Mark Binder, Chang M. Liu, Anthony Nguyen and Greg Skalaski Weigh In On 2023 Outlook

This panel is produced by the L.A. Times B2B Publishing team in conjunction with Cathay Bank; Shawmut Design and Construction; Shegerian & Associates, Inc.; and UBS Financial Services Inc.

The business landscape in 2022 was faced with complex challenges. The lingering elements of change and management of new protocols after the COVID-19 pandemic continued to force companies to assess and in many cases make permanent changes to their operational protocols and how they approach relationships with customers, clients and employees.

This Los Angeles Times B2B Publishing discussion is designed to provide unique perspectives and insights into forward-looking business strategies for 2023. What new best practices should business leaders be aware of this year? How is 2023 shaping up for international business? What supply chain management trends can we expect? How will the remote work trends continue to alter business norms? For the answers, we turned to a diverse assortment of four trusted advisors and experts, who graciously shared predictions and forecasted what to expect.

Q: In the bounce-back from the pandemic, how has the job market been affected?

Chang M. Liu, President & Chief Executive Officer, Cathay Bank, cathaybank.com: Everyone is used to the hybrid workplace model but it has resulted in big changes for employers and employees. It’s been a challenge to fill hourly-paid positions when potential candidates have different alternatives across industries that offer the same hourly rate. Employers have been thrown a curve by the shift of bargaining power to employees and must remain flexible in order to recruit the necessary talent. In order for the hybrid model to move forward, management needs to evaluate how it affects team members’ work momentum and what can be gained or lost in this new work environment, e.g., loss of ideas that gets generated through daily face-to-face interactions, higher turnover with new employees who do not feel fully integrated with the team, expansion of the pool of candidates by taking a long commute out of the equation.

Mark Binder, Managing Director - Wealth Management, UBS Financial Services Inc., advisors.ubs.com/wise-river: The reaction to the pandemic in the spring and summer of 2020 was to shut down the economy to slow the spread of COVID. As a result, over 22,000,000 Americans lost their jobs. In order to assist those out of work, the Federal Government issued an unprecedented amount of fiscal stimulus that included extended unemployment benefits, direct stimulus payments and forgivable loan programs to companies. The stimulus created disequilibrium in the labor markets, and as a result, there are now almost two jobs available for every person looking for one. In the coming year, wages should continue to rise as even in a slowing economic environment, service sector labor demand will likely continue to grow. As we head into a recession, the demand for labor may ultimately decrease and labor costs could begin to stabilize toward the end of 2023.

Q: What are the main pros and cons of doing business in California today compared with other states?

Anthony Nguyen, Shareholder, Shegerian & Associates, Inc., Shegerianlaw.com: California is at the forefront of progressive protections afforded to employees. This does, of course, come with the “cost of doing business in California” as business owners are often quick to say, but such concerns should and are alleviated if employers simply follow the law and provide the legal protections afforded to their employees. In turn, employers will be able to enjoy the rewards of a diverse and highly qualified workforce.

Q: What advice would you give your clients for the coming year?

Greg Skalaski, Executive Vice President, West Region, Shawmut Design and Construction, shawmut.com: Keep a long-term view in mind. While short-term economic uncertainty may cause wariness in moving forward with a construction development or project, upfront planning and collaboration can mitigate risks. Find experts and partner with them from the outset - having the right construction manager at the table alongside owners, architects and designers allows for feasibility reviews and real-time adjustment to market changes. In a time of uncertainty, this helps provide certainty of outcome.

Binder: There are many cross-currents facing investors in the coming year. The Federal Reserve has raised the Federal Funds rate from 0% to a range of 4.25% to 4.5% since March 2022. In addition, the Federal Reserve is likely to raise rates by another .5% to .75% by April. This will likely result in an economic recession in the coming year. Stocks will likely experience volatility in the first half of 2023 as analysts bring down earnings projections. High-yield, lower credit-quality bonds will likely underperform as spreads over treasury bonds increase as the economy weakens. Our advice for the coming year is to ensure clients’ asset allocations match their risk tolerance, and we recommend owning high-quality stocks and high-quality, relatively short-duration bonds.

Q: What are some new challenges/issues that have surfaced for employees as a result of COVID and the hybrid/remote work models?

Nguyen: A “new” challenge is actually an “old” one, as more and more employees will have to adjust to transitioning from working from home back to physically working in the office. Many employees changed jobs during the pandemic, so how will such employees deal with physically working around others who they’ve possibly had little physical interaction up until this point, and in turn, how will the more senior employees deal with this influx of “new” coworkers, subordinates, and management? As more and more businesses begin to shift back to working in the office, the new dynamics of personnel interactions will be something to watch.

Q: What market risks do you foresee for 2023 and how do you suggest clients mitigate them?

