP) Steven Roulac (New Book) • 1 in 4 employees (related industry – builders, banks, etc.) • 50% of the world’s wealth stored in Real Estate/True Wealth • 30% of Household Budgets • #1 Household Expense • 20% Indirect Household Budgets • Second Largest Business Expense

1. Trump “Wins” • He is a Real Estate Expert • Understands and has created jobs • Understands After tax income • Is a Business person • All his Real Estate Deals did not work – some Bankruptcies! Good.

He is willing to take reasonable chances with an action plan.

2. Federal Reserve Bank – The FED • Interest rates will rise (Baen was wrong for 3 years) • Pre November 9, 2016, publically tied and was waiting to raise

rates after the election. • Now will raise rates (and CAP rates will follow) • Trump will be wrongly blamed for stock market correction. • Stocks with offshore IRS/Corp Tax havens will suffer. Apple, Intel,

etc. • Federal budget and deficit will blow up to interest rate increases. • A new Quantitative Easing (QE 4, 5, etc.?) will be required or

recession and “Fluttering” economy will continue in US. • Corporate taxes will Fall, stimulating jobs

3. The Liquidity of the World is in the US for FDIC “guaranteed” Currency

and Perceived Relative “Safety” of the U.S. and $.

4. The Rate of Foreign Capital flowing into the US will SLOW – Much of the foreign cash here is from unstable countries and drug money or money escaping from China

5. The Devaluation of the Pound – Euro Drama is Real and Smart by the UK • UK votes to Exit Europe!

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• Real Estate wins (Homes up 30%) • UK Exports win • Hard Asset = huge play

6. Greece Bites Bullet, Raises new Taxes, Collecting more Taxes, Firing

Government Jobs, No $ and Real Estate Values and Economy are Collapsing! Who cares? They do!

7. Puerto Rico Defaults on Huge Per Capita Financial Bonds and U.S. Prints Money and Congress Bails them out! What a crock! Bond investors bailed out by U.S. taxpayers.

8. China Exports Down 25 – 40% and Government very Smart! Dropped

Values of the Yuan – to Boost Sales and protect Chinese Jobs/Banks. • China devalued currency, killed US exports, increased US imports • August 26, 2013, Cut Interest Rates – Yikes! And 2016 Devalued

Yuan • China slow down killed Worldwide Commodities for raw materials,

<-25%> • Chinese drop in exports by 25% is an indication of how weak the

U.S. consumer economy/people are!

9. 2016 US Dollar very “Strong” (China beats US in any Devaluation) • Vacuum Cleaner of the World’s Capital • New Capital flowing into the US • Keeping Interest Rates Low • “Flight to Safety” • Perceived “Safety” of FDIC and US Government (US Printing

Press) • China Invaded U.S. FDIC Computers and Banking System 6 times

in 2016 • Killed US Exports and Walmart sales drop off with export figures

from China reflective.

10. Middle East and Turkey continue to be Problem Areas for World Peace. We sell them F-16 (From Fort Worth, Texas – Lockheed) and Weapons and US needs their Air Bases and Air Space for American Defense

11. Ireland Imposed New Taxes on US Companies Based on Income and

Company Value (The benefit of US companies going offshore for manufacturing or corporate headquarters may be shrinking)

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12. Serious Trouble (Oil, Land, Security of U.S.) • Iran – “Treaty” to Export Oil If Nuclear Deal Approved by Obama

Administration is not repealed? • Yemen - #1 Threat to Saudi Arabia/U.S. is there! • Ukraine – Russia is in the oil business • Saudi Arabia – Defending the Kingdom (100,000 Troops) • Israel • Syria – Now Russia is there and controls the sky. • Iraq – Now Russia is there. • Afghanistan – Now Russia or China is there. • Russia – Yikes! – Primarily in Oil Biz and broke (Only export except

war … U.S. too?) • Mecca 1,500,000 people gathered while Pope 100’s of 1000s

(9/25/2015) • 5,000,000 “Syrian” Migrants, (Camping in Europe) – winter now. If

ever armed by “somebody,” they could invade western Europe rather than freeze. 85% men, 15% families.

• U.S to “take 10,000/ 85,000/ 100,000 Syrians migrants in 18 months – Texas Balks – What will Trump Administration do?

• US Passport Offices Closed – 6 in Fort Worth • US – China “Reach” Cyber Treaty

To spare: Electricity, Water, Internet Systems and “Financial” institutions. Wow!

5.6 Million Finger Prints Stolen – High Security 24 Million US Gov. Employees/ Applicant Files stolen Mrs. Clinton’s E-mails plundered FDIC computers invaded six times in 2016

13. U.S Economy “growing”/recovering at less than break even (2.6%); more

like 2.3% in 2016 … and future? • Fewer Jobs • Fewer Higher Paying Jobs • More Migrants (Legal and Illegal) • Robotics doing more work • Minimum wages @ $15/hour will kill restaurants and retailers

(Washington, New York, etc.)

14. Other than military related, what export business is the USA in?

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15. What can the U.S. sell to the world to bring in and create fresh capital to grow? New jobs?, etc.

