Light At The End Of The Tunnel

Doug Marshall, CCIM
Market Assessment
Published December 8, 2009

In a previous market assessment, I identified seven things that need to occur before commercial real estate lending can return to normal (whatever the new normal is going to be):

1. The overall economy needs to improve
2. Commercial real estate fundamentals (vacancy rates and rental rates) need to stabilize
3. Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets
4. Weaker banks need to fail
5. Lenders need to extend, amend, and pretend
6. Inflation needs to happen, and
   
7. A new version of the CMBS product needs to be created.

Today's post falls into the first category: the overall economy must improve before lending can return to normal.

Chart of the Day (shown below) is a product of Barron's Magazine, which provides insightful charts that both inform and educate the reader. Rarely can you find a chart which better illustrates how this recession compares to those experienced in the past.

The chart compares the third quarter earnings of most companies that comprise the S&P 500 to other recessions that have occurred since 1936.

Notice the precipitous decline in corporate earnings since the third quarter of 2007. Earnings have been in freefall, having dropped 92% from the third quarter of 2007 to the third quarter 2009 trough, which makes it easily the largest decline on record.

However, on the positive side, the S&P 500 combined earnings has bottomed out and is moving up sharply. Improved earnings are the first step to recovery; but as we all know, employment growth is the real indicator needed to show that a recession is over.

Unfortunately, we are not there yet. In Oregon and Washington, unemployment is expected to continue to rise through the second half of 2010.

But for now, we should realize that the U.S. economy is in the first stage of a recovery. It may be a slow and arduous recovery, but it appears we are in for better days ahead.

Have courage! There's light at the end of the tunnel.

Source: Barron's Magazine Chart Of The Day, November 20 2009

Kicking The Can Down The Road

by Doug Marshall, CCIM
Market Assessment
Published November 23, 2009

In my market assessment dated November 3, I identified seven things that need to occur before commercial real estate lending can return to some semblance of normality.

Some of these are obvious. Others are counter-intuitive. In order to recover:

• The overall economy must improve
• Commercial real estate fundamentals need to stabilize
• Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets
• Weaker banks need to fail
• Lenders need to extend, amend, and pretend
• Inflation needs to happen, and
• A new version of the CMBS product needs to be created.

Over the past year, some of my readers have criticized my interpretations of what's happened in the commercial real estate market as being far too pessimistic. Maybe they're right. I don't know, to be honest.

But to those who agree with this assessment I make this pledge: whenever I can find worthy commercial real estate news that will provide evidence of a thawing in the liquidity crisis or in the real estate market in general, I will bring it to my readers' attention.

Such is the case in today's market assessment.

Recently, the FDIC, the Federal Reserve, and the Office of Thrift Supervision have published new rules for modifying loans to creditworthy customers. This comes under the category of 'kicking the can down the road.'

This is good news; not only good news but plain common sense, something that seems to be lacking these days. The fact remains that it is in the best interest of both groups - banks and investors - to avoid foreclosure by any means possible.

Regulators are recommending that loans be amended for investors who are on time with payments, even if the real estate isn't performing as well as expected or desired.

The regulators have made it clear, in the new rules, that these kinds of loans by banks will not be classified as high risk.

While the new regulations require banks to be careful and conservative, to say the least, they also approve of the modification - through lower interest rates, extended loan terms, or a longer amortization - of properties currently held that would be foreclosed on otherwise.

It is to be hoped that a lot of banks will be able to extend these loans so that they outlast the current sour economy.

It's going to be interesting to see which banks will be able to extend and modify loans for the sake of their customer base and for their own self preservation. The future of the real estate market will depend on it.

Let's hope that the lending institutions come to see it that way, too.

Sources:
New Rules For Modifying Commercial Property Loans, Seattle Daily Journal of Commerce, dated November 2 2009

What Will It Take For Lenders To Lend Again?

As everyone knows, the commercial real estate capital markets have been in turmoil since June of 2007, when the single family sub-prime lending debacle first appeared on the scene.

Since that time, the lending market has slowly but - ever so consistently - continued to deteriorate. There are fewer lenders lending today than at any other time during this credit crisis and those who are lending are using more conservative criteria for underwriting their loans and qualifying their borrowers.

One question I am frequently asked as a commercial mortgage broker is, “What will it take to get lenders to start lending again?” There is no silver bullet – no one solution that will resolve this lending crisis.

In order to get commercial real estate lending back to some semblance of normality several things need to happen, listed below are seven:

1. The overall economy needs to improve. Sorry to state the obvious but it needs to be said. The good news is that the economy, fueled by government stimulus, grew last quarter for the first time in more than a year.
   
   Over the last 3 months, GDP grew 3.5%. But the problem is that the recovery so far has been a jobless recovery. In fact, employment growth is still contracting just at a slower rate of loss than previous months.
   
