2009 April | CPE Blog

Economy: When It’s Time to Be Innovative, The Innovators Get Going!!!

Apr 282009

Is the bottom of the market approaching? Is it already there, and we have been submerged for too long to avoid the effects of the storm, and for too long we have been drifting just off the bottom without realizing we could navigate to improved waters?

As the residential market preceded the commercial market decline, it now seems evident that the residential market, in all but the most depressed locations, is evidencing an uptick in the sales of existing homes. What does this mean? It is in my viewpoint the first and necessary step of infusing some money into the hands of the consumer; it also supports a belief that the economy is about to become active once again.

The innovators have already “got going”. These are the individuals that saw opportunity to position their companies in a downturn, to take advantage of a slow but gradual recovery, assisted by the effects of economic stimulus provided by our government. I do believe we are now exiting from that period of time that bred shock, dismay and inertia. Now we realize we are in a very different environment and we need to take actions that adapt to this new “norm” and these calculated strategies can actually realize growth and profits, as we emerge from recession.

In most instances, companies have curtailed unprofitable operations, streamlined their expense structure, and now are poised to be more nimble and innovative.

I read with interest today at how Playboy’s shares are trading for about 5% of their pricing of just over a decade ago. However, a close look at the company’s assets identifies that the Playboy mansion alone is probably worth 25 times its recorded book value. This offers great asset value to someone looking to buy this company or for the company to realize that gain.

In the 1990’s, during the last “great” recession, my company at the time was asked to address a relocation analysis for a transportation company, whose restricted means of access was affecting the company’s ability to operate, and more seriously was affecting company profitability. Through this single real estate exercise we noticed that many of their national locations had, over time, become inner-city rather than transportation friendly, and the conclusion resulted in their having the ability to sell the existing properties at way above book value, and relocate to less expensive, more operationally efficient new locations.

This is again a great time to evaluate your real estate, which is probably an undervalued asset on your balance sheet, affording you an opportunity to increase your earnings by the potential for sale, and secure the added benefit of increased earnings as profitability of operations recovers, and just like the transportation company, potentially create a more modern and efficient base of operations.

Economy: We Forgot About Risk…Again!

Economy No Responses »

Apr 272009

I recently attended a conference where a speaker offered his theory for the cause and severity of the current financial meltdown. He said, “The ‘fuel’ for the downturn was a huge savings glut that required investment and the “oxygen” was a systemic ignorance of risk.” This is not a new story, but the size, scope and number of businesses and asset classes impacted has been far greater than previous ones. Margins and returns were razor thin and 30-1 leverage was utilized by some for purchase of assets. Investment decisions were based on the notion that values had almost no prospect to fall and capital would flow freely for expected investment periods.

Will lessons be learned or will memories become short after the recovery, now forecast by many economists for the first half of 2010? Will more federal regulation and oversight be required to “assist” in minimizing future bubbles?

There will be a need for some additional action by regulatory authorities. As far as the financial markets generally, additional capital requirements and transparency for such financial instruments as credit default swaps should be considered. In the CMBS world, the selection of rating agencies for specific transactions by a government related entity, i.e. the SEC, may be necessary to help revive bond buyers’ confidence.

Do the readers think this additional government oversight is needed? What are your suggestions?

RealTech with Peter Boritz: Real Estate & Twitter

Technology No Responses »

Apr 232009

Miami: A New Take on the ‘Tenant’s Market’

Miami No Responses »

Apr 222009

Many of us have jumped through hoops to meet a residential landlord’s demands prior to renting an apartment. Before you even have a key in hand, you’ve already shelled out thousands of dollars in the form of credit check and application fees, a security deposit, up-front rental payments, even background check fees. All of this in the name of due diligence.

With the commercial real estate industry and broader business world intently focused on what landlords are doing to lure and retain tenants in today’s economy, it’s time for commercial asset owners to get aggressive in requesting tenant guarantees that offset the risks associated with leasing space in a volatile economy. The fact is, tenants’ are just as vulnerable – more so, in many cases – to the ups-and-downs of this shaky economic climate as their landlords, as is evidenced by continued increases in the unemployment rate, the corporate bankruptcy rate, and the loan default rate.

