Gill Capital Partners 4th of July Update

Happy Fourth of July to our clients, friends and partners. Independence is something near and dear to our hearts at Gill Capital Partners. We are grateful and proud of our ability to offer our clients independent thinking, opinions, and advice. We wanted to send a brief update on recent market and economic events before the long holiday weekend, but first, some interesting Fourth of July facts…

Fourth of July Facts

  • Only two people physically signed the Declaration of Independence on July 4th: John Hancock and Charles Thomson. Most others signed it on August 2nd.

  • Three presidents have died on July 4th: John Adams, Thomas Jefferson and James Monroe.

  • Fireworks have long been a part of Fourth of July celebrations. In 1884 miners blew up the post office in Swan, Colorado (near Breckenridge) when local leaders refused to supply the men at a mining camp with fireworks.

  • Americans consume around 155 million hot dogs each year on the Fourth of July.

  • In 2016, the National Beer Wholesalers Association announced that July 4th was the number one holiday for beer sales in the U.S.

  • With many fireworks shows canceled in 2020 due to COVID-19, the American Pyrotechnics Association is asking for financial help from Congress to keep family-run fireworks businesses afloat. 

Corporate Social Responsibility – Some corporate heavyweights, including Unilever, Verizon, and Starbucks, recently announced that they are boycotting further advertising on social media platforms such as Facebook, Instagram, and Twitter. They are seeking to use their massive advertising budgets to effect change in the highly controversial social networking advertising space. Unilever said on Friday, “Given our Responsibility Framework and the polarized atmosphere in the U.S., we have decided that starting now through the end of the year, we will not run brand advertising in social media newsfeed platforms Facebook, Instagram, and Twitter in the U.S.” The company said further, “Continuing to advertise on these platforms at this time would not add value to people and society.” Unilever is a massive household goods company that owns over 400 brands including Dove soap, Lipton, Axe, Breyers ice cream, and many more. Unilever was the 30th highest advertising spender on Facebook in 2019, having spent more than $42 million on online advertising. The company’s decision was driven by concerns over hate speech and divisive content on social media platforms. Not long after Unilever’s announcement, many other large corporations followed suit, including Procter and Gamble, Coca-Cola and Hershey. Shares of high-flying Facebook and Twitter were down nearly 10% on Friday following the announcements. Facebook generates roughly 98% of its $70 billion in annual revenue from advertising. Facebook’s CEO Mark Zuckerberg has said that he intends to discuss how to curb hate speech and divisive content. Corporate America is demanding positive social change and using their substantial advertising budgets to effectuate it.

Commercial Real Estate – Proactively Reducing Risk – As the Coronavirus pandemic has wreaked havoc through society, few facets of life seem untouched. We have all been forced to change and adapt to a new reality that has brought meaningful changes to the way we shop, work, travel, and communicate. With the majority of offices working remotely, many local businesses shuttered temporarily, or in some cases, permanently, and others open under onerous regulations and capacity restrictions, it seems almost too obvious of a conclusion that commercial real estate will be negatively impacted. Many people anticipate a rise in office vacancies as remote working seems to be here to stay. Also, traditional retail has been in the midst of a major transition from brick-and-mortar to online for several years, and the pandemic has only accelerated this transition. On the positive side, the transition to online retail has generated an increased demand for industrial space, a market that was already red hot prior to the pandemic.

While we believe the commercial real estate market will survive, it certainly seems to carry meaningful risk at the present time, or at the very least, is in for a substantial change as the market absorbs the evolving work and business environment. For most businesses, rent expense is one of the top two or three expenses. Employers and employees have been forced to find ways to effectively work remotely, and many companies are now seeing a realistic way to reduce overhead by incorporating more work-from-home into their permanent business models. Office and retail leases are generally multiyear terms, so aside from bankruptcy and business closures, this is a bit of a slow-moving train. Businesses will address their space as their lease terms dictate, but it seems logical to assert that the demand for certain segments of commercial real estate could soften in the coming years. Furthermore, real estate valuations and pricing were elevated coming into the pandemic, so some reversion to the mean is to be expected. We think it is too early to say that office and retail are dead, and it is not likely a binary outcome; however, the warning flags and the potential risks are too great to ignore. Our investment committee has made the decision to proactively reduce our real estate allocation. This may be temporary until we have a better handle on the state of the commercial real estate market, or we might choose to re-invest into real estate in a more opportunistic manner. Our investment committee takes the decision to buy and sell securities seriously and we do not arrive at decisions such as these lightly. We would welcome the opportunity to discuss this topic with you individually and review our thinking, so please do not hesitate to reach out.

We hope everyone has an excellent Fourth of July weekend and can find a way to celebrate independence in a healthy and safe manner, complete with hot dogs and fireworks.

As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.

Erin Beierschmitt