Updated: Mar 22
I remember September 29th, 2008 like it was yesterday. It was my first official day working in the commercial real estate industry. I had spent the entire night before laboring over the task of pressing my white shirt that I had just bought from a Macy's discount bin. I carefully slipped my perfectly knotted necktie over my head after at least 40 attempts, and placed it around the shoulders of the one business suit I owned. I spent 15 minutes shining my shoes, and another 45 minutes feverishly trying to get shoe polish out of the living room carpet in my mother's house, which I was living in at the time. I was ready to take on the world, and show everyone how smart, talented, and capable I was. The next morning, the commercial real estate industry was going to be introduced to the next big name in CRE. Me.
What a surprise the next morning was. On that infamous day, the Dow Jones Industrial Average dropped 777.68 points. Until three days ago, that was the largest point drop in history. Just like this weeks fall from record high to record decline, my excitement for my new career ahead dropped from that of an energetic young professional into a battered and beaten little boy.
My first meeting with my new boss was something I was so looking forward to. I couldn't wait to get my first assignments and prove myself. I was told to budget 30 minutes for this meeting with the owner of the company, and then to find the office administrator to pick out office furniture. That 30 minute meeting was shortened to 3 minutes, and my used desk was chosen for me before it was over. My new boss walked into the conference room, asked me my name, and then said something to me that I have repeated in my mind thousands of times over the last twelve years: "Well Sam, if you can make it through what we are going through right now, you will be able to make it through anything." Then he told me I had exactly 30 days to show him that I was worth keeping and ushered me out the door. In less than fourteen hours, my enthusiasm to prove myself transformed into fear that I might not be able to.
Most of the new people and some of the more seasoned brokers quit that day. They all had different reasons ranging from the need to find a more secure job and provide for their children, to simply not having the sufficient willingness to climb such a steep and treacherous mountain. I wish I could say that I stuck it out because I'm brave, tough, and I always stare my adversaries in the face before I break them to my will. That is not the case though. I stayed because I had no other option. I had expended literally everything I owned, and some other people's money too, so that I could get to this place. For me, the only way out was through.
Today, as I watch seemingly normal people attack each other in supermarkets for small amounts of toilet tissue, my mind goes right back to September 2008, and the look on the old man's face when he said "Sam, if you can make it through what we are going through right now, you will be able to make it through anything." The reality is, I did make it through "what we were going through" then. Not only did I make it, I thrived in it. I became a master of my craft. I earned a wall full of awards, beat the figures of people twice my age with 20 times my experience, and earned a reputation as one of the most skilled commercial real estate professionals in the region. Most importantly though, I learned. I learned to be creative in ways that my competitors could not. I learned to make myself valuable to the adapting needs that my customers were finding they had. I studied the past, and learned to anticipate what would be coming. I showed my clients, and myself, that the goal of succeeding beyond your initial expectations while the world burns around you is most certainly possible.
The world has shifted in a major way over the last 20 days. I assure you, however, that there is a right and wrong way to manage your commercial real estate decisions right now, and I can help you steer that ship. Adversity is no stranger to me, and I have voyaged in rougher waters than this. As the old saying goes: "a smooth sea never made a skilled sailor." Let me share some of my insights into what has happened, what will happen, and how you can reach the shore not only enact, but better off than you were before.
First, it has been my observation in speaking with my clients and friends, that many commercial real estate owners who are otherwise well provisioned are becoming unusually restless. They propose such ideas as selling their property before values go to low (get out while you're ahead), or backing off of previous goals and objectives until things "feel right again." I hope none of my clients share sentiments like these. The most exciting thing about commercial real estate is that you can always make money, no matter what the market is doing. You have heard it before: "the stock market is not the economy." While it is true that general commercial real estate yield over the short term can have some relationship to the stock market, it is boldly fictional that these two types of investments perform in even slightly similar ways over the long term. Since 1971, real estate has beat the stock market nearly 2 to 1. Further, it has achieved this impressive record with significantly less volatility. The bottom line is these assets are not similar, they do not behave in the same way to a great extent, and that with sound knowledge and expert guidance, the increased control you have over your commercial real estate affords you creative opportunities to make yourself very wealthy in any economy or market.
So, am I suggesting that a person should buy and hold so that they can enjoy the rewards of consistent value appreciation? Let me be inescapably clear that I am not. I continue to submit, as I always have, that every CRE investor is unique. They have unique goals, unique assets, unique capabilities, and unique environments. Having a plan, and knowing how to correctly balance value appreciation, income, expenses, market expectations, incentives, and tax implications, and then applying those variables into your plan to maximize Internal Rate of Return (IRR) is how one succeeds in commercial real estate.
