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Bugs.
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October 18, 2007 at 4:13 PM #10667October 18, 2007 at 4:31 PM #90000
patientlywaiting
ParticipantExcellent post, davelj. That’s pretty much how i see as well.
Local banks like to look the other way. In the 1990s I was involved with an electronics manufacturer that was in trouble. As long as the interest payments are made, the banks would bend backwards to make accomodations.
It will be interesting indeed. Time will tell.
October 18, 2007 at 4:31 PM #90009ParticipantExcellent post, davelj. That’s pretty much how i see as well.
Local banks like to look the other way. In the 1990s I was involved with an electronics manufacturer that was in trouble. As long as the interest payments are made, the banks would bend backwards to make accomodations.
It will be interesting indeed. Time will tell.
October 18, 2007 at 4:40 PM #90006Stu949
ParticipantInteresting post davelj.
On a side note and not directly related.
My father is still in the construction industry. He’s worked as a soils engineer for approx 40 years. Been through a couple of down cycles (90s – he was temporarily laid off but has stayed with the same company his entire life). I did a little work for his company throughout the years, but started doing small jobs when I was 16.
At 16, I was digging holes and helping out with soils tests in an around Irvine. Today, Standard Pacific has the start of a community, but obviously they’re having trouble selling. My point being that in that particular location, someone started researching the viability of building on that land some 12 years ago – with actual construction just starting last year. At the time, they were avocado and orange groves.
Granted, not all jobs start that far out, but my dad’s company has no jobs to bid on. He’s been in San Diego for the last 10 years, as they’ve done many of the big residential projects and many commercial projects you all see today.
Being that they do the soil testing and supervise the grading, they’re pretty much the first step or phase in the construction process.
There is nothing even on the horizon for them to bid on. Nothing, zilch, nada… The 90s was slow, but he said there was still work. This is one of the first times they’ve ever seen where there are virtually no commercial or residential projects planned at all. The only thing out there is government contracts, but there’s more red tape with bidding on those and they’re not in abundance. His firm stoped competing for them a few years back because they were flying high on the commercial/residential bubble.
Any sign of a turn around will start with the soils engineering firms. We hear a lot about starts and permits…Many of those permits had the soils work done months ago. Not that it is a surprise to anyone here, but the permits should see even more declines in the next 6 to 9 months. When the turnaround comes (whenever that happens), permits will lag the start of the soils grading by about 6 months to a year.
October 18, 2007 at 4:40 PM #90015ParticipantInteresting post davelj.
On a side note and not directly related.
My father is still in the construction industry. He’s worked as a soils engineer for approx 40 years. Been through a couple of down cycles (90s – he was temporarily laid off but has stayed with the same company his entire life). I did a little work for his company throughout the years, but started doing small jobs when I was 16.
At 16, I was digging holes and helping out with soils tests in an around Irvine. Today, Standard Pacific has the start of a community, but obviously they’re having trouble selling. My point being that in that particular location, someone started researching the viability of building on that land some 12 years ago – with actual construction just starting last year. At the time, they were avocado and orange groves.
Granted, not all jobs start that far out, but my dad’s company has no jobs to bid on. He’s been in San Diego for the last 10 years, as they’ve done many of the big residential projects and many commercial projects you all see today.
Being that they do the soil testing and supervise the grading, they’re pretty much the first step or phase in the construction process.
There is nothing even on the horizon for them to bid on. Nothing, zilch, nada… The 90s was slow, but he said there was still work. This is one of the first times they’ve ever seen where there are virtually no commercial or residential projects planned at all. The only thing out there is government contracts, but there’s more red tape with bidding on those and they’re not in abundance. His firm stoped competing for them a few years back because they were flying high on the commercial/residential bubble.
Any sign of a turn around will start with the soils engineering firms. We hear a lot about starts and permits…Many of those permits had the soils work done months ago. Not that it is a surprise to anyone here, but the permits should see even more declines in the next 6 to 9 months. When the turnaround comes (whenever that happens), permits will lag the start of the soils grading by about 6 months to a year.