Skalaski: Material price and availability will continue to be volatile, but owners can set their projects up for success before they even begin. In the preconstruction process, align all key stakeholders - owner, architect, designer, construction manager, and major subcontractors - around a common schedule and cost target so everyone is driven toward the same goal. This ensures the best available materials are selected and eliminates the need for future redesigns; allows for early communication with subcontractors to set a base for material costs; and allows for the early release of procurement packages, mitigating lead time and pricing risks.

Binder: The Federal Reserve has been raising interest rates in an attempt to bring inflation down to its target of 2%. In addition, as of July 2022, the Federal Reserve has been taking approximately $100,000,000 of M2 money supply out of the economy per month. Higher interest rates and a decreasing money supply will typically lead to a recession sometime in 2023 or early 2024. As economic activity slows, analysts will adjust their earnings estimates downward. This can lead to market volatility. Although we had a difficult 2022 in terms of equity returns, the first part of 2023 may also be challenging. With regard to bond markets, The Federal Reserve will likely stop raising rates in the first quarter [of 2023]. As interest rates peak, the Bond market will likely represent good value and give investors relatively high yields and appreciation potential.

Q: Do you think California labor laws and COVID-19-related rulings will continue to impact businesses in ‘23?

Nguyen: COVID-19-related rulings continue to have a substantial impact on our judicial system in light of the backlog and delays caused by the pandemic shutdown. Individuals who need to enforce or defend their rights through legal proceedings should be aware that such processes may not be as fast as they would hope and that such will be the norm rather than the exception for the foreseeable future.

Q: What types of businesses will thrive during 2023?

Binder: Inflation has taken a toll on the U.S. consumer. As household savings created in large part by fiscal stimulus are depleted, consumers will become more selective regarding their purchase decisions. Due to the COVID shutdowns and long-term isolation, there is large, pent-up demand for services that are experiential. We believe travel companies, tourism and restaurants will do well in the coming year. Capital goods purchases will likely slow as more families spend their discretionary income and savings on services and necessities. Consumer staples companies will likely do well this year as inflation slows and margins improve. As interest rates have risen, increasing margins for banks should provide a backdrop for increased profitability that may offset a likely slowdown in lending.

Q: What are some trends or changes you are expecting to see in the lending market?

Liu: I think 2023 will likely see flat or low single-digit growth in loan demand for most banks. The primary driving force for this will be higher interest rates, higher cap rates and tighter credit underwriting. We will likely see some cracks in the industry’s current loan portfolios depending on the strength of the sponsors. We see potential problems with the general office market, especially in the Central Business Districts. Tighter underwriting for all commercial and trade finance clients is likely as businesses have inventory buildup that may not necessarily translate to higher revenue growth.

Q: What trends can we expect from a supply chain management perspective?

Skalaski: Any material can be affected, with costs and lead times shifting in an instant and many items reaching all-time highs in 2022. Immediate action and problem-solving are required to deliver on projects. Different construction methods should be considered - for example, mechanical, electrical, and plumbing (MEP) systems can be prefabricated, saving time and money by installing them all at once. Modular construction allows for expedited schedules and the flexibility of reconfiguration to meet changing needs. Customized tools and processes can allow project teams to react quickly to changing conditions when implemented effectively. For example, Shawmut created an in-house department led by preconstruction and estimating experts that collects, analyzes and disseminates data in real-time to monitor and react quickly to changing conditions. These reports arm project teams and clients with the latest information to make the best decisions based on the current market.

Liu: Now that the zero-COVID policy has been lifted and despite rapid increases in COVID cases, factories in China have since been reopened and productions are ramping up despite rapid increases in COVID cases. The cost per container has already decreased and I think it will continue to come down. This may translate to more supply, and coupled with a higher price per unit, it may lead to reduced demand and flattening prices. It is a positive trend that we are moving in the direction of seeing more manufacturing here in the U.S.

Q: What is the commercial real estate outlook for 2023?

Binder: We are seeing a continued move from brick-and-mortar retail to online shopping and a continuing trend of working remotely from home. There is a continued migration from urban areas to the suburbs and rural areas. These trends will likely have a direct impact on commercial real estate. We believe that urban office vacancy rates will rise and rents will trend lower. Traditional shopping malls and retail will also likely continue to struggle. Industrial, particularly last-stop industrial, should continue to see high demand and continued low vacancy. It is estimated that there is a four million housing unit shortfall in the United States and as interest rates are rising, construction of new housing supply is slowing. As a result, we think that multifamily housing should continue to perform well, especially in growth markets where the population is increasing.

