Commercial Real Estate & Lending

A Slowwwww Recovery!

Steve Banicki — Sun, 23 Aug 2009 12:59:00 GMT

Where Have All The Consumers Gone, Long Time Passing

It is common knowledge that 66% of our economy, as measured by the Gross National Product (GNP), is driven by consumer spending. What do you think consumers will do, and should do in the future? Consumers will not be consuming the way they were prior to the collapse of the economy and below are just two reasons why this recession is not going away quickly.

A major, respected, bank concludes that the housing crisis is far from over and consumer's net worth will continue to be hit hard. In addition, three well respected economist believe that a significant number of major banks are "zombies" and will need to be closed down and liquidated in an orderly fashion. This also will get the attention of consumers and cause them to think twice before spending; rather than saving for troubled times.

Based upon the projections of Duetsche Bank's Global Market Research study dated August 05, 2009, the U.S. housing market is still in a steep decline. The entire study can be read by clicking on their logo below, however their conclusion is summarized by the quote after the logo.

"The continued decline of U.S. home price will contribute to rapidly rising rates of negative equity. We project that over the next two years, an additional 11 million households will be underwater, bringing the total to as many as 25 million households. The most obvious implication is for mortgage defaults; borrowers with negative equity may be forced to default after a life event (e.g. unemployment, underemployment, divorce, disability, etc.). Borrowers may also “ruthlessly” or strategically default even without such life events. Apart from default, this reversal of fortune for the middle class will surely suppress consumption. In the meantime, we don’t expect a quick turnaround of the housing market due to the weakness in labor markets, excess supply and continued un-affordability in some regions."

In addition, three top economist believe that many of our major banks are insolvent and need to be taken over by the government, cleansed of their toxic assets, and put back in the hands of the private sector after they are once again in good financial shape. The video to the left is a discussion by the three scholars of what they believe must be done. It is 10-minutes long and worth watching.

If these events happen, the consumer is not going to be in any mood to ratchet up his spending and be the engine that quickly puts us back on the road to recovery.

Based on these factors, it is not realistic to expect that the economic recovery, along with a drop in the unemployment rate, will be happening soon. It will take several years, and maybe decades, before the consumer will start consuming at his pre-recession pace.

For the sake of the long-term future of this country; the consumer is making the right choice of saving rather than spending. We must become more than a consuming nation.

Health Care Solution: Back to Our Core Beliefs!

Steve Banicki — Sun, 16 Aug 2009 01:13:00 GMT

Two of the founding principles of this country, Christian beliefs and personal freedom, should guide us in our quest to improve our health care system. It is these beliefs that made us the greatest and most generous nation on this earth. It is these same beliefs that will make the greatest health care system on the planet even better.

As a nation that was founded by mostly Christians, one of our core principles is that it is a morale obligation of those that have been blessed with superior talents and gifts to help the needy. This includes providing basic health care to those who are in need but not in a position to afford it on their own. Christianity is not the only religion that preaches this belief. One of the basic Pillars of Islam as stated in the Koran is Giving Zakat which means ‘giving a specified percentage on certain properties to certain classes of needy people.’

Our core value of helping our neighbor is why we need to improve our health care system. Now we must decide what is the best way to do it. Another reason is that is presently inefficient.

The government is not the answer. Lord Acton, the British historian. said in 1887; "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."

In our country, the entity having the most power is our federal government. Our founding fathers were wise enough to create three branches of government in an attempt to dilute this power. Abraham Lincoln said that we are a "Government of the people, by the people, for the people, .................."

The federal government should not be overseeing our health care system; but rather it should be taking steps to assure that the private market is regulated in a way that we accomplish our goal by utilizing the system that has made this country the most wealthy and innovative in the world.