16. What businesses or industries (Not government funded) is the United States in? What industries are doing well? Worrisome!

17. Jobs, Jobs, Jobs can only come from small businesses creating new products, services, etc. – NOT, Not Healthcare.

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II. A 2016 overview of US Economy and Capital Markets for 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

*RATES DID NOT INCREASE! (Baen was wrong for 3 years!) We need some inflation and some rate hikes to move the economy.

** New rules and reduced financial services fees for Fidelity, Ameritrade, etc. will send shockwaves through the industry. Rollovers will stop! Churning will stop.

1. See Snapshot charts of the Pulse of America 2004 – 2016 (attached) • Fed Debt trends (flattening but Low in Rates) • U.S. Printing Money – Out the Roof in a low Interest Rate Environment • U.S. “Food stamp” Program off the charts high, huge (how to defuse

without civil disobedience) • Home Ownership Rates have crashed from 72% to 63% in seven years. • We have become what appears to be a No Stigma/A Nation or Society of

permanent renters? (Transfer of Wealth/Appreciation/Tax Incentives to Investors!) We must reignite the Great American Dream of Home Ownership.

• Student loans – Huge! 1 Trillion and growing investment? Or drag to US and Borrowers? And kills credit scores and future government benefits. FHA Homes, Social Security, etc. are canceled in the future for those who default!

• Old Americans work? Yes. • More Americans have 2 jobs • Walmart and McDonalds are laying off 10s of 1000. (more efficiencies)

2. FED will no longer delay Rate Hike (From Fed Rate of .25 %!) and Rates may

increase to .75% quickly and the sooner the better? • Weak US Economy (2.3% not break even growth) • Fewer full time jobs for now; may improve in 2017. • Bond market artificially supports Housing Market • Weak World Economies • Effects on Bonds and Stock Market/ETFs on total wealth of the 2% of U.S. • Dividend Effects! Rats off Ship • Banks to increase reserves! Developers will have less $ to develop.

Private equity will replace the financing.

3. US Dollar Hopefully Will Increase in value! (Predicted Wrong last year) Good or Bad?

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a. After Stimulus/Bond Buying, stopped but offset by Foreign Deposit into U.S – Capital flow is slowing

b. U.S is Huge Vacuum – Cleaner in the world for liquid cash – China Cash flows to U.S. but offset by Buying, US hard assets (Oil) and companies

c. Perception of Safety – FDIC and ultimate guarantee of U.S government (Printing Press)

d. Killed oil and other commodities. Prices will continue to flutter. (Also weak U.S. economy)

e. Killed exports of U.S expensive exports (Currency Differentials)

4. Stock Market Volatility and ETF Risks – Huge due to low profitability of companies – Nov 11, 2016 Largest Drop in Emerging Market ETF Funds Ever

a. In 2015 stocks had melted down: • Energy (- 19.5%) • Materials (- 18.8%) • Health Care (- 12.5%) • Telecom (- 9.3%) • Utilities + 2.37%

b. In 2016, many of these recovered (oil, gas, etc.)

5. U.S Household Wealth Growth 2013 – 2015 was 90% Financials vs 10% home

equity, other investment, etc. This will shrink in 2016 – 2021 due to correction in financial cycles. – 12 year Bull Run.

6. Forty (40) year 10 year Treasury Rate and Inflation Cycle fits Perfectly. Hyper Inflation or Depression to Follow?

7. IMF Warned 9/30/2015 that U.S. Mutual Funds and Bonds are Risky (Short term

Corporate Bonds, Drilling Bonds, etc.) – illiquid

8. U.S Treasuries in Danger of Sell – Off (Liquidity Rush – and Sold First when Interest Rates finally go up)

9. China Devalued First! a. Yuan Devaluation – Brilliant! (Beat us!) b. Dropping Int. Rates! (We are @ zero). China Can Drop and Devalue

More! c. “Stopped” Currency transfers out of China d. China stock market Crash

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e. Saving Rate 35% (Average) f. Bankers and stock brokers arrested

10. EB – 5 Program ($6 Billion in US) (cash for Green cards) and $30 billion USA RE

Investment • Will Slow – Green Card Investors for US “biz” • And US Real Estate Projects. Likely invested $30 Billion U.S $Dollars

(Leveraged deals @ 80%)

11. U.S Banks told to hold extra Capital (Nov. 2015) “Appear to be Solvent.” • Fewer loans? • Fewer extensions? • More deposits? • Reduce risk of 6 largest banks! • Restriction on fess and new accounts for big banks are worrisome.

12. Bankruptcy Filings (Oil Companies First)

• 130 companies declared bankruptcy 2015-2016 • 60 Companies on Watch List

Debt/Bond Refinance trouble • Hedges, Derivatives, Junk Bonds • Mergers and acquisitions by cash rich companies do not create jobs….

Job killers but good for companies!!!

13. Many Pension Funds Insolvent • Cuts of 30 – 65 % (soon) • 401 – Ks in Mutual Funds. • Texas Effects (They will not Freeze Here) many retirees will move to

Texas. • Social Security running out of $? When? “20 years”

Printing press and new criteria will save the system.

