November 29, 2008

Economic Hangover

We are at a watershed moment in our economic history. We are in a recession but the way we do business after the recovery will be different from the post-recoveries over the last 70-years.

In the past, we worked our way out of a recession with the help of the federal government providing some kind of stimulus package. In one to three years, the economy was back on a growth track and there were no serious, long-term casualties. We continued to spend and consume as in the past.


That was then and this is now.
Our economy has too much debt. Our federal government is running record-breaking federal deficits and the American consumer is dangerously overextended with mortgage and consumer debt. This has happened at the same time as the value of his principle asset, his home, has fallen in value by 20 to 30 percent. Further, we have been transferring our wealth to oil producing countries at a rate of $700-billion per year and other nations are getting stronger economically.

The federal government is doing the right thing spending money to revitalize the financial infrastructure of our economy and trying to stimulate short-term demand. These actions are necessary to prevent a depression and the total collapse of our economy: not to prevent a recession. The recession is here and will not go away soon.
In the long term, we need to reduce the amount of debt that we use to support our life style; or change our way of life. This is true as a nation, as investors and as individuals. If we do not, we will lose the economic battle with the rest of the world and the United States will no longer be the super power that we perceive.
Reducing our use of debt means that less money will be available to consume. Less consumption converts to less demand for the goods and services produced and excess capacity in the system to produce and deliver the products. Excess capacity will mean less demand for retail space and that in turn will mean lower rents for commercial properties and higher vacancies.
Lower rents, higher CAP rates and conservative underwriting will mean lower values for commercial properties.
Recovering from a hangover is painful.

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