Our government needs to see to it that our free markets work to the benefit of its citizens. We need more competition in the health insurance industry; not less by giving the power to the government. Where does it say that markets will work more efficiently with fewer competitors in the marketplace? When Adam Smith talked about “rational self interest” and competitive markets in his book Wealth of Nations he envisioned many consumers interested in buying goods and services from many producers. This “free market” system best serves the private and public good. He was not talking about producers, insurance companies, controlling markets and being too big to fail.

The role of government is to encourage more competition in the marketplace and regulate and incentivize it to assure every American is afforded basic health care.

It seems that a significant number of elected officials want to walk away from the engine that has propelled this nation to greatness and wealth........ Free Enterprise. Give it the room to solve our health care issues and let government govern.

Recover From Economic Hangover

Steve Banicki — Fri, 07 Aug 2009 17:08:00 GMT

Recovery From Economic Hangover

This is a watershed moment in our economic history. We are in a recession but the recovery will be different from the last 70-years.

In the past, we worked our way out of a recession with the help of the federal government providing the stimulus. In one to three years, the economy was back on a growth track and there were no serious, long-term casualties. We continued to spend and consume as in the past.

That was then and this is now.

Our economy has too much debt. Our federal government is running record-breaking

federal deficits and the American consumer is dangerously over-extended. This is happening while the value of his principle asset, his home, has fallen in value by 20 to 30 percent. Further, we have been transferring wealth to oil producing countries at a rate of $700-billion per year with other nations getting stronger economically.

The federal government did the right thing spending money to revitalize the financial infrastructure of our economy and stimulating short-term demand. These actions were necessary to prevent a depression and the total collapse of our economy; not to prevent a recession. The recession is here and will linger for a while.

Long term, we need to reduce the amount of debt that we use to support our life style; or change our way of life. This is true as a nation, as investors and as individuals. If we do not, we will lose the economic battle with the rest of the world and the United States will no longer be the super power that we perceive.

Reducing our use of debt means that less money will be available to consume. Less consumption converts to less demand for the goods and services produced and excess capacity in the system to produce and deliver the products. Excess capacity will mean less demand for retail space and that in turn will mean lower rents for commercial properties and higher vacancies.

Lower rents, higher CAP rates and conservative underwriting will mean lower values for commercial properties.

Recovering from a hangover is painful.

Housing Aftershock!

Steve Banicki — Mon, 20 Jul 2009 19:02:00 GMT

Are you ready for the next housing crisis? This crisis will be like an aftershock from an earth quake. Sometimes the aftershock can be as damaging as the original catastrophe.

The initial housing bubble was primarily caused by wall street lenders allowing buyers, who could not qualify to purchase a home in the traditional manner, to increase the demand for single family homes by providing sub-prime loans. Eventually these sub-prime borrowers began to default on their mortgages and this in turn dramatically increased the supply of homes on the market relative to the number of qualified buyers.

The result is that home prices began to fall and are still falling as shown by the chart to the left, which is derived from a study done by Standard & Poor's/Case-Shiller, for the 20 largest metropolitan markets, through March 2009.

Prices appear to be falling at an accelerating rate. If someone purchased a home in January 2008 and put 20% down while obtaining an 80% to value loan, they lost all of their equity in the first 12-months of ownership.

If the downward spiral continues, a large percentage of homeowners will not be able to refinance their homes, because all, or most of their equity will have disappeared. Nor will they be able to buy a new house because they will not be able to sell their present house.

Frankly, if you want to get equity out of your house; do it now. It may not be there tomorrow.

Health Insurance - What Is Needed!

Steve Banicki — Tue, 14 Jul 2009 15:46:00 GMT

What does AIG, General Motors, Chrysler, the UAW, large banks and the health care industry all have in common; other than, they have all contributed to the severe economic downturn that we are now experiencing?They are all either too large to fail or they are in an oligopolistic or monopolistic industry that does not function efficiently.

