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Now What?

October 21, 2008 – 4:45 pm

So here we are as a nation with a slumping stock market, frozen lending market and a financial market in disarray.   Our national leadership has come up with a $700 billion bail out/rescue plan that may only be the beginning of the fix.  We now own part of  the largest insurance company in the world and will soon own part of the largest banks in the United States and in some cases, the world.

The most unsettling thing about all of this is that no one seems ready to say that this is the final fix. After all these heroics we don’t really know what will work because nothing quite like this has happened before.  It sounds like the next step will be taking a hint from the FDR New Deal days and start massive public works projects.

The most striking image that I have in all this is that our financial and political leaders insist on saying that no one could forsee this.  Well, that is not exactly true.  My wife Barbara forsaw it 3 1/2 years ago.

You see Barbara does our property management for our or our client’s properties.  The apartments that we manage tend to slant toward the lower socio economic strata of our society.   Around 3 1/2 years ago tenants who were barely able to pay $800/month rent for an apartment suddenly gave her notice that they were moving.

In come cases these tenants had been in their apartments for years.  When Barbara goes to the various buildings she tends to say Hi to the tenants and spend a few minutes chatting with them. She knew their economic circumstances such as where they worked, how many hours they worked and the way they managed to get through the high cost of living in Orange County.

Most of the tenants were moving to the Inland Emprire where they could live the American Dream and buy a home of their own.  The warning signals that came up were that they were buying homes for $300,000 to $500,000.  How could these people who struggled to pay their bills each month possibly come up with a 10% to 25% downpayment for a home in that price range.  How could they possibly pay 2 or 3 or more times their monthly rent for their new housing.  How could these well meaning and hard working people possibly qualify for a loan, much less actually service it.

The answer of course is that they couldn’t.  Loan officers were blind to this, banks were blind to this, investment rating agencies were blind to this, the Wall Street packagers were blind to it and the ultimate buyers of the loans were blind to it, not to mention Congress being blind to it. That is a lot of people that simply did not want to think about future consequences.  But Barbara did.

Actually there were a great many people who could see the danger in all this.  However, they were the ones who were not making money from this national pastime of kidding themselves.  In reality anyone who has any business background at all knows that not checking on credit and an ability to service a debt is flirting with disaster.  The subprime mortgage business was a disaster waiting to happen.  The only thing I believe that most people did not forsee is that this fiasco would take down the entire world.

Sooo now what?  Well I wish I knew but I don’t.  In my commercial real estate world things have really slowed down while people are scratching their heads wondering what to do next.  The strange thing is that commercial real estate in Orange County is still in fairly good shape.  Sure prices are softer than last year but they haven’t plunged.  Office vacancies have opened up more than is comfortable but industrial is not terribly out of whack. Retail vacancies are still relatively small and are threatening to open up but they haven’t yet. Apartments are doing well but it looks like rents will not be climbing much in the next year or 2.  Vacancies may open up more as homes and condo rentals increasingly come on the market.

Basically commercial real estate is sort of tip toeing in the dark right now.  It has not been horribly affected by the current recession in our country and it’s hoping to get through all this intact.  Let’s hope it does.


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