The notion that landlords should be demanding more from their tenants becomes even more important in a market that enjoys a roster of stable owners, such as the Miami office market. By requesting letters of credit, tenant contributions to upfront TI costs, and other case-by-case guarantees, landlords have an opportunity to safeguard themselves for the long-term. From a tenant’s perspective, this is a small price to pay considering the concessions that landlords are making in today’s economy.

by Danet Linares, President of CREW-Miami (Commercial Real Estate Women) & executive vice president of Blanca Commercial Real Estate

India – Converging Forces in the Rising Consumer Marketplace

Economy, Global Green Design, International Strategy No Responses »

Apr 212009

The growth and development of India’s emerging economy in recent years has been of great interest to me. India’s dynamic energy and vibrant culture, combined with the new economy, present a singular opportunity for retail development. Fashion week, Bollywood, and international designers are all converging in a market that, according to a joint study by ASSOCHAM and KPMG, expects US $25-30 Billion investment in modern retail formats over the next 4-5 years.

I am hearing s parks of optimism spreading across many markets over the past few weeks – from our clients and friends in New York, Paris, Moscow, Shanghai, Dubai, and more. Many interesting personal connections to India have presented themselves recently, and I am increasingly intrigued by these opportunities. Having spent time in India, I find many compelling aspects to the culture, the people, and the opportunities ahead.

First, a recent visit from Bangalore – both the Chairman of an enlightened development group as well as the CEO of an architecture firm that we are working with in India. The gift of a deeply thoughtful presentation on architecture, art, beauty, culture, memory and the merging of theory and practice.

Then, a series of reports on business development and retail sector opportunities landed on my desktop. This was followed bya visit from a newly minted design intern from India, then London, now living in our neighborhood with a passion for retail design and seeking the beginnings of her career. Then, a conversation with a friend on all the emerging opportunities – an international architect, originally from India whose career has been spent in the US focused on retail design.

With favorable demographics (two-thirds of India’s 1.1 billion population is under 35), nearing 50 cities with more than one million residents, strong economic growth figures projected over the next 5 years, a growing middle class and ascendant wealthy households – the emergence of organized retail remains in its infancy.

Last year I attended a global gathering of retail industry leaders in London: imagine the UN of retail leaders.By far the most exciting, and dynamic talk we experienced was delivered by the Chairman of the major retailer in India. I’m looking forward to what happens next, and planning to be a part of it.

http://www.ibef.org/industry/retail.aspx

New York City Tri-State Area: Distressed Buyers Seem Distressed

New York City No Responses »

Apr 212009

Properties aren’t the only thing falling into distress these days. Private buyers, whose higher yield requirements left them on the sidelines during the 2004-08 run-up, see opportunity in distressed assets and are eager to purchase. Unlike the early 1990’s, however, when banks and the FDIC sold many single assets as well as bulk real estate portfolios, the abundance of distressed product has yet to surface. The current lack of “troubled” properties originally expected by potential buyers, is a function of several factors: significant foreclosures in many parts of the country have yet to occur, banks are more patient and hopeful that asset pricing will return to a higher level, and the commercial real estate world is waiting to see what effect TARP, TALF and any future government programs have on the market. While note purchases are an alternative for various “debt funds” and buyers with deeper pockets, the high-yield small-to mid-size private buyer continues to wait their turn. Based on our read of the tea leaves, the wait will be a bit longer.

Finance: Musical Chairs – Managing and Matching Debt to Real Estate

Finance No Responses »

Apr 202009

Where were you when the music stopped? More hard lessons are being learned every day in our industry about the risk of high leverage short term debt. As tempting as it is in good times to leverage development and acquisition activity with short term lines and other high leverage debt, the price can be very high in a downturn. Commercial real estate and short term exit/finance strategies are not a good match.

