The real estate optimist, like Sasquatch and the honest politician, may be no more than myth. Real estate runs on jobs and jobs are a reflection of the economy. With the U.S. economy growing at an annualized rate just 1.7 percent in the second quarter, we appear to be entering another sustained slowdown, or so claims the Federal Reserve. The loss of 8.4 million jobs caused by the recession has crushed consumer confidence and overall spending. The housing market cannot muster sustained growth in the absence of a government buyer tax credits. In a business fueled by jobs, the real estate market appears to be weaker than stone soup.
Enter Bill McCall, founder of McCall & Almy, and member of the “Legends” panel at the BisNow Breakfast at the Copley Marriott. Among a gathering of over one thousand Boston real estate professionals, McCall, sounding very positive, rhetorically asked (paraphrasing here) what business allows you to turn over your business every three years or so and renew it at market rates? Smiling, he noted that while the real estate market is unhealthy at current growth rates, at a 3-5% growth rate it is quite healthy indeed. He confidently stated that we would certainly be at those rates again. Now that is optimism! Funny, however, that McCall would make such claims while telling the huddled masses that our local hospitals are tabling development plans altogether – a sure sign of a sustained downturn, but I digress.
Most of us are confused. Are all things real estate good, or are they bad? Are they bad now and soon to be good again? Are those real estate good times inevitable?
I recently spoke with another unnamed Boston lion of real estate finance who told me in no uncertain terms that Route 495 real estate was dead and deteriorating. There are a few exceptions, such as Westborough Office Park, which is near route 90, but there are not many. In making this claim, he noted that while the need for commercial space will certainly grow in the future, the economic climate has so paralyzed real estate owners that it will be difficult, if not impossible, for them to hold and manage existing empty space for the long term. Noting that the need for office space will likely return in late 2011 and early 2012, the inventory of shadow space is so great that it will absorb demand for another year or more – extending the new space drought well into the new millennium. New Millennium! Forget about new construction! Ouch!
So what should a real estate owner do about what appears to be a Paleolithic diet of good news. I say “put all of your eggs in one basket and watch that basket.” Specifically:
- Focus on what you’ve got and work hard to make it operate as efficiently as possible.
- Be creative about renewing your tenancies. A bird in hand is worth…..well you know. A tenant who pays a lower rate for a longer term is better than no tenant at all.
- Focus on net operating income. Divine a financial plan imbued with the reality of long term high unemployment and zero tenancy growth. Do not wait for that 5%.
- Build cash wherever and whenever possible.
- Invest in effective systems and good people to run them.
Finally, remember the three rules of real estate management – measure, measure and measure again.