The pundits are all over the place, but it seems that there is some sort of optimistic consensus that the economy will start to look better by sometime next year. Kiplinger's has an index for such a prediction: http://kiplinger.com/businessresource/recovery. And while I think this is a great traditional (and thus conservative) tool for monitoring lagging indicators, I'd argue for a newer approach. Otherwise, we are completely discounting the fact that we may find a truly transformative path toward economic recovery.
I'm more interested in reevaluating our methodology in looking for leading indicators than measuring our lagging ones, in order to better reflect changing values. There was a great article on fool.com about the historical performance of large cap stocks (http://www.fool.com/retirement/general/2009/06/23/its-already-worse-than-the-depression.aspx). On the one hand, the article's observation begs the question of a bottom in the market--even though I predict another year of poor lagging results--but it also raises the possibility of a new kind of growth.
What if we the entrepreneurial class decide to overturn traditional economics by bringing forth an era of immense economic growth coupled with deleveraging. Not only do I believe that we need this for the long term, I also think it's possible with a short-term focus on old school yankee ingenuity. And I think that Gen X is uniquely capable to take on such an ambitious goal. What choice do we really have? More on this later.... including a tie-in to why this should especially concern those of us in the western U.S.
Monday, June 29, 2009
Monday, June 22, 2009
The Truth About Changing Hotel Revenue Models
Here's a great story from Michael Schindler, themed "Things I’d Prefer Not to Hear Anymore." In it, he discusses the whining that is all too prolific in our industry right now. Following is a reprint of my comment on his blog:
While this financial model is different from the limited service world where I operate, it's really not too different in its approach to the market. Hotel operators need to leverage their relationships with revenue sources and influencers to look for opportunities for quality promotions. Here in sunny Arizona, for instance, I would consider tapping into the cheap rates at golf courses and other currently struggling businesses to promote stay-and-play packages. Given all of the automated marketing and property management tools available, it doesn't take too much effort to try. And if you fail in one area (or marginally succeed), then simply move on to another idea. Remeber, if you fail to capitalize on such opportunities, I bet that the bigger players (Hotwire, Priceline, etc.) will happily do this with or without you.
I feel the same way as Michael about our industry's currently sorry state. To his final point in this story about being a cheerleader, I would take his comments a little further to the acerbic side by saying "shut up and work through the tough times." Our industry is reeling right now from an era of all talk and cheap money. This meant that no one had to do much in the last few years aside from managing their time to process all the business transactions. Now, deals are tough to come by--as they should be in an efficient market (where efficiency is tied to parity on upward and downward forces in the economy). We should each focus on succeeding rather than pegging the date that the market makes it okay to do so again. That means working with what we've got.Also, I often wonder why hotels aren't getting more creative in their reaction to the once again dynamic nature of our business. I have made a couple of recent trips to Las Vegas, where I frequently gamble at MGM properties in my spare time (low dollar amounts, I promise). While I regularly receive deals for $49 or $69 room nights, which are far below "acceptable rates," I know that these are offered at huge discounts to their simultaneously advertised rates. Thus, the hotel is using a classic marketing strategy to segment pricing based on overall customer value. Some people are indeed paying $200 per night, while I'm only paying $50; also, I'm making up for my room discount by dining out, attending shows, and gambling. A good marketing analyst is likely tracking these numbers to ensure that their strategy is working.
While this financial model is different from the limited service world where I operate, it's really not too different in its approach to the market. Hotel operators need to leverage their relationships with revenue sources and influencers to look for opportunities for quality promotions. Here in sunny Arizona, for instance, I would consider tapping into the cheap rates at golf courses and other currently struggling businesses to promote stay-and-play packages. Given all of the automated marketing and property management tools available, it doesn't take too much effort to try. And if you fail in one area (or marginally succeed), then simply move on to another idea. Remeber, if you fail to capitalize on such opportunities, I bet that the bigger players (Hotwire, Priceline, etc.) will happily do this with or without you.
Tuesday, June 16, 2009
In a nutshell....
I think this pretty well describes the world we've been in for the last year or so. Great stuff. The sad part is that when everyone goes through the motions, deals tend to get done. Now things are changing so that you have to put up the money in order to demonstrate the justification for everyone doing the work.
Wednesday, April 15, 2009
Vegas Is Making a Comeback. Yeah, Baby.
