Facts Do Matter

After reading hundreds of articles in the past few months on the recent credit crunch and debt market deterioration, it was clear that there were hundreds of different opinions and forecasts. In order to develop a reasoned perspective, I was forced to search for facts because, today, Facts Matter more than ever before.

We have become a culture where uninformed opinion and sound bites often masquerade as fact. This is why I read and analyze raw data and statistics about global market conditions rather than read another editorial. This column will explore and explain the facts with the goal of helping you navigate in the turbulent global markets as you steer your own ship to safe waters.

We won’t soon forget August 2007 when the sub-prime mortgage began its meltdown and the liquidity and credit crises powered one of the fastest momentum changes in the history of the U.S. housing market. The market made an aggressive U-turn from an overheated housing market with its fast-escalating valuation, to full-on brake mode, starting the biggest slow down we have seen in many decades. By February of ’08, the crisis was full blown and began to depress corporate earning growth, especially in the financial and consumer sectors. Market giants Countrywide and Bear Stearns were pushed to the brink of collapse.

The Fed took an aggressive approach and announced one of the broadest expansions of its lending authority (lending directly to securities dealers) since the 1930’s in an effort to stem the crisis that is continuing to engulf the financial system and threatening recession. The Fed’s direct lending program drew an average of $30 billion in daily borrowing during the first week. The positive effect of these monetary policies will be evident in the next few quarters.

The future is always uncertain, but the good news is that data suggests we are near the bottom and underlying conditions should not deteriorate any further. The economy has slowed and will continue to correct itself through the first three quarters of the year, pressured by housing, high energy prices, and a tightening in credit for consumer and business. The data suggests that we should hit the bottom in late third quarter and start seeing improvement in the fourth quarter of 2008.

What about commercial real estate? On the downside, transaction and investment activities have slowed significantly. Lenders are reluctant to lend and when they do, the spreads are very high. Second, because liquidity rules, some buyers will sit on the sidelines and wait for better valuations and more stable lending practices. Finally, sellers, shocked by the market devaluation, will wait for better times.

On the upside, the cap rate should not move any higher because we still are experiencing strong corporate performance in all other industries and continued demand for more space. Adding to that is inflation, which should help steady rental rate growth going forward. What do I think? We will flirt with recession for the next two quarters. The financial market will stabilize and lending practices for the commercial real estate industry will normalize by fourth quarter. In the meantime, I will to continue to worry about everything and some of my colleagues will find a great spot on the beach so time passes faster.