14. Wanted by FED: Some Inflation! ($30 Raise in Social Security Benefits in 2016!!)

a. Appreciation!! b. Inflation (wanted!)

15. Historically, interest rates Increase for three reasons:

i. Shortage of Capital ii. Anticipation of Inflation iii. Overheated economy / developments

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iv. Defaults (Families, Cities, States, Corps, US Government) “Appear” “Stable” today (bonds to be artificially Re-Financed will

crash at higher rates in 2017, very near – or defaults/panic) Bond Market is 600% Larger than US Stock Market Huge exposure to US banks – Drilling and oil/gas bonds/financing

based on high oil prices (Now dropped by 60% in price/bbl – Bond values)

Consumers up to their necks in debt – risk.

16. Millennials at the Point! • 66% have Little to No Job Loyalty; most want to leave where they work

within 3 years (a restless bunch who have not found their work groove or passion)

• Only 17% have typical Work-Life Balance Wishes at this Point To have families (They will?) Get married (They will?) Have kids (They will?) Buy a house (If possible?) Treadmill life (They might!) Not material driven (at this point) Love one year apartment leases with no plans – unless move

around area for better apartment – Do Not want a house yet! ARE moving to Texas and Southwest for jobs, are highly educated

and will compete with local college grads.

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III. 2017 – 2021 Overview of Texas Oil and Real Estate – The FRAC Bubble By John S. Baen PhD. (Baen@unt.edu)

1. Effects on Texas Real Estate/ Economy is Huge (won’t be felt until 2016/2017) • Rural North Texas (from 240 Rigs to 2 Rigs – Nov. 2015; 2016 = Zero!) • Rural Areas Slow Meltdowns/School districts, etc. laying off. • Slow Down in Land Sales (Loss of wealth/income effects.) • Reduction in Severance Taxes (State Budget) • Less Disposable Income – Royalty Owners • At Risk Real Estate Markets – Texas Real Estate Markets:

Houston – High – Big House market meltdown, Luxury Apartments suffering Corpus Christi – High San Antonio – Medium Dallas – Low Austin – Very Low Fort Worth – Low (Toilet flush in slow motion since 2014) Fort Worth Alliance – Low!

2. Oil Prices have rebounded 30% in one year – 2016 (still half of peak)

3. Layoffs huge and under reported. 80,000 – 125,000 in Texas (2015 – 2016)

• Many Banks Exposed to Oil Deals and acquisition loans • “Innovative Finance”/ Hedge / Bond Deals Scary • First Year Shale Decline Curves <-80%> • Royalties have dropped <-80 – 90%> - (The hidden evaporated TX

wealth) • Many more bankruptcies expected (160 companies) • Many S. Texas communities in the Eagle Ford have built Community

Centers, etc., with long term Bonds based on Oil Production/ Values and Assumptions and Tax Base

• Hunts buy ONCOR Electric Utility Company Oil and Gas Owned, Pipelines, etc. Electricity Grid/Delivery Built in Customers Going Public? Wow.

• Russia may help Oil Prices – Supply/Disruptions/War • U.S./Tex Oil Companies fighting for Survival – Tactics

Suspension of Royalty Charging, Outrageous, Expenses (35 – 53%) Stealing from State and Mineral Owners Related Party Pipe lines and Buyers

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IV. 2017 NOW/ North Texas Overview What is positive about Texas? 2017 – 2021 – The Beat Goes on! By John S. Baen PhD. (Baen@unt.edu) More Corporations will come! (Frisco Boom - Toyota, FedEx, Liberty Mutual, Fidelity, TDAmeritrade, etc.) (Southlake/Westlake Boom!) Texas Minimum Wage works! $8.50 vs $17/hour. * 48,500 NEW North Texas JOBS are real 2017-2021

You/We are Ambassadors of Texas, sell others to come to Texas!

1. Cost less to go broke in Texas – U.S Corps. Struggling (Many U.S Companies not doing well)

2. No state Income Tax (yet) – State Sales Tax, O+G Severance Taxes and Royalties make our state rich

3. Shipping Coastal and Rail (Liquefied Natural Gas Complexes) 4. International Boundary (+/-) 5. Cheap Labor (Migration and non-union state) 6. Time zone extra 2 hours’ work day (East – West coast) 7. Center of US – Travel Time Costs (50% less) 8. Cheap Buildings and Land (No snow designs) 9. Cheap houses (Preowned $130/sq. ft. – New $174/sq. ft.)

10. Pro-business attitude/ Easy Zoning (Local and State Incentives – Tax Waivers 11. Self – Reliant Oil and Gas production (Oil Curve of Boom/ Bust) 12. Texas Electric power grid vs East/ West Power Grid (Selling Excess off Texas

Grid) 13. Texas CAN DO attitude and personalities / positive! 14. EZ Zoning (vs 5 + years in California) – (Except Flower Mound!!) (Denton doing

much better than 2013/2014) 15. Friendly Corporate Legal Environment – the courts and Laws 16. Privately funded Foreign Support to Mexico (US$ -> Mex) 17. New California and New York immigrants’ $ to buy houses and other investments

• Land • Warehouse • Farms/Ranches • Etc.