Well...... maybe not so fast. But it's encouraging to know that they get it. Vegas is driven by the leisure travel industry, focusing on gaming, parties, shows, and hospitality in general. This we know.
But what if the travel industry in Sin City were to consider the current state of the economy in its pleas for increased travel. According to this article, they are: http://www.hotelworldnetwork.com/lasvegas. It will be interesting to see how this all shakes out--whether I'll just keep receiving the same "stay two free nights" promotions in my email or perhaps something a little more alluring. The fact remains that the great bulk of weekend business in Las Vegas comes from California and Arizona, and that's because a car-load of wild and crazy guys can get there from either location on little more than a tank of gas.
So if most of the recent travel news is correct, in noting that Americans increasingly see travel as a right rather than a luxury, then Vegas is still potentially a good deal for a short trip in the Southwestern U.S. They just need to tone down the decadence and the bling, and explain to me why I am doing my wallet and psyche a favor by going there rather than elsewhere.
Here are a few less predictable reasons the Las Vegas CVB should recommend that you Angelenos and Phoenicians consider Vegas for your next trip:
Final note: The sooner this market turns around, the easier it will be to get some of MY PROJECTS off the ground in LV, and they are undoubtedly value oriented. I don't understand why the banks don't get this.
Okay, Final Final Note: I truly don't care much for Vegas, although this blog entry (and perhaps the time of night) has convinced me otherwise. Seriously, when my wife and I go together and catch a nice dinner and show, it's really a fun place. We may have to schedule another trip soon....
But what if the travel industry in Sin City were to consider the current state of the economy in its pleas for increased travel. According to this article, they are: http://www.hotelworldnetwork.com/lasvegas. It will be interesting to see how this all shakes out--whether I'll just keep receiving the same "stay two free nights" promotions in my email or perhaps something a little more alluring. The fact remains that the great bulk of weekend business in Las Vegas comes from California and Arizona, and that's because a car-load of wild and crazy guys can get there from either location on little more than a tank of gas.
So if most of the recent travel news is correct, in noting that Americans increasingly see travel as a right rather than a luxury, then Vegas is still potentially a good deal for a short trip in the Southwestern U.S. They just need to tone down the decadence and the bling, and explain to me why I am doing my wallet and psyche a favor by going there rather than elsewhere.
Here are a few less predictable reasons the Las Vegas CVB should recommend that you Angelenos and Phoenicians consider Vegas for your next trip:
- A car load of people is a greener way to travel than by plane (better yet, take the Greyhound or train, or don't and say you did).
- Car trips with friends are a much better way to pass the time if you are jobless and bored.
- You don't have a gambling problem, but how can you ignore the possibility of rescuing your 401(k) in one night.
- Has the economy got you feeling down and out? There's probably not a more distracting place on earth for most adults than Vegas.
- You can finally enjoy some of the city's more exclusive offerings in peace, now that the crowds are smaller.
Final note: The sooner this market turns around, the easier it will be to get some of MY PROJECTS off the ground in LV, and they are undoubtedly value oriented. I don't understand why the banks don't get this.
Okay, Final Final Note: I truly don't care much for Vegas, although this blog entry (and perhaps the time of night) has convinced me otherwise. Seriously, when my wife and I go together and catch a nice dinner and show, it's really a fun place. We may have to schedule another trip soon....
Wednesday, March 25, 2009
The Economics of Solar
A friend of mine recently posted to facebook a great article about the issue of centralized large-scale solar generation versus broadly distributed small-scale units (such as roof-top units on our homes). But what about a middle road that combines both of the above as well as a niche between the two? And what about the hangups we have about each of these solutions. In the end, the debate won't be about whether or not to go solar, but how.
Thanks to technological improvements and improved production, we've already cleared most perceived hurdles of large scale solar--and we may be well along the way for smaller models too. The issue of intermittent power is mitigated both by built-in system redundancy using legacy generation equipment and the fact that solar cells generate throughout peak daytime power usage (and throughout the night via other related technologies). Likewise, transmission lines are already being improved--although we have to ask ourselves how many more power lines are acceptable across the landscape in order to appropriately bolster the grid. The biggest tech hurdle, according to some sources, is cheap battery storage, which would make most of the other issues moot.
