A GUARANTEED WAY TO TELL WHICH WAY THE ECONOMY IS HEADING
Short Answer: Contact Your Friendly Real Estate Attorney.
Yes, you read that right. Your friendly local real estate attorney. The one who writes leases for commercial space, evicts tenants and collects rents from defaulting tenants. We’re the ones who get to see the economic patterns before everyone else.
After handling commercial real estate work for 5 decades now, this last recession wasn’t my first rodeo.
Around 2006, I decided to focus my efforts on my real estate brokerage work, rather than my law practice. I did some commercial tenant representation but mostly I was dipping my toe into the home sales business. But, as they say, timing is everything. I almost lost my toe. The residential housing market stopped on a dime in late 2006 and 2007 and someone walked away with the dime. Finding buyers for homes was an exercise in futility and little or no income was coming in. Home inventories for sale were growing at a rapid pace, prices were plummeting and my wife’s thriving recruiting business was no longer thriving, experiencing an 80% drop in revenue. Companies stopped hiring and starting laying people off. Demand for real estate and workers had fallen off a cliff.
Just when our finances started to look bleak, I started to receive telephone calls from former clients looking for help evicting tenants and collecting rents. Sure enough, as in past recessions, some of the first businesses that stopped paying rents were restaurants and furniture stores. Although I am not an economist, with the understanding that, where goes consumers, there goes our economy, when those consumers run short of cash, they eat home and stop buying furniture. The only real difference between this recession and prior recessions that I worked through was that during this recession, the first defaulting tenants were mortgage brokers and residential real estate brokers, a circumstance directly related to the housing crisis. Things were so bad for these real estate related businesses that most often they abandoned their space before I even considered taking action to evict them.
During the Savings and loan fiasco and the RTC days, the majority of my clients were insurance companies who were or had foreclosed on commercial property borrowers. In the 90’s, there was no such thing as CMBS. Insurance companies were one of the major lenders for commercial real estate. Initially, during this last recession, my major client’s commercial property owners who were feeling the pinch from defaulting tenants. As in prior recessions, many of my landlord clients soon defaulted on their loans and my client base shifted to the special servicers who were managing the loans for the CMBS lenders.
During 2009 through 2012, my law office was very busy litigating and collecting rents from defaulting tenants. While I did some lease negotiations, most of which was restructuring existing leases, the vast majority of my work and that of other lawyers was litigation. Solid, financial worthy tenants were hard to come by. Of those leases that were being signed at the time, they tended to be shorter term leases with tenants with questionable financials.
Sometime around mid-2014, I started to see a shift in the work that I was getting. For the prior 3-4 years, my average litigation case load was about 25-35 cases per month. In 2014, I began to see the demand from landlords drop to about 15 cases on average per month to about 5-10 cases per month in 2015. As my litigation load diminished the demand for lease negotiations and drafting has increased proportionately. Now, most of my legal work is lease negotiations where both the landlords and tenants have a positive attitude toward the future. The leases are longer in length with an additional focus on learning our lessons from this last recession. Financial statements look stronger as do the tenants. From my perspective, things are definitely looking up.
Howard Kline has been a real estate attorney since 1976 with a special emphasis on commercial real estate leasing and litigation. Over the last 5 decades has served as General Counsel for four different companies and as a Director of Real Estate managing the companies real property assets throughout the United States. He is a noted author, blogger and video personality and continues to represent clients in lease negotiations and litigation. He can be reached at @creradio or can be connected on LinkedIn.
Featured image of “Furniture Store”, courtesy of Supertrooper at FreeDigitalPhotos.net