   In order for commercial real estate to benefit from this recovery employment must begin to grow and consumers need to have the confidence to increase spending.
   

2. Commercial real estate fundamentals need to stabilize. Employment growth and improvement in consumer spending will result in an increase in demand for office, retail and industrial space.
   
   Occupancy rates will stabilize causing rents to firm up and with increased net rental income, default rates on loans will slowly lessen.
   

3. Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets. One of the important lessons that we learned from the S & L crisis of 20 years ago is to address the problem head on.
   
   Yes, it was painful but bad real estate deals that were taken over by the Resolution Trust Corporation became exciting opportunities for those risk takers that purchased these assets at substantially discounted values.
   

4. Weaker banks need to fail. There are about 8,000 banks in the United States. During the past year about 120 banks have failed with another 400 to 500 banks expected to follow.
   
   If we want to avoid a 10 year recession similar to what Japan experienced during the 1990s we must allow the weaker banks to fail.
   
   We don’t want to follow the example of the Japanese bank regulators who allowed insolvent banks to survive which only prolonged their country’s painful recession.
   

5. Lenders need to extend, amend and pretend. Performing loans, with borrowers who have never been late on a payment, need to be extended when their loans are due regardless of how the loans underwrite in today’s lending environment. Those loans that are marginally performing but are basically sound real estate may need their loan terms amended.
   
   Maybe a lower interest rate, a longer amortization, or a reduction in the loan principal should be implemented, whatever it takes so that the bank doesn’t have to foreclose.
   
   Not foreclosing would be in both the lender’s and borrower’s best interest. Lender’s need to have the wisdom to “kick the can down the road” in hopes that as the economy and real estate fundamentals improve that the future lending environment will also improve making it easier to finance real estate in the future than in today’s lending climate.
   

6. Inflation needs to happen. Experts are predicting, and I fully agree, that inflation is inevitable. It’s not a matter of if it will happen, it is only a matter of when and how much.
   
   Those who lock in long term fixed rate loans are going to look incredibly intelligent in a couple of years as interest rates begin to climb along with the cost of a loaf of bread and every other consumer product.
   
   That being said, inflation is the friend of the owner of commercial real estate. As values are slowly pushed up due to inflation the trauma of the present situation will slowly subside.
   

7. A new version of the CMBS product needs to be created. Without the CMBS market there is an estimated $400 to $500 billion shortfall in the supply of capital to finance all the real estate loans coming due over the next three years. There is no lending source – not banks, or life companies or GSEs – on the horizon to absorb this huge loan volume.
   
   What needs to take place is a new and improved version of the CMBS product. Experts suggest four regulatory changes in order to re-establish confidence in this once thriving market:
   

• Reform of the rating agencies which were complicit in the downfall of CMBS.
• Those who securitize mortgage pools should be required to retain a significant portion of the riskiest tranche (a slice of a mortgage pool with similar inherent risk).
• A portion of the profits should be deferred on the securitizations until the loan portfolio is well seasoned.
  
  To make these regulatory changes will require someone in Washington, DC – Congress, the Federal Reserve, the Treasury Department – to take real leadership on a complicated issue, which so far has been sadly lacking.
  

All of these solutions will take time to favorably impact the market. Even if all seven factors were to begin moving in the right direction today, it would take months before the lending environment would fully feel this positive influence.

Unfortunately my crystal ball tells me that 2010 is going to be another ugly year in commercial real estate as the fundamentals to turn this market around are not yet in place.

Hang in there. It’s not over yet.

The Fed Pulls The Rug Out

by Doug Marshall, CCIM
Market Assessment
Published September 30, 2009


And the hits just keep onnnnn comin’!

After having committed earlier this year to a policy of artificial stimulus of the mortgage market, the Fed made the announcement on September 23rd that they were withdrawing – or at least not expanding – direct purchases of mortgages and government debt.

Most “experts” believe this decision to stop buying mortgages and government debt will have a dramatic long-term impact on interest rates.

Shown below are the opinions by knowledgeable sources about this monumental decision that we find most provocative:

· With the amount of money the Federal government has pumped into the economy, almost every economist is predicting the return of hyper-inflation. The Federal Reserve’s only remedy for that will be to raise interest rates which, as we all know, is counter to business development and growth. 1

Surprisingly, I have also seen this premise directly contradicted, including this one by the Fed: “the Committee expects that inflation will remain subdued for some time.”

Another humdinger of a quote regarding the recent Fed decision:

· These purchases helped the Federal government continue its stimulative deficit spending over the cries of budget hawks in Congress, it helped keep a lid on borrowing rates throughout the economy.

Thus, we had a unique situation where stocks were rising without a concurrent and ultimately self-defeating rise in Treasury yields – enjoying a daily slice of chocolate cheesecake without an expansion in the waistline.