The primary concern still comes down to simple economics. This is why power company APS recently announced intermittent generating stations using natural gas rather than solar--they could get a quicker return on their investment. Similarly, most homeowners opt not to install solar panels because they wouldn't dare make an investment in their homes that offers no immediate benefit and takes as many as ten years to pay for itself. We just aren't concerned enough to put that kind of money on the line. And yet, the utilities are making big investments on solar all of a sudden (including APS). I'd argue that it's entirely due to recent federal and state policy changes that affect the economics of large-scale solar.
The federal tax incentives apply to individuals and to corporations alike, offering a 30% tax credit for any qualified investment in renewable energy. So why are corporations and well-backed speculators the only ones going after these dollars? It's because they just hit payday, given a solid investment model that allows them to amortize their expenses by up to 30 years with little operational costs, obtain inexpensive financing, and then get an immediate bump to their first-year revenues with the help of a tax credit. The financial model is great for them, but not necessarily for individual homeowners looking to offset their electric bills.
To put the small-scale model in perspective, if I want to completely offset my electric bill, which averages about $100 per month, I would have to install a minimum 400 square foot system on my home in Phoenix, at a cost of about $33,000. With the available tax credits and rebates, it would be about $8,000 total (from this vendor). In order to bring the monthly expenses to a point where such an investment is attractive to me as the homeowner, I would need to finance that remaining $8,000 over the course of 8 years at 6% interest (or maybe less, if I assume that my monthly bills would otherwise increase due to inflation). Considering that the average American relocates every five to seven years, why would any such person want to take on that expense, except out of the goodness of their hearts or after settling down in a fully owned home?
If I am doing it because I feel green all of a sudden, I could opt instead to partner with a company that will pay for my solar panels and then either lease them back or sell the electricity to me (such as SolarCity or SunRun). This seems like a much more practical solution for that purpose, in my opinion; but again, it's a company that reaps the financial reward rather than me. Thus, I arrive at a stale mate between the two options and end up paralyzed in the decision process.
So then, where's the sweet spot for the rest of us? I would argue that it's somewhere between the capital-intensive mega projects and the individual ones. For my money, I would rather be in the middle of the transaction, offering customers the right to be green and offering patient investors a steady, reliable cash flow, by financing the installation of solar panels. But while I admit that SolarCity seems to be on the right track in this regard, I think the company that truly gets it is SunEdison. Rather than try to convince individual consumers to go green, SunEdison focuses its efforts on bigger consumers (like Whole Foods Market), who can leverage the publicity of adopting solar solutions rather than focusing solely on the cost savings. What a great deal for both parties involved!
So my prediction for the near future is that we will see huge utility-scale systems proliferate (due to economies of scale), as well as the smaller commercial applications. The only factor that could come into play to change my mind is if there's another policy change to incentivize consumers. I'd say that you could get me on board if you reduce my pay-back period to less than five years. Perhaps the scientists and industrialists will beat our policy-makers to reaching that goal. That would be a cause for celebration.
As a final thought, the one kink that I see in the large solar industry's armor is, ironically, the potential environmental cost. As we ponder the new found interest in developing massive solar fields throughout southwestern deserts, I can't help but wonder about habitat destruction and whether it has entered into the debate. Thankfully, it has in southern California. Will these environmental activists' claims be considered? Possibly, although we still don't have a firm grasp on how fragile semi-arid ecosystems actually are. So in California, it may be worth a betting that further research will be needed before approving such massive undertakings, which could slow the rapid growth of solar energy production. Or not.
Thanks to technological improvements and improved production, we've already cleared most perceived hurdles of large scale solar--and we may be well along the way for smaller models too. The issue of intermittent power is mitigated both by built-in system redundancy using legacy generation equipment and the fact that solar cells generate throughout peak daytime power usage (and throughout the night via other related technologies). Likewise, transmission lines are already being improved--although we have to ask ourselves how many more power lines are acceptable across the landscape in order to appropriately bolster the grid. The biggest tech hurdle, according to some sources, is cheap battery storage, which would make most of the other issues moot.
The primary concern still comes down to simple economics. This is why power company APS recently announced intermittent generating stations using natural gas rather than solar--they could get a quicker return on their investment. Similarly, most homeowners opt not to install solar panels because they wouldn't dare make an investment in their homes that offers no immediate benefit and takes as many as ten years to pay for itself. We just aren't concerned enough to put that kind of money on the line. And yet, the utilities are making big investments on solar all of a sudden (including APS). I'd argue that it's entirely due to recent federal and state policy changes that affect the economics of large-scale solar.