18. Alliance Corporate Campus tracts available for next 10 – 20 years (7X Frisco) 19. Road projects will end…… someday! 20. Politically powerful state in US and population/congressional seats growing 21. Will Alliance or Denton Airport become Love Field? (2020)

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V. North Texas Housing Market 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. We are becoming a Nation of Young People who are Satisfied with Renting (at this time)

• Home Ownership is Basis of any Stable Society and Democracy • We live in a totally government sponsored Socialized Housing Market!

(FHA, VA, FNMA, etc.) • U.S. Home Ownership dropped from 73% to 62% since 2008 • Texas Housing Market <- Houston> Booming – Affordability Driven? • Cheap gas prices help to drive until you qualify (Danger?).

2. There are Six (6) types of Buyers Driving the North Texas Market. Average Price, $240,000 or pay $7200/month take home pay or Pretax $120,000/year!

A. Typical first time buyers – Market on Fire • Affordable $150 – 250K (Inventory Low – New or Preowned) • Multiple Contracts • Selling in 40 days or less • Selling higher than asking (often) • McKinney Camp Out to Bid or New Houses

B. Out of State Migrants and New Professional from India, Pakistan, and China ($450 – 550k) • Often Pay Cash • Rarely Sell • Extended Family Residences (Often 3 generations) in same house) • Often Flock together

C. Investment/ Rent House Buyers (1 in 7 houses sold in North Texas) • Seeking 10% NOI, After tax 8% returns • Seeking Appreciation 9 – 12% • Seeking Tax Write Offs • Property Management Firms Booming • DANGER!

Cities of Dallas, Denton, others Slum Lords unit! City Rent House Inspection and Permit to Rent Ridiculous City Standards for Rent Homes Health Safety Illegal Protection and Imposition of Law Owner Occupied vs. Landlords Owner Occupied Discrimination

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D. Condo/Townhouse Boom (Alternative) • Are conversions next (Apartments)?? • Inner City up Town etc. Booming @ $1700/month rents • Mega Multiuse Booming? (Building Now)

E. City Infill Developments and Demolish of Old Buildings/Homes (Booming in North Dallas) $450,000 Homes being demolished for Lots!

F. New Micro / Cottages Proposed by city of Dallas – 400 - 900 sq. ft. homes • Small lots • Small, small homes • Welcome to Europe • Affordable Homes • 12 lots/acre

3. Tight Supply of Existing Homes and Affordable Lots

• People not moving! Satisfied! – That’s a “Good thing”? • 7 years “Rule” not occurring – Lifetime Home concept (Europe?) • Move up being questioned – Incomes not increasing with value • Hip Pocket Listing (data missing)

4. This is a Job and Immigration pushed House Market from Corporate Transfers, Announcements, and People moving to Texas Jobs?

• Toyota expects a large number to come to Texas – 4000 • Expected was 25% - Now up to 66% may come that were invited • Many are buying early! For 2017 and 2018 arrival date • Many buying Temporary smaller home, wait and see, possible Rent

House. • “Raindrops Now, small Stream in 2017, and Giant River in 2018 of people” • Many will keep their homes in California as Rentals and “Safety Value” to

return to California!??!! • The “Low” Initial Cost of Nice Homes here in Texas are “offset by very

high property Taxes”

5. Realtor Data is incomplete view of Market in 2016 • “Coming Soon” Signs • Hip Pocket Listings • Online and “Help You Sell” save the Fee programs • Some “Realtors” going independent (Non – Realtors) • FSBO (For Sale By Owners) and reduced commissions

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6. Housing Market driven by Low Interest Rates and FNMA buying Loans for $417,000 or less and Migration of People from Expensive Markets! (Risk potential in bond market) The market will cool due to loan qualifying ratios and over supply of $450,000+ homes

7. Collin and Denton County will Boom and Follow the Jobs to Plano/Frisco and

Alliance

8. Buyers are willing to commute one hour (travel time – not distance) each way (less than California) Growing Gas Prices a Risk.

9. Lot Prices and Development Costs will change the ratio of House to Lot (20% Lot becoming 25 – 40% of total house Costs in key high demand areas)

10. Smaller Houses are the demand BUT the Supply and Zoning are for larger homes/City/Lot Size Driven – Uncooperative/Unrealistic Cities

11. 2016 – 2020…. Texas Homes are likely to Double in Value in 5 years! • Welcome to California 1955. Current Apartment Dwellers may become

California Dreamers… and be stuck in Apartments or Parent’s Home! There needs to be innovations to adjust for: Student Debt Income Stagnation with increasing house prices Shorter View of life and lifestyles (less responsibilities and risk) Less Materialism Life Style Transportation issues/Urbanization Appreciation and costs increasing further than Incomes!