Now the equity market must operate in a more normal environment where rising stock prices result in higher interest rates. 2

The Federal Open Market Committee, which made this decision and other decisions affecting monetary policy, seems itself to be at odds as to what inflation is going to do, how much slack is in the economy, and how much intervention is necessary or healthy.

While it’s disappointing to see the Fed’s purchases of mortgages and government debt being discontinued, surely commercial real estate is going to require a return to more realistic – if painful – conditions in order to right itself well.

Perhaps not quickly, but well. PriceWaterhouseCooper, for one, is forecasting that the commercial real estate market will remain in recession until at least 2012. 3

It’s the byword of capitalism: survival of the fittest. And, while the fittest are surviving, look for more vacant storefronts and a shorter lender list, as the lions have their way with the lambs.


Sources:
1 Commercial Real Estate Will Not Benefit From The End Of The Current Recession, by Robert Canter of Gerson Lehman Group, Sept 8 2009
2 Did The Fed Just Kill The Bull Market? by Anthony Mirhaydan of Top Stocks Blog – MSN Money, Sep 23 2009
3 Commercial Real Estate Recession to Keep Going, by SquareFeetBlog.com, Sep 15 2009

The China Effect On The Dollar

by Doug Marshall, CCIM
Market Assessment
Published September 15, 2009


During America’s recent economic swan dive, we must admit that we have issued some dire warnings and predicted some difficult times.

But we’ve also come to the conclusion that we need to focus our attention these days on some key financial indicators instead of rambling all over the place about the bad news.

Right now, we believe, the key financial indicator to watch is the health of the dollar.

The almighty dollar has been for many investors the most important, reliable, and used currency in the world. The question is – what is the dollar’s long-term outlook?

To prognosticate accurately, one must think globally because the dollar really isn’t ours anymore. It belongs, in the purest sense, to whoever has the most of them. Um, that would be China (see chart below).

As we wend our way through the economic morass, America has counted on the ability for China and Japan, among others, to continue buying Treasuries at their typical rate.

Right now, though, that demand has slowed, especially for long-term Treasuries.

This is bad news for Washington. When investors got nervous about the crazed spending, borrowing, and printing of money from the Bush & Obama administrations, they backed off on the purchase of Treasuries, which is how Washington raises cash to fund their agenda.

Now, to make matters worse, China has actually begun selling, in net terms, their massive holdings of Treasuries.

And, according to Mike Larson of MoneyandMarkets.com, “One thing seems clear: that one of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up.”

Mr. Larson quotes the following figures in coming to this conclusion:
· In 2006, China and Hong Kong accounted for more than 50% of the increase in the amount of Treasury debt sold to the public.
· In 2008, their share had fallen to 22% of newly issued treasuries at the same time that the U.S. government increased its public debt by a record $1.2 trillion.
· In the first half of 2009, China and Hong Kong acquired only 9% of the more than $800 billion worth of Treasury bonds that were sold.
· In June of 2009, China actually reduced its note and bond holdings by $25 billion.

The sour appetite for Treasuries across the board is a concern to the Federal Reserve. Without a robust demand for U.S. Treasuries, treasury rates will have to increase to spark additional interest.

Higher treasury rates mean higher across the board rates for everything from auto loans, home loans, business loans, you name it.

So what would be the upshot of all this? At the least, higher interest rates would be inevitable as a result of China more and more leaving Treasuries where they sit on the table.

And in that process, the hope of vigorous economic recovery gets squashed.

Doggone ripple effect…!


Sources:
China Is Now A Net SELLER Of U.S. Treasury Notes And Bonds!, Mike Larson, moneyandmarkets.com (9/6/09)
U.S. Concerned on Debt Demand, Treasury’s Dollar SaysBloomberg News (9/11/09)

How to Survive the Economic Downturn – Part 3

by Doug Marshall
Published September 10, 2009

Back for an “encore performance” is a 3-part series that I sent out in January. For those of you who missed it the first time, or who want to re-read it again, read below.

Over the last two weeks I have re-sent Parts 1 and 2. Today is the third and final part to this series. Enjoy!


In this series’ first installment, I discussed getting back to basics, staying absolutely focused on the task at hand, and differentiating yourself from your competitors. Click here to read Part 1, if you missed it.

Part 2 continued by discussing how to remain 110% committed to your career, the value of redefining yourself - sometimes a good move in a bad economy, and the importance of keeping a positive attitude. Click here to read Part 2.

This is the final installment to this series…


Deep-Six What Doesn’t Work
Albert Einstein once said “The definition of insanity is doing the same thing over and over again expecting different results”. Years ago I was employed at a company where the fee split was such that I was barely hanging on.

I had worked there for several years and I kept asking myself why I thought that my compensation the next year would be any better than it had been so far?

