We are pleased to report our acquisition of another core asset in 2010. We bought two retail buildings in the high profile shopping district of Saint Armands Circle.
There also appears to be a slight upturn in leasing and a few new jobs being created in the economy. So far, the recovery for the most part is a jobless recovery. As an eternal optimist, I had hoped for more but now I have resigned myself to the fact that the political leadership will provide no magic bullet to the country’s problems.
The billions of dollars thrown at the problem of our fiscal dilemma in an effort to stimulate demand and kick start an expansion were given to Wall Street and the financial institutions and as a result primarily benefited the same group who created the problems to begin with. Yes, I can understand the argument that things could have gotten worse had the financial institutions not been saved but I certainly don’t agree with the philosophical end result of having the big banks, receive long term cheap money from the government, grow even bigger, and feel more immune from the need to evaluate risk in a responsible manner. The mere fact that JP Morgan Chase financed a $20 billion dollar transaction without participants for AT&T to acquire T-Mobile is evidence that “too big to fail” is here to stay. I highly recommend the Academy Award winning documentary, Inside Job, for anyone who wants to understand how the financial crisis occurred and why we have done little or nothing in the end result to prevent the next one.
In the financial markets, there has been a recovery arising out of huge sums of stimulus money from the federal government and the unconscionably low interest rates and loose money policy which encourage highly leveraged transactions. As a result, the recovery has been skewed towards corporate America with little benefit to mid America. Not only has the recovery been jobless but also wageless as average hourly earnings have been flat with only a 1% annualized growth - the weakest performance in 25 years.
The lack of wage gains is bad enough but when coupled with the way the cost of living is climbing, the real wages are actually falling and therefore the same middle class, the largest segment of our population, is bearing the brunt of the improved corporate profits and therefore paying for the recovery. Once again, the gap between rich and poor is further widening.
Through all of this the political divide also widens with each party wanting to impose their philosophy that they have been given a mandate to do so as the public flips from one party to the other at each election in utter disgust.
This decline of the middle class becomes more evident as salaries and employee benefits slip from 75% of all personal income in 1970 to 64% of personal income in 2010. The shrinking middle class becomes poorer and the upper 20% of America now accounts for 40% of all consumer spending.
We have truly misdiagnosed the problem and need to step back and realize that the failure is in philosophy because we have lost the concept of the long-term in every aspect of our society. Businesses avoid investments in the future no matter how promising they seem for fear of the impact on the next quarter’s earnings. We lose our will to invest in a sustainable future in energy every time the rollercoaster of oil prices drops a few pennies. Our commitment to education is not based on excellence but compromised by union contracts and erratically dependent on the current year budgetary stress at the local government level. Our tax policy is written by the big corporations and therefore dependant on the political favors of the last election. By example look at the 2010 two year extension to the tax law intended to only deal with the problem for two years until the next election.
There is no clear long term tax policy to provide incentives to invest long term and without long term investment, a high level of sustained allocation of resources year after year there will be less innovation and hence less job growth. In turn there will be many less discoveries of new medicines and technology advances to propel our productivity growth. One can look back to our national commitment to win the space race after Russia launched Sputnik and realized that commitment to research and development gave rise to many of the inventions that have been responsible for our prosperity for the last decades, including the internet and computers.
The solutions can only be found with a change in our moral commitment to the long term which will not only stabilize our economy but create a more secure world. The burden cannot fall only on the middle class but needs to be fairly allocated to the
corporations and the rich as well. The incentive is for highly leveraged trading (gambling) instead of the allocation of resources to long term research and development of other projects such as sustainable energy. We also have to address many sacred cows such as Medicare and Social Security. The solutions to these looming problems have always been obvious but no one has had the political resolve to act.
Regarding the commercial real estate market, problems still persist as the banks continue to extend their loans and pretend the problems will all go away. All the cheap stimulus money makes it easy to carry these non performing assets. If they wait long enough there may be some loans that do self correct. However it is quite clear that the bulk of the problems will not go away without a cleansing and an entrepreneur to bring things back to a new normal. Lenders have a hard enough time running their loan portfolios, let alone managing property and operating businesses. We are seeing more product come to the market that is lender-owned and there is no end in sight to real estate that is upside down, both residential and commercial. The cure for the problems in the United States and the world today will unfortunately require everyone to share in the burden.
Our properties all continue to operate profitably and we have been unccessful in our leasing efforts in 2010 to fill vacant space, although based in the new reality of reduced rents and more competition for the tenants. Our long term philosophy has paid off and we are now approaching the day when many of our properties will be free and clear of debt as a result of the long term fixed rate mortgages that we have financed them with. As these loans mature, our partners will benefit from our ability to significantly increase distributions out of the free cash flow no longer going to service debt. We remain believers that cash flow distributions will greatly benefit our partners as other sources of cash flow such as interest on bank accounts and bonds remain low and perhaps other cash flow sources such as social security and retirement plans are reduced and therefore cash flow will always be king.