12. FNMA Dependent/Secondary Market? Yikes? US Housing Market Driver!

• $417,000 Max Loan • Income Ratios for a $417,000 Loan Requires $12,000/month take home

Pay – After Tax! or $150,000/year • Or the 30-year Mortgage will be gone Forever

13. Need: Planned, approved by cities Granny Flats and places for grandparents

(Baby Boomers) to live in the back yard! • Families cannot afford assisted living • Older Americans are broke. • Families will love it –Baby sitters

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• Grandparents Not welcome IN the House • Cities will fight Granny Flats with all they have on zoning. • Voters should demand this NOW and approve new projects NOW! • New Homes will be smaller but need MORE storage for Baby Boomers

Special Heirlooms and Individual Treasures. (S.H.I.T they inherited from their parents!)

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VI. Growing Concerns in The Housing Market and Investment Values 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. 3.5 – 4% Increasing “Texas Mortgage”! Even if paid for 2.5 – 3.5% Taxes and Equal to as much as Mortgage. High property taxes could put many investments and city/school budgets at risk during correction of markets.

2. Unequal Imposition and Protection City Rent House Rules of Inspection Unequal imposition and enforcement of City Housing rules, inspections, repairs and License in regard of Rent Houses

• Vacation Renters ???? • Rent house vs. Owner Occupied Repairs Required? • Enforceability (Renter Rooms) • Boarding Houses/Rooms will be new trend of older Baby Boomer

3. Other concerns:

• Young College Grads and professionals are not excited or motivated to buy a house… yet. When?

• Interest Rate increases? • Affordability Index Down? (Construction/Lot Prices, College Debt Loads) • Appreciation Rates far exceeding Income Increases! DANGER SIGN! • Huge Lot Inventories on Horizon for $ 450 + K Homes Major Assumptions

of FNMA support and Corporations are coming to Texas • Correction or Shift in U.S Economy and Wall Street (Down) • Bust in Texas Oil Boom – Houston = Foreclosures? • FDIC Reserve Requirement Changes • Changes at the FED – Interest Rates Increase • Availability of Loans – Loan Standards • Oil bust area home defaults… serious • “New” 3.5 – 4% “Texas Mortgage”! Even if Home is Paid for 2.5 – 3%

taxes plus 1% Insurance per year based on value! • City impact fees/lot and construction costs up 15% (Income not?) • Old kids live with Mom and Dad? (34% over 25 years old)

4. Lot Prices Outrageously HIGH! Due to:

• City Fees/Impact to Fees • High Dev. Costs • Low density “Desires” of City • Regulations • Huge “impact fees” by cities (transferred to lots.)

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VII. Rural Land and Urban Fringe Land 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. The Waggoner Ranch 510,000 Acres Sold for $725 Million - $1,400/Acre!! Base line for all Texas land?

2. Land Rents and Values in Midwest should be crashing with Commodity prices.

Texas Hunting Lease and Grass Lease suffering. Farmer Profits, as Baen projected in 2015-16, expected to drop in 2017 (continued down)

3. A drop of 25% for corn and wheat (examples) may relate to a 50% drop in profits:

• Reduced subsidies • School lunch programs (healthy?) • Ethanol Support B.S discontinued

4. AG Values (different than Market Value) being raised significantly by Appraisal

Districts even with FALLING commodity prices and lower Farm NOI – DANGER! This is Real – Take Note!

5. Farm Royalties and the Market is softening for the sale or liquidation of mineral rights/sales. (Lower NOI for farms and ranches)

6. Midwest Banks/Farm Belt is bracing for Farm Foreclosures and possible increasing interest rates… will increase costs/defaults

7. U.S Food Exports to continue to fall (U.S Dollar Strength)! Also Changing in

eating habits among primarily younger customers

8. Texas Cattle Prices are dropping for many reasons: • Affordability of consumers!! $6.00 hamburgers!! • Antibiotics effects (Costs up – Losses up) • General Economy • Rains • Herd Repairs/ Numbers have recovered.

9. Texas Rural Land Prices Stable but market has Stalled

• Oil crunch • Royalty Crunch • Commodity Prices • Risk of CWD in deer herds?

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• Risk of Florida screw worm! (New) 10. The Immigration of Jobs and people to Texas will increase and rural land prices

will follow 2017-2021 due to “higher and better use” rural homes and recreation.

11. Land is a way to store wealth very long term (Waggoner Ranch)

12. Land has maintained its value, although volume of sales in significantly down • Farm land has appreciated above inflation rates • Quantity of farm land decreases but productivity is up • World population pressures provide growing opportunity in this segment

13. Record low debt on Land today per acre, appears as few foreclosures are found

in data

14. Oil and Gas and other hidden income have been icing on the cake, not the cake • Royalties • Wind royalties • Water Sales • Pipeline Condemnation Income • Hunting Leases (Stable for Now) • Lower grass leases and farm leases • Power line easement payments

15. Financing for Land will be tough! Farmer Mac and U.S may bow out while FDIC

restrict loans • Liquidity will be low • Holding periods will be longer • Down payment 35%+

16. The Rich will keep their lands (Perot, Hunts, Basses, Ted Turner, etc.)

17. Land, as always, will be a place to store wealth and for retaining wealth for

estates and very long – term holding periods – The True Basics of Wealth

18. The Illiquidity of Land has Skyrocketed. 2017-2021 Owner Financing will return and retired farmers will enjoy much higher interest rates than banks will pay them on a cash sale!

