AN INTERVIEW WITH A COMMERCIAL REAL ESTATE INSIDER
Thanks to Ilene at Phil’s Stock World for this excellent interview with a commercial real estate insider:
Mr. Solomon (name changed) is a CRE veteran with 40 years of experience developing commercial real estate in 15 states and has kindly agreed to be interviewed about the current conditions in the CRE market.
Ilene: Thanks for doing this interview with me. Like global warming, rumors of continuous heating up in the CRE market, didn’t exactly pan out. What are you seeing in the CRE market now?
Mr. Solomon: CRE is undergoing deleveraging with the rest of the economy, debts are being reduced or going into default. Large numbers of projects are not cash flowing and will have to be liquidated, or ownership will have to be transferred. Concurrently, there’s an oversupply caused by the same ill advised financing that led to the overbuilding.
Ilene: Did you see this happening?
Mr. Solomon: Yes we knew, and so did everyone else. Most people make a decision based on what they can get out of it in the short term. It’s the collective crowd behavior problem. Why do the lemmings jump over the cliff? It seems like a good idea till they get to the cliff – they keep being rewarded, till they’re not. Like the stock market, people invest because it keeps going up, without knowing when to get out, when the market’s going to crash. It’s a justifiable course of action as long as the market goes up and there are no losses. You can argue that the players didn’t really lose because the government bailed out a lot of the participants. Taxpayers lost the most.
Ilene: How far into the decline are we now?
Mr. Solomon: So far about 25%. A lot has been recognized. And it’s no longer a surprise. Some properties have already been foreclosed out. There are a lot of vacancies. I think a further substantial group of commercial properties will get foreclosed. I don’t see it leveling off for another few years because of the problems of contraction, debt, and oversupply. Oversupply in real estate doesn’t get worked off, the buildings have to be used. Less consumption and less business mean less demand. Creative financing, excessive easy money caused the oversupply, caused hyped up prices. Now there’s less demand, less employment, less consumption, and on top of that, the excess debt still has to be paid off – there’s more deleveraging coming. There are probably many years of value declines ahead.
Ilene: Do you think the recession is over?
Mr. Solomon: No, we will be in it for a number of years. Assuming the GDP is up in the short term, it doesn’t matter. It’s due to more debt expansion. The real world debt must eventually decline. It’s a government induced blimp that cannot go on, it’s not sustainable.
Ilene: Are there any areas where you would be building now?
Mr. Solomon: Regions will do better in the lower tax states that are less unionized, with less government regulation, for example Texas.
Ilene: I know many of your projects are in CA, how is that state doing?
Mr. Solomon: The California government is dysfunctional, too little revenue and too much expenditure. Compared to WA, there are more people, more speculation, more bureaucracies, and now more contraction. CA also has extra political risks, the state is bankrupt. The U.S. is also bankrupt. If there were no restrictions due to traveling and language, many people would be going elsewhere. All things being equal, I’d be building where opportunity is greatest, taxes are lower, and there’s less regulation. I’d be more apt to buy something in Texas because the economy is stronger than in CA, there is less regulation, no income taxes and the budget is better balanced.
Ilene: When do you think it would be a good time to buy real estate?
Mr. Solomon: It’s a dangerous time to buy now, but better now than a year ago. It may be better next year.
Ilene: You actively avoid places with any regulations?
Mr. Solomon: The regulation needs to be balanced. Some is needed. But it has to be right and the bureaucratic political system doesn’t help get it right. The system is politicized. For example, Greenspan tried not to have an economic contraction while he was in charge of the Federal Reserve. This paved the way for a longer decline now. The Fed didn’t stick to its mission. It’s complicated because politicians want to be reappointed. This encourages short term decisions. The last thing we want is a short term perspective in the Federal Reserve system.
The basic problem is that they have been and are continuing to print money when there’s nothing backing it. There’s no self-restraint. If you’re creating credit at 25% per year to raise the GDP 2%, something is wrong. Credit induced expansion in the economy. Obama says he’s creating jobs – that’s the kind of nonsense that government parties are selling us.
For example, is it sustainable to give people $4000 to go buy a car – one shot buying of cars to make the GDP go up temporarily? It’s just appearances. On a micro level if you can’t pay your bills, you have to stop spending or get a better job.
Ilene: Does it matter that we’re bankrupt?
Mr. Solomon: We seem to be functioning as though we’re not. There’s no question that only two trillion of revenue can’t service $100 trillion of debt. It’s pretty clear that there’s a major problem.
Ilene: Given the sad shape of the economy, I guess you wouldn’t think the stock market valuations are reflecting reality?
Mr. Solomon: The stock market goes up because it’s an asset class that the government’s moving money into now. It’s a bubble, another Ponzi scheme. Government just moves money from one asset class to another, playing the system. The banks made the taxpayer responsible for all the losses. The government allowed the banks to get into unregulated fields and destroyed regulations. This keeps the problem going. It’s been going on for years but keeps getting worse.
When businesses spend money it tends to be more productive, but not when the government spends it. This is a drain on the economy. Businesses use their money better, people will work harder. If the government taxes enough money away, people will eventually leave for other countries. .
Ilene: In your business, would you be hiring people any time soon?
Mr. Solomon: No hiring. Due to the economy and health care issues, we’re not hiring anyone. Hiring is a liability, might be taking on a life-long obligation. We prefer to be firing now, decreasing the number of employees.
Ilene: What to you think of Obama?
Mr. Solomon: He hasn’t done anything. He doesn’t tell the truth, that’s part of the problem. They can’t for political reasons – we have creditors we can’t tell the truth to, we are in that position with other countries. No one wants open discourse. Our country’s insolvent but the government doesn’t want this to come out as news, so they control how the news is managed.
