Yesterday I had a meeting with an analyst from PNC bank, which is based in Pittsburgh.
PNC recently acquired National City Bank, which is based in Ohio.
PNC has financing for several buildings in the Ridge Property Trust (I do not remember if they originally offered the financing or assumed it from National City Bank, I am looking into that now).
He was out here to check the status of several speculative industrial buildings and some completed projects in Perris and Moreno Valley.
PNC is trying to decide if they should require Ridge to pay them more money. This is part of the de-leveraging that we all have been hearing about.
Obviously, the assumptions in the pro formas that said all this speculative space was a good idea has been proved false. Rental and sales price depreciation has made fools of us all. Few people saw this fallout coming. And if they did, nobody wanted to listen.
Almost overnight, these loans have became a lot riskier (especially if these were not your loans in the first place but were part of the bank you just bought).
The analyst is trying to feel out the market, visiting the sites, meeting the people. Things are not as nice and pretty in real life as they are on paper and there is no substitute for boots on the ground. It is getting harder and harder to quantify anything, especially when everything is changing and is changing in ugly ways.
Here is the condensed version of my argument:
2009 will not be a better year than 2008 in absolute terms. But, in relative terms, the rate at which things fall apart will be less. We have not reached the bottom, this is not the recovery period. But we are closer to what could be called a "bottom".
At face value, this is complete and utter BS, simply because I seem to be stating the obvious. A picture of the business cycle will illustrate these facts. See below:
The peak already occurred, and it occurred in December of 2007, when the recession was officially realized. Looking at the chart, we are now nearer to the trough (the bottom) than in 2008, so I am just stating the obvious.
I really hate that though. I disagree when people say that this recession will be over by such and such a date. They do not know, and their guess is just as good as anybody. It is a moving target, and it is easy to adjust as new information arrives.
What I meant to say is that, people are adjusting to the current situation. Commercials on TV are constantly advertising lower prices and are news shows are spouting on and on about these "hard economic times", simply because everyone can now agree that things are bad.
This was not the case in 2008, when it may or may not have been true and the uncomfortable surprises we only starting to occur.
In 2009, we have adjusted to the "mental recession". Our minds are no longer economically out of shape. The choices people are making now are more risk adverse and are grounded in fear.
Yesterday, borrowing money made you richer than saving it. That was true then, and only painfully ludicrous now. But it made sense then, people did it, that was the old economic reality, and the winners and losers of that game are being sorted out.
People realize they are playing a new game and are adjusting to the new rules. That is why 2009 will be better than 2008, in my opinion.
Case and point, construction activity is down severely in the Inland Empire. Rental rates are declining and vacancy rates are going up. People will adapt at a faster pace, simply because it is harder to pretend that these things are not happening.
I am not sure if this ray of sunshine was inspiring to the PNC analyst. His portfolio was grounded in the old rules, and would probably need some kind of adjustment.
Had he still been under the 2008 mindset, he would never have had to leave Pittsburgh. He could see it all on paper and would never have to personally visit the flaming wreckage that is currently the East Inland Empire industrial market.
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