AIG was the insurer of such a large portion of the sub-prime mortgage market that if they failed we would have had a banking crisis that would have equaled what happened during the great depression. The cost of this calamity would have been far more costly than bailing out AIG. If the risk of insuring these toxic assets was spread out over many more companies we could have let AIG fail

General Motors and Chrysler is in a growth industry. Dozens of countries, with large populations, are developing a middle class that will want to purchase a car. If we allowed these companies to fail, just when new markets are emerging, we would lose a competitive edge and lose 100’s of thousands of jobs. If we had 5 to 10 viable auto companies with several labor unions rather than just the UAW, the failing of GM, Chrysler and the UAW would have been a yawning experience for the economy as a whole.

The health care industry is another oligopoly. I heard the other day that that Blue Cross and Blue Shield controls 84% of the heath insurance business. If this is true, why are the conservatives not barking about the fact that such a large concentration of market share does not allow the free market to work efficiently. An inefficient market causes waste and higher prices than need be.We do not need government to be an active provider of health insurance.

We need government to do its job and make sure that free market forces drive the industry. Additional rules/regulations may need to be imposed to provide an incentive to the insurance companies to serve segments of the market that may otherwise not be considered profitable. This would be far less costly than the government directly being a service provider.We all should let free markets work and we should take corrective action when they are not working.

Banking Crisis - Here is The Solution

Steve Banicki — Sat, 17 Jan 2009 19:11:00 GMT

It is time to face the problem head on and take over the insolvent big banks. The FDIC needs to declare them failed and sell off the assets in pieces to the 8,000 smaller, profitable banks. Below is what I said the problem was in October 2008 and we should correct it.

When Adam Smith talked about “rational self interest” and competitive markets he envisioned many consumers interested in buying goods and services from many producers. This “free market” system would best serve the private and public good. He was not talking about producers, companies, being too big to fail.

This is a major problem in today's economy. We lost our way in regards to allowing competitive markets becoming oligopolistic markets. The financial institutions that are here to serve our needs have gotten so big, and have such a huge impact on our markets, that the public sector is forced to step in and save them because of the irreparable harm that would be caused by having them no longer in the market.

Everyone is talking about reforming the "system". A major part of that reform is to break up the size of our financial institutions Make each of them small enough, relative to the size of our economy, that we yawn as one of them cease to exist. This will result in them no longer counting on the taxpayer to bail them out and will provide the added benefit of keeping the compensation of the scoundrels running these companies from being ludicrous. Small is Good!!

America Needs To Invest In New Industry!

Steve Banicki — Thu, 11 Dec 2008 17:36:00 GMT

There are many nations in the world with a growing middle class including, China, India, Russia, Viet Nam, other parts of Southeast Asia and Latin America. This new middle class will want to be transported from point “A” to point “B” in an easy, independent, no hassle manner. They will want a car.

This "car" will not be propelled by oil. It may fly instead of roll along on a road. Whatever shape it takes, it will be in demand.

This is why we need to save our auto industry. If we lose it, we lose our advantage over the rest of the world that wants a piece of the business. Does the industry need to change and adjust? Of course! Does it need to make structural changes that position it better to compete? Of course!

What we cannot do is destroy what we have in place and start from scratch. We should be building on our experience of making cars and not destroying it.

Wanted: More Domestic Auto Companies

Steve Banicki — Sat, 06 Dec 2008 22:41:00 GMT

This country needs more domestic auto companies; rather than fewer. This country also needs more unions representing the autoworker; rather than just one union representing all autoworkers at all domestic auto companies. This country needs fewer domestic auto models, autoworkers and production facilities, however this does not convert into needing fewer producers.

When did economic conservatives start believing that markets will work more efficiently with fewer competitors in the marketplace? When Adam Smith talked about “rational self interest” and competitive markets in his book Wealth of Nations he envisioned many consumers interested in buying goods and services from many producers. This “free market” system would best serve the private and public good. He was not talking about producers, companies, being too big to fail.

