The real estate downturn forced a lot of developers to reassess the way they were doing business. Fortunately for Martin Melaver, CEO of Melaver, Inc. and author of the socially responsible roadmap/memoir Living Above the Store: Building a Business That Creates Value, Inspires Change, and Restores Land and Community, looking out for the needs of the community paid off—and in more ways than he could have foreseen.
Recently, I’ve been reading with my son The Hitchhiker’s Guide to the Galaxy. We’re at that point in the story when our travelers arrive on the planet of Magrathea. Magrathea, you may recall, made a name for itself millions of years ago by specializing in building designer planets for the super-wealthy. Then, out of the blue, a severe economic recession hit the galaxy and demand for Magrathea’s high-end product vaporized. The citizens of Magrathea decided to mothball the planet until market demand returned. Fast-forward five million years, and the Magratheans are still waiting. Talk about an allegory for our time.
In a recent webcast, Stephen Blank, Urban Land Institute’s Senior Resident Fellow for Real Estate Finance, expressed what many in real estate already know and fear: that the downturn in residential real estate in 2007-8 was nothing compared to the tsunami coming at us in 2010 in the commercial sector. Values are likely to dip to 40 percent from three years ago, a commercial resurgence is not likely to occur until 2012, and the financial markets will continue to remain frozen except for the vulture plays stepping in with all-cash, low-ball purchases of distressed assets. Of the total $3.5 trillion in commercial debt out there, $900 billion is held in the problematic CMBS market. Thirty-nine billion dollars of that debt will be due in 2010; $150 billion by 2012.
The pace of foreclosures is uncertain. So, too, the pace at which distressed assets will then subsequently be written off at a discount, sold to vulture funds, and then stabilized over the ensuing years. What is certain is this: Want to build a nice upscale hotel in some touristy area? Forget it. Looking to pick up a piece of dirt on the cheap and build some cool office or retail development? Good luck.
Probably best to take a page from Magrathea’s playbook and mothball your empire-building business plans. It ain’t gonna happen any time soon. Which leads to some deeper lessons from Magrathea: probing into the viability of a business model that ignores a cosmos’ true needs.