S.E.C. Real Estate Observer

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The current factual numbers in long-term (30 years to 80 years) macroeconomic trends and cycles show the historic patterns of what is known as the “winter segment” of the overall cycle. This segment of the long-term cycle is where excesses from earlier cycle segments are corrected. I think we are already into the beginning of the “winter segment”.

Government and Central Bank policies and actions are in uncharted waters. Almost none of the professional economists (including the FED) have recognized and predicted our catastrophic down cycles (think September 2008). In the Great Depression of the 1930s, we did NOT turn out the lights completely. Many were unemployed, homeless and hungry. However, many prospered and some of the most prosperous businesses of today were founded during the 1930s. The Great Depression was also a time of tremendous innovation as people addressed problems and found solutions. Many of those solutions and innovations are considered necessities of life today.

Will we have another recession in the near future? Will we have a 1930s depression in the immediate future? Nobody knows, but the odds are that we will have a growing number of problem properties across many areas of the United States.

WHAT SHOULD WE AS SOCIETY MEMBERS AND GUESTS, THE REAL ESTATE PROBLEMS SOLVERS, BE DOING AS WE GO FORWARD INTO 2015? This is NOT a rhetorical question. I am challenging each of our members and guests to share the specifics of how they might be modifying their business models and marketing and project goals for the immediate future.

Some big changes are occurring impacting the real estate world. The US “Baby Boom” generation is entering its retiring cycle when they spend less and save more. However, the baby boom generation in most of the rest of the world is already in a serious down cycle and is having a negative impact on the economies of major players including Japan, Germany, China, and South Korea.

The Millennial generation is actually numerically larger than the Baby Boom generation. However, the Millennials are spread over nearly twice the time period during which the Baby Boomers came on the scene. Thus, the impact of the Millennials will be smaller than the Baby Boomers. There will simply be less spending at each point as they move through their spending life cycles. Millennials are coming of age at a time when employment and other economic opportunities are depressed. They are already clearly delaying life moves such as marriage, children, home buying, etc.

IT IS MY CONTENTION THESE CHANGES WILL MAKE THE NEXT FEW YEARS “OPPORTUNITY TIME.” None of the segments of our real estate world are going to disappear. There is a pretty good chance that many of those segments, such as residential development, retail and office space utilization, and urban land development will be radically different in just a few years. The question is whether we will be the source of those positive and profitable creative changes or if we will be opposing those changes to our detriment.

I believe the next few years will require a more conscious implementation of critical thinking concerning the world of real estate. Besides our mindset of creativity and thinking “out of the box,” S.E.C.s must proactively take the creative actions that our economy and real estate will need in the next few years. The following are just a few ideas presented for everyone’s consideration of what we must do going forward:

• Reanalyze business models and practices with careful attention to the data used to create the information on which we base business decisions.
• Separate hard data from “expert opinions” and/or agendas presented in the form of percentage changes to support a specific position.
• Consciously challenge familiar and “routine” functions in our business models and practices to make sure past solutions and proactive business actions will continue to be effective going forward.
• Expand upon the sources and types of data and information used in making forecasts and decisions to include directly and indirectly related fields and technology impacts.
• Recognize that, even in the immediate future, we might be presented with opportunities and obstacles we cannot even imagine today. Mentally prepare for multiple possible scenarios to avoid being caught unprepared.
• Use consciously intended, accurate thinking to successfully embrace changes in our businesses that are almost assuredly coming in a shorter time frame than ever before.

It is my assessment that we have at least two major categories of creative/adaptive change to address over the next one to four years:

1. Free market-based political, social, demographic, and economic changes that reoccur over long-term macroeconomic cycles.
2. Government and private sector laws, regulations, policies, and practices based on incorrect or (at best) out-of-date assumptions, which negatively impede or outright seek to prevent effective adaptation to free market cycle changes.

As referenced above, Baby Boomers are still dominating asset ownership and spending, but most Boomers are rapidly entering the life period where eliminating debt, consuming less, and saving will take highest priority in their financial lives. In 2014, more US citizens reached 84 years old and left the normal housing market than there were US citizens reaching the age when they normally buy their first house. How are such trends going to affect your business and business model?

We are experiencing the implementation cycle for a lot of technology that was developed over the past 20 to 30 years. Much of that technology has resulted in the elimination of whole categories of jobs. How will robotics and broadband communication affect office and retail space usage? What will those displaced by technology do to obtain alternate employment? How and who will make that retraining/reemployment happen? How much geographic relocation will occur across state lines and regions? Those who start thinking about and addressing these and the multitude of additional critical changes to our economy and society will be the new millionaires created over the coming decade.

The other area for innovation and creativity is in overcoming government and private sector impediments to effectively address free market changes and forces. In government and many big private sector businesses, many laws, regulations, policies, and procedures are designed to protect the status quo and prevent the entry of competition and/or the success of those who would totally displace or replace the status quo. Economists exert tremendous influence on the government and business policy and direction. Their forecasting is generally based on computer models and assumptions about the actions of people that are in many cases obviously incorrect. “Saint” Keynes predicted that as people acquired everything needed to live comfortably, they would cease to buy anything else, hoard their income, and bring the economy to a halt. Obviously, that conclusion was wrong.

There are many great opportunities in attending to regulations and policies of governmental units and private sector centers of influence. Some opportunities result from finding creative (and legal) ways to accomplish goals in spite of regulations and business practices. Some opportunities come from recognizing when there is no opportunity for success in the face of regulations and/or entrenched business forces. Sometimes, innovations must be moved geographically, delayed, or modified to get a foothold on the future. The key is NOT to be intimidated but to attend to the details and “THINK ACCURATELY.” One of the best pieces of advice I ever received came from Steve Barker a long time ago at a Michigan Real Estate Exchange meeting. He said, “READ THE DOCUMENTS.” I believe that if we attend to a wider range of details—reading the rules and policies—and apply accurate thinking with creativity and optimism, the odds of our success will increase exponentially. This has been the S.E.C. way for over fifty years and will continue to be the S.E.C. way for generations to come.

I challenge each of you reading this article to contribute your thinking and ideas for achieving success in light of the probable changes coming to the world of real estate.