Last week I attended the National Association of REALTORS® Annual Convention in Orlando, FL. I went there for a number of reasons, but mainly for Patty Nooney, 2008 Chairman of the REALTORS® Commercial Alliance Committee of the National Association of REALTORS® to pass the baton to me (or the gavel, as it were). As of this event, I am officially the 2009 Chairman of the 83,000 member strong REALTORS® Commercial Alliance Committee of the National Association of REALTORS®.
I had the opportunity to attend sessions led by top economists in our country and it gave me pause to consider what leadership role I’m going to take within the RCA and the NAR, and how I’m going to counsel potential sellers during what will prove to be a bumpy ride.
I listened to presentations from Lawrence Yun, PhD, NAR Chief Economist and Senior Vice President of Research and Mark Dotzour, Texas A&M Economist. My read of their advice is that the real estate economy is likely to continue to spiral downward for the next three to five years. Serious credibility issues regarding the government’s ability to fix the problem remain at the heart of the matter.
Given the debacle with the Resolution Trust Corporation (RTC) in the past, the NAR is working on a series of agenda items to put before Congress and the remaining powers that be and I am part of the REALTOR® group seeking to move this effort forward.
Backing up, below is a summary of the economists’ speeches, my take and suggestions for how we can all move forward productively.
VALUE OF UNDERLYING ASSETS
Property owners, especially of commercial assets, are holding their breath waiting for their turn for devaluation of their properties. The likelihood of increased vacancies, based on massive layoffs, retailers going out of business because of a halt in consumer spending and a lack of liquidity to refinance these deals make it clear that 2009 is going to be an “ugh” year for non-residential properties too.
CONSUMER CONFIDENCE, SPENDING AND DEBT
Congress put the bailout in place to send a message, “sit tight, we’re fixing it.” The message received from consumers is that the government has no real solution and that to really fix the problem will cost so much more than the first bailout package. There’s already a 90% to 20% inverse relationship of consumer spending to government spending. It’s critical to note that consumer spending isn’t the only area to watch – we need to keep an eye on consumer debt. George Bush intended for people to spend their tax rebate in the marketplace, but instead because consumer confidence is so low, they used it to pay down their debt so the effort didn’t stimulate the economy at all. The longer consumer confidence continues to erode, the less faith will be placed in any bailout packages or other government economic stimulus effort.
THE REAL REASON FOR THE BAILOUT
The bailout is also short sighted in that it’s not in place to save shareholders of corporations from failure; it’s there to protect companies for defaulting on their bonds. Right now companies are in certain financial trouble but there is still cash flow to meet these important commitments. If we get to the point where companies are defaulting on their bonds, we’ll see a triggering of further downturn.
The dollar is strengthening, which to the average consumer gives some sign of hope immediately because they see things happen like the price of oil is going down. But what the rising dollar means is that the peso to dollar ratio is down 30% -- Mexican clients want to pay in pesos and with this new development we’ll see the industrial sector slow down. This triggers layoffs and further reduced consumer spending.
THE GOVERNMENT HAS LOST CREDIBILITY
Right now there’s no infrastructure to solve the real estate problem. SELL NOW – don’t wait for the market to clear up, your assets won’t have the same value. This will no doubt stimulate our business as a real estate auction firm, but the lending policy is currently being rewritten based on the inability to pay the loans, not on the value of the collateral. We’re living with these conditions for at least the next three years unless we’re incredibly lucky. The volume of commercial transactions is down 70%, layoffs will be rampant, and companies are currently in and will continue to be under great duress.
Going back to the point made in the beginning, preserve the asset value by selling now, not waiting for the value to deteriorate further as the market declines further or the asset experiences wear and tear. This harkens back to a similar time in history when our firm was instrumental in dealing with the RTC liquidation process, one lesson learned with the government developing a liquidating agency is the time required to get the assets into the agency devalues the asset 70-80% which is enormously detrimental to the marketplace.
ACTION
NAR and the RCA Committee are assembling a summit the week of December 15th to discuss pertinent commercial legislative issues including the capital gains tax, 1031 exchange, tenants in common and create a potential commercial real estate liquidity solution scenario to be vetted through the NAR’s leadership and ultimately its membership. Many members under consideration to sit on the committee had experience with the RTC. Firsthand experience with the problems associated with creating a federal liquidating agency that simply liquidates properties on a wholesale basis, the net effect of which is to depress the markets further than they already are, is essential knowledge given today’s market conditions. Our group will seek creative solutions – the outcome of which will hopefully be better than the ones of the past.
OUR BUSINESS RECOMMENDATION
We are carefully researching sellers who can sell – starting with corporate America (retailers, big companies with assets to sell NOW). Our strong suggestion is to be aggressive with lenders that offer sellers relief. Unless accommodations are made, everyone is going to lose. We offer caution to the lenders who aren’t realistic with the outcome in workouts.
Here are some supporting documents from the NAR website and the press that lend further insight:
A chart on the US Economic Outlook from October 2008
http://www.realtor.org/wps/wcm/connect/a5fdca004ba54e93bc89fd5d696a4b5c/Outlook.pdf?MOD=AJPERES&CACHEID=a5fdca004ba54e93bc89fd5d696a4b5c
Real Estate Insights, October 2008
http://www.realtor.org/wps/wcm/connect/36d7a4004ba54e9abc95fd5d696a4b5c/currentissue.pdf?MOD=AJPERES&CACHEID=36d7a4004ba54e9abc95fd5d696a4b5c
ARTICLE: "REALTORS(r): Commercial Real Estate Sectors Disrupted By Credit Squeeze, Weak Economy" on 11/11/08 by David M. Kinchen from Huntingtonnews.net
http://www.huntingtonnews.net/columns/081111-kinchen-columnsrealtors.html
ARTICLE: "U.S. pending home sales fall, tight credit bites" on 11/7/08 by Lucia Mutikani from Guardian.co.uk
http://www.guardian.co.uk/business/feedarticle/7994376
Steve Good is Chairman and CEO of Sheldon Good & Company. He is an attorney, Accredited Auctioneer of Real Estate, licensed REALTOR in several states and author of a top-selling book; Churches, Jails and Gold Mines...Mega-Deals from a Real Estate Maverick (Kaplan, hardcover). The book features an afterword by Donald Trump.
Friday, November 14, 2008
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