The federal tax incentives apply to individuals and to corporations alike, offering a 30% tax credit for any qualified investment in renewable energy. So why are corporations and well-backed speculators the only ones going after these dollars? It's because they just hit payday, given a solid investment model that allows them to amortize their expenses by up to 30 years with little operational costs, obtain inexpensive financing, and then get an immediate bump to their first-year revenues with the help of a tax credit. The financial model is great for them, but not necessarily for individual homeowners looking to offset their electric bills.
To put the small-scale model in perspective, if I want to completely offset my electric bill, which averages about $100 per month, I would have to install a minimum 400 square foot system on my home in Phoenix, at a cost of about $33,000. With the available tax credits and rebates, it would be about $8,000 total (from this vendor). In order to bring the monthly expenses to a point where such an investment is attractive to me as the homeowner, I would need to finance that remaining $8,000 over the course of 8 years at 6% interest (or maybe less, if I assume that my monthly bills would otherwise increase due to inflation). Considering that the average American relocates every five to seven years, why would any such person want to take on that expense, except out of the goodness of their hearts or after settling down in a fully owned home?
If I am doing it because I feel green all of a sudden, I could opt instead to partner with a company that will pay for my solar panels and then either lease them back or sell the electricity to me (such as SolarCity or SunRun). This seems like a much more practical solution for that purpose, in my opinion; but again, it's a company that reaps the financial reward rather than me. Thus, I arrive at a stale mate between the two options and end up paralyzed in the decision process.
So then, where's the sweet spot for the rest of us? I would argue that it's somewhere between the capital-intensive mega projects and the individual ones. For my money, I would rather be in the middle of the transaction, offering customers the right to be green and offering patient investors a steady, reliable cash flow, by financing the installation of solar panels. But while I admit that SolarCity seems to be on the right track in this regard, I think the company that truly gets it is SunEdison. Rather than try to convince individual consumers to go green, SunEdison focuses its efforts on bigger consumers (like Whole Foods Market), who can leverage the publicity of adopting solar solutions rather than focusing solely on the cost savings. What a great deal for both parties involved!
So my prediction for the near future is that we will see huge utility-scale systems proliferate (due to economies of scale), as well as the smaller commercial applications. The only factor that could come into play to change my mind is if there's another policy change to incentivize consumers. I'd say that you could get me on board if you reduce my pay-back period to less than five years. Perhaps the scientists and industrialists will beat our policy-makers to reaching that goal. That would be a cause for celebration.
As a final thought, the one kink that I see in the large solar industry's armor is, ironically, the potential environmental cost. As we ponder the new found interest in developing massive solar fields throughout southwestern deserts, I can't help but wonder about habitat destruction and whether it has entered into the debate. Thankfully, it has in southern California. Will these environmental activists' claims be considered? Possibly, although we still don't have a firm grasp on how fragile semi-arid ecosystems actually are. So in California, it may be worth a betting that further research will be needed before approving such massive undertakings, which could slow the rapid growth of solar energy production. Or not.
Thursday, February 26, 2009
Scottsdale's Luxury Resorts in Foreclosure? No!
http://www.azcentral.com/php-bin/clicktrack/email.php/8624274
That's the link to a story my friend Danny sent me, regarding the W Hotel in Scottsdale. While I think that this specific project was one of the good ones (and the building itself was quite well executed), it is illustrative of the problems we created in the past several years.
How much higher could the market possibly go? That's the question that many developers forgot to ask themselves, along with the whole question of underwriting based on assets with declining values, such as speculative real estate holdings.
Scottsdale and Paradise Valley were adding luxury and upscale hotels (or new renovations) like crazy, while at the same time nearby cities like Tempe and Phoenix were beginning to do the same. Part of what made Scottsdale so attractive in the recent past was its exclusive claim to luxury. But that benefit was obviously eroding as the competition for that segment was growing, as was supply, and the demand grew at a slightly slower rate.
Overall, this would appear safe to most investors until the real estate bubble is taken into account. The entire Phoenix market is disproportionately dependent on real estate, and especially all that new "wealth" in Scottsdale. To the developer in this environment, it's a double-edged sword: upward pressure on land costs and development costs, followed by a burst bubble at the end of the day; which impacts the ability to sell condos, prove net worth (on other real estate assets), and generate the expected cash flows on the hotel and restaurant(s).
