When I was younger, in kindergarten to be exact, I lived in an apartment complex just outside of town. Completely surrounding the three building apartment complex were fields. There was one building, just down the road, but nothing more. One day, out of nowhere, a helicopter landed in a field next to the buildings. How exciting, a helicopter! What more could I have wanted as a five or six year old boy?
Over twenty years later, I wish said helicopter would never have landed. I wish, I could go back in time and tell the people who landed on this field to stop what they were doing and to never think of it again. However, I cannot travel through time, and the executives were very delighted indeed about the property. In time, the field across the highway, the fields around the apartment complex and in fact the whole North side of town became one big development.
Several years later, I moved to a new town to attend college and have lived in this new town for nine and a half years. This town, like my home town, probably had the same helicopter land in a field just out of town, near the same year as the helicopter which first captured my attention. This helicopter, was the start of the coming commercial real estate problem, which I will examine in this blog over the coming weeks. The idea will be to paint how the doom and gloom picture has developed, present some raw data to provide an empirical basis to further study the problem, and then to display possible solutions for digging us out of the next financial disaster we face in the United States, as well as the rest of the world.
The Town I Live In: Industrial
I moved to this town in 1999 to attend college and become, for better or worse, and economist. From my arm chair, I have observed the commercial real estate market and how it has changed during the past decade. Here in Indiana, the economy has largely been supported by farming and manufacturing. Government leaders from local to state have focused their efforts on how to create new jobs, i.e. build more factories and introduce new retail establishments. Who can fault them, its what they are supposed to do and it has worked, for the most part, since World War II.
Before I moved to this town, Crawfordsville had already experienced the first sign of things to come: a major factory closing. Many people were let go and large empty buildings in decay would dominate the heart of the city for years to come. Since I have arrived, many more have followed. The industries have been diverse, including an RV manufacturer and an optical lab. Of the factories remaining, one has ousted the union employees, closed the doors, opened back up with temporary employees, opened up with regular employees at decreased wages, put a fence around the place, repeatedly menti0ned shutting down, changed names, and sold itself. Another company came close to shutting down two or three of its four large buildings, but somehow manged to pull together enough orders, for now, to continue on. Another factory is slowly but surely consolidating its operations from two plants to one. I could go on with more problems, but the point is the factories in this town are closing slowly, but surely. They are laying off employees slowly, but surely. In their wake will be additional large, empty buildings to go with the ones already in place.
The local government during this time has come up with a great solution (hah). "Let's create a new industrial park," they say. "If we build a fancy new road, with a nice landscaped median and full utilities we can get someone to build a factory and create new jobs." But what about those other empty buildings? What about the other buildings in town which could be vacant on any given day? What about the road built specifically for a steel company, with interstate access and everything? Can't this road also support factories?
Remember the wire company? Well years ago, before I moved here, another company had looked into buying the building and its properties and running it wide open once again. This would have been great, but it never happened. The building remained an eye sore for many, many years. Just recently, in 2008 the property was cleaned up by a new owner, who now operates a recycling facility in its place. The hoops this person had to jump through were enormous. Cleaning up the old building, which included chemical waste and other unsavory items, must have cost this company a ton of money. They had to repair all the windows or brick them in. Additionally, the building had been set on fire by many groups over the years in an attempt to rid the town of an ugly heap.
Immediately after starting on the endeavor, the purchaser was wrongfully accused of tax fraud in the local papers. The rumors of scandal were rampant. Eventually the paper had to retract their accusations. All of this, from one company trying to get one building back on its feet and make it a functional property. What about the other empty buildings? What about the ones which will soon become empty? What about the brilliant new industrial boulevard to nowhere with no factories and not even a set of surveyor's stakes in the ground? These issues loom on the horizon.
The Town I Live In: Retail And Office Space
I wish the problem here and elsewhere were just limited to industrial developments, but I believe they are but one third of the overall commercial real estate problem. The next third is the retail and office sector and this third is more deep rooted in the American way of life. We take for granted the virtually unlimited amount of space we still possess in this country. The problem here lies not in the general spirit of starting new businesses, nor in the lack of people wanting to start new establishments throughout the city, region, and country. The problem lies in "cookie cutter" convenience.
Oh, the helicopter. I'm sure many can guess who was in the helicopter and perhaps glean the reason why I left the name of the company out so far. I do not want to create an idea here of bashing Wal-Mart, but indeed the Wal-Mart way of business is a piece of the commercial and industrial, and to some extend the residential real estate problem. I will leave the moral, ethical, and other practices of Wal-Mart for another blog topic. So please, set those aside and take the following as a discussion on Wal-Mart and the cookie cutter retail outlet as a discussion on real estate.
The helicopter landed and the cookie cutters rolled out their prefab buildings in my home town. Burger King, Arby's, and Taco Bell were the grand champion cookie cutters and claimed the prime spots around the Wal-Mart. In the town I live in now, Taco Bell and Shoe Show won the battle to be in front of Wal-Mart. Right in front, fresh out of the oven, stereo-typical buildings. Other companies and their prefab businesses were soon to follow. Staples, Subway, and Home Depot enjoyed the Wal-Mart push. Times were booming. The strip mall which was attached to Wal-Mart was a typical strip mall. Glass windows in front with an overhang roof to put a sign on.
