Don Tishman's Real Estate Development and Investing Solutions

In China the two largest banks are owned by the Chinese government. When China’s economy was going south, the Chinese solution was to order the two principal banks to increase their loans significantly. This lending led to investments that created many jobs. China’s economy has since made tremendous improvements due to these loans.

In Germany, where the economy has been worse than the U.S., the Deutches Bank, partly government owned, has had a record third quarter in 2009 due to greatly increased lending.

Today, many ” U.S. experts” are predicting a disaster in commercial real estate. Offices have a five year high is vacancies. Retail vacancies are even higher. In the third quarter of 2009, there was an impressive increase in retail sales.  After hearing this yesterday, the Dow went up 200 points . Today upon hearing that consumer confidence was down slightly, 6/10 of 1%, the Dow lost more than it gained today. This is a good example of the fickle actions on Wall Street.

Problems are that many office buildings and shopping centers have short term loans that are expiring. One of the largest shopping center companies recently went bankrupt because there was no financing available to take out their expiring real estate loans. This company has a great financial statement.

The same applies to office buildings. Many office buildings with at least 90% occupancy can not obtain financing for expiring loans.

What is a solution for U.S. commercial real estate? Many large banks that make commercial real estate loans are not making any loans in 2009. Some of these banks expect to start making a few loans in the second quarter of 2010.

Although the Federal government put almost a triillion dollars spread among almost all large banks, most of these these banks are not making commercial real estate loans. The U.S. method of recovery was to add to the capital of every large bank. The basis of this capital enhancement was that this would increase the bank’s ability to raise their lending limits- lend more money!. Bank’s have a capital requirement to maintain reserves of at least 10% of their loans. So when the U.S. added a billion dollars to a bank they could make $10 billion of new loans. So with a trillion dollars- the banks could totally add ten trillion in new loans. This did not happen. There was no express condition of these federal capital enhancements for the banks to make more loans.

It is this failure to have capital available that is contributing to this disaster in commercial real estate. The banks are lobbying Congress hard to prevent any passage of laws that would add lending requirements to these Federal loans to banks. But all is not lost. On many of the Bank’s Board of Directors our Government has named Directors. Now it is time for these Directors to stand up and demand the increased commercial real estate lending- before this market collapses like the home market collapsed.

The present U.S population is about 305,000,000. By 2040, the U.S. Census Bureau projects a U.S. population of 405,000,000. An increase of 100,000,000. The projection shows this gain will be 51% female and 49% male. Of these 67% will be a natural increase ( births-deaths) and 33% will be immigrants. Today the Total Fertility Rate(TFR) is about 2 per female and this is what the population projections are based on.  The highest recent TFR was in 1957 at 3.6.  At the height of the depression the TFR had dropped to 2.1. The households per person today is 2.59 person per household.  Any change in the TFR would significantly alter these projections.

As you will note from the table below, based on this household size, the Census Bureau expects about 1,250,000 new households per year. The present total households in the U.S is about 111,000,000. The increase annually is about 1%. Not gigantic. A study the of other Census tables in the population projections shows that the only age group whose % of the total population increases each year is the age 65 and older group.  This group is 12% of the population in  2010 and is 20.17% in 2040.  Today, there is almost a year’s housing inventory available.

These projections do not apply to areas that have significant changes in employment.

One of the few ways I see an increased housing demand is if much of our present housing is considered functionally obsolete. An old example of functional obsolescence is when I first started in apartments, most apartment complexes did not have central air conditioning. Soon residents demanded air conditioning.  These non-air conditioned apartment complexes became dogs on the market that had few occupants and no buyers.

If new households demand green residences, a home that is not green would soon radically lose value because the house becomes functionally obsolete. How serious is the demand for green houses in the next thirty years? Could the demand for green homes have a similar result as the demand for air conditioning had many years ago?  Could your home suddenly become obsolete?  Beware- Only the shadow knows!!