We owe foreigners $50 trillion. The government wants to sink the dollar so that we’ll owe $25 trillion.. Longer term, it’s better to have a strong currency. But as a debtor nation, we want the dollar weak. In any event we’ll eventually be owned by foreigners. But what does Obama care if he sells out the country? The leaders are international, and they take care of themselves. Once you’re in this vicious cycle, you’re in it. The nature of the information is a problem once you’re so weak.
Good stuff TPC. Thanks.
While tailgating at a U2 concert this fall I talked to this guy that works for a commercial real estate company that manages office bldgs and shopping centers. Basically stated the same items listed at the top: vacancies and more vacancies. His group comes in and makes sure the lights are on, collects whatever rent there is – owners are willing to walk away and give the keys to the bank – very dire.
Also spoke to a banker friend, said most shopping centers and office bldgs were financed with ‘starter’ loans from banks then they would roll-over to longer term loans that are brokered for insurance companies and investment trusts. However, the longer term market is gone so these loans have no place to go.
“Yes we knew, and so did everyone else. Most people make a decision based on what they can get out of it in the short term. It’s the collective crowd behavior problem. Why do the lemmings jump over the cliff? It seems like a good idea till they get to the cliff – they keep being rewarded, till they’re not”.
Hey, buddy, go on to the next unregulated local and leave it in ruin, but don’t moralize about what should be done in your aftermath.
Hypocrite.
How do we owe foreigners 50 trillion dollars?
The US is NOT bankrupt. There is plenty of private wealth that can be taxed to pay of all of the US debt.
We could start with a windfall profit tax on Goldman Sachs (and every other big US bank) and their employee’s bonuses.
Add 10% tax to all income over $2 million per year and an additional 10% on all income over $10 million. Tack on another 10% on all income over $20 million. Add another 10% on all income over $50 million. Taxes to be repealed as soon as the taxes as some as the budget is balanced for two years. (Automatically added back in any year that the budget is not balanced.) Lloyd Blankfein and Jamie Dimon will be first in line to advise Obama and Congress on how balance the budget.
Next implement a 2% wealth tax on all assets held by individuals in excess of $20 million. Like a real estate property tax, but on all assets (If somebody has $40 million is assets. Take $400K per year.) The tax should be on gross assets, not net worth. Too bad if they are in debt, they can sell their assets is they don’t generate a return.
Tax all capital gains as ordinary income, but factor in inflation into the basis. If a security was purchased in 2002 for $100 the the basis should be adjusted for the 20% inflation to $120, but any gain over $120 should be taxes at progressively higher ordinary income tax rates. The current capital gains tax is regressive.
Freeze the pay of all goverment workers until the Federal budget is balanced. Reduce the pay of all Senators and Congressman by 10% each year until the budget is balanced.
See this is easy if only there was the political will and a few of the right incentives. There would be the political will if the masses revolted, but they are busy watching “reality” shows on TV.
Rob your solution is to grow the government, while the solution should be to shrink the government. The government needs to cut the entitlement programs and military budget drastically, not steal more money from people (this alone would save almost 1 trillion/year). The government has no money, it takes from others. And the more it takes, the more it wants. And no matter how much it takes, it always finds itself in some deficit. Would you give a shopaholic more money to stop it from spending so much?
My solution is absolutely NOT to grow the government. I should probably have started out saying that there should be a freeze on all government spending.
My point is that there is plenty of money available to fund the government as it is today. The government is NOT bankrupt. The government can tax its way to solvency. It can not spend its way out of debt. The additional taxes will cause absolutely no pain. Those being taxed won’t even miss the money. Those who have benefited most from government policies should be taxed the most.
The richest 1% hold a disproportionate amount of the country’s wealth but also hold the power in Washington so that they can increase and protect their wealth. A portion of their wealth should simply be taken to get the country out of the mess it is in. The masses do absolutely nothing since most of them are as financially irresponsible as the government itself. If the ultra-rich don’t want higher taxes then they should really push to cut spending (they own the lobbyists and have most Congressmen in their pockets), but the spending increases favor the ulta-rich.
We should start with an massive windfall profits tax on the banks who are benefiting from free money from the Fed. The banks (even GS) wouldn’t even be in business if it weren’t for the taxpayer bailout (or so claims Timmy).
If the ultra-rich are taxed more they will work harder to make more money to make up the difference (or they were making more than they wanted and won’t miss the money in the first place). Increasing taxes on the middle class will not have the same effect.
The problem with government spending is the way the goverment spends money. I agree that it is very wasteful. But there is plenty of money available to fund the government as it is.
Regarding shrinking the government.
Most people cannot put on condom properly to have safe sex. I guess this is a simple way to show the implausilibity to relying on “personal responsibility” as a major pillar in any political philosophy.
Most people need “mommy” or the welfare state to take care of them.
Ron,
You are completely misguided. The government has NO MONEY — all money government receives is from taxpayers. I agree with you, government should freeze all spending; however, taxing individuals with wealth at the levels you propose will only further exacerbate the problems, because individuals that have the level of wealth to pay the additional taxes you propose will simply shut down their investing. I know, because my husband and I fall into the $2 million dollar income level you talk about and I guarantee you that we would work to reduce our income so as to avoid the tax structure you propose. And by the way, we have NO connection to local, state, or federal lobbyists, government, etc. and we are individuals who want government to GET OUT OF OUR LIVES AND OUT OF OUR WAY so that we can continue to invest in our own business and other businesses in order to grow our economy. Spending increases do not benefit “the rich”, it benefits government and individuals in the government. Please do some research and rethink your position.