After months of struggling with this question, I knew that I had to move on. I had to leave my comfort zone and take some calculated risks.

Have you been doing the same thing over and over again expecting different results? Is there some way of marketing yourself that is no longer effective but you’re still doing it anyway? Are you working for a company that does not have the vision to succeed in this economy which will ultimately take you down with them?

A bad economy can sometimes be a blessing in disguise. It can force you to make those decisions that you’ve known in the back of your mind had to be made, though you were unwilling to make them, being comfortable with the status quo.

If you’re like most people in sales these days you are no longer financially comfortable, as sales have dramatically dwindled and profits have disappeared altogether. Like many others, you are beginning to feel the pinch in your wallet. So what changes do you need to make in order to survive?

Don’t Give Up
In his book, Good to Great, Jim Collins refers to the Stockdale Paradox, named after Vice Admiral James Stockdale. Stockdale is one of the most highly decorated officers in the history of the United States Navy.

In 1965, he led aerial attacks from the carrier USS Ticonderoga. His plane was shot down over enemy territory, he was captured, and he spent years in a North Vietnamese prison. While in prison he encouraged his men to retain their absolute faith that they would prevail in the end regardless of their difficulties AND at the same time to confront the most brutal facts of their current reality.

Do the same thing:

· Retain absolute faith that you can and will prevail in the end, regardless of the difficulties you face.
· At the same time confront the most brutal facts of your current reality, whatever they might be.

In his classic book, The Greatest Salesman in the World, Og Mandino spoke eloquently about the importance of persisting through adversity. His book tells the story of Hafid, a poor camel boy who longs to learn the secrets of salesmanship.

One of the ten secret scrolls reveals to him that to succeed in life requires the character quality of perseverance. The scroll states,

“I was not delivered into this world in defeat, nor does failure course through my veins. I am not a sheep waiting to be led to the slaughter. I am a lion and I refuse to talk, to walk, to sleep with the sheep.” When all else fails, that attitude can carry one through many, many difficult times. Don’t give up, no matter what.

This has, of course, been a recounting of my personal journey. I have found that there are no stories or examples that resonate so well as those born of one’s own experience. I am grateful for the chances I’ve had and hope that you can benefit by these ideas and concepts that I’ve garnered over the years. Many are mine… many more are not. But then, we all stand on the shoulders of someone.

In summary, there is an old African proverb that may say it best:

Every morning in Africa, a gazelle wakes up.

It knows it must run faster than the fastest lion or it will be killed.

Every morning a lion wakes up.

It knows it must outrun the slowest gazelle or it will starve to death.

It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.

We need to have the same attitude as the lion and the gazelle – let’s run as hard as we can so as not to become the economy’s next victim. To do so will likely require that we conduct our business differently than times past as doing “business as usual” will not work in today’s faltering economy.

Improve your chances of still being around when the economy rebounds by adopting the business principle that’s been presented that is most appropriate to your specific situation.

I wish you the best in 2009. I am confident that weathering this economic perfect storm will prove us more resilient than we could ever have thought or imagined.

How To Survive The Economic Meltdown - Part 2

Doug Marshall, CCIM
Published September 3, 2009

Back for an “encore performance” is a 3-part series that I sent out in January. For those of you who missed it the first time or those who want to re-read it again, read below. Last week, I re-sent Part 1. Today is the second part to this series. Enjoy!


In my previous installment, I discussed getting back to basics, staying absolutely focused on the task at hand, and differentiating yourself from your competitors. Click here to read Part 1, if you missed it.

Be 110% Committed To Your Career
I had a friend, years ago, when I was first starting out as a commercial mortgage broker. We both were struggling to pay the bills and at that point in our careers we were wondering if we were going to make it or not.

I remember him saying that if this did not work out he had another lucrative opportunity with a newly established dot-com company. He asked me what my plans were if I didn’t succeed at being a commercial mortgage broker. I told him I had no other plans.

My choice was to succeed as a commercial mortgage broker or fail miserably and utterly. There was no other alternative. Because I knew the consequences of failure I eventually succeeded.

It was a difficult struggle and took years to be successful but giving up was not an option for me. On the other hand, my friend was out of the business within a year and the opportunity with the dot-com company never materialized.

The lesson to be learned is this: It is very difficult to succeed in any profession or any endeavor if you are not 100% committed to it. In today’s economy that principle is truer than ever. Some may view having another job waiting in the wings as a prudent safety net should their current job not pan out. In reality, it’s a recipe for failure.

If Necessary, Redefine Yourself
Sometimes after you go through the self-assessment process you realize you’re not the problem, the market is.

No matter how good you may be at differentiating yourself from your competition, there may not be enough remaining market share left to make a living, no matter how good you are at your profession.

If that is true for you, redefine yourself by finding a new market niche within your profession.

