Insight
By Thomas R. Sherlock
2010 Sets Stage for Healthier Market
Autumn is an exciting time of year when debate reigns for sports fans. Does a fifth ring make Kobe Bryant as good as Michael Jordan? Can the Ducks bring Lord
Stanley’s Cup back to Orange County? Sports fans everywhere
are excited and forecasts abound. The situation in commercial
real estate is similar to that in the sports world: lots of questions, plenty of predictions.
Talk began focusing on next year when Ben Bernanke said
the recession is probably over. Are we finally going to turn the
corner and get back to growth? The desire exists now, and so
do good investment opportunities. However, 2010 is likely to
be the year the stage is set for recovery rather than the year
the Promised Land was reached. In other words, get ready to
use the Cubs’ fan mantra of “wait ’til next year” during 2010.
(Hopefully, we won’t be saying that for the next 100 years.)
breadth of existing problem loans, and what actions they take,
are harder to forecast. The FDIC has been leasing office space,
hiring staff and preparing to handle a large number of failed
banks. They have been appointed receiver on almost 100
failed banks this year. The cleansing process has begun.
However, this is likely only a fraction of the institutions
that are insolvent and won’t survive. Additionally, a clear
demonstration of the business and political will to realize and
act upon this problem is absent. Delaying tactics—extend and
pretend by lenders and Treasury Department guidance, such
as Remic allowances—are reminiscent of Japan’s response to
its 1990s banking crisis.
While there are mixed signals about the response to
problem loans, 2010 could become known as the year of the
foreclosure. Through the combination of healthy lenders
cleansing the problem loans from their balance
sheet, acquisition of zombie banks whereby
loans are marked to a new basis reflecting their
real market value and the FDIC receivership of
hundreds of additional banks, 2010 can further
set the stage for a healthier capital market and
therefore a healthier real estate market.
Questions and predictions…sports and
commercial real estate are a lot alike. A fifth
ring for Kobe or the Ducks kissing the Cup
depends on what the teams and players actually
do. Scottish-born American industrialist and
philanthropist Andrew Carnegie said it best:
“As I grow older, I pay less attention to what
men say. I just watch what they do.” Since the
actions of the professionals and companies in
our industry are more telling than the words
we speak, now is a great time for companies and individuals to
differentiate themselves from the pack. Actively participate in
a leading industry organization, have a voice and an active role
in solving today’s challenges, and shape the commercial real
estate industry of the future. Employ Carnegie’s sage counsel
and see for yourself what you can do.—SOCAL
Next year is likely to be the year the stage is set for recovery rather than the year the Promised Land was reached. In other words, get ready to use the Cubs’ fan mantra of “wait 'til next year” during 2010.
Two keys to watch in evaluating the industry’s progress to
health are job reports and the lending community, including
the FDIC, and the actions they take regarding the 2005 to
2008 vintage loans that are underwater.
The easiest factor to forecast is jobs. Everyone recognizes
job growth is essential for a healthy market. Not as many know
that it typically takes 18 months after job growth turns positive
before occupancy and rental rates start increasing. Today,
monthly job losses are decelerating, and that is positive news.
So, expect the economy to break even on job creation during
2010, but also expect rent and occupancy declines to occur on
a macro basis within the office sector. Rosy rent and occupancy
news will have to wait for 2011.
Whether lenders and regulators accept the depth and
The views expressed here are those of the author and not necessarily those of
Real Estate Southern California.
Thomas R. Sherlock is the 2009 president of Naiop SoCal and
senior managing director of Buchanan Street Partners. He can
be reached at trs@buchananstreet.com.