19. There will be opportunities due to the Oil Bust for Raw Land (New Mexico and

Texas Ranches)

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VIII. Apartments 2017 – 2021/2017 to be the Top of Cycle By John S. Baen PhD. (Baen@unt.edu)

Short-term Apartment Leases add Volatility to General Economy due to 1 year leases

1. Dallas rents $957/month and 97% occupancies and construction are reflective of a New Renters Society in America. Appear to be a classic cycle @ peak

• Rents increases will slow • Construction cycle/Number of Permits

2. No longer any stigma of renting vs. Owning a home (good for apartment

investors)

3. Economic Reality for Tenants – Short view Volatility, 12 month Leases

4. Short – Term housing Fuse? 12 Month Option vs 30 years Loans

5. Apartment Owners tenant criteria options is more flexible than LOANS and may allow 50% or more of take home pay to apply to rent. May insure occupancies and high NOI at risk of lowering tenant quality.

6. More professional and better property management companies/institutions are operating in Texas and reduce risk.

7. 51 – 58% Operating Expenses for apartments by owners are cheaper than cost of ownership of homes for tenants. Rent/buy decision is a very, very wide gap in 2016.

8. Condo Conversions is always an option to monetize and create value for apartment Owners (Here we go again?)

9. Doubling Up is always an option for Broke Tenants

10. Uptown Dallas rents at $1700/month vs $925/month 5 miles away is the cost of Rich Mate Hunting. The IN Group who later will settle down and likely buy home in the suburbs??

11. Untested major mixed use projects with DART Rail will change the dynamic and market for all apartments. (State Farm Project, etc.)

12. Cost and labor to construct increased 15% in 2015 and 5% in 2016. Yikes!

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13. Rent increases are greater than income increases of tenants!

14. 2016 will be found to have been the peak of the apartment market:

15. CAP Rates are likely to increase when interest rates finally increase?

16. Market or replacement value versus investment value may become the new NORM!?!? Look out in 2017-2021.

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IX. Usage Texas Retail Investment Trends 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. Smaller Standard Footprint Stores and Lease Renewals will have Huge Dynamics

• More tenants in smaller spaces. Same total space? • Smaller freestanding buildings /Less lands and parking? • Smaller pad sites? • Redevelopment or reconfiguration of existing retail projects!?

2. The rapid rise in Internet Sales will continue and accelerate to cut into Gross

Sales. • City Taxes and eventually less Real Estate Taxes? AND Lower retail

property returns? • Giant Gas Stations will change Gas and Convenience Store Retailing and

Sales/Property Tax Dynamics

3. Giant mixed use projects in Richardson (State Farm) and Frisco will place new Dynamics in the overall market

4. Conversion Action of Reduced needed Specialty Buildings? • Branch banks? • Car title loans? Locations? • Traditional gas station? • Taco and chicken places? • Emergency care places?

5. What to do with huge larger spaces and places after the retail grocery store

wars? • There will be many closings.

- Can you say THRIFT STORES! • Walmart’s serious changes – Building and New store slowdown:

• 230 new buildings in 2016/2017 to 34 new building in 2018 • Closing Sam’s Club and Walmart stores • Change in operating and acquisition policies. Develop and keep retail

pad sites! (Kroenke/Waggoner) • Projected changes in existing store uses (distribution) and footprint

Smaller stores Internet groceries and drive through pick-up options Major online retail efforts Major grocery store dominance

• Huge loyalty of senior managers and store management (14,000+) dues to less development /Growth and Efficiencies

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6. Many companies that traditionally grow through expansion and new locations will

begin to close locations • The Gap (-25%) • Rent-A-Center • J.C. Penney • High-end Retailers in “Wannabe” shopping centers trying to copy

Southlake Town Center • Sam’s, Walmart, Macy’s, etc.

7. Nebraska Furniture was projected to put big-time pressure on all local furniture

stores, impact has not been readily apparent • Rooms to Go • Finger Furniture • Etc.

8. Restaurants and retailers – Build to suit is changing

• New minimum wages of $15 - $17/hour in New York, Washington State, etc. will reduce or eliminate profits of many businesses – Help Texas grow

• $8 Hamburgers? Consumer will cook at home?

9. New federal Guidelines proposed for “Daddy Baby Leave and Pay” and overtime requirements will hurt retailers (and employers)

10. Serious anti “antibiotics” chickens, cows, and grades for food will really hurt both supply and cost of food (Farmer’s cost, too). Increase costs in meat

• Report cards – Quality of food served: A+ - Chipotle – stock down <-26%> B – Chick-Fil-A F – all, all others

• Whole Foods “Organics” Expensive – Questioned!

11. Grocery stores will continue to fight for market share • Walmart will win (28.4%) • At risk?

Whole Foods (1.8%) Market Street (1.0%) Sprouts (1.5%) Etc., etc., etc.