Recently, a friend of mine was meeting with someone who is in the residential mortgage market. As you know, this market has been devastated. Employment in this sector of the economy has declined over 80% in the past year or so.

But this person, who is in this profession, is surviving. How so? He has moved away from doing exclusively residential mortgages to focusing on reverse mortgages for seniors, currently a lucrative market.

With every change in the economy there are winners and losers. Find those clients who are in the most financial pain resulting from the poor economy. They are the ones in need of assistance and they are motivated to make changes in their current situations. Then find a market niche that helps those who are in financial distress.

You will be doing them a service while making a living until the market changes again. As Jerry Mason of Westland Apartment Brokers says so aptly, “Follow the pain.”

Stay Positive!
Having a positive attitude, to me, is by far the single most important thing to focus on during difficult times. Here are some suggestions for staying positive when the business is hurting:

Avoid negative people
We all know who they are. Sometimes these negative people are unaware of the harmful impact they have on those around them. Avoid them at all costs and, if you cannot avoid them, tell them you don’t want to hear it.

Quit watching the news
Yes, a lot bad things are happening right now. Each day, some new calamitous event happens that makes our economy that much worse.

But it’s also important to realize that those in the news business are there to make headlines so that they have an audience.

How much of what we hear is overstated or incorrectly stated by the news media in order to create headlines and increase their own market share?

Don’t go it alone
Find someone, or maybe more than one person, with whom you can share your deepest fears, someone who will lift your spirits when things aren’t going well, and someone who can celebrate with you when you succeed.

Solomon once said, “There is a friend that is closer than a brother.” Find that person. Don’t be a Lone Ranger.

End, part two

How to Survive the Economic Downturn - Part 1

by Doug Marshall, CCIM
Published August 27, 2009

Back for an “encore performance” is a 3-part series that I sent out in January. For those of you who missed it the first time or those who want to re-read again, read below. Enjoy!


The downward spiraling of the economy has not yet bottomed out. No one knows where this is heading. Not the experts, not those in high office, no one.

Watching the harmful repercussions of this bad economy is like watching a train wreck in slow motion: there is very little you can do to minimize the carnage. It’s going to happen, with or without you. The best you can hope for is that you personally steer clear of its path of destruction so that it doesn’t suck you down, too.

Those of us who work in real estate sales or some related field, such as finance, title and escrow, legal, etc, have been and will continue to be particularly hard hit by the dramatic slowdown in the economy. Heck, we helped bring on this crisis. It only stands to reason we would be some of the most affected.

But there are some time-proven principles, if applied that can help us out of this quagmire. In a three-part series, beginning today, I will share eight principles to help you avoid being a victim of the current economic decline.

Go Back To the Basics
For those of us in any kind of sales profession, we learned the critical importance of marketing ourselves when we got started. It wasn’t easy, but we learned to make those telephone calls or attend those networking meetings where we met potential customers for our business.

We learned the hard way that our ultimate success was dependent almost solely on how many marketing contacts we made each week.

But when times are good, which they have been for many years, we slowly drift away from the discipline of making those marketing contacts, instead relying on satisfied clients to refer business back to us.

Now the phone has stopped ringing. What do we do? We go back and do what made us successful in the first place. In a slow economy like this, marketing ourselves becomes more critical than ever.

Stay Absolutely Focused
At the beginning of every year my wife and I go to the beach for a weekend to plan for the year. We prepare questions about our personal and professional lives that we ask ourselves, reflect on, and discuss with each other.

As I pondered these questions over my planning weekend, I had an epiphany. The cartoon light bulb actually went on over my head. It was this: all of these “important” issues were a distraction from the overall point of focus for this year, which is to market myself like there is no tomorrow.

To do anything else would be a distraction from the immediate need of the moment, which is to get business through the door.

What one thing do you need to do this year that will best help you survive this economic slowdown? Identify it, and forget all the other things that are begging for your time and effort but which are simple distractions to the bigger picture.

Determine What Differentiates You From Your Competition
Consider doing a brutally honest self-assessment about your product or service. What core competency distinguishes you from your competition? Conversely, what do you do that is no different than anyone else?

For those of us who are commercial real estate professionals, no matter the particular discipline, we provide our clients a service which is often difficult to distinguish from our competitor’s. For most of us, there are only nuances that make us stand out from the next guy.

If you can’t differentiate your product or service from that of your competition you’re in deep trouble. You end up being a commodity in the eyes of your clients; just one of many possible choices. Let’s face it, there are no real differences between true commodities, whether you’re talking about corn or a barrel of oil.

On the other hand, I marvel at the loyalty of those real estate investors who will only use the services of one particular title company. How does a title company, providing near-identical services as the next, generate such loyalty? They do it by delivering a quality of service that exceeds the customer’s expectations. And they do it consistently.