This is a major problem in today's economy. We lost our way in regards to allowing competitive markets becoming oligopolistic markets.

The auto companies that are here to serve our needs have also gotten so big, and have such a huge impact on our markets, that the public sector is forced to step in and save them because of the irreparable harm that would be caused by having them no longer in the market.

Everyone is talking about reforming the "system". A major part of that reform should be to break up the size of our auto companies. Make them small enough, relative to the size of our economy, that we yawn as one of them ceases to exist. This will result in them no longer counting on the taxpayer to bail them out and will provide the added benefit of keeping the compensation of the scoundrels running these companies from being ludicrous.

Small is Good!!

Given the economic crisis that the country, and the auto industry, is currently in, this is not the time to tackle the issues of how to make the domestic market more competitive. We must focus on saving what we have, however keeping in mind what our long term objective is. ......... Create a More Competitive Domestic Auto Market.

The Economy - A Long Term Plan

Steve Banicki — Sun, 23 Nov 2008 15:33:00 GMT

We know what to do to solve our economic problems for the long term.The question is whether we have the intestinal fortitude to do what is hard but right.

As a country, and as individuals, we are over-leveraged. We need to consume less and save more. When you spend $2,000 for a new LCD TV, the money will go to a foreign company and it will last for 5-7 years. The foreign company will use your money to make and sell more TV’s.

If instead you save the money, you will earn interest, increase your wealth and the bank where you saved your money will invest it in a loan to a company that will grow and prosper and create more jobs in this country.

We need to adjust our balance between consuming and investing. We need to borrow less for consumption and save more for investments.

If we do not, this country will continue to lose power and influence in the world.

Auto Industry - Leaders Please Step Forward

Steve Banicki — Sat, 22 Nov 2008 14:24:00 GMT

This is leadership from an executive who is the CEO of Japan Airlines. He cut his pay to less than what the pilots at his company are making. He eats in the employees cafeteria and rides a city bus to work.

This is leadership by example. The Board of Directors and executives of our auto industry cannot expect their fellow employees to make sacrifices if they are not willing to sacrifices themselves. Talk is cheap and can cause employees, or members of any group, to buy into what the leader says in the short run. Action is what motivates over the long haul.

Barak Obama is a good example of this. He won an election to a great extent because of his oratory skills and his ability to communicate. He also won the election because of his organization skills and his ability to get his team to remain focused on the goal. In the long run Obama will only be successful if he takes action and remains as focused as he was in the campaign

The auto executives and the UAW should learn from the leadership skills of the CEO of Japanese Airlines. Everyone in the American auto industry is going to be expected to make sacrifices. The Board of Directors and executives at the top are part of this group called "everyone". They need to cut their own salaries and take stock options in their own companies to show their commitment.

The UAW needs to be an integral member of the team who develops and ultimately implements this plan for survival. The leadership of the UAW has a special problem because a plan is needed by December 2nd and this does not give him enough time for getting membership approval. This obstacle must be overcome in some manner.

It is time to lead.

The Economy - Hang on to Your Donkey!

Steve Banicki — Fri, 21 Nov 2008 15:29:00 GMT

Leelanau Capital, LLC 3115 Coolidge Hwy, Suite 126 Royal Oak, MI 48073 P: 810-577-6663 F: 248-724-4533		We Can Help You Optimize Your Commercial Financing Opportunities. Stephen P. Banicki sbanicki@leelanaucapital.com
Real Estate Capital Markets!
		Nouriel Roubini is an economist and has a PhD from Harvard University. He predicted the current economic downturn back in 2006. The video to the left is an interview on the Bloomberg Channel on November 18th wherein he gives his current thoughts as to how bad things are going to get before they turn around. Before viewing it you may want to sip on your favorite alcoholic beverage. It is not pleasant to hear, but you need to listen to it.
There is still money available for good projects.

Something Liberals & Conservatives Can Agree On!