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12. Buc-ees 80 pump destination store will close or have “wars” with a significant number of gas stations along Interstates

• Quick Trip (will prosper) (Gas @ $1.77 11/08/2016 @ 114 and 35W) • Race Trac (will prosper) • Shell (hurt?), 7-11 stores/gas splits

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X. OFFICE MARKETS ON FIRE: Office Market Snapshot – North Texas 48,500 New jobs 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. Frisco turning mixed use industrial land and buildings into offices or “office” retail. Higher and Better use.

2. Average office rents @ $22.39. Office record price? Record Office Sale prices

$510 (Uptown Dallas) 3. 54 Fortune 500 companies driving construction and 48,500 new

employees/transfers expected. Synergistic Effects – Big word but absolutely the perfect word. – More Positive Moves Bring More Positive Moves. • State Farm 3,000 • Liberty Mutual 4,000 • Toyota 4,000 • Kubota (TBA) • FedEx (TBA)

• Ameritrade 5,000 • Charles Schwab 1,500 • Brothers Coffee • Many Confidential HQs in

Transition in 2017 - 2021 • Related suppliers’ huge numbers • Many, many more

4. North Dallas Toll road and 114 Northwest hubs for new offices markets (as

always and always) 5. Older class “B” and “C” buildings in Dallas and Stemmons Freeway – Second

look and life? • Love Field booming • Arts District

6. Chinese Modular office buildings may be exported or concept adopted and

kill traditional office building!?? Serious supply shocks possible – like warehouses? 40 stories – Yikes!

• Components built offsite • Built in six months • Ugly, ugly buildings • But may be in U.S./Texas?

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XI. Industrial Projections for 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. Hillwood/Perot sells their new, leased, industrial portfolio in/at Alliance!! • Retained 10% ownership • Retained management • Very, very smart people • What will they do with the cash! Great question!

2. Frisco has zoned industrial land that is worth so much more for other uses

3. Plano wants all industrial land to be employment centers, vs. warehouses/distribution uses.

4. Industrial split market • Alliance/Denton/McKinney • Wilmer, Hutchins, South Dallas • Denton on Fire! • Westgate Denton projects – win groceries, target fridge, Winn Co, etc.

5. Average Cap rates 5-7%

6. The “average” new rents for new projects may be “$5.18/sq. ft.”

• These will stay flat or slightly increase due to construction materials costs in the future (longer term/flatter rents)

• Concrete is costing a lot more!

7. Land/development costs and construction costs more and continue to increase faster than rents.

8. Warehouses average rent (new, old, low ceiling, high, metal, etc.) is $4.10/Sq. ft. and “Flex space” is $9.90 (Colliers Data – thank you)

9. Vacancies are currently “8%“

10. The South Dallas Development are getting farther and farther away in many ways from North Dallas/Collin County growth:

• Travel time – more traffic • Social economic difference • Distances • Opportunities for population • Hourly pay/Cost of living differentials

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• Frisco economic development boards industrial land – in valuable Never Never Land???

11. Alliance, Denton, and McKinney projects will blossom and have high growth rates of large projects to support Plano/Frisco and Southlake/Westlake Corporate growth (Suppliers)

12. Affordable Industrial Land will win!

• South Dallas • Denton • McKinney

13. South Dallas warehouse projects are isolated locations far from North Dallas

Plano/Frisco executives and inventory managers

14. Traffic/Construction is a Temporary Barrier (2499, 35W, 35E, 380, 121). Shocks when completed – isolation until then

15. Employment center vs. Warehouse Distribution in Frisco/Plano • Hillwood warehouse/Distribution/Industrial Alliance Portfolio Sold! • Frisco shortage of economically priced Industrial land

“Higher” and Better use reality. Frisco Economic Dev. Corp. has land but at what price to offer? 5

offer but cannot compete with others in town industrial developments by policy.

16. The Toll Roads System will act as both Barriers and Security for the Hot Now Developing Markets. No crime or criminal can occur without Toll Road Central, Photos and Transparency/Tracking.

17. The boom in mini-maxi warehouses to store Baby Boomers: Special Heirlooms and Individual Treasures (S.H.I.T.) the kids do not want or appreciate.

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XII. Texas/US Health Care and Hospital, and University Buildings, Investments and Jobs Creation 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. Health Care Insurance Proceeds and Judgement against Citizens and Families are driving the Market (More bankruptcies due to hospital bills than any other reason for families in Texas.)

2. High local taxes, Insurance, attorneys and high pharmaceutical costs are driving Health Care prices high

3. Emergency care clinics will go broke

• Cost of real estate construction high! • Cost of care overly high • Cost of staff overly high • Clinics on every corner • Plan alternative uses Now

4. Doctors are revolting on Insurance claims, Obamacare, Med. Care, and

Medicare. The money is stalled • Service price lists • Difficulty in getting paid • Insurance slow pays • Paperwork is huge • High cost of prescriptions

5. Health care costs and insurance are killing businesses, small businesses, and

families • $17,000 - $18,000/year with $10,000/year deductible • Blue Cross raising Obamacare members 35-65% in 2016

6. Government Health care is untested in Texas. Fines on the way for Employers!

7. Parkland and property taxes for hospitals continue!

8. Obamacare Premium increasing 35-65% during 2016, and will worsen in 2017?

9. Universities raise tuition for administrative positions and because they can

• Supply of $ by Government loans • State taxes • State co-funding

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• Fees are increasing faster than tuition and unregulated • If universities were business, they would be bankrupt • Underutilized space, classrooms and buildings • No accountability to anyone on costs • Driven by Student Loans by Government. • Classroom underutilized (Few 8:00 am classes/students) • Administration Financial and Staffing Ratios are equal to Academics’

Budgets and number of Professors. (Something wrong with the photograph.)

