Earlier this week I received an email from Ilene at Phil’s Stock World about her interview with a Commercial Real Estate Developer.

Ilene writes “Hi Mish, I thought you might find this interesting, and perhaps want to use some or all of it. I know my interviewee well, and his thoughts in this area have been consistently correct.

With that backdrop here are a few excerpts from Interview with a Commercial Real Estate Developer about the CRE Industry.

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: 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: 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 TX because the economy is stronger than in CA, there is less regulation, no income taxes and the budget is better balanced.

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: 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.

Thanks Ilene and Mr. Solomon

Mike “Mish” Shedlock
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