Steve Banicki — Fri, 07 Nov 2008 15:18:00 GMT

Conservatives and liberals are close to agreeing on how the economy should work. Both sides need to define their views, compare their beliefs and they will find many similarities.

Conservatives believe that the free market is the way to go. They quote Adam Smith when he discussed “rational self interest” and competitive markets in his book Wealth of Nations. He envisioned many consumers buying goods and services from many producers with everyone looking out for their self-interest. By keeping markets “free”, conservatives believe if producers pursue rational self-interest they will best meet the needs of the consumers and the citizens of our country. If they do not, they will not survive and consumers will go elsewhere.

Liberals say corporate America has gotten out of control. Producers are looking out for their self-interest at the price of the average consumer/citizen and that “rational self-interest” is not working. Liberals conclude they should tighten control over the producer/corporations.

Liberals and conservatives lost track of a key ingredient that Adam Smith identified as necessary in order for “rational self interest” to work. There must be many producers. In too many industries, the number of producers has shrunk and the ones remaining have gotten “too big to fail”. This is true in the auto industry, the banking industry and will soon be true in the computer software industry.

The liberals are right that regulation is required and conservatives are right that a free market is the best way to meet the needs and wants of our citizens. The common ground is that regulation is essential to make our markets more free. We have too many industries where companies have too much power and they are too big to fail.

Lets’ free our markets, from not only governments but also oligopolies, and watch the American worker and entrepreneurs thrive in the world economy.

GM & Chrysler Merger

Steve Banicki — Sat, 01 Nov 2008 14:25:39 GMT

The UAW shares some of the blame, with two other culprits, regarding the problems facing the domestic auto industry. Our politicians and the executives overseeing these large corporations also failed in doing their jobs over the last 40-years.

When Adam Smith talked about “rational self interest” and competitive markets in his book Wealth of Nations, he envisioned many consumers interested in buying goods and services from many producers. Our politicians allowed the competitive automobile market to become an oligopolistic market in the ‘50’s and ‘60’s instead of a free market.

This oligopolistic market allowed the auto executives either to ignore the coming onslaught of foreign competition or not even to think about it. They knew their “competitors’ at the other two auto companies would match any conspiratory agreement that was reached with the UAW. This occurred because there was no foreign competition to worry about at the time.

Even back then, there was plenty of blame to go around. The free market has not caused our problems; it is the governing of our free markets.

Two Wolves

Steve Banicki — Sat, 25 Oct 2008 03:58:00 GMT

An old Cherokee chief was teaching his grandson about life...

"A fight is going on inside me," he said to the boy.
"It is a terrible fight and it is between two wolves.

"One is evil - he is anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, self-doubt, and ego.

"The other is good - he is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, compassion, and faith.

"This same fight is going on inside you - and inside every other person, too."

The grandson thought about it for a minute and then asked his grandfather,
"Which wolf will win?"

The old chief simply replied,
"The one you feed."

Economic Hangover

Steve Banicki — Thu, 23 Oct 2008 15:35:00 GMT

We are at a watershed moment in our economic history. We are in a recession but the way we do business after the recovery will be different from the post-recoveries over the last 70-years.

In the past, we worked our way out of a recession with the help of the federal government providing some kind of stimulus package. In one to three years, the economy was back on a growth track and there were no serious, long-term casualties. We continued to spend and consume as in the past.

That was then and this is now.

Our economy has too much debt. Our federal government is running record-breaking federal deficits and the American consumer is dangerously overextended with mortgage and consumer debt. This has happened at the same time as the value of his principle asset, his home, has fallen in value by 20 to 30 percent. Further, we have been transferring our wealth to oil producing countries at a rate of $700-billion per year and other nations are getting stronger economically.

The federal government is doing the right thing spending money to revitalize the financial infrastructure of our economy and trying to stimulate short-term demand. These actions are necessary to prevent a depression and the total collapse of our economy: not to prevent a recession. The recession is here and will not go away soon.

