Commercial Real Estate Needs Small Business Job Creation

A few times each week I am asked by clients and colleagues what my biggest concerns are in our current marketplace. One that has really been resonating with those that I speak with is the unprecedented shift in economic power from the private sector to Washington DC and how this fact could impact the commercial real estate market. Our CRE market (and the ecomony for that matter) needs job creation which does not seem to be on the minds of those with the economic power today.

While most Americans and businesses are cutting expenses and being prudent about spending under current economic conditions, the present administration has continued the reckless spending habits of the Bush administration. I am not criticizing Democrats or Republicans but all elected officials who are spending our way into serious trouble. If you read StreetWise regularly you know that I do not discrminate when objecting to policy inplementation.

During W’s 8 years, the supposedly fiscally conservative President, oversaw a GDP increase of 15% while he allowed government spending to increase by 58%! The present administration’s stimulus plan is full of more pork than a butcher shop with only 11% of the $787 billion targeted toward infrastructure which is truly stimulative. A number of those on Capitol Hill had agendas other than stimulus and they were the ones shaping the package. Additionally, there are trillions in various programs which are in various stages of deployment and when there is that much cash being thrown around, you are kidding yourself if you don’t think waste, fraud, abuse, incompetency, inefficiency and corruption will exist. History has shown us that this is normal regardless of the party in control. The risk is, however, much greater under a unified government such as we have now. The midterm elections should be quite interesting.

We must remember that politicians do not grow economies. The truth about growth is that it is the product of millions of decisions made by millions of people about what to produce, buy and sell. Politicians can influence decision making by increasing or decreasing incentives about what we produce, buy and sell ( like offering to paying $4,500 for cars that may have been worth an average of $500). Regardless, they cannot control today’s global economy.

In the most recent cycle, since output peaked, our GDP has contracted by 3.9%, the steepest decline since World War II. Many economists believe that our economy is at an inflection point at which we may need to shift to an export based economy as opposed to continuing to rely on a consumer based economy.  We have had decades of growth led by consumer spending which, along with residential investment, grew from 67% of GDP in 1980 to 75% of GDP in 2007. During the credit crisis, $13 trillion of wealth has evaporated. We have seen an implosion of the shadow banking system and a tangible shift to thrift.

In 1980, the savings rate in the US was 10%. In 2006, the abuse of credit cards and readily available mortgage equity withdrawl catapulted us into a savings rate of -4%. During this period, we saw all borrowing in the form of household debt grow from 67% of disposable income to 132%. Today, the savings rate has risen to 6%. This 10% swing in the savings rate alone has eliminated $1 trillion from our total annual output. The stimulus, along with other government programs, combined with dramatic declines in tax revenues have created record budget deficits, now projected to rise to about 13% of GDP. To put this into perspective, this $1.8 trillion deficit amounts to $3.4 million per minute, $200 million per hour and $5 billion per day. Our federal debt is now 60% of GDP and it is projected to hit 82% by 2019. At some point the spending must stop.

Moreover, the off balance sheet obligations of the US associated with Social Security and Medicare put us in a $56 trillion financial hole. Both of these programs are looming train wrecks if there are not fundamental changes made to the way they are structured. Fannie Mae and Freddie Mac liabilities are also off balance sheet whollops to our financial picture – add $7 trillion more.

We are presently faced with 4 looming deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and an economic leadership deficit. Political careerism must give way to the implementation of real solutions.

So why do I care about all of this political mumbo-jumbo? Because our real estate market needs real solutions. We need the government to focus on creating incentives for small business. We have been led out of the last 7 recessions by small businesses which have created two-thirds of all new jobs. Anti-business sentiment on Pennsylvania Avenue is not stimulative. We need small businesses to thrive. That will create jobs and those jobs will allow residential tenants to move from a one-bedroom apartment to a two-bedroom, or from a two-bedroom rental to purchasing an apartment or a single family residence. The additional jobs will create demand for office space and the increased economic activity will increase room rates and occupancy levels in hotels. New jobs will put disposable income into the pockets of Americans who can go to retail stores and purchase goods which will allow retail tenants to pay better rents and open new locations. Small businesses have the power to create these valuable jobs. Where are the incentives for small businesses?

The massive deficits we are experiencing (at all levels – federal, state and city) will certainly create pressure for tax increases but tax increase are not the answer. We are all cutting expenses, why can’t the government – at all levels? If they can’t, we could be in this soup for quite a while.

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9 Responses to “Commercial Real Estate Needs Small Business Job Creation”


  1. 1 terrig September 11, 2009 at 9:22 am

    We need jobs, but please NOT another government program. We have too many programs and not enough of “get out of the way.”

    Unfortunately there are not enough people in government at all levels – legislative, adminstrative, etc. that have worked for a small business. Very few people, esp those in government (entrepreneurs & gov’t works are very different personalities) have tried to actually tried to form their own business and dealt with the myraid and sometimes byzantine requirements of goverment.

    There was a recent City government initiative to try and reduce the burden for small businesses. The State needs to get on board. Why do LLCs need to publish, no other corporate entity has this requirement. Why are there two fees $200 to form the LLC and $50 fee with the publishing requirement. Why not make it $250 and call it a day. Simplier & easier.

  2. 2 Ed Tristram September 11, 2009 at 10:24 am

    Don’t get me started about tax policy. We tax the activities we want to ENCOURAGE – having income, buying merchandise, owning real property, running a small business. But discussion of substituting a carbon tax is so shocking and taboo that it’s off the table.

    On another point, maybe there’s a way for the economy to be healthy without consumers spending themselves into debt. We need full or fairly full employment for the economy to be healthy. But the industrialized world is ridiculously wealthy, and a slowing in growth in “standard of living” (this means total things we buy) may not be required and likely is not healthy.

