I just wrote this headline to make myself feel better.  I am so tired of reading about the demise of the commercial real estate market in every publication that crosses my desk and their projections for the rebound of our industry which run from late 2010 until the middle of 2012. For individuals whose livelihood depends on the health of the Charlotte Commercial Real Estate market, it is tough to come to work everyday with the hope that today might be the day that a client has a need that he can no longer put off, that the banks will finally begin taking ownership of distressed properties and will need help restructuring these assets, or that the three or four clients who are actually looking to do something can find the financing to make a transaction a reality.

We have a lot of clients who are actually swimming against the tide and are doing quite well; however, the problem with most of these clients is that no one knows how long their success will continue.  Therefore, no one is willing to take a risk to expand or enter into a long term lease arrangement even as today’s market offers the most favorable rental rates that we have seen in a decade. It is only those clients who have no choice but to act who are doing anything. So what are those service providers who depend on the real estate transaction market to make a living going to do while the market decides what it is going to do?

Every service provider that I know, including NAI Southern Real Estate, is gearing up to market their services to commercial banks who have, as part of their asset base, distressed real estate loans. This would encompass every commercial bank in the country, which creates an enormous potential base of business. These service providers include, of course, real estate companies both large and small, large law firms, large consulting firms, large architectural firms, land planners, engineers, environmental consultants, contractors, investment bankers who have raised money to form large vulture funds to buy distressed properties and/or loan portfolios backed by real estate assets. The list goes on and on. To those firms who have predicated all or a large portion of their income on serving an active real estate market, this potential distressed asset market represents the road to the continued existence of that part of their practice or of the whole organization.

The real question that I have been trying to resolve in my own mind is what happens if this distressed asset market does not materialize in the way that most of us think that it will, and what happens if it does? Based on my experience to date having talked with a number of commercial bankers both large and small, those bankers who do not have liquidity issues are not seeing pressure from regulators at this time to dispose of troubled real estate related assets. Most of their time is being spent understanding these assets and trying to get their hands around these properties in case they are forced by regulators to foreclose. Exceptions are those properties which are partially completed but will require significant amounts of capital and expertise to complete. These properties are being foreclosed upon and in most cases are sold at deep, deep discounts to buyers who can either hold or complete at prices much lower than actual replacement cost. To date we have seen little of this in the Charlotte commercial marketplace. Under this scenario, the bankers and regulators will hope that the economy as it improves will bail them out. I think this would be the best scenario for our country because, with the exception of those borrowers who are dishonest, the best person to work with financial institutions to resolve sticky loan situations are the people to whom the original loans were made.

If the banks do not create a pool of distressed assets which need to be sold or individual properties which need to be restructured and sold, what happens to the vulture funds? No money is disbursed and no fees earned.  What happens to the real estate companies both large and small, large law firms, large consulting firms, large architectural firms, land planners, engineers, environmental consultants and contractors all of whom have geared up to support this massive redeployment of real estate assets from commercial banks and other financial institutions? No business is generated and no fees are earned. Can these businesses survive? The answer is maybe, but not without internal restructuring to be able to survive on significantly lower earnings than those to which they have been accustomed. Those without a strong capital base will go out of business. Not many folks in good times put money away for a rainy day.

This is already happening.  Real estate companies have sharply reduced their staff levels or closed, and brokers who can find other employment are leaving the field in great numbers. Law firms are closing offices and reducing staff, something that hasn’t happened in the Charlotte marketplace during my business career to this point. Architects and engineers are down to the bare essentials with no immediate prospects for future work.  Other than public work, there is very little going on from the contractor’s viewpoint.

2010 will certainly be the turning point for those groups who make up the real estate industry. In the 34 years that I have been in this business, I have seen many ups and downs, but none quite like what is happening today.  What I do know is that the business will return to a very profitable level, and I also know that what we are going through today will happen again.  Perhaps under a much different set of circumstances, but it will happen again. As you begin your celebration of Christmas 2009, take every opportunity to hold those dear to you and recognize the blessings that family and friends bring to your life. Thank God that you live and work in the Charlotte Region. Nowhere else will you find more long term opportunity, and soon the headlines of the Charlotte Observer and the Charlotte Business Journal will read “GOOD SIGNS FOR THE REAL ESTATE MARKET”.

Please do not hesitate to call NAI Southern Real Estate at (704) 375-1000, or contact David Goode at dgoode@srenc.com for any of your real estate needs.