The Second Big Bubble: The Future of Commercial Real Estate. It May Be Time To Move Out.

Abstract: The second wave of business problems will probably come in the form of a truncation of commercial real estate. That is the second bubble and we think consumer credit is the third now in line. Business people need to worry about the availability of credit and the tax structure as they plan their futures. We are currently in a deflationary downward spiral despite what the propaganda from our government suggests. Our government is now in the micromanaging business or so they think. It appears that commercial real estate “…market is headed for major collapse in 2010.”A sound recovery depends critically on small businesses and their credit opportunities and on the tax structure. A punitive tax policy will prevent expansion in small business and that is apparently the plan of our government. Many people and businesses and even some states may revolt against current Marxist-style policies emanating from Washington. Entrepreneurs may want to exit California very soon and perhaps leave the US for good since the business climate here is now the most hostile in the world.

Today, I incorporate in my blog a contribution from a reader who has extensive expertise in mortgages and forecasting. Brandon Laughridge has contributed this piece for publication on this blog and my comments are intercalated in blue for contrast. He supplies us with important forecasting and financial advice on the next probablebubble burst: commercial Real Estate and warns us of the improper use of credit and signals the opportune use of cash. The economic problem, as I see it, as do others, is that the deflationary debt spiral[1][2] is continuing as it is in Japan with consumer prices “…falling seven months…” in a row[3] and Ireland’s prices falling 6.6 % in this year.[4] The US is apparently fighting deflation as in evidence from falling wages, car prices, house prices and other items. The near zero interest rates and bank bailouts are classic examples of the fight against deflation. Deflation is not even yet reaching its minimum [or asymptote] on the downward-sloping curve in my view and that our government might even be exacerbating the problem[5] by synthesizing false credit for political reasons. Our government officially denies that deflation is happening. If the government acts improperly, they might just force or fail to prevent another bubble and that monster would be in commercial real estate. Consumer credit is thought to be the third bubble to start to burst.

The Deflation fundamentals from Irving Fisher:

“Following the stock market crash of 1929 and the ensuing Great Depression, Fisher developed a theory called debt-deflation. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:”[6]

1.     Debt liquidation and distress selling.

2.     Contraction of the money supply as bank loans are paid off.

3.     A fall in the level of asset prices.

4.     A still greater fall in the net worth of businesses, precipitating bankruptcies.

5.     A fall in profits.

6.     A reduction in output, in trade and in employment.

7.     Pessimism and loss of confidence.

8.     Hoarding of money.

9.     A fall in nominal interest rates and a rise in deflation adjusted interest rates

Is there anybody reading this who can not see all of these nine points not glare out from this page if you are watching our economy? So, the forces of disinformation are now aided by politics and thus surge forth to ‘correct’ the deflationary model alarm and attack its adherents.[7] Now, on to some options and information:

Here is the guest contribution with my comments in blue:

The Future of Commercial Real Estate by Brandon Laughridge[8] [an expert in loans from Mortgage Loan Place]

Commercial real estate and businesses who occupy such places with investments, businesses and other economic factors are essential to our recovery as they supply a major portion of our jobs and lead in the creation of new jobs. It is essential that we understand the problem and address solutions before the problem worsens.--rycK

The commercial real estate market is headed for major collapse in 2010, according to a recent survey of industry experts. This potentially devastating decline could make the housing market bubble look like a blip in comparison. [Emphasis is mine in all quotes.]

Commercial real estate values will fall close to 50 percent in some parts of the country and 40 percent on average from their highs in mid-2007, according to the Emerging Trends in Real Estate report, a publication issued by the Urban Land Institute and PricewaterhouseCoopers.

This is part of the process of deflation.

Fueled by a swirling tsunami of economic decline and a hardened credit market, the expected decline would mark the steepest since the Great Depression. Experts predict office parks and retail sites will bear the brunt.

Office parks are the central nervous system of small businesses and the retail outlet sites provide the revenue. Credit IS money since Roman times and the proper use of credit is essential to successful business.

"Not surprisingly, the overwhelming sentiment (of) interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report reads in part.

