Back a little over a year-and-a-half ago when I was at the apex of my employment as Editor of a commercial magazine called “Real Estate Southern California,” I was being inundated with ominous reports on the sector. That was when the noise of the crashing housing market was drowning out all the other sounds from the clanking and sputtering engine that drives the US and world economies.
And that was right about when even the big players in commercial real estate were really scrambling, or they were getting scrambled.
At the time, the way in which I communicated to others outside that industry my measure of how bad things in CRE were shaping up—if they asked, as the main, and almost only, concern was housing—was to tell a story about a Harvard MBA I got to know and like who was a high ranking executive at one of Southern California’s most established, and best respected commercial financing companies.
This guy not only had the educational pedigree, but the background and the Rolodex, if need be, to survive the cuts in CRE, then only starting to be made. He had been in the CRE lending game since the early 1990s, and in his case the “VP” in his title actually carried some responsibilities and moneymaking implications with it. One of his fortes was business development. He brought money into his company by drumming up new, rich clients in need of a little more liquidity to make their multimillion projects go.
Well, as you may have surmised by my lengthy buildup, Harvard got the axe. My thoughts upon hearing this—ole Harv delivered the news to me at a trade show in Los Angeles where he was handing out his newly restructured resume—were as follows: If it can happen to Harv, it can happen to anyone. Talk about an ominous thought; and that thought haunted me to the point of obsession the rest of the day and for some time afterward.
Then a few months later, the axe came calling for me. So much for a coupla Bachelor’s degrees from Cal State Dominguez Hills and a dozen years as a dogged reporter—but hey, I did outlast Harv, as odd as that now seems.
However, I do have to give Harv his props for his superior knowledge, which he demonstrated moments after breaking his bad news, with yet another shocker. He told me he expected to be unemployed for a lengthy period, and that he might even have to go into an entirely different industry for a time to keep his family financially afloat. I dismissed Harv’s statement as some momentary pessimism from a guy in a dour mood who’d just been blindsided by a job loss. In case you weren’t listening: He held a graduate degree from what is arguably the finest business school on Earth.
Harv, wherever you are, or aren’t, I take my Mortar Board off to you. You were right, damn you. Things continue to get ugly in CRE, and don’t expect much good news from that sector any time soon. This week was flush with more bad news for CRE.
Despite an improving economy, “fallout from the recent recession continued to negatively impact commercial real estate sectors in the fourth quarter,” according to a National Association of Realtors report issued this week. In that report, the group’s top economist, Lawrence Yun, states: “Because of the lingering impact from the deep recession over the past two years, vacancy rates will trend higher and many commercial property owners will need to make rent concessions. With the job market expected to turn for the better later this year, we’ll see rising demand for office and warehouse space, but that isn’t likely before 2011. Click here for NAR’s sector-by-sector breakdown of CRE.
A story on Tuesday from iMarketNews.com cites a letter sent Monday to Federal Reserve Chairman Ben Bernanke and the heads of other regulatory agencies by Senate Banking Committee Chairman Chris Dodd Monday expressing his concern about the weakness in the commercial real estate market. In his letter, Dodd argues the weakness “requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy.”
The iMarket story also cites estimates from rating agency Moody’s that “total remaining losses on CRE lending may well exceed $150 billion.” An iMarket story on Wednesday about Fed Chairman Ben Bernanke considering whether more economic stimulus is necessary, the Fed Chairman is quoted as saying that CRE loans are “the biggest credit issue that we still have,” and that “There are a lot of troubled commercial real estate properties and they are causing a lot of problems for banks, particularly small- to medium-sized banks and we’re watching them very carefully.”
In fact, an article on Wednesday from mortgage default servicing website DSNews.com states the default rate on commercial real estate mortgages held by U.S. banks more than doubled in 2009 from a year earlier, and “Real Capital Analytics reported that the default rate on loans made for office, retail, hotel, and industrial spaces shot up to 3.8 percent in the fourth quarter of last year, compared to 1.6 percent for the same period in 2008.”
What does this all mean for Long Beach?
My answer—much like Harv’s portending outlook for himself, and ultimately the industry, over a year-and-a-half ago—may come off as a tad pessimistic: Just as in other cities, all those half-built projects (and there are quite few along Ocean Boulevard, not to mention the countless number of drawing boards that I’ll bet one can find laying around the city’s Planning Division offices) around Long Beach are likely going to sit that way for at least the next year or two. And since retail is a prime component of CRE, I wouldn’t expect all those empty storefronts to get filled anytime soon (sorry to those hoping for a little relief along ailing Pine Avenue). And as the health of the office market is tied to jobs creation, I wouldn’t look for too many headlines about new firms setting up shop in Long Beach and filling some of the voids being left in offices around downtown by downsizing and dying firms.
And if you value common sense as I do, I don’t think it’d take someone with a degree from Harvard to bear me out.
