This blog is all about commercial real estate. We follow the office, retail, multi-family, industrial, warehouse, mixed-use, telecommunications and land markets. We will discuss topics such as investments, acquisitions, dispositions, asset management, property management, finance, brokerage, leasing, interior design, architechture, green building design, telecommunications, and technology.
One of my relatives recently admitted that for last six months, she had been afraid to open her monthly 401(k) investment account statements for fear of the certain very bad news. Ignoring them would make the bad news go away. When she finally opened the statements, she realized her fears and just cried. For many American workers who have worked hard, lived within their means, and saved religiously, the recent meltdown in the economy is almost a repudiation of the American dream. The worst is yet to come, in some instances. Decisions such as when to retire, whether or not one can afford to retire, and the life-style that will be enjoyed during retirement have all been pre-empted. Bigger issues such as job loss, loss of medical benefits, eviction and car repossession are more pressing.
I expect the current near-depression recession will leave its scar on the and “millennial” generation similar to the way the Great Depression scarred the generation of my 86 year old parents. Growing up during the Great Depression forced my mother and father to be extremely conservative with financial and physical resources. When I was growing up we rarely splurged on restaurants, except for the occasional McDonald’s. We ate well but my parents believed in buying in bulk, buying on sale and growing many types of vegetables in our large backyard garden. My parents drove the cheapest cars offered, all without air conditioning until the 1980’s. We wore the most practical clothes and enjoyed simple vacations. Once we splurged to see the World’s Fair in Toronto – what a treat, I can remember. The one area with relaxed spending limits was education - they placed very few estarints on books, magazines, educational experiences and college tuition.
So what’s this got to do with real estate? I believe the current near-recession depression will leave a lasting imprint on the real estate industry.
Some may say, “But have we been through down cycles before.” True, even recently: the high inflation of the early 1980’s, the savings and loan disaster of the late 1980’s, and the dot-com boom and bust of 2001- 2003. They were all pretty bad, but the damage they inflicted was localized.
The recession of the early 1980's resulted in high inflation and interest rates for cars and home loans in the upper teens. Didn’t work for or have money in a failed savings and loan? That’s ok. Your savings account, retirement, job and home were all safe. The greedy unskilled bankers and the greedy, crazy, real estate developers took the direct hits. Never heard of the dot-com boom until after it was over? That’s ok. Only venture capitalists and other investors in dot-coms took the direct hits. Oops, I almost forgot about the thousands of unskilled, inexperienced, naïve, young geniuses who got fired from made-up positions at shouldn’t-have-been-started companies.
As for average Americans, we still had our jobs, our houses, our savings accounts and our health benefits.
This time is very, very different, though.
Who hasn’t been impacted by the current recession? Those who were never directly involved have been equally decimated along with those who were very involved. Stock markets: off 40% [based on DJIA close of 8,473.29 on 5-26-09]. Home housing prices: off 25 – 50% [Case-Shiller Index, National Association of REALTORS®]. New home construction starts at their lowest levels since 1945. [Bloomberg.com] Domestic auto industry: 2 of the Detroit 3 producers in or near Chapter 11 bankruptcy. Banking industry: alive, but on a $1+ trillion lifeline from the U.S. Treasury. Retailers: sales have declined in 13 of the first 16 months in 2009 [National Retail Sales Estimate, ShopperTrak RCT Corporation] Dozens of retailers such as Circuit City, Linens ’n Things and Mervyn’s have closed. Commercial real estate: Nationally, sales volumes are down 80% and sales prices are down 17% year-over-year as of February 2009 [Real Capital Analytics]. Unemployment: 8.9% and rising. Jobs: 5.7 million lost since recession began in December 2007 [Bureau of Labor Statistics]. Job losses have been so large that the April job loss of 590,000 was celebrated as a positive sign. Bank failures: 36 to date, more than the last five years combined [FDIC].
In other downturns, we as a society learned crisp lessons writ large in the headlines of the day:
Savings & Loan Crisis: Speculative development is bad. Don’t start a project without at least 50% of the project pre-leased to financially solid tenants.
Dot-com Bust: Real sales, real earnings and real products are the only reality. Dreams are what you experience while sleeping. Adults must still be in charge.
What is the lesson this time?
A consensus appears to be growing in the popular press and among my clients, friends and family: Live within your means and save for a rainy day. More and more people are beginning to admit that we, average adults in the United States, were not living prudently within our means. We spent money we had not yet earned using credit card cards and home equity lines. We drove cars that cost too much and were too inefficient. We saved too little. We lived in houses that were too large. Corporations borrowed up to their eyeballs on unrealistic expectations for future earnings and confidence in the ability to refinance debt. Businesses assumed that an economy fueled by extravagant consumer spending would endure for the ages. Commercial real estate owners, developers and investors assumed that prices, values, rents and demand for real estate would continue their upward spiral. So now we know.
Going forward, I predict that commercial real estate decisions will be driven by one simple question: does this decision support a society living within its means?