Mid-2008 Report
The topic of the day seems to be the impact of the subprime disorder on real estate in general and SODO real estate in particular. First of all subprime is a symptom of a broader problem. My parents were able to support a family with one wage earner. By the 80s it took two wage earners to support a family. By 2007 it took two wage earners and, a car loan, credit card debt, a home equity loan, and a high loan to value house mortgage to support a family in the manner to which we've all become accustomed. Things finally reached a point where there were no assets left to borrow against causing a collapse of the financial house of cards resulting in massive losses to money center banks, hedge funds and investment houses.
At the same time the US generally failed to invest in transportation and other infrastructure and fell behind many parts of the world in that regard. This creates inefficiencies that increase the costs of doing business.
Banks and investment houses took large write downs of their assets which reduces their ability to loan. To restore liquidity and to prevent further losses many banks called loans to a hedge funds, causing the funds to sell securities that collateralized the loan resulting in the stock market decline. On top of everything higher oil prices further reduce consumer spending. All of these events take money out of the system which means less money to loan, higher interest rates and decline of the price of investment assets. The more leverage one has the more severe the punishment. The Fed's lowering of interest rates helps a few people but lower interest rates can't fix loans that already went bad and don't benefit companies and people that can't borrow for more fundamental reasons.
It's obvious that virtually all investment assets will suffer. The question is; What's the best of the worst? The Seattle area is fortunate in that its major employers, Boeing, Microsoft, biotech, engineering, and resource extraction in Alaska are still healthy. Within Seattle, higher gas prices and traffic congestion favor close in real estate. This dynamic makes SODO a more attractive investment locally than say Kent, which is 15 miles to the South. Being debt free adds another layer of safety because we can reduce rents if needed and don't risk losing the properties.
So far SODO land prices and rents haven't declined. The number of transactions has dropped because many sellers in SODO can afford to wait, and there are fewer tenants willing to step up to new space in these uncertain times. Simply put it will take longer to lease buildings than in the past several years and rent concessions to win tenants that we think are good long term investments, may become necessary. The bright spot is that the cheap dollar has spurred traditional and modern industrial uses, which is a large part of our tenant mix.
My guess is that it will take three to five years before banks can recoup enough of their losses to resume more normal lending practices. First the legal system has to work out who holds the bag. Once we know who bears the losses, the system can work around bad credits. This sort of litigation is a 2–3 year process. At the same time banks and investment houses have to raise more capital and make profitable deals to restore their balance sheets. That's a several year process also. Federal spending or loan guarantees for infrastructure would help employment and may even provide jobs for the 500,000 or so soldiers and contractors in Iraq that will come home at some point. This is a long term fix also.
This too will pass. We plan to continue acquiring strategically located and well priced properties, with the understanding that full lease up may become more time consuming and difficult than in the past. This area of the world has a lot of growth left. There are simply too many human and natural resources for this down turn to be anything more than a pot hole in the road.
Sincerely,
American Life, Inc.
Managing General Partner
Henry Liebman
Its President
