The Truth hurts but we better start getting used to it

Implications: As the article so vehemently proposes, the worst is yet to come. The bottom of the commercial real estate down cycle hasn’t even been reached yet and there are those who are claiming the return of the good times are just around the corner. Is this a fantastic case of wishful thinking or do these folks know something the rest of us missed? What this writer suspects is once again major industry players are in major denial, or as the saying goes misery Loves Company. If you follow their unjustified optimism you will be in total misery.

Analysis:  The first thing to realize when sorting through all the noise and sound bites of the financial news is Wall St. is the most self serving institution on the planet. Remember stock traders (brokers) make money in up markets as well as down markets, as long as there is trading volume. That is how they get compensated.  

The Banks are rushing to bail themselves out so they can return to profitability for their shareholders or least the top executives who just recently replaced the deposed Emperors of their financial worlds be next on the chopping block.

The Federal Reserve is doing everything in its limited power in this new age of Global Markets to fend off a banking crisis. The sad truth is they are trying to ease the public’s mind by actually promoting what they are going is helping the business borrower by lowering their rates. This has worked only modestly with perhaps Home Equity Loans, but the inconvenient truth is borrowing has gotten a whole lot more expensive if you can get a loan.  


What is happening as the article points out are markets are in the process of balancing themselves out.  In other words the bubble has finally burst on a Global scale.


The United States has been existing literally on “borrowed time and money”. That works well as long as there are no glitches in the financial system. However the markets have gotten way out of balance. So too had the prices being paid for investment properties with cheap debt. Smart investors would have known this and not fallen prey to the overly leveraged return. I guess one has to ask the definition of “smart investor”.  

So what happened in commercial real estate is the same thing. Investment properties were bought with the same mindset, with the thinking nothing could go wrong. Maybe its because there are newer players in the industry that never experienced the early 1990’s commercial real estate implosion or the other 4 major recessions prior to that. Perhaps they never waited in gas lines or saw double digit interest rates and inflation rates and typical vacancy rates in the mid to upper teens in almost all sectors of the commercial real estate universe.


Perhaps they weren’t witness to the 1987 Stock Market Crash that wiped out half of a trillion dollars in stock holder equity in one day which then took 3 years to hit the commercial real estate markets along with the realization the market had become over-built.  

Here in the DC marketplace for example, it has come to roost once again with close to 20 million square feet of new office construction and only 20% pre-leased. This of course has created double digit vacancy rates with no short term horizon on when these will be filled. One local economist has put the current vacant inventory at 3-5 years in which to be absorbed. And yet there were two investment groups that decided to pay over $800 psf in the face of that.  


So sadly these same people have bought into the Greenspan can do no wrong mindset. The Federal Reserve can fix everything. Our politicians can come up with some nonsensical amount of money to hand to all tax payers as if that is the cure. Unbelievable is what this is all is.  

In addition you have a current ailment afflicting our culture which is the utter lack of taking responsibility for ones actions. It must be someone else’s fault, but don’t worry all will be fixed like new in any time flat. Just look at the United States Citizen’s mentality of 5 years out from 9-11-2001. Its as if that tragedy occurred 50 years ago. If the problem can’t be fixed immediately, go on to the next thing.  Americans have a very short attention span. It’s a cultural ADHD.  


Well boys and girls the free ride is over. As my colleague Mr. Leonard had so eloquently pointed out in one of his recent posts we have many long term issues that need our attention. One of which will be the lack of clean water. The other is our long term health care for the soon to be retiring baby boomers and the cost that will create for everyone. These will be problems to be dealt with for multiple generations.   Clean water & air, the cost of oil and gas, Middle East Conflicts that will not go away as much as everyone wants to pretend will. The politicians from whichever Party do not want to deal with these issues. Why, because it might involve sacrifice of some variety or very hard unpopular decisions to be made. Our roads and utility infrastructure is beginning to crumble beneath our very feet. Will politicians raise taxes to pay for this, of course not? The article is on the money when it reveals that we are in for a long term readjustment of our Standard of Living.  


I know those on Wall St. and many of the Top commercial real estate players will not want to help pay for solving these issues as it may mean giving up the life style they have been accustomed to for a generation. But unless the mentality changes we are in for an even longer period of downward adjustment.


If the Federal Reserve can bail out Bears Stearns, why can’t the Federal Government bail out our long term needs? No need to answer it was a rhetorical question.  


And just because some sales person says the problem is solved, its OK to jump back in the water, you should stop and think and ask a simple question...How was the problem fixed and does it make sense, and for how long is the fix going to last.  


Its no different in commercial real estate, as its vitality is based on the economic strength of the United State’s economy. And when you read along with the other sound bites which company has laid-off workers or which companies have filed for bankruptcy that is when you should realize the commercial real estate market is still headed towards its bottom. Always keep in mind Commercial Real Estate is a LAGGING Economic Indicator.


Its Ok to be optimistic, but you need to have a logical reason to be optimistic in light of current and more importantly, future circumstances. Otherwise its called being foolish.