Norton on Real Estate: There are silver linings in the clouds

I have been taken to task over the past month for being too negative in my recent columns. That has not been difficult, given all of the dramatic drops in the markets along with rising unemployment, multiple stimulus proposals and talk of creating a “bad bank” in which to move the “toxic loans.” No one can ignore all of these elements that have contributed to the current recession. Nonetheless, some of our commercial real estate brethren are experiencing near record levels of activity and transactions.

While the U.S. economy is not at bottom — which under the most optimistic scenarios will arrive in the second half of 2009 or, more likely, some time in 2010 — it is just too difficult to predict, as there are so many variables and elements completely interconnected. The good news is President Obama is smart, has brought smart people with him and has put through a stimulus with a combination of spending on infrastructure along with tax credits (and a bunch of pork to the tune of more than $200 billion!).

So what are the hurdles and what are the opportunities for commercial real estate? Here are the hurdles:

• Job losses = less demand for space
• Credit is tight
• The conduits are frozen
• Retail is in disarray
• Consumers are hunkered down
• China is quiet
• Local and state governments are running large deficits

The opportunities:

• Multifamily is strong (except for a half-dozen markets)
• Owners under stress want to sell
• Health care is still strong
• The government intends to spend trillions on stimulating the economy
• Some tenants are expanding or buying properties

With equities oscillating wildly, real estate can be a good investment. The key is identifying good properties — location, new, code-compliant, parking, etc. The other side of the equation is identify and securing good tenants. This can be much more challenging than it used to be. Corporate credit ratings are not as reliable as they once were. So the next 12 to 18 months will be challenging. But then what?

In the long term, New Hampshire and New England will spring back. We are strong in what Jeff Thredgold calls “The Big Three”: financial services, health care and leisure and recreation.

But more importantly, New England has a legacy, history and heritage of adaptability and innovation. Starting with the Pilgrims who thought they were going to Virginia and instead got dumped on Cape Cod with three months of food, they adapted by trading with the Indians. Their children turned to the sea and started whaling. Their children learned to build ships and got into shipping, then banking. Then they turned to manufacturing, ultimately building the largest textile mills in the world. When cotton moved south, they made shoes in these mills, then war materials for World War I and World War II. Lincoln Labs, Raytheon, defense, electronics, computers — first minis, then micros, then PCs.

All this time, the region’s colleges, universities, hospitals and medical schools turned out the best and brightest.

So whether it is nanotechnology, biotechnology, general technology, the green revolution or some of each, New Hampshire and New England have a promising role to play. But as the Brookings Institute notes, first the country has to:

• Restore financial stability
• Set the right green agenda
• Exercise smart power
• Re-imagine global trade
• Understand and balance trade with China
• Figure out our future with Russia
• Revitalize ties with Latin America
• Support Africa’s turnaround
• Pursue a positive agenda for the Middle East

This is all going to take time, but incremental steps and progress will steady our nerves and get us back on track. So don’t be looking for a quick bounce-back, but a steady climb. When the timing is uncertain, go to investments with stability. Bricks and mortar have definable value. They can be local. You can drive by and see your investment. Think about it.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at