Something needs to break before the entire investment real estate community does.  Never before have I seen a client turned down for a loan when he has significant funds in the bank, excellent credit and passive income well into 6 figures because he doesn’t have a job.  But I just had that happen.

Never before have I seen a client given the burden of having cash collateral for the renovation of a building when that is what they need the money for but that is what just happened.

Something better happen to get banks lending  on commercial real estate again under reasonable circumstances or this recession can never end.

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.

Now imagine your surprise to receive an email with 50 choices on it. How can that be? You only want to be in top notch buildings and only within a mile of the airport. 50 Choices???? That’s absurd.

Absurd? Maybe. True? Definitely.

What happened to all the office tenants? That my friend is the big question these days. Office building owners are giving bonuses to brokers to do a lease, they are giving bonuses to tenants to do a lease and they are giving bonuses to existing tenants to not opt out of their lease.

I know that officials in the Federal Government are loath to use the word recession but an awful lot of ordinary people think we’re in one now. Office tenants seem very fearful of making a move in case business gets worse than it is.

Interestingly this makes for a very good time for a tenant to cut a great deal for the next few years. However, it is precisely at times like these that most people opt to do nothing out of fear. In many cases it’s an irrational fear but in many other cases the fear is justified.

Us, commercial brokers and office building owners may be looking for tenants in all the wrong places but so far no one has told us where the right places are. Any one who knows of these places please feel free to share.

For more information about Orange County Office market see this article in National Real Estate Investor online edition