Tuesday, May 13, 2008

NAIOP Take-Homes

As I mentioned on Friday, the National Association of Industrial and Office Properties (NAIOP) has been the absolute best source of knowledge for someone who didn’t have any experience when I started down the path of building manufacturing and high tech facilities in rural America. Fortunately, those with more experience from urban areas have been very generous in their assistance over the years and I will always be indebted to NAIOP. The organization was also the one that took a chance on me and published BoomtownUSA.

The mood at NAIOP was probably as subdued as I can remember at any NAIOP event, with many concerned about the long term impacts of the meltdown in the credit markets over the past nine months. However, the general consensus was that these problems would be behind us by later this year or early in 2009.

USA infrastructure is rapidly falling behind the rest of the world and we are not spending the funds needed to keep us world class. We are spending about 3% of our GDP on infrastructure compared to 10% in Japan and 8% in China. We are $1.6 Trillion behind, the Highway Trust fund will be bankrupt by next year and we don’t seem to have the political will to correct.

Mark Doutzer, a very entertaining economist from Texas A & M University, gave a very sobering talk about changes occurring in Washington and the impact that they will have upon the USA, “The worst risk that we face in the USA is Congress trying to fix everything. We are migrating from a land of opportunity to a land of entitlement.”

Another observation that looks like it will be hotly debated in the presidential campaign, “If we change the Capital Gains Tax from 15% to 24% it will cut the value of stocks and real estate by 11% overnight!”

Stuart Rothenberg, Managing Director of Goldman Sachs, related some of the changes that have occurred in their investment thinking since the credit meltdown, “A year ago we were looking at deals in the mezzanine arena where we were helping to take 4% equity up to 13%, getting LIBOR + 200 to 225 bp and maybe 65 bp in upfront fees. Now we are helping to take deals from 25% equity to 40% equity, getting paid LIBOR + 850 bp with 150 to 200 bp upfront and with LIBOR floors. We are cleaning up since there is no debt in the market.”

My summary from these talks is that we are going to very quickly come out of this downturn which I still refuse to call a recession since we continue to have positive GDP growth of around 0.5% for the past two quarters (a recession is defined as two consecutive quarters of negative growth). The credit problems of Wall Street will be history within a year and have not had the same impact on Main Street. In fact Main Street has probably benefited from the much lower interest rates.

The USA economy has always climbed a “wall of worry” and probably always will. We are in one of those times but will be quickly through it.

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