Hence the repeat business that many of them enjoy.

In order to succeed in a slowed-down economy, abandon or at least downplay those things you do or sell that so look like everybody else’s. Focus on those things that make you unique.

End, part one

Small Upticks - We'll Take 'Em!

Doug Marshall
Market Assessment
Published August 20, 2009


Oh, how exciting! Houston, we have a positive indicator.

For months, the news on the economy, especially as it relates to commercial real estate, has been gloomy.

Looking at the numbers, it’s been too difficult for us to believe that the “recovery” considered underway for the economy in general is going to apply, in real-time, to commercial real estate.

We were, after all, the last shoe to drop in the global downturn. Further thuds are pending, we have said: inflation, huge defaults in commercial loans… just more bad news.

So naturally when the Labor Department issued their monthly jobs report on August 7, we were as surprised as most macroeconomists.

And, in dissecting these numbers, we have of course decided to approach with caution, bringing out the poking stick to try to determine how real these numbers are.

The unemployment rate, according to this report, dropped from 9.5% to 9.4% during July.

It’s an encouraging sign to many that the jobless rate shows any improvement at all, when many were predicting 300,000 lost jobs instead of the 247,000 actually reported.

However, it’s important to maintain perspective and context:

• This is a definitive, historical trend. As seen below in Barron’s Chart Of The Day from August 7, a one month drop in unemployment does tend to happen when a recession has ended.

So it’s encouraging that this might be considered empirical evidence, pointing to recovery.

• On the downside, this certainly doesn’t mean that unemployment will continue decreasing. A third of those currently out of work are long-term unemployed. And these workers will find it harder to re-enter the work force, no matter how unemployment is slowing. Many have given up looking for work and, when they decide to try again, it’s going to play with that number.

So is this a recovering economy or an economy “adapting” to a lessened workforce (1)? An unemployment rate of 9.4% may be a heartening sign, but only compared to the Great Depression.

Still, at this point in our economy’s spiral, we’ll take any positive number that’s based on real improvement. Not caution to the wind, mind you, but crossed fingers…


Sources:
Barron’s Chart Of The Day, August 7, 2009
(1) Larry Doyle, http://www.senseoncents.com/

That's What I Said!

Doug Marshall

Market Assessment
Published August 4, 2009


Yes, hindsight is 20/20. Yes, wearing the mantle of officialdom often means having to censure oneself and not say what you know, for the greater good.

Shown below is a very illuminating speech by Ben Bernanke, current Chairman of the Federal Reserve, back in 2002 before he attained his lofty position and had reason to hold his tongue.

After months of telling you that I believe inflation is on the horizon, it depresses me to realize that Bernanke knows it, too, and has for some time. He opines:

“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.

A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost.

Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days.

What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet.

Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”


This from the one man in the nation, perhaps in the entire world, that has the most weapons at his disposal to bring inflation under control.

Over the past several months the Bush administration followed by the Obama administration have poured trillions of dollars of money we don’t have to prevent a banking collapse, to bail out the American auto industry and then to stimulate the economy out of our current recession.

This excessive money creation by the Federal Reserve has to adversely impact the value of the dollar.

The verdict is still out whether they will succeed on any of these fronts but this we know for sure: the once mighty dollar is going down for the count.


Source:
Erste Group Research reprint of Ben Bernanke, “Deflation: Making Sure ‘IT’ Doesn’t Happen Here.” November 21, 2002. http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

The Future Of CMBS - Is There One? Absolutely!

Doug Marshall
Market Assessment
Published July 28, 2009

In our daily business of mortgage brokering and facilitating commercial real estate loans, we have been hampered by large holes in our lender list.

I’m constantly reminding borrowers that sectors of the lending market that would have aided them in past years are gone – just gone – and we don’t know if they’re coming back.

One of those lending sectors, lost to us at this time, is the CMBS (commercial mortgage-backed securities) market. Shoddy securitized lending practices have been one of the primary causes of the entire credit crisis.

Its lack of oversight, furious pace, and too aggressive underwriting criteria, has driven CMBS investors to lose all faith in the process. It is no longer an option for a sane, rational investor.

But what of the future? Does the CMBS market stand a chance of returning? Yes, unequivocally, says Adam Klingher of Johnson Capital. “Lending has gotten too big to do it the old way with banks and insurance companies taking in money and then lending it out the back door…”

As long as the issuer can show they are really underwriting their loans and making “good investment decisions, the security investors will return,” says Klingher.

But how will it re-emerge with any credibility? That’s the real question. How will the CMBS market convince security investors that it has learned its lesson, so to speak, and can be trusted not to occasion a similar crash and crunch in future years? What changes to its customary ways will it have to make?