This story will likely play out many more times in the near future, and in generally similar cases. And in the end, the winners will be those who either buy buildings like this one, at a huge discount, or those who build similarly strategic projects at a substantial discount. We all know who the losers will be--those who stayed speculative too long (who deserve no sympathy) and those who had solid projects that fell victim to a bad market, like this one. I just hope that the Triyar group will survive to move forward on some of their other great local projects when the market returns, and the rest of the development community learned how to better use debt in their businesses.
That's the link to a story my friend Danny sent me, regarding the W Hotel in Scottsdale. While I think that this specific project was one of the good ones (and the building itself was quite well executed), it is illustrative of the problems we created in the past several years.
How much higher could the market possibly go? That's the question that many developers forgot to ask themselves, along with the whole question of underwriting based on assets with declining values, such as speculative real estate holdings.
Scottsdale and Paradise Valley were adding luxury and upscale hotels (or new renovations) like crazy, while at the same time nearby cities like Tempe and Phoenix were beginning to do the same. Part of what made Scottsdale so attractive in the recent past was its exclusive claim to luxury. But that benefit was obviously eroding as the competition for that segment was growing, as was supply, and the demand grew at a slightly slower rate.
Overall, this would appear safe to most investors until the real estate bubble is taken into account. The entire Phoenix market is disproportionately dependent on real estate, and especially all that new "wealth" in Scottsdale. To the developer in this environment, it's a double-edged sword: upward pressure on land costs and development costs, followed by a burst bubble at the end of the day; which impacts the ability to sell condos, prove net worth (on other real estate assets), and generate the expected cash flows on the hotel and restaurant(s).
This story will likely play out many more times in the near future, and in generally similar cases. And in the end, the winners will be those who either buy buildings like this one, at a huge discount, or those who build similarly strategic projects at a substantial discount. We all know who the losers will be--those who stayed speculative too long (who deserve no sympathy) and those who had solid projects that fell victim to a bad market, like this one. I just hope that the Triyar group will survive to move forward on some of their other great local projects when the market returns, and the rest of the development community learned how to better use debt in their businesses.
Tuesday, February 24, 2009
National Report: Bank Failures Accelerating
This is certainly a rare viewpoint in most of the news lately. But I think it deserves some attention. After all, are we sure that we're out of the housing mess yet? And then what happens if the lagging commercial real estate market's short-term loans can't get refinanced in the next year or two?
National Report: Bank Failures Accelerating
Tuesday, February 24, 2009
By Brian K. Miller
OAKLAND, CA-The failures, now totaling 40, have grown in size and frequency such that an additional 82 banks are now expected to fail over the next six months regardless of government support.
The entire article may be viewed at http://www.globest.com/news/1353_1353/sanfrancisco/177067-1.html
Copyright © 2008 ALM Properties, Inc. All rights reserved. Reproduction in whole or in part without permission is prohibited.
Friday, February 20, 2009
Does the Government Need to Intervene?
Subtitled: A capitalist real estate lover's humble lament and plea
This is a little off-topic, but I'm a big picture person and feel that the big picture is particularly important in this case. What happens in the global and national economy will affect any developer wanting to work on new projects, and that includes us. So here goes.....
Income redistribution, mortgage bailouts, bank nationalization. These are a few of the loaded terms floating around in today's market commentary and raising eyebrows among investors. But before we react with such outrage that capitalism is on the brinks of failure, maybe we should go back to the fundamentals of social theory to ask whether "Capitalism" (with a big, egotistical, capital C) has earned its own demise.
Many of our recent business and governmental leaders have forgotten why we as a society protect capitalists' ability to build and keep wealth. It's because capitalists are essential in a free market, and a free market is the most efficient way that we can all prosper together. That's it. We moved into denser cities, installed governments/militaries, and did whatever we could to promote our security and wealth--but almost always in general accord with Maslow's hierarchy of needs.
We also created markets and empowered our federal government to provide the invisible hand needed to keep them fair and functioning. A functioning market, after all, is open to everyone; it has a life that we all breath into it, and it needs to remain healthy in order to survive. Yet most market leaders in recent years were acting like they could take the market into a world of excess that we would enjoy forever, as if they were at an all-you-can eat steak buffet with a hooker, a carton of cigarettes, bag of sugar, stick of butter, and a syringe full of heroin. Then our date turned around and asked for a referral fee in exchange for all the pleasure. And we paid. As high as we were, we felt obligated to pay dearly and come back for more.
