Originally by Miguel de Arcos
I am asked almost daily the same question, “How’s business?” Whether it’s a peer, client, friend or someone I just met, once they know I am in commercial real estate I instantly become their barometer for the economy. Some genuinely want to know, but most are looking for a glimmer of hope that they can take home to help sleep more soundly.
My standard answer is “Our activity has picked up immensely in the past 4 months. In fact, I have not been this busy since the 06/07 boom years.” I then start my next sentence with “unfortunately” and you can almost hear their bubble of hope bursting. “Unfortunately, I cannot say we’re so busy for positive economic reasons, but because banks are starting to work through their balance sheets, agree to short sales, take back non-performing assets and selling their REOs.” 80% of our workload is from the sale of distressed assets like short sales and bank owned properties(foreclosures.) The other 20% is leasing.
Banks were frozen solid in 2008 and 2009. It was a virtual Ice Age with no lending, no loan workouts and no selling of the troubled assets. Everything was just frozen. In an economy based on credit and moving money around, it had devastating consequences. Industry wide sales volume was down close to 90% across the country. While distressed asset sales surely mean unpleasant stress to the property owner(a topic for another time), there IS a positive outlook!
The “Great Thaw” has begun and there is evidence. The proof of the end of the commercial real estate ice age are the assets that died before or during the freeze-over and are now starting to be uncovered as the snow melts. Those dead assets are like contaminated carcasses that must be cleared out to make room for new growth.
It is obvious to anyone that when an economic engine is fed by the constant flow of financing and credit from banks, and those banks freeze up, many will starve to death.
In order to help the banks, we need to work with whatever user, vulture firm or investment group it takes to buy those undesirable assets. As banks finally start clearing out their balance sheets from many of the casualties of the deep freeze recession, they will begin lending again and our free-flowing credit based society can get back to some sense of normalcy. We are starting to see this in small doses already. As an example, my firm has closed 6 bank owned or short sale commercial properties in the past month, with 3 more in contract. In every occasion, a once vacant, unsightly blight on the neighborhood is now working to put a solvent user operator in its place. As I tell most of my clients, “Don’t worry about how the discounted sale price negatively affects you(or your comps). Think about how a stabilized and operational property positively affects the success and sustainability of you and the business community.” Activity breeds activity and gets the economy flowing.
Hopefully we have all learned a lesson in credit responsibility and over-leveraging so we won’t allow ourselves to be caught so unprepared next time. The first true signs of recovery are here, but the “Great Thaw” will take time…
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