Now, lets say that you are not an established CRE investor and you don't have 2 years of expenses worth of cash in your reserve account. Maybe you own a restaurant, bar, or other public interaction zone, and the recent government imposed mandates to shut down for a month have you more worried about what will happen next week than what will happen next year. Maybe you purchased your first investment property recently, and you are now wondering if you wasted your savings on a dying asset. I think I can offer some comfort to you.
If past outbreaks are a useful measure, coronavirus will be entirely contained within the second quarter of the year. Assuming this likely scenario, most experts and professionals expect a strong rebound in the second half of 2020. While I can't speak for the stock market, it is true that lower interest rates and lower commodity prices have traditionally been good for real estate. That is exactly what we are seeing. Coronavirus has shoved interest rates to their lowest recorded levels. Lumber and oil (the literal building blocks of commercial real estate) have seen similar price disruptions. While these facts are much less exciting to those who make their living by scaring people into hoarding Clorox Wipes, the question deserves to be asked: "what if this virus is contained like almost every other in the past?" Then, we're only left with the favorable conditions that make commercial real estate investors happy. Remember "SARS Round 1", Swine Flu, Ebola, MERS, and (my personal favorite in terms of name) Mad Cow Disease? Our current pathogen-of-the-hour has an impact about 3.2% of those infected with Swine Flu. Somehow I'm still hear to write this and you are still here to read it. I certainly do not mean to make light of the tragedy that has befallen those who have lost their lives to this virus. I simply hope we can explore the issue with a rational perspective.
When I step back and look at all of the variables, as I do when I perform analysis for my clients, the negative corona virus seems much less heavy against generally strong employment, low interest rates, favorable commodity prices, and (unlike in 2008) banks with capital requirements that give them a much more comfortable ability to withstand a shock.
Finally, here is what really "grinds my gears" for lack of a better term. I have been studying the economy, both modern and historical, for a long time. I am not an authority on the topic, but it matters that I know what is going on and how historically similar situations played out. Let me be loud and clear on something that I reasonably believe almost every economist would agree with me about. This past 2 weeks of economic instability have been entirely dissimilar to the Great Recession of 2008. The Great Recession was caused by the economy, while todays problem is external to the economy. American household debt reached a record high 134% of GDP immediately before The Great Recession. This caused consumer spending to trend down steeply. Today American household debt is at a historically low 96% of GDP. This means they can handle economic problems and continue spending money without as much impact. During the housing bubble, home prices more than doubled over 10 years before crashing, according to NAR. Even though prices have risen steadily since then, they’re just 22% above their peak. Homes are not over priced generally speaking, and that means with mortgage rates low, housing can help offset troubles in the rest of the economy. That couldn't be more of an exact opposite to The Great Recession.
A recession is not certain. If it does happen, it is likely to be short. The general population of the US is in a good position to weather a short recession all things considered. Anecdotally, I observe that the most severely economically impacted in our society are the marginalized members of our society who are grievously damaged by the economic consequences of self-quarantining and social-distancing.
Because of The Great Recession, I can put a handsome knot in my tie with one attempt on my way out the door. I don't spill shoeshine on my mom's carpet, and as I'm sure she appreciates, I live independently of her house. I have moved hundreds of miles away, started successful business after successful business, and I have had the privilege of helping countless people make their real estate business decisions and grow their wealth. The most important thing The Great Recession did for me though, was that it taught me what to do when crises arrises, when your enthusiasm leaves you with one exhale, when the things you thought were certain seem unclear and maybe even impossible. I think for myself, I add value for those around me, I learn as much as I can, I press forward, and I never stop. I promise it works.
As a commercial real estate specialist partnered with The Echea Group at Compass, Sam Perks assists buyers, sellers, owners and tenants of commercial property. Having spent his entire career in commercial real estate, Sam is uniquely qualified to offer assistance and advice as a real estate specialist. His background includes commercial and residential construction, subdivision development, brokerage, and property management. He has served as the 2014-2015 Chairman of the Commercial Real Estate Network, and on various charitable boards and committees. Sam is also President of The Sam Perks Company, LLC, a company specializing in the delivery of hotel and hospitality management products and services, as well as concierge property services to property owners of commercial and residential real estate.
This information in this publication has been obtained from sources believed reliable. We have not verified it and make no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of any property or investment. You and your advisors should conduct a careful, independent investigation of any property or asset you plan to invest in to determine to your satisfaction the suitability of the property or investment for your needs.