NorthMarq Capital’s mortgage servicing portfolio of $37 billion is comprised largely of fixed rate transaction based financing with staggered maturities. Even our shorter term financings that we now service were generally conservatively underwritten. Our overall 30 day delinquency rate is slightly over 1.0%. We cannot overstate how fortunate we feel that our clients largely chose to finance their properties in this manner.

Many commercial real estate owners are in the enviable position of minimized exposure to the current credit/value crunch because they effectively matched long term fixed rate transaction debt at levels that cash flow even in today’s environment. The best operators staggered their maturities so that no more than 10% of their portfolios mature in any one year. Some owners kept their development/acquisition activity in balance with their financial capabilities. What may have seemed at one point as very conservative financial management now appears so prudent.

So why would anyone make that short term bet? The flexibility, pricing and ease of bank financing at the height of the market; the misplaced belief that the lender/banker will always be there to extend the loan at maturity; the confidence that one will see the point to sell or convert to more conservative financial structure before the music stops and values drop? In the rear-view mirror all those concepts look ill-conceived. Some refused to make the bet.

What did those owner/developers see or believe that others missed? Perhaps the simple understanding that values don’t always go up. YES, IT IS POSSIBLE THAT VALUES OF ANY PROPERTY TYPE WILL BE LOWER IN THE FUTURE. Seems fundamental, but some are just now admitting to the concept. Whether we are talking commercial real estate or any other asset, the hard lesson is that values have always been cyclical and always will be. If you can time the market, high leverage can work. If you guess wrong, creditors will occupy your life. Maybe we forgot these basic concepts because the positive run had lasted so long; many were not even around to see the last meaningful downturn from 1989-1991.

It is a luxury to focus on cash flow and not worry about values in this down cycle. Some real estate owners are in that situation but in most cases it’s no accident they had their chair picked out before the music stopped.

Management Matters with Mike Myatt: Experience – Help or Hindrance?

Business Management No Responses »

Apr 172009

While experience can certainly be an asset, it is not at all uncommon for it to be a severe hindrance. While I’m not prone to stereotyping, it has been my observation that there are generally two types of people: those who don’t know what they don’t know, and those who do know what they don’t know. All other things being equal, the difference between the two groups boils down to experience and discernment. Those people who don’t know what they don’t know typically tend to be either younger professionals beginning their careers who have a lack of experience, or older professionals who have not gained wisdom and maturity as they have progressed along their career path.

The Early Stage Professional:

On the positive side of the equation young, inexperienced, and energetic professionals sometimes accomplish great things because they don’t have the experience to know what they are not supposed to be able to accomplish. As a result of their professional naivete, they sometimes appear to achieve the impossible. However more often than not, young professionals operating outside of experiential and/or educational boundaries are met with failure and frustration by having what appear to be great ideas eventually unwound by unforeseen factors that only were unforeseen to them due to their inexperience or lack of discernment.

The failures and setbacks of the early stage professional can be healthy learning experiences that lead to professional maturation so long as learning actually takes place, and mistakes of naivete don’t become patterns for future disruption. It is essential that young professionals gain an understanding of where their skill sets and competencies begin and end. Once the boundaries of knowledge are understood, then definitive steps can be taken to create a plan for personal and professional growth. The decision can be made to ignore weakness by design by playing to your strengths, or you can choose to improve weak areas by closing the gap between where you are and where you want or need to be.

The Tenured Professional:

Regrettably, it takes more than time on the job to reach true professional maturity. I have personally witnessed people, 20-plus years into their careers, who have reached executive level positions and they still don’t know what they don’t know. It is all too common for these types of people to operate in a vacuum by believing that their experience alone is a cure-all for any issue or problem.

How many times have we all observed an experienced person with subject matter expertise in one area, try to drive an initiative or an agenda in another area, only to fail miserably because they didn’t know what they didn’t know? Let’s look at this issue another way; how many times have you seen an older and more experienced person fail to solve a problem that a younger and less experienced person solved with seemingly little effort? While experience is a valuable commodity, in-and-of-itself and to the exclusion of other traits and characteristics, the sole reliance on experience can be a barrier to professional growth and maturity.