Lending has slowed to a trickle nationwide, and the job market remains stagnant ”at best” in most corners of the country. Commercial developers who overleveraged to obtain properties during the boom cycle will find a buyer’s market where cash is truly king.

I watched an interview with Donald Trump who said that there is not even one dollar to loan out in the city for commercial real estate and that ongoing investments and business are fueled by cash.

The scope of the commercial conundrum is so vast that a high-ranking Federal Reserve official recently singled out the commercial real estate market as a major detriment to the nation’s overall economic growth.

In fact, commercial defaults topped $110 billion in the second quarter of 2009, and banks across the world have lost more than $1.6 trillion in the last two years, according to news service Bloomberg.

The numbers and predictions spell potential disaster in the weeks and months ahead unless, of course, you’re flush with cash and looking to purchase or invest. In that case, 2010 has all the makings of a banner year.

[This guest post was written by Brandon Laughridge of Mortgage Loan Place http://www.mortgageloanplace.com/ ]

Conclusion:

What is happening is a direct result of capitalism. Market forces are in control. The falling prices are predictable from simple supply and demand schedules and fit into classic economics as we learned from Jean-Baptiste Say[9], Irving Fisher[10] and Adam Smith.[11] What should happen here is that those who guessed wrong or mismanaged risk or credit will have to pay the price and disassemble their business groups and start all over again. Those who avoided credit binds and massive leveraging will benefit from this capitalist reorganization. This is how things should work. Unfortunately, our phony government—dripping with socialism and worse—believe that the government should fund jobs and tax businesses to oblivion.

Our government believes that they can micromanage business hence the economy through taxes designed to force policy and that the average citizen has ‘rights’ to property, health care and jobs. This is a corruption of capitalism and has never functioned well. Command [USSR, Cuba, NK] economies[12] never work out because of two factors: [1] the level of expertise in political groups is always hostile to commerce and lacking in essential cognitive attributes and [2] they cannot guess the correct price or supply level for any service or commodity and thus generate excesses and shortages. They will fail at their task and unemployment will continue to rise until Americans realize what this Obama Outrage is all about. Then, they will react at the polls or even before that with various revolts.

The states might start this off. The federal government is not a national government—let that be made clear. The Constitution restricts the power of the Fed to a few duties and leaves the rest to the states. So certain federal laws prohibiting the use of ‘medical marijuana’ in California were officially ignored by the state so they defied the federal government. Now, they intend to encourage the farming of such recreational drugs for the purpose of healing the tax base. Other states, like Texas, can just refuse to comply with other federal mandates like healthcare and other nostrums and become more independent as the 10^th Amendment specifies. These are examples of state-level revolts.

Capitalism springs up everywhere and anywhere after chaotic systems transform the business landscapes because that is a natural process while government’s top-down or cram-down policies are unusual, undesirable and inefficient. Nancy Pelosi now wants an international tax[13][14] or other controls on businesses so they cannot escape from the most hostile environment in the world to do business [The US] and tax them into oblivion.  Her disgusting and Marxian philosophy is to “…to keep Wall Street jobs and related business from moving overseas...”

When ownership in the real estate markets starts to shift due to normal business variations then those in the small businesses community must be aware that their survival depends on proper business conduct and that our government is hostile to them. Business people need to understand that a flight across our borders or oceans might just be the next appropriate move to avoid the slimy tentacles of Pelosi-style Marxism. California[15] is working on a tax to “penalize people who leave the state by seizing 55% of assets exceeding $20 million.”[16][17] Californians have several good reasons to sell out and flee this disgusting Marxist enclave now—and it will get worse.

We are all in a global economy for better or worse now so the fluidity of: business acumen, assets and capital are mostly free to operate at will in many places other than the US. Entrepreneurs need to think about what and where as they already know the how about business. Numerous countries need capital and expertise and will accommodate many of our people who wish to avoid the terminal economic society that Nancy Pelosi and Obama are planning. Think about your business future as you make your 2, 5 and 10 year business plans.

rycK [a 5^th generation Californian in exile]

Comments to: ryckki@gmail.com