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The
topic of Mr. Keebler’s talk was “strategies for getting the most profit to the
bottom line.” Quite compelling and interesting was the subject and ensuing
discussion.
Preceding
the lecture was a brief outlook for 2020 by our host - Northwest Mutual. The
Cliffsnotes? We should be OK through mid year when the outcome of our
presidential election will permeate the air waves and suck the collective
oxygen from most conversations.
Mentioned
during the preamble was a check of five factors which cause bear markets -
inflation, recessions, commodity shortages, crazy market valuations, and
uncertainty. Since I’ve plied my trade since 1984 - I’ve experienced a number
of commercial real estate bear markets - 1991-1993, 2000-2002, and 2008-2010.
So, I decided to do a bit of unscientific noodling to check the five factors
against my experiences with the down markets and if any of those factors might
be in play today. Full disclosure - I’m not predicting a buyer’s market anytime
soon.
1991-1993. Kuwait was invaded by Iraq in August
of 1990. We experienced amazing growth in commercial real estate values
beginning in the mid eighties and the Reagan “trickle down” policies. Savings
and Loans - remember them? - were de-regulated and money was flowing freely
into properties - causing a spate of new development. With the collapse of the
S & Ls, Gulf war, and dramatic overbuilding - the economy plunged into
recession. Global uncertainty, a shortage of capital, and unsustainable values
were the culprits. Turn around didn’t hit full throttle until 1995.
2000-2002. Also known as the dot.com age - we
witnessed commercial real estate investors purchase old, obsolete, warehouse
buildings with proximity to phone infrastructure to house the burgeoning
technology needed to power telecom - precursor to e-commerce of today. With the
election year of 2000 came a burst of the dot.com bubble. No longer were the
buildings needed for telecom applications. Given the obsolete nature and high
prices paid - many were foreclosed. Terrorist attacks of 2001 created enormous
uncertainty as the world adjusted to new travel security measures. So crazy
valuations and uncertainty were villainous.
2008-2010. The Great Recession! Liberal lending
policies, securitization of bad loans and government guarantees of their
performance caused the housing market to crater. With the failure of Bear
Stearns, Lehman Brothers, Country Wide Mortgage and others plus the ensuing
government bailout - asset values plummeted, lending froze, uncertainty
prevailed and those of us in the commercial real estate business reverted to
survival mode. Commercial real estate went on sale in early 2009 and buying
activity commenced in earnest. Mountains of investment dollars poured into
industrial, retail, and office buildings. The music continues today. I’ve
stopped predicting when it will stop.
Today. Recessionary fears are in our rear view mirror - or are
they? Storm clouds. The Corona Virus is wreaking havoc on the Chinese economy -
causing a major disruption in our supply chain. Steel production in China is
down 90%, automobile purchases in China down 99%, visits to movie theatres down
over 90%. Look at the resulting prices in oil - $52 dollars a barrel at last
check. Silver lining. Interest rates are low - with the Fed possibly taking
another cut soon. Domestic consumer confidence is high. Net, net, net - I
believe we’ve another six to nine months before the uncertainty of an election
year is upon us.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
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