  3. 3 Carl Todd September 11, 2009 at 2:21 pm

    rk-
    You hit the nail on the head! Commercial RE is dependent on its income stream – its only source – is from its tenants. The majority of the tenants in the non-trophy buildings are small businesses and professionals servicing them. The customers of the small businesses are, in the main, the people we see in the streets. As FDR said: “Unless the man in the street has money in his pocket there can be no prosperity”. How does the man in the streets get money in his pocket? From his job – a job that so many have been exported in the last 25 years.

    My real estate father used to tell me: “When push comes to shove, don’t buy fire insurance on your building, buy life insurance on your tenants”. He also admonished me with this warning: “Owning vacant real estate is like going to an out-door movie (remember them?) in a taxi cab with the meter running and a baby sitter at home watching the kids.”

    The big question is how do we give the person in the streets a secure steady income so that they can support our domestic economy and keep it growing? Just think what a blown oportunity the stimulus money was – as of the beginning of this year it cost every single American over $77,000! If every American of all ages was given $77,000 we would have had the bigest family debt reduction followed by the biggest retail boom in history.

    One day we will get elected officials the represent us, not the lobbyist’s special interest businesses.

  4. 4 SF "Mac" McCormack September 14, 2009 at 3:47 pm

    Please ask the ICSC folks why they’re pushing the small CRE Brokers away from their trade shows with higher fees for Non Members…… I think this will hurt the large retailers and big CRE company as we try to dig out of this mess…..
    Thx
    sfm

  5. 5 Michael Banner September 15, 2009 at 1:27 pm

    I don’t believe small business will lead us out of this recession if it does not have access to capital. I recently co-sponsored an Economic Development Town Hall Luncheon with the Black Business Association of Los Angeles (www.bbal.org). The Honorable Maxine Waters was our keynote speaker; additionally, we held a panel discussion which included representatives from the Small Business Administration and Governor’s Office of Small Business.

    Congresswoman Waters, is a ranking member on the House Financial Services Committee, along with Barney Frank, the committer Chair, have oversight for the financial services and banking industry. She is well known advocate for the rights of underserved populations and her constituents. As I listened to her remarks, I thought she raised a very important point with regards to small business. She said the banks have been withholding credit from its very good small business customers. She indicated that her constituents have continually contacted her office to plead for her help in trying to reestablish borrowing relationships with their banks after their credit has been reduced, withdrawn, or terminated. She clearly indicated that these were long time customers and not sub prime or marginal borrowers. This problem was reinforced during the question and answers session by the response offered by Alberto Alvarado, Regional Director of the Small Business Administration in Los Angeles. He has seen a significant reduction in bank lending under the SBA guaranteed lending programs and it appears the decline in Los Angeles County will be substantial- dropping from $1 Billion to less than $500 Million. It appears the Obama Administration incentives of reduced fee and increased guarantee to 100% is not making a difference in the small business lending market. A quick check of the major TARP recipients will show that they are not making SBA guaranteed loans. If you accept this as a proxy for small business lending then it is easy to assume all other small business lending has declined in a similar fashion.

    It is my conclusion, that the ability of small business to be the engine of growth for the commercial real estate industry is not a given. When you don’t put fuel in any engine it won’t run. My question remains – In which (bucket) would you invest? Small Business Lending (Main Street) or Repackage Toxic Securities (Wall Street)

    Michael Banner
    President/CEO
    Los Angeles LDC, Inc.
    A Community Development Financial Institution

  6. 6 Broker September 17, 2009 at 6:01 pm

    Terrific article as usual Robert. The economic ignorance of the present administration is frightening, not that the RINO GWB was substantially better. The American people unfortunately voted themselves into a real mess that will take a long time to correct.

  7. 7 Nick Chiechi September 18, 2009 at 10:43 am

    Thanks for the thoughtful article Robert. I am the owner of a small design agency in Manhattan for the past 18 years. A good percentage of our business has been in the commercial real estate sector and we have, along with many other businesses, have been affected by this horrific economic downturn. From a real estate user perspective I find myself in a position of being in too much space for too much cost, as I tend to sign my leases at the worst possible time. And I know this is the scenerio for companies of all sizes.

    As indicated in Crains yesterday when the employment numbers reached 10%, I would imagine we have a ways to go to get back to equilibrium. This leads the entrepreneur to try and figure out what to do in the interim. We have all been though the lowering costs phase but at a certain point you can’t get blood from a stone.

    So what can “our” government do if small businesses are the engine of growth? My first response is get out of my way, but I know that is a simplistic reaction. One positive program that we have employed is Work Share. This is a program that allows you to cut back a workers work week and the worker can apply for that time lossed with unemployment. This definitely saves jobs. This program gives options. Instead of firing one employee, you take five employees down to a four-day work week. This saves jobs. I would like to see an expansion of this program to help subsidize retaining employees. The worst possible scenerio is to let a person go where there is pretty much no place to go.

    One thing that I realized as I struggle to figure out where my business needs to shift to sustain itself is that we are all connected and in this together.

  8. 8 Annie ( Real Estate Company ) Wagner October 7, 2009 at 5:41 am

    Excellent blog! This knakalstreetwise.wordpress.com is well done and I was really pleased to view : this it’s just what I needed to know.
    I am really interested in real estate so I will be very pleased to become a regular visitor.

    Thanks

  9. 9 Carl Todd October 12, 2009 at 6:41 pm

    rk
    I’m just about finished reading NY Times best selling #1 author Michelle Malkin’s book: “Culture of Corruption”. Before I started reading it I was begging to loose hope in the Obama administration. Now my disappointment in them matches my disappointment when I was a kid during the depression and did not get my much wished for bicycle for my birthday.

    Stimulate (not bailout) Main St. auber Wall St.


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