Ugh.  Round 2 is here, and I don’t feel recovered from round 1 yet.  I was just pulling my head out of the sand to hide from the residential real estate bubble when the news is full ofinformation on Dubai World.  The development arm of the city/state of Dubai is asking creditors for deferments on payments from its 65 billion some dollar in loan amounts.  Dubai has become the symbol of the commercial property boom/bust cycle of the double aughts.  Architecture and design - bordering on the phantasmic- all built with borrowed currency.  But Dubai is nearly half a world away.  And yet we will still feel the shocks.  Their situation may become, unfortunately, even more familiar to us as we move into 2010.

Our commercial property owners are facing similar problems as the state of Dubai is.  Granted  we may not have committed resources to building the tallest building in the world, but our overriding issues are similar.  High unemployment leads to stagnant business earnings, which leads to companies downsizing space, foregoing plans to build/lease new space, and simply exiting the marketplace.  Excess capacity created during times of easy credit are only adding the second edge to a very painful period in time.  I firmly believe that our commercial real estate sector is staring at a similar fate that has befallen Dubai - notes (and short term interest only loans) about to come due; vacancies and capacity at all time highs; unemployment lingering near the dangerous 10% mark nationally; banks unwilling to extend more credit to upside down or significantly leveraged owners; very few buyers willing to either purchase the property or able to come up with the necessary level of capital to secure financing.

I have discovered over the course of my life that I am an odd species of capitalist - an Optimistic Bear.  I believe in the strength of our economy and systems.  I believe recessions weed out poor performers and punish poor choices.  They also create opportunity and are a very necessary part of the business cycle.  I also believe that we are about to see yet more defaults and distressed commercial properties.  I am bearish on commercial (and residential) property and new construction right now but optimistic that unemployment will eventually ease  once credit fundamentals have reached a sustainable level.  But we will have to define a new normal for the aggregate, as the level of construction spending in recent history is, I believe, an anomoly and will skew the averages. I hope that I am wrong, but I strongly believe the situation in Dubai is the beginning of commercial woes in our own country and not the symbol of the end.

My team and I recently performed a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) on our company.  After a rather dismal 2009 in the construction world, it seemed like the timing couldn’t be better than now to get everyone together and discuss what we do well, what we could improve upon and what we perceive to be the big drivers of change in our industry.

What came up more often than I would have suspected was the relative lack of credit available to the homeowner and small business owner.  In years past, we often didn’t have much direct dealing with the bank beyond a schedule of values, a draw schedule and a milestone inspection here and there.  Now, I am an old-fashioned business person and don’t use debt much, but judging by the change in business climate, most folks that hire us do.  Therefore - the lack or availability of credit has a huge impact on my organization.  What happens on Wall Street obviously doesn’t just stay on Wall Street, but impacts Main Street in towns and cities all across the nation.  What we also came up surprised me and provided a “Duh” moment.  Those companies that are still around must be well-managed enterprises, and we should have no shame in seeking out assistance from them.

My business training taught me to use metrics to judge the cost/benefit of an acquisition and to determine the Net Present Value of cash flows.  I was taught that a good deal pays back quicker, and a bad deal doesn’t.  Fairly basic stuff.  What I wasn’t taught is what happens when lending freezes?  What happens when there is no capital available on which to analyze, spreadsheet to pieces and make business decisions from?

We are operating in an area that I certainly wasn’t trained to handle.  I wasn’t trained how to manage business finances when the ability to get short term loans ceases.  I wasn’t taught how to get customers when the value of their home has plummeted, in many cases to less than they owe on the property.  Nor was I taught how to make capital markets liquid again and dollars available to lend.  Instead, the School of Hard Knocks (HKU) is teaching me, and the trouble is one cannot drop out from HKU.  We can hire a tutor.  We can consult with fellow students.  We can’t, however, turn the pipes back on, or make our clients feel good about their future.

What we can do is stick to our fundamentals.  Sharpen our processes and garner as much efficiency as our companies can muster.  We can pay down as much debt as possible.  We can take heed when the banks stop running credit card commercials and instead run savings commercials.  We can look to the future, but that future is unclear, aside from energy efficient construction and more severe pressure on sales prices.  Those that have made it thus far and have remained in business are experts in their field.  Take them out to lunch.  Sit next to them at the next AGC or HBA meeting.  Pick their brain.  ”Borrow” their ideas.  Above all, imitate!  The companies that remain in business are fountains of useful information and data - don’t be afraid to use them as a resource.  My guess is that they have well developed processes.  Excellent communication skills.  First rate staffs.  Very little debt load or inventory.  They operate in the BASICS of good business, and we can all learn a thing or two from them.