Is the Recession Really Over? What Lies Ahead in 2010
Author: Jim Young
‘Can a bubble that took 15 years to create really right itself in just 24 months—especially when considering the shadow inventories in both the residential and commercial real estate markets?’
Ask the ‘recession question’ of 10 people and you’ll get 10 very different answers. While there’s no doubt that the Internet, 24 hour-a-day news services, text messaging and social networking have all contributed to the deluge of information available to us, the fact that your neighbor has begun blogging and is now an ‘expert’ on the topic de jour, requires some intense ‘sifting’ of information. A strong argument could be made that there is too much information and an incredible amount of noise that actually slows down our ability to forecast and make appropriate decisions.
Residential Real Estate
Despite, or perhaps because of, our access to an extraordinary amount of information, it is ironic that there is a lot of important information that is not making its way into the mainstream media. Recent sound bites suggest that home prices are stabilizing and, in some markets, going up. Yet, based on a recent Deutsche Bank report on residential negative equity, a congressional study on the status of the foreclosure market (old fashioned reading that takes more than 15 seconds), and several articles in the Wall Street Journal and other financial publications, we learn that there is a giant wave of ‘shadow foreclosures’—up to 7 million, one report states—being ‘held’ by lenders. This, understandably, is significantly affecting inventories and prices. There is speculation that the banks are not processing these foreclosures at the normal (3-5 months) pace and are in some cases actually extending the process up to 2 years because they don’t want to recognize/report the losses. The bottom line, based on the analysis of these ‘shadow foreclosures’, is that the residential real estate problem is far from over.
Commercial Real Estate
The commercial market is also experiencing uncertain ‘signals.’ Although the transaction market has come to a near halt, the wave of distressed assets has yet to materialize. One investor stated, “The party has begun; the buyers are here, and we are just waiting for the sellers to arrive.” Various reports on the commercial real estate market show approximately $15 billion in debt becoming due in 2009 with that number doubling in 2010. With asset prices down, the CMBS market gone, and banks not lending to 2006-07 levels, one would expect to see a large increase in the amount of distressed assets.
While there are few notable deals (one Southern California mixed-use project located near the 15 freeway once valued at $115,000,000 was recently valued at $3,000,000 in a bankruptcy proceeding), we still have not seen the wave of distressed assets many speculate to be out there. The consensus is that the speed of processing distressed assets is slow because 1) the institutions do not have resources in place to handle these assets; 2) there has been no push to process toxic assets that will negatively impact the organization; and 3) the Federal Reserve may have requested delays so as not to negatively impact the struggling economy. If you combine the stress of both the residential and commercial markets with the fact that the FDIC is (for the most part) out of money, the slow pace of this toxic asset delivery is more understandable.
According to most ‘experts’, the US recession is over. While not a noted economist, I have to ask the question, ‘Can a bubble that took 15 years to create really right itself in just 24 months—especially when considering the shadow inventories in both the residential and commercial real estate markets?’
In this area also, getting clear and accurate information continues to be challenging. With the national unemployment rate in the 9.5 to 9.8% range, there is a wide range of positive and negative perspectives. The most difficult things to measure when it comes to unemployment trends are the many contributing factors which are not necessarily included—those who have stopped looking for jobs, those who have stopped receiving unemployment, ‘consultants’ with little or no work, those with reduced hours. All of these contribute to the total employment picture.
Unemployment is a critical component for the recovery of the residential and commercial markets. People don’t buy new homes when they’re unemployed and the office, retail and industrial market segments need employment growth in order to absorb the existing inventory before it can expand.
At some point we need to look beyond the varying and confusing prognostications and keep a careful eye on our own ships. Owning and operating commercial and corporate real estate is very complex. Whether it’s keeping track of space, collecting rents, marketing space, forecasting financials, managing energy consumption or providing secure buildings for our tenants, our business consists of a large number of people, processes and both manual and electronic systems.
In these days of economic uncertainty (either the recession is over or we will experience up to 5 more bad years, depending on who you listen to), it is critical to stay focused. Common sense tells us that streamlining businesses, doing more with less and becoming more efficient will be fundamental parts to recovery. We encourage our industry to examine every business process—from answering the phones (no receptionists) to collecting rents (electronic funds transfer) to how you pay the bills (automated accounts payable). Strive for higher efficiency. One of our favorite sayings is, “Don’t waste a good recession.”
Whether or not the recession has ended is certainly important for long term planning; however, running our businesses daily is still the #1 priority. Technology, automating business processes, streamlining our companies, managing energy better, keeping buildings safer and more secure, communicating with tenants better and managing our complex information systems with more transparency should be even a higher priority than ever before.
While we understand the significance of the debt scenario our industry is faced with, making operations more efficient and therefore profitable is the other side of the equation. Throughout history, technology has played a major role in economic recoveries and operational paradigm shifts. We believe that what we are currently experiencing is a cyclical economic occurrence and the opportunity for a transformational change in the way we do business. If we merely emerge from this cycle and return to ‘business as usual,’ we will have missed the opportunity to significantly enhance the way we operate our multi trillion-dollar industry. Technology and innovation are continuing to have significant impacts around the world in places like Abu Dhabi, South Korea, Singapore, Finland and others. Whatever happens in 2010 with the US economy, don’t lose site of the significant impact we can have by using technology and innovation to better design, develop, lease, operate, transact and use commercial space.