The market got fat--really fat-- and it felt good. The smart investors made plenty of money along with some dumb ones, even though they too are now suffering (most are, anyway). Most even made enough to deal with the pain. But the problem is that the people who didn't make enough to ease the pain of a truly wicked hangover are now pissed that we have to deal with it. Plus, there's a general sense of moral outrage over the ability of a select few to profit from the rest of society without regard for its wellbeing. What's worse is that we continue to pay without even having the luxury of a complete diagnosis and treatment plan (let's go back to the buffet and imagine that the hooker gave us STDs, the rich food caused heart problems, and the smoking gave us cancer--plus we'll probably go through heroin withdrawal to boot).
The moral of the story: Since financial markets have become so complex and inaccessible to most, yet maintained such a profound influence on all other economic activities in our society, people have a right to be frustrated. Most of us have lost control of our financial futures due to a lack of savvy and misplacement of trust. As long as we lack control, we get confused, scared, and we brace for our inevitable fight or flight stimulus. And most people will choose the latter, which is to flee or hide until the storm blows over.
But there is another way to regain control, and it's found in the Constitution's guarantee that the government remain of, for, and by the people. We can demand, through our government, that the rich give back something to the poor and middle class; even if redistribution of wealth is a terribly unpopular idea for a proudly capitalistic society. Alternately, we can take away the dangerous toys that the rich utilized to get the best of everyone else to prevent it from happening again in the same way. Or we could do both. Or we can go in a completely different direction and later change our collective mind. Flexibility is one of many beautiful traits of democracy, and I hope that people rediscover their democratic empowerment as a safe haven in uncertain times.
So before we act completely outraged that our pro-market government would consider adopting socialistic policies, perhaps we should first consider why it would do so and how it affects us all. I remain firmly planted in the idea that my business activities should serve to meet market demands and make the world a better place. So if socializing certain aspects of our economy will restore confidence and make the market move with more fluidity again, then yes, I can accept that--after all, the economy has broken and someone must step in to fix it. To whoever that is, please just don't take away my ability to be a capitalist, for I know no other way.
This is a little off-topic, but I'm a big picture person and feel that the big picture is particularly important in this case. What happens in the global and national economy will affect any developer wanting to work on new projects, and that includes us. So here goes.....
Income redistribution, mortgage bailouts, bank nationalization. These are a few of the loaded terms floating around in today's market commentary and raising eyebrows among investors. But before we react with such outrage that capitalism is on the brinks of failure, maybe we should go back to the fundamentals of social theory to ask whether "Capitalism" (with a big, egotistical, capital C) has earned its own demise.
Many of our recent business and governmental leaders have forgotten why we as a society protect capitalists' ability to build and keep wealth. It's because capitalists are essential in a free market, and a free market is the most efficient way that we can all prosper together. That's it. We moved into denser cities, installed governments/militaries, and did whatever we could to promote our security and wealth--but almost always in general accord with Maslow's hierarchy of needs.
We also created markets and empowered our federal government to provide the invisible hand needed to keep them fair and functioning. A functioning market, after all, is open to everyone; it has a life that we all breath into it, and it needs to remain healthy in order to survive. Yet most market leaders in recent years were acting like they could take the market into a world of excess that we would enjoy forever, as if they were at an all-you-can eat steak buffet with a hooker, a carton of cigarettes, bag of sugar, stick of butter, and a syringe full of heroin. Then our date turned around and asked for a referral fee in exchange for all the pleasure. And we paid. As high as we were, we felt obligated to pay dearly and come back for more.
The market got fat--really fat-- and it felt good. The smart investors made plenty of money along with some dumb ones, even though they too are now suffering (most are, anyway). Most even made enough to deal with the pain. But the problem is that the people who didn't make enough to ease the pain of a truly wicked hangover are now pissed that we have to deal with it. Plus, there's a general sense of moral outrage over the ability of a select few to profit from the rest of society without regard for its wellbeing. What's worse is that we continue to pay without even having the luxury of a complete diagnosis and treatment plan (let's go back to the buffet and imagine that the hooker gave us STDs, the rich food caused heart problems, and the smoking gave us cancer--plus we'll probably go through heroin withdrawal to boot).
