Monday, July 20, 2009

“We Live in Interesting Times”

Don’t we though? We are celebrating the original Moon Walk, an African-American sits in the Oval Office, and the Dodgers have the best record in the major leagues for crying out loud. When was the last time that happened? Yes, these are interesting times indeed. Not always so pleasant though, eh?

This past week was full of meetings and as I am sure sometimes happens to you, I realized at the end of the week that there was a common theme. In each meeting there was conversation about where we are, where we are headed; and what values, strategies and actions will help move us in the right direction.

There are lots of data points to think about, and we should all be doing exactly that as we endeavor to take care of our own little corner of the world.

Commercial Real Estate Defaults Rising Stories are everywhere you look stating that commercial RE is “the next shoe to drop” in the economic crisis. With properties entering or already in default status having nearly doubled since the beginning of the year many would say the shoe has already hit the deck. Real Capital Analytics, Inc. reports that 5,315 buildings representing $108 billion are now in default, bankruptcy or foreclosure. Those making the direst predictions have already pegged this as the deepest failure in U.S. commercial property market history with potential economic impact that dwarfs the residential crisis. Some analysts predict $90 Billion to $140 Billion in losses to securities backed by commercial property loans. Depending on who you listen to the turnaround in this market is 3-4 years away since recovery here will follow recovery in other market sectors such as manufacturing and retail.

CRE’s and FM’s should see risk in this predicament, certainly; but there may also be opportunity. Check the financial health of your landlords and develop contingency plans for their failure. Some may have opportunities to leverage the landlord’s difficulty, offering to extend terms in exchange for concessions. Others may consider buying when the cost is right.

“Extend and Pretend” Programs Only Defer the Inevitable The delay actions currently being proposed and implemented largely fail to solve or effectively deal with underlying problems. We are crafting ways to defer solutions because of the pain and displacement doing so now will cause. We may be releasing immediate pressure but at what cost? The bills will still come due but with added cost in financial and human terms.

When possible avoid falling into the trap. It is like any other conflict, business or interpersonal. The longer you wait the harder it gets. In this case extending the crisis will impinge future options and diminish future capability. Organizations that can avoid “extend and pretend” scenarios will have big advantages over competitors who are forced to play the delay game.

Expect Increased Taxes Governments world wide are running large deficits and few are monetizing them through liberal use of their printing presses. That’s good, but it does mean that the ability to pay the bills will have to come from somewhere. Guess where that will be, Mr. and Mrs. Tax Payer.

Here in California we are living the realities of all of these situations. Past failures are coming home to roost and it hurts. Services are being reduced, important programs slashed, unemployment and foreclosure rates are surging. Eventually we will find a way out but all of us, families and businesses alike should realize that “we” are going to be a big part of the solution. Many companies are taking a strong look at their tax liabilities and while working to minimize them they are also increasing allowances to accommodate new taxes and increasing rates on existing taxes.

Like the man said, “we live in interesting times.” I don’t know about you but I certainly hope no one ever looks back and calls these “the good old days.” While my grand parent’s and parent’s generations lived and eventually succeeded through the Great Depression, I have no desire to pass this one on to my heirs or theirs. Of course it’s tough. But it will be easier now than later.

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