The rest of Crawfordsville has not been so fortunate. In the ten years I have lived here, the town has lost a Target, JcPenny's, Hardee's, two furniture stores, Goody's, a grocery store, more mom and pop shops than I can keep up with, the aforementioned Shoe Show, and a host of chains normally occupying the strip malls of American life. Additionally, many professional offices have closed, such as insurers, brokers, lawyers, and the like. Target left not due to losses, but due to insufficient margins. Bah!
So now there are empty, desolate buildings from downtown to the strip malls next to where the old Wal-Mart stood. The old Wal-Mart? Yeah. They didn't like the building. They needed to add a grocery store. They needed to make sure Goody's closed down as they were competition, despite the fact the main competition, Target, had already left. They needed more and they needed it to look exactly like every other Super Wal-Mart in the country.
Where did they build the new building? In the field right next door! Oh what a Super idea! Another Super idea would be to, oh, let's say, rotate the building ninety degrees and not put a twenty foot section of pavement to connect the Old section with the Super section of retail establishments. Oh it was a horrible spot now. Who wants to be in the Old strip mall? The Super building had forced the town to create a new entrance to the shopping area and install a new traffic light. How horrible it is to be behind and right next to such a Super retail spot. In order to survive, the other retailers in the Old strip mall had to move 300 feet to the Super strip mall. This new spot is so much better with the Super Wal-Mart lording over the area.
But remember, this is not a knock on Wal-Mart, but a knock on all of this mess. Radioshack had to move to the news strip. Buffalo Wild Wings had to ensure a new spot across the street. Steak 'n Shake and Culver's with their completely distinct, completely cookie cutter designs had to start new franchises. Never mind the old strip mall behind the Super. Forget about all the other strip malls in town. Forget about every empty building already in existence. We need new, perfectly located buildings.
Luckily, the town found a Big R to put right behind the Super, in the former spot of the Old. Some life has been breathed into this spot. But, there still stands, two stop lights away, the Target building, the JcPenny's building, and soon the Goody's building. Oh and they leveled a Shell and there still are some cracking slabs of concrete supporting weeds and the occasional summer ice cream shack.
The other parts of town? What other parts of town? They have nearly all died or have rolled through one business after another like mad. Downtown? Luckily a bar caught fire and some of it burned down, while the remainder stares with mostly blank expressions at the void created after the fire. The same blank stare seen all over the country in down towns. Walgreen's also leveled a few buildings to drop a prefab across the street from the prefab CVS, which is four blocks away from another prefab CVS. Oh joy! Who wants to shop at stores where each one is different and nothing is the same? In the name of efficiency, lets not get creative!
The Town I Live In: Commercial Housing
Commercial housing takes two forms for my purposes, but they both boil down to a living unit where there is a tenant paying rent to a landlord. These include apartment complexes, condos, hotels, and people who own many homes which they rent out. No matter the division, the third part of commercial real estate is a bit more complicated. Commercial housing loans have their own sub-category of statistics, separate from "residential" housing and other categories of commercial real estate. The physical structures themselves compete with the other forms of real estate. Some buildings can easily be offices, apartments, or become a hotel. Ultimately, once a building loses its value in the retail, office, or industrial sector, it will often end up as apartments, if the building does not stand empty. This is just the progression of a typical building.
In Crawfordsville there are plenty of apartment complexes, duplexes, and old retail buildings converted into 2, 3, 4, or more units. There is a hotel here where many of the rooms are let out indefinitely at cheap rates. People literally live there with their 1 bedroom 1 bath "apartment." Lastly, there are a few landlords who own several houses, one with supposedly over 100 properties. In a poor town, these dwellings are the norm, and home ownership is certainly less abundant.
With the apartment complexes, the problem lies in the over zealous building programs of the real estate trusts. These companies are often publicly traded on the stock exchanges and produce complexes in suburbs and small towns all over the country. When times were booming and rents were increasing, one could afford to build a new complex and inevitably, tenants would move in. Well, times are not booming so now we have lower occupancy rates and lower rents. In Indianapolis, its to the point where new apartment complexes sit unfinished, because there are just not going to be any tenants.
The landlords who own multiple homes have a special contribution to the nation's problems. For a long time, one could buy sell and trade houses at will. One could also rent out houses at will. This enticed land lords around the country to skimp on maintenance. Why upgrade this house? Its just a rental. So the stock of houses owned by such landlords have been declining in usability, while the price may have been increasing the whole time. After the bubble burst, the truth has come out of the woodwork. The houses are livable, indeed most are probably still occupied. But the insides have been declining rapidly, more rapidly than the pace of upkeep. So now the landlord has a loan for an over appraised house, which may have been intended as a flip to begin with. If the landlord can't collect rents and the house is declining in value, the landlord is in trouble. One can see how the landlord is running the same course as those in the category of trying to own their own home.
One can tie in old retail and office properties, and in some cases industrial properties, in to the same problem of landlord not keeping up on maintenance. Remember the JcPenny's earlier in this blog and the Big R? Well the roofs leaked in both buildings. Nice way to run a retail business right? The factories as well are in disrepair. The problem throughout is not only the shear number and shear over valuation of the real estate properties, but unless the property was owner occupied the UTILITY of the buildings are declining. More on Utility of a building later...
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