The moral of the story: Since financial markets have become so complex and inaccessible to most, yet maintained such a profound influence on all other economic activities in our society, people have a right to be frustrated. Most of us have lost control of our financial futures due to a lack of savvy and misplacement of trust. As long as we lack control, we get confused, scared, and we brace for our inevitable fight or flight stimulus. And most people will choose the latter, which is to flee or hide until the storm blows over.
But there is another way to regain control, and it's found in the Constitution's guarantee that the government remain of, for, and by the people. We can demand, through our government, that the rich give back something to the poor and middle class; even if redistribution of wealth is a terribly unpopular idea for a proudly capitalistic society. Alternately, we can take away the dangerous toys that the rich utilized to get the best of everyone else to prevent it from happening again in the same way. Or we could do both. Or we can go in a completely different direction and later change our collective mind. Flexibility is one of many beautiful traits of democracy, and I hope that people rediscover their democratic empowerment as a safe haven in uncertain times.
So before we act completely outraged that our pro-market government would consider adopting socialistic policies, perhaps we should first consider why it would do so and how it affects us all. I remain firmly planted in the idea that my business activities should serve to meet market demands and make the world a better place. So if socializing certain aspects of our economy will restore confidence and make the market move with more fluidity again, then yes, I can accept that--after all, the economy has broken and someone must step in to fix it. To whoever that is, please just don't take away my ability to be a capitalist, for I know no other way.
Sunday, January 4, 2009
The time for local businesses is now
In recent months, I've been in discussions with the local retail real estate community about how we can help small business owners find the resources they need to open up shop. For our community, it's not just my personal desire to promote local business, but it's also a way to limit the number and duration of vacancies in our shopping centers. And we know that this should limit some of the mindless opportunistic vandalism often targeting shopping centers.
So imagine my pleasure at the sight of Ian Ritter's latest blog entry, Is Now the Time for Independent Tenants?
The shopping center developer's goal, like any other businessperson, is to maximize return on investment. This means filling all vacancies at the highest possible rent, with the most credit-worthy tenants. More specifically, this means that most of those tiny infill strip centers that were so popular in recent years would love to have a Starbucks. Next up, a Walgreens or CVS. And then comes the grocery store or Target/Wal-Mart for larger shopping centers. The reason is fairly obvious -- the daily traffic generated by these familiar names will attract other tenants hoping to derive some of that benefit.
But these aces-in-the-hole are all scaling back on expansion plans, and right at the moment that those last few spec centers are being completed. So now developers must ask themselves how they can rebuild the inherent value that is no longer available from such reliably high rent paying tenants. Is it merely a waiting game, or must they find other solutions? Well, let's just say that suburban markets and other newly growing secondary markets will probably have quite a way to go before they see any salvation from this residential real estate mess, and commercial usually follows residential.
So, is it finally time to look for local business owners for the first time? Well, yes and no. The truth is that neighborhood shopping centers have always relied on local tenants -- in the form of nail salons, hair salons, dry cleaners, Subway franchisees, etc. And these businesses are in a sort of catch-22 in the current market: while they could perhaps capitalize on weaknesses in the commercial real estate market, they're as cash-starved as the rest of the world right now. Let's not forget that we live in a leveraged credit-hungry economy and most small business owners must borrow from their homes in order to finance their businesses. So now, with little remaining equity in most existing homes, the typical small business owner is facing a much tougher environment for expansion.
But there may be other types of small business owners still on the sidelines. To find them, I say, bring on more doom and gloom. As well-paid professionals keep losing jobs, major employers maintain their hiring freezes, and we keep believing that cash is king, I think that some of those displaced yet talented folks will recognize an opportunity in the world of entrepreneurship. They'll be holding onto wads of cash from severance packages as they look for the next step in a career ladder that won't allow any sort of regression within the corporate environment. At the same time that they burn out on the job search and consider the title of "consultant," they'll likely see that real estate is finally cheap/affordable again, and say, "Hey, I could always do that," (whatever that is).
This process will likely take just long enough to allow developers to write off 2008's unrealistic expectations as ancient history and recognize 2009/2010 as a time to play ball or quit the game. While national retailers stop returning phone calls and emails, and they too increase demands in the rare cases where they consider new locations, developers need to change their habits to acquire new tenants (or else die on the vine). Likewise, communities should embrace this as an opportunity to redefine their community culture and do what they can to assist developers/operators in promoting local business.
