Why most people don’t see or “choose not to see” the on coming head-on economic crash coming their way?

Implications: It boggles the mind that so many in the business world and particularly in the commercial real estate industry don’t heed the dire and unprecedented actions being taken to stave off an economic collapse last seen during the Great Depression. Just look at the recent Federal Reserve actions and if that does not signal it is in near panic nothing will. Lastly, what many folks don’t seem to understand is the Federal Reserve is having no impact on lenders lending not only on commercial real estate but for other business loans. The standards have been tighten to an extent not seen since the last commercial real estate crash in the early 1990’s. Who said “if you don’t learn from history, history is destined to repeat itself.” Add this toxic mixture with the looming entitlements due the biggest generation in American history, and we have a major economic mess on our hands.

Analysis:  Everyday we read bad news about the economy and at the same time you can read commercial real estate (mostly broker) statements found in trade publications or on the internet, or various other media outlets, that basically say, “ yes things have slowed down, but it will only last a few months and markets will return to normal” Or you will read industry insiders say” We acknowledge the market has slowed, but not in our area” Then for example there are those industry people here in the DC area market that will parse their statements when called out on it, “well are you talking about DC Proper or the outlying suburbs?” Just this morning a trade publication quoted some investment brokers as acknowledging the investment sales market has but shut down. BUT they say, the fundamentals based on '07 are strong. What this means the fundamentals "WERE" strong between Jan-July '07. Since then absorption has been flat to negative. Further it was said the local market was "insulated" by the Fed Gov't, and should remain so in the face of an economic downturn. Obviously they don't understand or "CHOOSE" not to understand that the Feds are in a contraction mode.
So Investors of any variety, unless you are a big pension fund or institutional investor that "NEEDS" to park your money, is ask the hard questions.



The real problem is the same that got our economy into trouble to begin with. Its called denial for the benefit of one’s own pocketbook. Providing bad business advice for the sole purpose of making oneself money is just greedy and very costly at the end of the day. As this writer has previously pointed out, all the gains that were made over the last 2-3 years have all but vanished and then some.  


Now we come to the present and we see a Federal Reserve providing rescue not only to member banks that they have control over, but to non-member investment banks. What does that say to any intelligent business person? They are bailing out Bears Stearns because there was a “RUN” on the company by creditors wanting to withdraw their money. Doesn’t that sound very similar to what most of us learned in history or economics classes in school about the beginnings of the Great Depression? Wasn’t deflation of asset values one of the flash points of the era? Well does anyone think for one solitary minute what the Federal Reserve is doing is trying to save the Banking System both here and globally. This problem is not going to go away anytime soon as many in business and certainly the commercial real estate industry will have you believe.  


The closest comparison in many industry veterans’ minds is the early 1990’s commercial real estate collapse. They point to the over building and over supply of commercial office space as the prime reason for that collapse. They are quick to point out the “market fundamentals” are different this time around. But what built those buildings in the 1980’s was easy and cheap (in context of the time of course) credit. In those days it was matter  of banks selling off the hard assets at fire sale prices. Once sold and taken off their books the banks returned to profitability albeit dazed and evermore diligent on their underwriting.  


What we have now is an over abundance of collateralized debt that can not be sold even at fire sale prices. The reason is simple; no one really knows what is backing the paper. The Wall St. whiz kids that formulated such complex debt structures have confounded the rating agencies and it is almost impossible to figure just what they are worth. And since there is zero confidence and everyone is running scared, the debt markets have all but seized up, except for the “traditional lenders” such as Life Insurance Companies or Pension Funds. These lenders have limited resources by design because they have to be prudent matching liabilities against assets.  


This writer predicted the ripple effect the subprime mess would lead to along with the gutting of the housing market. Now the talk has become action which means the lenders are now looking at all debt which is well beyond real estate be it commercial or residential, and has moved onto all manner of debt. From car loans, credit cards, equipment sales/leasing and so on. Businesses of all manner shape and sizes, and especially small businesses will have a hard time and most likely will shelve any expansion plans. The operative word now is survival.  


Now the ripple effect has cost hundreds of thousands of jobs in the financial sector. This on top of construction jobs and everything real estate related. Chrysler announced they will close down their entire production in July for two weeks. That is unprecedented in the least. 
Just today, 3/28/07 the consumer spending report was released. It said spending was the lowest its been in 17 months. 


Federal, State and local governments are running major deficits for the first time in many years, especially in what are considered the most affluent areas of the United States. This means increased taxes or spending cuts. This will mean hiring freezes and layoffs in Government.  


Put all this together and you have a major economic slowdown. Today’s society is so enmeshed in credit and debt that it will be almost near impossible for the economy to grow for the foreseeable future.  


Now lets look at the external forces that will keep a recovery at bay for quite a while. There is the obvious cost for fuel and this is beginning to seep into all aspects of the economy which is causing inflation. Add to this a dose of the devalued dollar and you have greater issues. The only companies that are happy are those involved in Exports. The European commercial real estate markets are in retreat due to the same credit contagion, and we have an unstable equities market to add to this toxic brew. But everything is OK and will be going forward according to the commercial real estate brokerage community.  


But the real other shoe to fall is the fact, which this writer has brought up before, and is the most dangerous of all, is the looming entitlement payments to the soon to be retiring and aging Baby Boomer Generation. Some estimates say it will be a $34 TRILLION problem. (Geoff Colvin, Senior Editor at Large CNNMoney.com 3/17/08)  


The politicians don’t want to speak or do anything about it, and businesses don’t want to have to think about it and what it may mean to their future profits etc. Add to this equation the very real possibility that several large Pension Funds will be in significant trouble due their over zealous and misguided purchases of securitized debt that will lose much of its value just in time for the Pension Funds to start paying out to their Baby Boomer members.  


This problem will be approaching by the time this recession is almost over. Now what are we going to do?  

So while there are those singing merrily along and acting like everything is beautiful in their area, and are advocating the current mess is a mere anomaly is like the boy who cried wolf, and says “lets keep doing business the way we have always done business”. These are the same folks that keep harping on the market fundamentals, and keep suggesting rents are going up and will remain in that direction. They keep saying this time around there was no over building, as that is the bullet proof vest commercial real estate owners are wearing. What they haven’t yet come to terms with is the fact with no readily available credit, no business. No business, companies leave space or go belly up. Business contraction means just that, and it applies to commercial real estate.


These are the same industry folks that had no problem selling 5% cap properties while interest rates ticked up while handing would be investors their version of the future with bloated “pro-forma” income statements like any of it made any sense to begin with.  


It is this writer’s hope that these practitioners will eventual be exposed as the snake oil sales people of this era, and lets hope that happens sooner rather than later.   The rest of us will be out and about figuring out how to bolster our economic immune systems against this contagion and the big one that is fast approaching.