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XIII. Conclusions/Investment and Taxes – Action Plans 2017 – 2021 By John S. Baen PhD. (Baen@unt.edu)

1. The election and American system worked

2. There is a refreshing hope and a real spirit of “Yes!” for Business and America with the new President. The media and the polls did not pick the President.

3. Small business is the only answer for more jobs in America

4. More layoffs are coming in America due to • Efficiencies • Mergers • Robotics • Slowdown in economy • Less disposable income by families that trickle and Reduce Retail Biz. • Over market minimum wages (California, New York)

5. The financial and stock market cycle of investments is nearing the end of a 12-

year bull run cycle.

6. Volatility, speed of automation, and worldwide information flow and increased risks of economic problems are High

• Internet Retail business attacks • Terrorism • Civil disobedience • War • Disease • Excuses to be lawless here in U.S.

7. The velocity of:

• Money • Technology • News • Financial markets are huge and disturbing • Pre-election U.S. Stock Market up due to Layoff/Dividends layoffs and

Mergers.

8. US Job reports are concerning • Flat • No new business growth driven • Employment driven

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• Banks and financial industrial layoff • Smaller retail footprint • More Internet commerce • More efficiency due to technology means fewer jobs and at lower pay • Smaller profit margins for retailers • Less sales and property tax for local/state governments

9. Corporate moves to Texas are smart for the Corporations and a boom for North

Texas (And a Drag on the economies where these people come from!) • The impact and implications of job surge is underestimated • The time fuse is 2017 – 2020 (seems like long time) • Gas efficient cars in less demand due to $2.00 gas

10. Property taxes and IRS taxes on domestic companies are a huge drag on U.S. and Texas Real Estate investments. Something got to change! (California freeze/Legislation?)

• See changes proposed on estate planning • See carried interest rules • See corp. taxes for US companies onshore vs offshore.

11. Financial investments will correct (crash) and Real Estate values rents and

liquidity may also fall but Real Estate is always the True Wealth!

12. The winds of war are blowing and may stimulate the world economy but disrupt Financial Market? Or like most wars create a Booming Jobs and Economy?

13. North Texas House Appreciation rates will increase faster (for a while) than income and may require lower loan standard

• Federal loan/Bond buying (FNMA) • Lower down payment (Higher risks) • Reduced credit scores • Smaller lots • Smaller homes

14. Rent house – 10 years old or less will be great investments homes only (High

leverage/Non-recourse) with superior tenant and property management selection

15. For Real Estate investments, either go long on today (Low interest Rates/Fixed Mortgages - High leverage/Non-recourse) or pay cash

• If financing (No liability/Non-recourse)

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16. The US Dollar will be devalued to create inflation and exports and will suffer (Let’s hope!) but propped up by worse-looking currencies in Europe: UK Pound/Euro Falter/Etc.

17. The Euro will fail, refugees will cause problems, political and economic, and security

18. We will either have (within 5 years): A. Hyper-inflation/devaluation of US Dollar:

• Debt cancellation • Fresh capital created for all Americans • Skyrocketing hard assets value • “increasing” home and small business values • Debt holders and bind holders slaughtered

China, Japan, foreign T-bill holders Mortgage holders Treasury investments Municipal bond holders

• Peace and new economy B. A depression 1930s’ type (10-year slow or shrinking or slow growth of economy)

where US $1 is King and the dollar buying power worth 10x! – Purchasing power will remain as rents fall!

• Cash will be king • Hard asset value crash but buying power remains • Financial assets, bonds, stocks evaporate to zero value • Civil unrest and rioting • Political upheaval • Civil/Financial far and new economy • Game over, start over! Unless you paid all cash – You break even

19. Protect yourself and pray for peace

• 10% cash (f a crash, buy buck assets @ 10 cents/$1,00 • Hard assets – the 7 Gs:

Gold Guns Good cash flowing small business Grub (Commodities) Ground (Real Estate) Gas/Oil God

20. Action plan (Choose A or B or C – Combination of three blended approach)

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A. Be highly leveraged: with non-recourse debt on Real Estate with cash flow (the default option). Go long on cheap debt now!

B. Have zero debt on Real Estate Assets: Cash flow will drop, but purchasing power will remain (all prices fall). Concept know in Economic = PARETY

* If we have devaluation/hyperinflation to cancel out/ cheapen debt, borrowers will win 3 ways. If we have a depression, use the default option on leveraged deals. If you pay cash, as rents fall the value of cash flow (purchasing power will skyrocket).

AMERICA IS GREAT without regard to the economy.

WE ARE BEST PLACE IN THE WORLD!