Some industries have been showing smaller losses and some factory orders have increased.  In fact home sales are actually up from last year in many areas of the country.  So are things about to break wide open?  As kids might say, ” Are We There Yet”?  Is it time to break out the check book and take advantage of the market?

In my opinion, investing in commercial real estate is premature on a wholesale basis but can be selectively carried out.  Jumping into the market whole heartedly must wait until it has actually started to go up.  However, we are starting to see well thought out offers on properties, that would have once been quickly dismissed, now being accepted.

Well thought out offers does not mean to shoot from the hip and just discount every price by 50%.  Rather it means that one must pay attention to cost per square foot, cap rate, current and reasonably projected vacancies and current and reasonably projected attainable future rents. That is the case even with REO properties. The hold period should be projected to be at least 5 years which necessitates the real estate to be well located and well situated in its marketplace.

We often have to make multiple offers for clients seeking to buy smartly in this economic environment.  However, if there is a sound rationale behind the offer the seller will usually at least think about it.  I believe that in the case of motivated sellers, the offer will be kept and revisited after a period of time has passed.  That is true even by bank REO managers.

Therefore if I had small kids in the back seat of my car asking “Are We There Yet?” I would have to respond “perhaps”.

Just today I received an email from a financial wizard who tells me that we need to start acting on an inflationary economy.  Then I picked up an article that points out we are in a deflationary economy.  Yes says another article, but the government is spending money like water and huge inflation must follow.

Of course goes another pundit, but manufacturers are operating dramtically below capacity and even if the first tiny hint of an increase in orders is starting to show, it is no where near inflationary.  Yes goes the counter argument, but money pouring into stimulating the economy is reving the engine with the parking brake on. Soon as the brake is released, off we go.

It makes sense says another expert but have you noticed interest rates have gone up and are still climbing?  That will kill stimulation of the economy like a spike through the heart.  The bickering goes on and on between the pundits, experts, gurus, geniuses, economists, mathemiticians and no one seems to getting the upper hand.

So now what?  Good question.  For a real estate investor such as me, the long term key is buying real estate with an understanding that both sides may be right. Deflation in the short run but inflation, or at lease moderate inflation for the mid run. 

With this 2 part theory in hand one must buy real estate knowing that there is a good likelyhood of deflation in the next year and that the purchase price must account for that.  If inflation sets in approximately 2 or 3 years from now, hard assets such as real estate are the very best hedges one can have.  Although no one wants to sell low, the sales that are actually occuring are at prices that should offer the buy good protection through a deflationary economy until things normalize.

Unfortunately it is not the productivity that we especially wanted to see.  The net effects are a financial market in turmoil, banks who won’t even loan to one another, dramatic drops in the stock market and an investment community that is shell shocked.

The question now is what do we do when the smoke finally clears?  When I say we I am really talking about real estate invesments.  No one really knows where we are headed not to mention what we do on the way to getting there.

It seems safe to say that the financial mess and the general economic doldrums that the United States is in will not correct itself in the very near future.  Some say things will get better in a year and others feel that we still have 3 years to go.

In my opinion we  do have at least a year to wait and probably 2 or 3 years of a challenging economy.  Most markets take 3 to 5 years to fully develop and turn around and we are in this one approximately 2 years.  What to do in the meantime?

Owners of properties have an interesting decision to make.  In general, rents, while soft, are not collapsing in Orange County.  Office rents are being aggressively negotiated by landlords and are definitely lower than a year ago.  However, retail space is holding much firmer and industrial is somewhere in the middle.

If an owner thinks that they would like to sell in the next couple of years it seems apparent that they should be marketing their property now.  Things are not going to get any better for the foreseeable future and they could get a lot worse.  Hesitating can cost real money.

It’s a good time to get very aggressive with office vacancies and do what’s necessary to fill them. Who knows how many people will even be looking for offices in the future.  This is a tenant’s market and there is no use pretending otherwise.  Owners big and small are coming to that same conclusion.

Buyers are in the beginning of a great market.  This is the start of a time when significant profits can be taken. For those who have staying power, deals can be cut that are huge discounts from 2 or 3 years ago on office properties.  Deals are not as plentiful in retail or aparments but those days are most likely coming, especially in retail where rents got extremely high.  Riduculous offers from just a few months ago may well be welcomed in the next few months.

As always there will be winners and losers in this market and as always we may be plenty surprised at just who they are.  Hang around, things are just starting to get interesting.