How To Survive The Economic Meltdown (Part One of Three)

Doug Marshall, CCIM
Musings On The Market

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.

End, part one

2008 Market Recap

This week I received a very insightful market assessment from Kevin Geraci of Zions Bank and he granted me permission to quote from it liberally and then send it on to you.

Doug Marshall, CCIM

2008 Market Recap

Bear Stearns and Lehman Brothers, two near-Biblical names on Wall Street, are no more. Freddie Mac and Fannie Mae were seized by the U.S. government.

Merrill Lynch was absorbed by Bank of America, Wachovia was absorbed by Wells Fargo, and Washington Mutual by Morgan/Chase.


Goldman Sachs and Morgan Stanley are now bank holding companies. The housing industry imploded. Wall Street tanked, with investors losing $7 trillion from their investment portfolios. Okay, in the face of this financial Darwinism, what can we look forward to in 2009?

Predictions for 2009

Here are some predictions by various editors of national publications gathered by SourceMedia Publications, as it relates to banking and financial industries.

Regulation, Regulation, and More Regulation
“Credit card practices, mortgage disclosure, suitability standards, loan modifications, executive compensation, ratings-agency status, overdraft guidelines, Basel II deadlines... There may be no area of financial services where rules don’t get tightened in the coming year.

And it won’t just be regulators leading the charge; leading members of the newly-elected Congress have made it clear that they’ll be pushing for change--either in tandem with agencies or with an eye to filling what they perceive as gaps in existing oversight…” (American Banker)

Housing
“The home price collapse that triggered the current financial crisis will bottom out in 2009, leading to a mortgage sector recovery in 2010. It is said that housing always leads the economy into recession and then back out of it…

Real estate went into recession in 2006, followed by the mortgage industry in 2007, the national economy this year. It should be true on the back end as well. A further 10%-15% fall in home prices in overpriced states should establish a bottom that will bring fence-sitting buyers back into the market for homes.

If long-term rates stay low, the combination of refinances and purchased mortgages will act to bring the mortgage market out of its prolonged funk.” (National Mortgage News)

GSE Shake-down
“Fannie Mae and Freddie Mac will be merged in 2009, in advance of being divided into a number of mini-GSEs specializing in niches such as MBS, affordable housing, or portfolio holdings.

While the two GSEs once had separate identities (Freddie Mac catered to thrifts, and was an MBS shop, while Fannie Mae specialized in mortgage banks, and acted as a giant savings and loan) they are now practically interchangeable, so there is no necessity to keep them as separate brands…

Merging them, and combining their assets into categories, makes sense as a preliminary step towards dissolving them into manageable smaller entities that will dilute the huge risks that caused the government to nationalize them.” (National Mortgage News)

Securitization
“It remains a bleak picture for ABS, with issuance expected to be focused on credit cards and autos, with a smattering of student loans…” (Asset Securitization Report)

So if these predictions are true, 2009 may not be a stellar year! Surprise, surprise.


As I’ve stated in other recent market assessments, our goal for 2009 should be to get through it and wait for better times to follow.

Wringing In The New Year

A new year is upon us, full of challenge and promise. All over the country people are looking forward to making this a better year than 2008 was.

In the world of commercial real estate (CRE), however, and in the economy in general, a darker scene at the start of a new year has rarely been encountered.

Without getting maudlin, it's true that experts, economists, and CRE professionals are making the same declaration: let's just get through it and see who's left standing.

Even though CRE remains in "better shape than some other industries", with "good balance between supply and demand", "modest" vacancies and loan default rates that have "so far hovered at a rock-bottom 1 percent", banks are reluctant to lend out the cash they have been given by the Treasury Department.

And that's a bad thing, a very bad thing.

For example, in the European markets, banks have been provided massive injections of cash, assuring that there is enough in the system to begin moving the credit process forward.

However, instead of lending, the European banks are hording. They are routinely parking over 200 billion euros, overnight, with the Central European Bank.

This does not inject cash into the lending process, even between the banks themselves. Credit, therefore, remains scarce and very difficult to obtain.

In the world of CRE, the real concern right now is not with financing for new commercial real estate acquisitions. Those loans will get done, albeit with more conservative underwriting than in years past.

The real concern is with the refinancing of existing loans coming due this year. More than $1 trillion of both short-term and 10-year fixed rate CRE loans come due in 2009, each posing a different type of problem to hurdle.

The short-term bridge loans that were underwritten during the go-go days of the real estate boom were very aggressively underwritten - with high leverage, interest-only considerations, questionable assumptions about vacancy absorption, or unrealistic expectations on rental rates.

What happens with these under-performing loans when they come due? Will banks play hardball, causing an avalanche of foreclosures? Or will they realize the need to tread lightly?

If lenders require borrowers to inject additional cash into their investments in order to secure new financing, many cash-strapped borrowers will end up defaulting on their loans.

In addition, loans that closed 10 years ago with lenders in the commercial mortgage-backed securities market (CMBS) will also be coming due this year.

Those lenders no longer exist. They have gone the way of all flesh. What lenders will be willing to step up to do the enormous amount of refinancing required just to maintain the status quo?

Despite massive bank bailouts by the Treasury Department, little seems to be exiting those banks for the benefit of real investors. This is why CRE groups have been meeting with Federal Reserve officials, Treasury workers, and their members of Congress, asking for relief from this impending problem.

It's not insignificant. And if what is predicted plays out, the effect on corporate America and the economy will be just as bad as any other industry that falters.

Sources:
Financial Week, Dec 29 LIBOR Rates Fall As Banks Tap Other Sources Of Funds
Erika Morphy, GlobeSt.com, Dec 23 CRE Clarifies Its Fed Request
Amy Cortese, The New York Times, Dec 28 A Wish List For Commercial Real Estate