Just when this is starting to work, as the pro-local crowd is cheering its success, and business owners are finally in the black, we should then take a breath and appreciate the restored momentum toward an American ideal of entrepreneurship. That's because the business cycle will finally sway back in favor of the developer (or new shopping center owner), thus making it more difficult for newcomers. And the entrepreneurial pioneers will have made the consumer market safe for national tenants again, which will make the competitive environment as difficult as it ever was. But then, other businesses will be hiring again too, so why would someone want to go the tough entrepreneurial route at that point?
I never said that business is easy. But I will always believe that businesses should be as local as possible. For more on this, please also check out the following:
Local First Arizona
Article: "Preparing Corporate Professionals to Start Businesses" (from BusinessWeek)
Now tell me there's no silver lining. Cheers!
So imagine my pleasure at the sight of Ian Ritter's latest blog entry, Is Now the Time for Independent Tenants?
The shopping center developer's goal, like any other businessperson, is to maximize return on investment. This means filling all vacancies at the highest possible rent, with the most credit-worthy tenants. More specifically, this means that most of those tiny infill strip centers that were so popular in recent years would love to have a Starbucks. Next up, a Walgreens or CVS. And then comes the grocery store or Target/Wal-Mart for larger shopping centers. The reason is fairly obvious -- the daily traffic generated by these familiar names will attract other tenants hoping to derive some of that benefit.
But these aces-in-the-hole are all scaling back on expansion plans, and right at the moment that those last few spec centers are being completed. So now developers must ask themselves how they can rebuild the inherent value that is no longer available from such reliably high rent paying tenants. Is it merely a waiting game, or must they find other solutions? Well, let's just say that suburban markets and other newly growing secondary markets will probably have quite a way to go before they see any salvation from this residential real estate mess, and commercial usually follows residential.
So, is it finally time to look for local business owners for the first time? Well, yes and no. The truth is that neighborhood shopping centers have always relied on local tenants -- in the form of nail salons, hair salons, dry cleaners, Subway franchisees, etc. And these businesses are in a sort of catch-22 in the current market: while they could perhaps capitalize on weaknesses in the commercial real estate market, they're as cash-starved as the rest of the world right now. Let's not forget that we live in a leveraged credit-hungry economy and most small business owners must borrow from their homes in order to finance their businesses. So now, with little remaining equity in most existing homes, the typical small business owner is facing a much tougher environment for expansion.
But there may be other types of small business owners still on the sidelines. To find them, I say, bring on more doom and gloom. As well-paid professionals keep losing jobs, major employers maintain their hiring freezes, and we keep believing that cash is king, I think that some of those displaced yet talented folks will recognize an opportunity in the world of entrepreneurship. They'll be holding onto wads of cash from severance packages as they look for the next step in a career ladder that won't allow any sort of regression within the corporate environment. At the same time that they burn out on the job search and consider the title of "consultant," they'll likely see that real estate is finally cheap/affordable again, and say, "Hey, I could always do that," (whatever that is).
This process will likely take just long enough to allow developers to write off 2008's unrealistic expectations as ancient history and recognize 2009/2010 as a time to play ball or quit the game. While national retailers stop returning phone calls and emails, and they too increase demands in the rare cases where they consider new locations, developers need to change their habits to acquire new tenants (or else die on the vine). Likewise, communities should embrace this as an opportunity to redefine their community culture and do what they can to assist developers/operators in promoting local business.
Just when this is starting to work, as the pro-local crowd is cheering its success, and business owners are finally in the black, we should then take a breath and appreciate the restored momentum toward an American ideal of entrepreneurship. That's because the business cycle will finally sway back in favor of the developer (or new shopping center owner), thus making it more difficult for newcomers. And the entrepreneurial pioneers will have made the consumer market safe for national tenants again, which will make the competitive environment as difficult as it ever was. But then, other businesses will be hiring again too, so why would someone want to go the tough entrepreneurial route at that point?
I never said that business is easy. But I will always believe that businesses should be as local as possible. For more on this, please also check out the following:
Local First Arizona
Article: "Preparing Corporate Professionals to Start Businesses" (from BusinessWeek)
Now tell me there's no silver lining. Cheers!
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