Commercial Real Estate Finance

Posts Tagged ‘credit crunch’

About a year ago we dedicated an entire week’s worth of posts to famed Analyst Meredith Whitney. As a quick refresher, she was responsible for “the call” on Citi, where she (almost prophetically) predicted that Citi was in serious trouble. Following a quick rise to fame, she was subsequently dubbed the “Oracle of Wall Street.” She left her job at Oppenheimer and started her own advisory firm: Meredith Whitney Advisory Group, LLC (rolls off the tongue, no?). She even made Forbes.com’s Best Analysts: Stock Pickers list. Her new advice: avoid anything related to the financial industry. Read the rest of this entry »

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Most people think of Disney World as a place for kids. Most people think of Florida as a place for the elderly.  Now, thanks to some  likely desperate,  possibly genius, and definitely confused residential real estate developers, the two have merged into one.

What am I talking about you ask?  Disney World for the elderly…that’s what. And no, this is not an April Fool’s Joke! Read the rest of this entry »

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10. You aren’t in control More recently as we watch credit card companies increase rates, banks penalize their best customers, and governments shift and change policies on a regular basis we learned another valuable lesson: credit should be used as a safety net, not a crutch. With guidelines and terms of use left largely to the whims of corporate giants and legislators, you can be left feeling like a puppet on a string. The big lesson here: it’s their game, and they can change the rules whenever they want.

9. Optimism vs. blinders There is a big difference between optimism regarding investments, business trends, and economic forecasts, and just moving blindly ahead assuming that economic conditions will remain positive. Bubbles burst, businesses fail, and jobs are lost. It is a fact of economic life that we often lose sight of risk during the euphoria of the good times, and it can be a costly lesson that is all too clear when we are on the financial downslide.
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Recently in Institutional Investor Online, Ernst & Young contributed a research report listing the top ten business risks for commercial real estate. In a suspenseful twist, we will provide them in descending order, a la David Letterman, and provide our thoughts and commentary thereafter. Without further ado, they are (drum roll please):

10. Volatile Energy Costs (O)

9. Economic Vulnerability and Regulatory Risks in Developing Markets (F)

8. Green Revolution, Sustainability & Climate Change (D)

7. Pricing Uncertainty (F)

6. Inability to Find and Exploit Global and Non-Traditional Opportunities (D)

5. Changing Demographics (O)

4. Global War for Talent (O)

3. Impact of Aging or Inadequate Infrastructure (D)

2. Global Economic and Market Fluctuations (F)

1. Continued Uncertainty and Impact of the Credit Crunch (F)

If we assign these concerns into one of the following three categories: Finance, Development, and Operations, as indicated with (O, D or F), we find that while the top ten issues are somewhat diverse in nature, the top two remain financial concerns.

The issues we chose to tag “Operational,” while important, we do not feel are vital to the health of the commercial real estate market. Changing demographics are sure to affect particular markets, especially in the southwest, but will take a while to reach corridors like the northeast. The Global War for Talent is an issue of the future, as anybody who is actually hiring in this market essentially has the pick of the litter from the copious amount of unemployed, likely overqualified candidates. When this does become an issue at some point in the future, it will likely mean the unemployment rate will dwindle from double digits back into the 5-6% comfort zone of a few years ago.

Energy costs are a necessary evil of the business. Lease type will dictate whether landlord or tenant will be paying for the rise in energy costs, and the government is attempting to implement a wide range of programs aimed at stemming energy costs from crippling the economy. These programs will take a long time to bear fruit, but they are being addressed.

The Development (D) issues are of greater immediate importance in our opinion. However, most are questions of project feasibility as they pertain to financing. If green buildings are not cost effective for landlords or tenants, you simply won’t see very many being built, or converted. Likewise, while aging infrastructure is a serious problem, developers will examine the cost basis of various opportunities before building or renovating. Until construction costs drop replacement costs closer to price per square foot figures being paid for existing product, new ground up developments will be fewer and farther between, especially if market demand is sluggish. Which leads us to the last (D) on the list…finding new global and non-traditional opportunities. This issue is probably the most abstract on this list, and so it will take time to figure out exactly what the issues are. More than likely, it was included on this list as a result of so many of the other issues being, well, issues. People fear the unknown.

This of course leaves us with Financial (F) concerns. Pricing uncertainty, regulatory risk, market fluctuations and the credit crisis blow the rest of the aforementioned issues out of the water, in our humble opinion, in terms of what people SHOULD be worried about. Frankly, these four issues would be 1-4 on our list. Of course, unlike David Letterman’s Top Ten Lists, which are supposed to make you laugh, ours, like E&Y’s, would be more likely to make you cry….

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