I have seen various ups and downs in the real estate business in my time. Never has there been such a confluence of frustration, from investors to lenders to owners as I see today.
Investors believe they deserve better returns than they could receive at current prices, based on what they perceive as the level of risk they are undertaking. Lenders are hesitant to lend money based on what they believe is a riskier environment, both from a property standpoint and in anticipation of increasing governmental requirements. Owners are unable to sell, believing their property is worth more than current pricing, or to buy, because prices remain high and investors and lenders are few and far between.
While all this is happening, the real estate industry stands still. Money sits idle on the sidelines earning money market returns; banks are investing, not in deals, which would generate economic growth, but in short-term government and other securities that churn paper; and owners hold onto properties that could better serve the economy if purchased by another party.
For landlords, the lack of job growth has left vacant apartments languishing on the residential market, creating a trickled down effect resulting in lower rents and slower rent collections. Lower income makes it more difficult to pay vendors, which makes it harder to keep up with building maintenance and tougher to retain existing tenants and attract the fewer and fewer potential new ones.
We are witnessing the undoing of the real estate industry as we know it. The day-to-day frustration of accomplishing nothing, hoping that something will change in some way by an act of God or an act of Obama is slowly bringing us all to levels of depression. First it's mental, but soon all our savings will run out and we'll find ourselves in an economic one.
We all need to do our part to shake things up a bit. Investors need to understand that they are better off putting their sidelined cash to work, albeit for slightly lower returns than desired, but understanding that many investments they are seeing today are much better than no investment at all. And in an improved economic environment, many of the lowered expectations will actually outperform pro forma returns.
Owners need to get rid of their "dog properties' and accept less profit on them, just to move on. Certainly, the money they perceive they've left on the table will be made up with a new purchase priced at similarly distressed levels, not to mention the psychological benefit of not having to deal with underperforming assets and the adrenaline rush they'll achieve by taking on a new project.
Lastly, lenders need to lend for these new purchases, perhaps less money at slightly higher rates, but lend. They will make up much of the lower loan to value coverage in fees, but more importantly, they will gain customers who will often remember that these banks were there for them in the tough times.