October 18, 2007 at 4:47 PM #90008davelj
ParticipantActually, I didn’t mention it, but I’m confident that this is going on at the national level as well. In fact, in a way the situation could be worse at the bigger banks. At the local level, the bank’s President probably knows what’s going on with most of the bank’s loans, particularly the larger ones. So, there’s delayed recognition of problems, but it’s a “consciously” delayed recognition. At the national level, however, there’s a lot more bureaucracy between the top of the pile and the lenders on the ground. Consequently, there’s a more “unconscious” delayed recognition of loan problems. The challenge for the local banks is that they don’t have the advantage of geographic diversification that the larger banks do. So they live and die by the local economy.
October 18, 2007 at 4:47 PM #90017ParticipantActually, I didn’t mention it, but I’m confident that this is going on at the national level as well. In fact, in a way the situation could be worse at the bigger banks. At the local level, the bank’s President probably knows what’s going on with most of the bank’s loans, particularly the larger ones. So, there’s delayed recognition of problems, but it’s a “consciously” delayed recognition. At the national level, however, there’s a lot more bureaucracy between the top of the pile and the lenders on the ground. Consequently, there’s a more “unconscious” delayed recognition of loan problems. The challenge for the local banks is that they don’t have the advantage of geographic diversification that the larger banks do. So they live and die by the local economy.
October 18, 2007 at 4:49 PM #90010HereWeGo
ParticipantYikes. There’s a world of hurt for some downtown builders.
How does the loan payback model work with commercial RE, both office space and retail?
October 18, 2007 at 4:49 PM #90019ParticipantYikes. There’s a world of hurt for some downtown builders.
How does the loan payback model work with commercial RE, both office space and retail?
October 18, 2007 at 5:57 PM #90026Mr_Brightside
ParticipantThis is a very interesting topic. We have been discussing a specific project on the thread below. On it I came to the conclusion that this particular project would not cease construction based on some research I did. Any other opinions or insight are always welcome. I do think this type of problem will be the source of additional weakness but that each project is very specific.
October 18, 2007 at 5:57 PM #90035ParticipantThis is a very interesting topic. We have been discussing a specific project on the thread below. On it I came to the conclusion that this particular project would not cease construction based on some research I did. Any other opinions or insight are always welcome. I do think this type of problem will be the source of additional weakness but that each project is very specific.
October 18, 2007 at 6:04 PM #90030ParticipantI’ll add to this that I know of new an eight unit project downtown that’s on the edge of foreclosure. I’m putting together a blog post for it so stay tuned.
October 18, 2007 at 6:04 PM #90039ParticipantI’ll add to this that I know of new an eight unit project downtown that’s on the edge of foreclosure. I’m putting together a blog post for it so stay tuned.
October 18, 2007 at 6:16 PM #90034Bugs
ParticipantThe operating margins on these local lenders aren’t large enough to sustain $1,000,000 losses, so you can imagine that it doesn’t take much in the way of exposure to create some really devastating problems.
I often look at some of these commercial condo projects that are springing up all over the place and marvel at the fact that in each case some appraiser developed and supported in their appraisal report an absorption analysis that projected how long it would take to complete the project, market it and get out.
What I find annoying is the fact that the commercial condo market has been around for a while and compared to other property types it was always a bit of a dog. Given the alternatives, most small companies that would occupy such a space could only justify it if the prices were in line with the rents, and over the long haul a $0.90/SF rent doesn’t economically support a sale price in excess of $100/SF. Duh.
Fortunately for me, I was smart enough not to allow myself to get caught up in these unrealistic projects. I lost some clients to other appraisers who were more “cooperative”, but now I don’t have to worry about the federal banking regulators associating my name with those bad deals.
October 18, 2007 at 6:16 PM #90043ParticipantThe operating margins on these local lenders aren’t large enough to sustain $1,000,000 losses, so you can imagine that it doesn’t take much in the way of exposure to create some really devastating problems.
I often look at some of these commercial condo projects that are springing up all over the place and marvel at the fact that in each case some appraiser developed and supported in their appraisal report an absorption analysis that projected how long it would take to complete the project, market it and get out.
What I find annoying is the fact that the commercial condo market has been around for a while and compared to other property types it was always a bit of a dog. Given the alternatives, most small companies that would occupy such a space could only justify it if the prices were in line with the rents, and over the long haul a $0.90/SF rent doesn’t economically support a sale price in excess of $100/SF. Duh.
Fortunately for me, I was smart enough not to allow myself to get caught up in these unrealistic projects. I lost some clients to other appraisers who were more “cooperative”, but now I don’t have to worry about the federal banking regulators associating my name with those bad deals.
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