IT’S TOO SOON TO TELL

The biggest challenge in writing this column is finding something new to report. The cycle is still the same season of predictions with the constant question of “how long will this last?” My crystal ball is still on vacation however. Eventually, we’ll stop asking the question and adjust to doing the work in front of us which was created by the cycles that proceeded leading up to this question.

New financing? What’s that? This gives a while new meaning to the word challenge. You could almost call it a dare: “dare to get financing.” While financing is available; it’s an understatement to say that it’s harder to obtain, takes much longer, qualification requirements are tougher even for the most qualified buyer, and loan values are much less (remember lender’s are terrified to put a value on a loan). While we remain in an unprecedented frozen credit market, many of the recent transactions are a result of a conglomerate source of financing. It’s commonplace in this cycle to have all cash transactions. Cash being “King” in this cycle creates a while new dynamic. In the Yiddish language money is called “gelt” but we’re not just talking about “tashngelt” (pocket money) it’s more like “oysleygelt” (ransom money!) When those with the cash are actually (spending money) it’s “fartinken” and I just don’t know a better way to describe this scenario in English.

We’re stuck in a tremendous paralysis between buyers and sellers. Some sellers remain in denial about the current market value of their properties while many buyers continue to remain on the sidelines waiting to smell “blood.” This is by far the worst part of this cycle. Yes, there are many deals in the C and D demographic areas (less desirable neighborhoods.) The Westside, which includes Santa Monica, is still considered a prime area (depending on particular locations.) It’s almost comical having a potential buyer looking to just “steal” a well located building while this same buyer who owns in this area would never even consider selling at this price! Now on the other hand the seller of a well located building is sill living in yesterday but admittedly will not pay yesterday’s prices. Here’s where I’m actually going to hopefully offer a bit of wisdom and that is to say that this paralysis must change. Now you can read all the projections you want, try to time the market, track the statistics and analyze the analysis; but when sellers adjust to the market values to realistic prices tied into financing or lack of financing and buyers stop “sniffing for blood” and stop low balling well located buildings the paralysis will end. For the most part Santa Monica and Westside apartment buildings were not leveraged even when the financing was readily available, buyers still put 30% or more down so the current debt ratio is not bleeding even though rents are coming down.

Rents of course are still down and will most likely continue to stay that way until the unemployment rate drops. Needless to say, we do what we can to keep our existing tenants even if it means reductions (of course I’m referring to market rate rents.) We do not recommend losing a good tenant to risk renting in this environment which usually translates to loss of more rent and additional costs to upgrade vacant units only to compete in this market for tenants.

The real estate industry lost an icon last month. I’m saddened to write about the passing of Ray Watt. Ray was a true champion in this industry. He started as a home builder, later branching out into commercial development, and in his later years, residential income properties. Ray started with nothing and survived several economic downturns. I had the honor of working with him in the last downturn, this was a privilege and an enormous education. Ray was the mensch of menschs, he did not boast about his successes and was honest about his losses, which allowed us to learn and grow not only as real estate professionals, but hopefully as people. I mention this in this article because of it’s relevance to where we currently are, its important to value and learn from men like Ray Watt, not to get stuck and paralyzed in theoretical framework, there is no new paradigm. While we may not have been around as long as Ray Watt, Lambert Investments, Inc. has been here in Santa Monica for over 30 years and one of the best assets we can bring to you as apartment building owners is our age, experience, and integrity. The greatest teacher in real estate and in life still remains to be history. Remember the cycles, things in life just do not stagnate and change effects change. We will continue to remind you and continue to guide you to know where you (personally) are in this cycle.

Okay, I will go ahead and make a prediction. It comes from one of my favorite Buddhist parables, “it’s too soon to tell.”