Liu: The commercial real estate market is experiencing some refinance risk since the five-year Treasury rate is 220 basis points higher than it was three years ago. Plus, I think the cap rate will catch up to interest rates as they continue to rise, and that will bring values down resulting in lower debt amount that can be financed. Owners who have liquidity will be fine, but those who don’t could face problems. Our bank has made a strategic decision not to originate much commercial real estate business collateralized by general office buildings for the past few years as the outlook for the general office segment continues to be a concern, given the change in the working environment as most industries had to adapt to both work-from-home or hybrid work schedules. Class A space may fare reasonably well but some Class B and C space may be repurposed. I also see a slow period for construction loans and new development based on today’s higher floating interest rates.

Q: What are some new laws that employees need to be aware of in the coming year?

Nguyen: Qualified employees will now have job protection for taking bereavement leave with most employers. Beginning this year, an employer with five or more employees will have to provide up to five days of unpaid protected leave to an employee upon the death of that employee’s family member, which is defined as either a spouse, child, parent, sibling, grandparent, grandchild, domestic partner, or partner-in-law. Only employees who have been employed for at least 30 days are eligible, and the leave must be completed within three months of the family member’s death. This is a substantial change in the law as employees previously had no such protections if they found themselves in a situation where they had to deal with the unfortunate passing of a loved one.

Q: How significantly has the work-from-home movement altered operational protocols in California?

Liu: I think it has caused businesses to become even more technology driven. Banking has always been paper-heavy and our experience during the pandemic taught us to be more digital - we had to evolve to continue to do business since our workforce was more mobile and that has continued post-pandemic. We have enhanced digital account availability to appeal to a younger generation and provide added convenience to our long-term clients. I don’t see branch banking ever going away but I must admit that when opportunities come up to move into a new area, I now ask myself if we need a brick-and-mortar location versus if the same business can be gained through the use of technology.

Skalaski: With the office market ever-evolving and the war for talent continuing, companies are putting an increasingly concerted focus on appealing, flexible work packages that include hybrid and remote work. As a construction company, the nature of our work requires in-person work on project sites and in the office, but we created a flexible work program in 2016 - the first in the industry - which allowed us to seamlessly transition to remote and hybrid work in March 2020. Shawmut Flex was created based on the principle that people perform their best when they feel their best, so everyone is empowered to own their schedule. The program has feasible options for the entire company, offering remote work, shifted hours, compressed work weeks and more.

Q: Any predictions for the stock market in ‘23?

Binder: Last year was a difficult year for equities. The S&P 500 lost 19.4%, while the Dow Jones Industrial Average and the Nasdaq were down 8.8% and 33.1% respectively. This occurred in a year when S&P 500 earnings were positive. Price earnings multiples declined from approximately 21 times at the beginning of 2022 to a low of 15 times during the year. If the economy slows and heads into a recession as we expect, earnings estimates will likely be revised downward. This could cause volatility to increase in the first part of 2023. At some point during the economic slowdown, investors will look to a future recovery which would bode well for stocks. While we do see volatility in the first half of 2023, we believe that we will recover in the second half of the year and have an opportunity for a multi-year recovery.

Q: How would you advise an employee who is facing harassment and/or discrimination in the workplace?

Nguyen: An employee who is facing harassment and/or discrimination should immediately notify management and human resources. A common mistake that employees in such situations make is to assume that nothing will be done, or worse, that they will suffer retaliation. While that certainly does occur in the workplace, employees must put the burden on the employer to respond accordingly to such wrongful conduct as they are legally required to do. Should the employer fail, then the employee should immediately seek legal representation to protect their rights to be free from such harassment or discrimination.

Q: What opportunities do you see in investing in bonds?

Binder: The Federal Reserve has rapidly raised rates since March 2022 in an attempt to reduce inflation. For the first time in decades, it is possible to earn a reasonable yield on short-term, high-quality bonds. We recommend beginning to extend duration to lock in higher rates. We believe as we head into a potential recession, the yield curve will further invert, meaning the yield on the 10-year treasury will come down while the two-year rate will rise or stay where it is. There could also be an opportunity to trade out of short-term, high-quality bonds into intermediate, lower-credit bonds as credit spreads widen later in the year. Buying bonds at a discount that will mature at par while receiving an attractive coupon has the potential to provide high, single-digit returns in a relatively low-risk asset class.

Q: In a nutshell, what advice would you offer a brand new startup launching in 2023?

Liu: First, I would recommend they have a unique competitive business model - it’s not viable to simply be another version of something that already exists. They must have a product or service that is different and not easily replicated. Second, I would suggest they focus on cash flow. Many companies, especially those in the technology space, focus on revenue growth or eyeballs per click rather than the bottom line. They think if they are able to keep increasing the top-line revenue for their investors that’s all that matters but it is tremendously important for them to generate a positive cash flow that reduces cash burn so that they can build a sustainable business model.