In the long term, we need to reduce the amount of debt that we use to support our life style; or change our way of life. This is true as a nation, as investors and as individuals. If we do not, we will lose the economic battle with the rest of the world and the United States will no longer be the super power that we perceive.

Lower rents, higher CAP rates and conservative underwriting will mean lower values for commercial properties.

Recovering from a hangover is painful.

What Goes Up..........Blood, Sweat & Tears!

Steve Banicki — Mon, 13 Oct 2008 14:17:00 GMT

It is going to take at least 5-years to repair the damage done to the economy because of our excesses over the past 8-years. Too many homes were added to our housing supply because of easy credit granted to consumers who could not afford the home they were buying.

Now because foreclosures resulting from poor credit decisions, we have an excess supply of homes on the market that has, and will continue to, put downward pressure on home prices. This trend will last for at least 5-years. Further, it will take sometime before homes will be viewed as a good investment. Houses will be purchased more for the shelter that they provide as opposed to a means of increasing wealth. To compound the problem, the demand for housing is not going to get much help from the demographic trends over the next 20-years.

This has resulted in a significant drop of the net worth of households, causing households to adjust their spending habits downward. Because of the decline in household spending, retail sales will fall off significantly and will not recover for sometime. There will be store closings and consolidations causing retail rental rates and values of commercial real estate to decline.

The glamour of real estate as an investment is over or at least tarnished significantly for some time to come.

The net worth of Americans has further eroded because of a 40% decline of the stock market over the past year and no one can be sure of when the fall will end. Retirement savers have lost $2-trillion over the last 16-months due to the stock market crash.

It is time for the government to institute public works projects to shore up our infrastructure, reduce or dependence on foreign oil and fossil fuel, improve our education system and to supply the jobs necessary to overcome our current economic problems. It is unfortunate that we ran huge federal deficits during “the good times” because now we have no choice but to resort to deficit spending to cure our problems and to make the necessary investment for our future. This is not being liberal or conservative; it is doing what is right.

The Economy - What Happened & What We Must Do For The Next 1,800 Days!

Steve Banicki — Sat, 11 Oct 2008 16:24:00 GMT

The glamour of real estate as an investment is over or at least tarnished significantly for some time to come.

Let's Remember What Adam Smith Said: "Rational Self-Interest".

Steve Banicki — Fri, 10 Oct 2008 17:58:00 GMT

Leelanau Capital

Financial Bailout 2008

Steve Banicki — Wed, 24 Sep 2008 01:52:00 GMT

The bailout should slow down the fall in housing prices and this will bring more consumers to the market place looking for homes. The downside is that we have a huge federal deficit that will be a drag on the economy and increase the likelihood of inflation and higher interest rates.

The bailout will also bring commercial banks and other traditional lenders back into the commercial real estate market.

The Bush administration is forecasting the federal deficit will hit a record $482 billion next year. Analysts say the bailout costs mean a $1 trillion annual deficit is not out of the question.

"When you try to print $1 trillion, that will kill your currency, lifting oil prices, which then in turn will not help the stock market," said Gary Kaltbaum, who runs the money management firm Kaltbaum and Associates in Orlando, Fla. "It is a vicious cycle, and we are seeing that right now."

Long-term interest rates are determined by two factors; perception of risk and inflation. The perception of higher risk has caused spreads above interest rates on treasury securities to rise for commercial loans. The proposed government bailout should reduce the perception of risk on commercial loans. This in turn will work in favor of holding down rates for commercial loans.

The reduction in the risk premium on interest rates will be more than offset by the perception that inflation will be on the increase as described by Gary Kaltbaum above.

In addition, the conduit industry is not coming back anytime soon because of the disappearance of the investment banking industry.

The net result will be that interest rates for commercial loans and CAP rates on commercial properties will be rising because of the collapse of Wall Street.

Leelanau Capital