That being said, I have never been a believer in the adage “you can’t teach an old dog new tricks.” In fact quite to the contrary; I believe anyone (yes, I mean anyone) can change given one prerequisite; the desire to do so. However in that vein, I feel just as strongly that change cannot be forced upon someone who does not recognize the need for change, or even worse, recognizes the need but has no desire for change.

Whether young or old, experienced or inexperienced, the best way to approach personal and professional development is to always stay in the learning zone. When you think you have all the answers is precisely the point in time when you are headed straight for the proverbial brick wall. Always seek out people who know more than you do and actively learn from them. Find a mentor or coach who can dispassionately point out your shortcomings and help you chart a path to progress.

Most things in life happen as a result of choices we make. It is clearly within your grasp to make the choice to gain an understanding of what it is that you don’t know, and determine what you want to do with that information. It’s your choice; choose wisely.

Miami: Downtown Focus

Miami No Responses »

Apr 162009

Much has been reported lately about downtown Miami’s challenges absorbing the influx of residential development that has taken shape in recent years. To examine where Miami stands today and how it will move forward, it’s helpful to take a step back. The latest wave of urban growth began in the late 90s, when Miami’s civic and business leaders saw sustainable vertical development in our urban core as the logical place to begin expanding the City. We’re neighbored by the Everglades to the west, the Atlantic Ocean to the east, and we sit atop our own drinking water, so condensed infill development in downtown Miami – the state’s largest employment center – was the bull’s-eye for residential developers and local leaders.

There is a perception among some that poor planning got us here. But in reality, development in our urban core – as opposed to urban sprawl – was the best method for meeting our community’s population needs. From an urban development standpoint, Miami is in prime position for long term, sustainable growth while other metropolitan areas are busy trying to curb sprawl. The fact that residential development took off in downtown Miami has built a strong platform for enterprise and job growth, government investment, and renewed interest in downtown Miami as a destination. The next step toward becoming a 24/7 city is boosting investment in mass transit and encouraging retail and commercial businesses to relocate and expand here, in turn creating a vibrant mixed-use environment for downtown’s growing population.

Chicago: Are We About to Emerge From The Doldrums?

Chicago, Economy No Responses »

Apr 142009

Wikipedia explains “the doldrums” as a reference to being in a state of listlessness, despondency, inactivity, stagnation, or a slump. Sound familiar? It surely is representative of our economy and the last six months in Chicago Metro real estate.

I would hazard to guess that most of our existing, or potential new clients, have felt just like the sailors of old, stranded in a calm, waiting for the winds of change to rise once again, so they can begin to see the skies clear, and offer a glimpse of hope to guide them back on course.

There are signs of “clearing skies.” The Dow has grown from 6500 to surpass 8000 in just the last thirty days, usually a harbinger of a recovering economy. During that same time period, companies that have sound fundamentals, and a recent and proven track record have also shown comparable growth in their share value.

The developer, Hines Interests LP’s apparent decision to postpone a planned 50-story tower at the northeast corner of Lake and Canal, has created an opportunity for high-rise building owners to compete for that tower’s planned tenants, a scenario that would reduce the current inventory of available space in the Central Business District.

Michael Burgess, a British author, was once quoted as saying, “I have also believed in empowering the individual and believe there is a degree of inertia in big government that hampers the ability to respond to a rapidly evolving crisis.”

Those same empowered and insightful individuals will see this “clearing of the sky”, and recognize that the economic slowdown we are experiencing will constrain near term new development. As already planned current developments are delivered with significant pre-leasing commitments, we will see less inventory and opportunities for rental rates to continue to deteriorate. History, coming out of previous recessions, supports this theory.

Accordingly, this is a very good time to make those bold real estate decisions, be a decisive tenant, secure an array of current opportunities, and have one less decision to make as the economy continues to make its recovery and your business can take advantage of the “economic bounce” and get back on course, singly focused on growing your business, with that real estate decision behind you.