CRE ~ Where Do We Go From Here?

Commercial Real Estate Brokerage
Where Do We Go From Here?
October 7, 2011
The real estate industry was flourishing in the early part of this decade, reaching a pinnacle in late 2007 with prices reaching previously unheard of levels fueled by “easy money” provided by banks eager to lend to all, whether qualified as a borrower or not. This was most notable in the residential sector where banks were threatened with sanctions if they did not increase mortgages to minorities and the disadvantaged. Such action consequently drove prices of homes upward with the value of commercial properties following suit. In some areas of Florida investors were buying homes and condos “on spec” and later “flipping” them at substantial profit.
Average mortgage interest rates for residential properties in June 2007 were at 6.61% (+/-) for a 30 year fixed rate loan, and as of June 2011 these rates were at 4.51% (+/-), slipping downward in a futile attempt to stimulate the economy at a time when banks had stopped lending. With the prices of housing escalating and lenders making it very easy for unqualified buyers to obtain mortgages they oftentimes could ill afford, the table was set for disaster. As the mortgages were “bundled” and sold to investors, often multiple times, the banking industry began a meltdown. In 2008 Washington Mutual collapsed and was sold to JP Morgan, and this signaled the beginning of the end of the banking industry as we knew it in 2008.
As the residential real estate industry crumbled, housing developers defaulted on loans leaving hundreds of housing projects uncompleted, banks began to foreclose on homes, and the supply chain withered. Construction ground to a halt putting thousands out of work; supply houses were left with undeliverable inventories; and manufacturers were left with no demand for their products. On a national basis, housing starts shrank from 1,046,000 in 2007 to 471,000 in 2011, a 55% drop in just four years.
The commercial real estate industry invariably follows residential, and this case was no exception. Construction stopped. Investors held their money. And banks discontinued lending, and as a result small and midsized businesses were suddenly left with no sources of capital. As the FDIC tightened its grip on the banking industry in misguided attempts to curb this economic catastrophe, the economy got worse, forcing hundreds of small business men and women into bankruptsy or insolvency. It became a joke in some circles with the catch-phrase “If you don’t need it we can lend it to you.” With the failing economy and failing business, banks began to be faced with more failed loans, more troubled assets, and began placing more commercial properties on their balance sheets.
The FDIC began applying the “Texas Ratio” to banks, and those with a ratio of over 100 are almost certain to be taken over and sold to another, larger bank. It has become a common belief amongst many that “the Government’s” underlying strategy is to close all small commercial banks resulting in a dozen or so mega banks that they can/will control.
Today we find ourselves even more deeply mired in uncertainty exacerbated by confusing governmental economic policies, uncertain leadership, and political bickering between parties resulting in a stalemate leading to more uncertainty, indecision, and poor economic growth.
So what is the beleaguered Commercial Real Estate Practitioner to do? How does one survive under such conditions? Without question the landscape has changed from the lush gardens of 2007 to the stark, harsh winter of 2011. The successful professional will look for niches in the market place, and be a problem solver for such clients as banks and large corporations requiring the knowledge and excellence of an outsources real estate department. A unique aspect of the circumstances in which we find ourselves is the presence of many very wealthy men and women whom have been hording their cash, keeping it safe as the economy melts down. This is a sure example of another often quoted phrase – “The rich get richer” because they are able to purchase prize properties at hugely discounted prices. Or said another way, “Cash is King.”
As we move forward through the turmoil of today, the successful broker will be characterized by:
A Sense of Urgency
Passion
A Belief in Self
A thirst for Knowledge, Self-improvement
` A keen awareness of the value of Service to Others
It’s easy to steer a safe course on a rising tide, and another thing entirely when moving through shallow water. Perhaps this is nothing more than the application of one of Darwin’s principles: The Survival of the Fittest.

Prepared by:

Nick Nicholson
President
Coldwell Banker Commercial Benchmark

October 7, 2011