Correcting the present CMBS approach to financing commercial real estate will require a sharing of the financial risk between the issuer and the investor. “The huge bonuses Goldman Sachs will soon hand out shows that the financial industry high fliers are still operating under the system of heads they win, tails other people lose,” says Paul Krugman at the New York Times.

Under the present system if a bank generates big short-term profits by securitizing and selling their loans, they get lavishly rewarded – and they don’t have to give the money back even if the investors get bilked out of their life savings. That’s just plain wrong.

As Adam Klingher puts it, there is a real need for the “economic interests of the banks or originators to align with the security investors.”

The issuer needs to leave “skin in the game” so investors know that the CMBS issuer will feel the financial pain just as much as the investor if something goes horribly wrong.

Otherwise, according to Paul Krugman, they will once again have “every reason to steer investors into taking risks they don’t understand.”

This is what it’s going to take to get the CMBS market back on the road to doing business with integrity.


Sources:
"CMBS Lending – Will it Ever Come Back?" July 14, 2009 by Adam Klinger of Johnson Capital
"The Joy Of Sachs," Paul Krugman at The New York Times, Oregonian article.

Light At The End Of The Tunnel – But Not Much Sun

Doug Marshall
Market Assessment
Published July 22, 2009


Signs of economic improvements, at the moment, are small but persistent: dire economic collapse is no longer a worry; the contraction of real GDP growth is slowing; the pace of job losses is lessening…

The question now is whether we’re near the bottom of this economic downturn, or if there’s more on the horizon – another proverbial shoe dropping and catching the global economy off guard.

For some perspective on the current economic recession, Baron’s June 12th Chart of the Day illustrates the duration of all US recessions since 1900.

As the chart illustrates, the five longest recessions all began prior to 1930. The length of the current recession (now in its 20th month) is above average and the longest recession since the Great Depression.

According to Nouriel Roubini and the RGE Global Monitor, this recession, the longest and most severe of the post-War period, produced an immediate contraction in consumer confidence and economic activity. Basically, growth came to a grinding halt and then slammed into reverse.

But, while that contraction is showing signs of slowing, there are many economic indicators that are not improving fast enough to declare this recession as coming to a close.

Unemployment, industrial production, real manufacturing, wholesale retail trade sales, and real personal income are indicators that are still seen as continuing in decline.

Therefore, “RGE Global Monitor does not yet see signs of a strong and sustainable recovery.” They predict that “real GDP will stop contracting at the end of 2009, but it is likely that many of these indicators will not bottom out before mid-2010.”

So how does this slow economic recovery affect us in the commercial real estate market? Unfortunately, it has a direct, adverse impact on the health of our industry.

Without new jobs being added into the marketplace rental rates can’t rise, vacancy rates can’t fall and property values can’t increase.

An increase in employment must precede a rebound in commercial real estate. Let’s hope that the experts are wrong as a jobless recovery would have long-term undesirable consequences for all of us.


Sources:
Wall Street Journal, July 11, 2009, Nouriel Roubini: Still Gloomy, But Sees Pace of Contraction Slowing
Barron’s Chart of the Day, June 12th.

Coming Home To Roost

Doug Marshall
Market Assessment
Published July 6, 2009

The numbers are alarming… probably because they’re simply so huge. And for some reason, the conversation about this doesn’t seem to be happening.

While most attention in commercial real estate today is focused on the dramatic deterioration in term loan performance (i.e. defaulting loans), an even more troublesome issue is the extent to which loans originated during the 2005-2007 period will encounter significant problems, refinancing at maturity.

A report dated April 22nd, from the prestigious Deutsche Bank Securities research group, focused on this refinancing issue. Shown below is a chart showing the annual maturities of loans by lender classification.
The conclusions drawn by Deutsch Bank Research are manifold, and are a great cause for unease:

· Commercial real estate prices have already plummeted 25-30% from their peak in 2007 due to the enormous changes in available financing terms (lower LTVs, higher interest rates, etc).

Further declines may be expected based purely on the degrading economy (which is resulting in higher vacancy and lower rental rates), pushing values down another 15-25%.

· The decline in commercial real estate values in the 2005-2007 period will make it very difficult for many properties to refinance when their loans come due.

They predict that two thirds of the loans maturing between 2009 and 2018 ($410 billion) are unlikely to qualify for refinancing at maturity without significant equity infusions from borrowers.

· This group estimates that the equity deficiency that would have to be made up by borrowers themselves tops $100 billion.

Solutions that have been floated to solve this problem seem, at best, naïve. One idea that has been presented is that banks and other lending institutions facing this refinancing wave will simply agree to extend the maturity dates.

This incorrectly assumes that either: 1) the lender, by shortening the amortization of the loan, will sufficiently help accelerate the pay down of the loan; or that 2) extending the loan term provides the property time to achieve additional growth in value so the loan can qualify for refinancing.

