Looking Ahead With Lights Out

Colleagues and Members of CREOPoint's Global Financial Crisis (GFC) Group

As the orginator for this group way back in mid-September, I recognized instantly that Lehman Brother's demise was the 'canary in the coalmine.' (Maybe Bear Stearns was the 'bear in the coalmine' but he blended in too well with the surroundings!) So much has happened since, and there does not seem to be any light at the end of the tunnel, at least not yet. When we have a weekend/bookend situation where on Friday we hear that Citigroup felt it was well capitalized and then on late Sunday night is bailed out to avoid its destruction, we all know that tougher times are ahead, and that what happens in Finance directly affects Commercial Real Estate.

You've also likely noticed that I have not posted very much lately to this site. First, I did not want this to be just a place for gloom and doom; instead the GFC group could be a place for early warning, early indicators of stress so that people could try to preempt some of the fallout. So you may have noticed that we were among the first who reported on a money market fund that could only pay 97 cents on the dollar, effectively 'breaking the buck', and record hedge fund redemptions, days before the business press really started to focus on the implications. If everyone is headed for the exits, it's a good idea to be out the door first, or make a conscious decision to wait for everyone to clear out. (Better yet, from a strategy point of view, be somewhere else!)

Yesterday, as the news focused on Citigroup and President-elect Obama's economic team, I happened to be watching CNBC when I heard Erin Burnett say she was talking with Tom Barrack, Chaiman and CEO of Colony Capital. She mentioned a Fortune article in 2005 that called Tom one of the world's greatest real estate investors. So my 'strategy ears' perked up and I stopped what I was doing and focused on the nine minute interview.

Erin noted that the interview was "not for the faint at heart." She was not being facetious. Here are some notes:

1. How bad will it get? Tom: It will be a 'global disaster.'
2. Commercial real estate has become an investment for 'trading, not holding' with the growth of the CMBS market and, even more ominously, the CMBX market (basically enabling investors to buy protection from declines without holding property.)
3. How far will commercial real estate drop? 50% in some markets, 20% in others.
4. "I can't spell equity. Today's equity is debt. The debt market is the entry door to equity."
5. "We are at the deep bottom of soup." The dimuition of value will worsen as the regulators turn their attention to regional and local banks which are holding loans on lesser quality properties.
6. More bank failures are coming at the regional and local level.
7. Once the government stops changing the rules, and new rules are defined, private capital will flow back into investing in commercial real estate, but there has to be a level playing field.
8. "The new GREAT is GOOD. The new WIN is SURVIVAL." "You do the best job you can everyday...that's all you can do." "This is a time to be patient."

The video link is here: Barrack Video 24 November 2008 (9:12) Please note that this came from CNBC via AOL so the 15 second ad in front is loud, please turn your speakers down. For some reason, CNBC's version is not linked on their site properly!

I'm reminded of a Swiss friend's advice a few weeks ago: 1. It's too late to sell unless you absolutely have to. 2. Have reserves for 3 years set aside. 3. Don't speculate in things like gold because they are too volatile. 4. Enjoy your life and stay close to the people who are important to you.

I think back through recessions that I've lived through, starting in 1974 when I entered the workforce when banks and retailers were failing; 1979-1982 with inflation, 21% prime rates and then massive unemployment; the crash of 1987 and early 1990's slowdown; the 2000-2002 period after the dot-com's blew up and 9-11-2001. This feels different, more fundamental, certainly an order of magnitude more complex because it is a global crisis, with larger institutions at risk, and the financial systems and amounts in play dwarf governments' ability to wrest control of the situation. And as we all walk through that coalmine mentioned earlier, it feels like our lights are 'out' right now.

When people such as Tom Barrack counsel "The new GREAT is GOOD. The new WIN is SURVIVAL...do the best job you can everyday...that's all you can do..." I take no comfort but I certainly pay attention, and glad to have colleagues like you to share thoughts and figure our way through. I welcome your thoughts on all this and ask you to share what you are seeing and feeling, wherever you are...

Jim
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Jim Searing is the Senior VP of CREOpoint, Inc, focusing on building a global professional network for commercial real estate executives. He retired from a +30 year career at Ernst & Young, where he spearheaded entry into emerging markets, new service and business development, change and crisis management, risk and competitive analysis, design and innovation. He served as the firm's Director of Strategy and Corporate Development, Director of Strategic Service Development and International Business Services. Opinions expressed here are his own.