More Gloom Than Doom: Commercial Real Estate

In a general review article this morning by Dees Stribling in www.commercialpropertynews.com, the headline is "Economic Update - Commercial RE on the Edge?" That's a bit, well more than a bit, hyperbolic, particularly from a Texas vantage point.

There is much handwringing in the financial press about the near future of commercial real estate, which so far has fared okay compared to the residential sector. Notes Stribling:

The idea that commercial real estate might be the next big thing to implode--which is all too familiar within the commercial real estate industry--is finally getting some mainstream attention. On Saturday, speaking at a conference at Vanderbilt University, Atlanta Federal Reserve Bank president Dennis Lockhart said that "on our watch list this year, as a risk to the (U.S. economic) outlook, is continuing worsening in the commercial real estate sector."

Oh my. An economist mentioned commercial real estate as something they will watch this year. And it generates a doom and gloom headline. This is a classic Soros investing tactic: identify when everyone else is wrong, then do the opposite of what they're doing. So if there is more fear in the commercial sector than is warranted (and that requires some analysis with horsepower), then investors will find some good opportunities, particularly in markets and submarkets where the fear or "gloom" may be particularly unjustified. I see those all around me where I live and write.

So watch those barometers.

Take this paragraph from the same article:

Whatever else commercial real estate will be in the near- to medium term, it certainly won't see the investment volume of recent years, not only in the United States but almost everywhere in the world. According to Real Capital Analytics, about 1,000 buildings valued at $47 billion traded hands worldwide in the first quarter of 2009, a small fraction--about 16 percent--of the volume during the same period in 2007.

Did you catch that? Only 16% of last year! Yeah, but there were still about 1,000 buildings valued at $47 billion in this past quarter sold. Last I thought about it, $47 billion is still a lot of money. Certainly it's enough for nimble and aggressive investors and brokers with buying power -- and in the right markets such as Houston.

Houston #1 Corporate Growth In The United States

From the Houston Business Journal, a report about Houston at "the No. 1 spot for the first time on Site Selection magazine’s list of Top Metro rankings for corporate location and expansion activity."

Eat that, Chicago (#3)!!

And coming in at #2 behind Houston? Our little sister to the north, Dallas.

Site Selection said Houston clinched the top spot after scoring 179 corporate real estate deals in 2008, unseating three-year incumbent Chicago-Naperville-Joliet.
Dallas-Fort Worth-Arlington finished No. 2 with 156 projects, and Chicago came in third with 138.

Last year, Houston was No. 4 behind Cincinnati and St. Louis for cities with more than 1 million in population.

“Site Selection ’s award adds to the long and growing list of distinctions the Houston area is earning for our business recruitment, business retention, job creation and economic growth efforts,” Jeff Moseley, president and chief executive officer of the Greater Houston Partnership, said in a statement. “We will continue to show that the Houston region is the most attractive place to locate or expand your business in the United States.”

There is no place in The United States that I would rather own real estate right now than in and around the Houston metro area and definitely in the rightfully proud great State of Texas. (That's why I do, of course.)

Not All Tax Cuts Are Bad

While "tax cuts" in the abstract are proven (yes, proven) to be less effective than "spending" for turning around an economy with cratering demand (more on that later), it is worth noting that not all tax cuts such as those included in the Senate and House versions of the stimulus bill are bad...

It's worth noting that many middle class earners who would get tripped by the AMT are not expecting to pay the AMT because they have not had to pay it in the past. So if the AMT were not eliminated, it would result in several million earners to have withheld too little in taxes and therefore come up short, or would have to withhold more in taxes from paychecks, thereby reducing disposable income.

So delaying the AMT is good policy. Tax cuts that produce immediate spending that otherwise would not have happened is still spending, and it's still good policy.

Tax cuts however that simply benefit the rich and would simply result in additional money cut from the government and staying protected in fat bank accounts would continue the economic crisis.

Another great good policy example: $15,000 refundable tax credit for (qualified) home buyers to get people buying new homes now and not waiting until it's too late.

Another great example: a multi-thousand dollar tax credit for anyone who gets a new air-conditioner (which will have a higher SEER rating, more efficient) or replaces single-pane windows, etc. This will cause middle and lower-class owners to consider replacing old A/C units for example that are at the end of their useful life and they will see a huge spike in efficiency in their bills and energy use -- not to mention getting a great break on a system that will need replacing regardless and creating jobs/saving jobs for the manufacturers and installers, etc. Not all tax cuts are bad. Not all public spending is good. Blah blah blah.

Homeowners and Landlords would do well to study the final bill (when it gets done) and take advantage of all provisions that give incentives for pulling forward spending that otherwise would be put off. This could include replacing old A/C units, replacing single-pane windows, replacing an old car (with a more efficient car at a low interest rate), and yes even buying a new house at a potentially lower-than-future market price and historically low fixed interest rate.

Not everyone has the ability to spend right now, and that's fine. But this nation desperately needs those who can spend to spend... without delay. Anything that causes spending right now, including pulling forward public spending for infrastructure, as well as private spending, etc., is going to help turn things around.

Right now (not in the long term): if we're spendin', we're survivin'.

Just sayin'...

Why Buyers Need Smart, Full-Time Professional Real Estate Brokers

Today's New York Times has a story about the new financial regulations under development in the new administration.

While there is a ton of badly needed regulatory reform that will address many of the problems already laid out on this blog to be included in the package, I will focus in this post on the impact of these wide-ranging changes on the real estate buyer. But first, an example of the broader much-needed reforms:

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.

Now to return specifically to real estate buyers. First and foremost, buyers will have to navigate a very new landscape of mortgage financing without necessarily understanding the recent history and context of the changes, which could lead to frustration and confusion. To wit:

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

Now more than ever before, financing is a huge complex piece of any real estate transaction. While it always should have been the starting point for buyers, in recent years when money was flowing freely, few people in the industry ever had to be concerned about a client getting financing for a deal, so long as the client had a pulse. Of course, things have changed dramatically, and directly as a result of that free-flowing period.

Therefore real estate brokers and agents of residential or commercial orientation, in order to fulfill their "market making" roles, will have to become far more involved in an ever-increasingly complex mortgage and finance environment to help buyers make their way through the complexity. We brokers can no longer just refer a buyer to certain lenders and leave them on their own. Doing so in this environment is a profound disservice.

As new regulations get rolled out, real estate brokers must stay at the leading edge to comprehend not just the rules, but their implications in any specific market. We must also help clients with their due diligence efforts when finding qualified lenders to help ensure clients find competent, informed, and ethical lenders with solid reputations. Bad financing is by far the most common reason a deal fails. This is a larger and far more complex obstacle than ever before.

The proposals that will come to pass in specific form are aimed, according to officials, at core regulatory problems and gaps:

They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.

Even high level regulations that affect lending way upstream will have to be understood by real estate brokers, not just mortgage brokers, as we move forward to manage fully the implications for buyers on the ground.

The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.

Going forward, real estate brokers and their agents who cannot understand the implications of such complex reforms for their clients in their specific market, and who cannot fully explain those implications to their clients if necessary, those brokers and agents will surely lead their buyer clients to failure, and that will undermine the market for everyone.

Bottom line: Brokers and their agents can no longer blindly refer buyer clients to a cadre of lenders they've used in the past. A higher standard for due diligence is required in this market, and while that responsibility falls principally on buyers, everyone assisting the buyer must support that effort. Those who don't understand the critical times and adaptation they require will not only be doing their clients a profound disservice, they will impede the progress and recovery of real estate markets for everyone.