With respect to the first possibility, the report concludes that the value deficiency for many loans is far too large to be tackled by simply accelerating the amortization over a reasonable time period. And with respect to value growth, the likelihood of significant property price appreciation is remote.

It’s a gloomy forecast. We strongly encourage borrowers to determine whether any of their loans are currently “upside down.”

This can be determined simply by taking current interest rates, cap rates, and underwriting terms to calculate whether their new loan would qualify for refinancing at more or less than the existing loan amount.

If the new loan is less than the existing loan you’ve got a problem; and now is the time to start working on a solution, not when the loan is due.

If you or a client of yours would like help estimating a new loan for their property under today’s lending criteria we are ready to assist you. Please do not hesitate to contact us for a no-obligation loan estimate today.

Source:
Potential Refinancing Crisis in Commercial Real Estate, April 22, 2009, by Deutche Bank Securities, Inc.

The Fourth Horseman of the Apocalypse - When?

Doug Marshall
Market Assessment
Published June 16, 2009

Many have written on the reasons and rationale for the current market and economy downturn, including us. But for many struggling in this debt-toxic atmosphere, especially in the real estate industry, the more pressing question remains: what’s still to come?

Prognosticators abound but we are intrigued by the long-maintained predictions of Dennis Torres, a California broker and head of Pepperdine University’s Real Estate Operations department.

Mr. Torres spoke out three years ago about the impending doom that is the current housing market crisis. In an article for Realtor Magazine, he has put into context the “four horsemen of the real estate market apocalypse” that that we are currently or will be experiencing.

The first three have come to pass. They have wreaked havoc on the U.S. economy and the shock waves continue: 1) the collapse of the sub-prime loan market followed by losses in the prime mortgage market; 2) high and increasing unemployment; and 3) the resulting escalation of the burden of consumer debt, especially credit card debt, on the economy.

But Mr. Torres’ “fourth horseman” remains on the horizon and could have a more long-lasting effect on the economy, and the real estate industry, than many believe or are talking about. And that ghost of ill wind is the one of rampant inflation.

The reasons are simple. Where are our bailouts to the banks, the auto industry, etc., coming from? How is our government paying for the wars? They’re printing money, of course, and you can’t do that without it losing some of its intrinsic value.

In the real estate world, what does this mean? Mr. Torres believes inflation will take hold within the next two years. Before that time home values will decline then stagnate until 2015 before climbing due to inflation.

The difficulty for consumers, in keeping their homes and paying their bills with paychecks that don’t match rising inflation, is going to have good and bad effects on the markets.

High prices for durable goods will be matched, says Mr. Torres, with increasing values in homes as the prices go higher.

And Mr. Torres doesn’t fear another housing market collapse, as those prices will be “based on the intrinsic value of the then-current dollar.”

So how will inflation affect commercial real estate? Rents and expenses will likely keep pace with inflation. So will interest rates.

Who will be the winners if inflation is rampant? Those lessees who negotiate favorable lease rates today and lock in their rates for as long as possible will be one group of winners.

And those borrowers who finance a property this year with long-term fixed rates will look back years from now and crow about how farsighted they were to realize the importance of locking in a rate when rates were comparatively low.

Mr. Torres calls the potential for high inflation “unsettling.” But in reality there will be winners and losers in this type of real estate market.

To be one of the winners will take a positive attitude, seeing the opportunities before us, and having the foresight to adapt real estate skills to take advantage of the market.

Source:

“Inflation on the Horizon?” by Dennis Torres, Realtor magazine, June 2009

The Last To Go – And The Next One Coming

Doug Marshall
Market Assessment
Published June 3, 2009


The housing crisis – the frozen credit tundra – the bipolar stock market… We’ve heard these bad tidings for over a year now, and more.

What is not being talked up yet (because we’re only on the cusp of it), is the rise in commercial real estate foreclosures and the potential impact that future defaults on commercial loans might have on an already wobbly economy.

Commercial real estate has been one of the last sectors to feel the pinch, being relatively stable and containing a lower default rate… underpinned by easy credit already obtained.

This interactive map (rollover your county) is a great resource for seeing how the economy is currently doing; it also gives rise to questions as to how various areas in the country might be affected by this trend.

The fallout due to the bad economy is already being felt. Linens ‘N’ Things, Circuit City, and many more… these large corporations are in serious trouble – leaving storefronts behind, vacant as they close down, declaring bankruptcy, or going out of business altogether.

“Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months.

For apartments and industrial buildings, rates have increased more than 80 percent, according to Reis, Inc,” says the Associated Press.

The impact on the economy of the coming wave of bankruptcies is hard to gauge.

But some pundits heralding “slight rebounds” in current market trends should take an honest look at this long-range financial impact on commercial real estate.

It’s not over yet.


Source:
Alex Veiga, StarTribune.com
May 11, 2009