Calling a Bottom

I work in the architecture industry and we are feeling the credit crisis probably a little harder than everyone else.  My firm steered clear of condos and single family homes, mainly sticking with apartments, retail, and student housing.  We avoided the end of the housing bubble, but we are stuck in the middle of the lack of lending.  Right now, nothing is being built and nothing is on the boards.  This is because developers, from the most aggressive to the most conservative, cannot get funding for their projects.  They have the land and they have the vision, but they can’t get the funds to even start the process.

Today, my boss went to a presentation on the emerging trends for 2009, and the story was that the economy would not get better until 2011 at the earliest.  According to the presenters, 2009 would just keep getting worse, 2010 would be volatile, but more on the down side.  Then in 2011, we would start to bottom out and maybe by the end of that year we would start to see building again.

Talk about gloom and doom!  To me, this is just as crazy as the NASDAQ 20,000 calls during the dot-com boom, the ‘15% a year forever’ real estate pumpers, and the $500 oil predictions from earlier this year.  Those signs told those who were really paying attention that things had gotten out of hand.  The rise of the stocks during dot-com days and the rise of commodities (especially oil) earlier this year did not follow any fundamentals.

It was the result of everyone piling on, trying to make a buck.  And with that piling on came all the cheerleaders.  I think Peter Lynch said that when the checker at the grocery store is giving you stock tips, you know it’s time to get out.  On the other hand, when all of the experts in the industry are calling for three more years of pain, it’s probably time to get in.

There is a lot of money to be made right now out there.  Not just in construction and architecture and engineering either, but that’s where I’m focusing.  We have clients trying to build retail centers in areas that have only old, run-down malls.  Others are trying to build boutique hotels.  Some want to build senior housing or low income apartments.  These are projects that people will use, no matter what.  It is not the viability of the project that is driving decisions right now.  It is fear and a loss of confidence in the system.

All it’s going to take though, is one firm or lender to realize that if they lend out money and just sit back and take the returns on it, they are going to make a killing.  In the current state, no one is going to buy a loan that is packaged and resold.  But there has to be some lenders out there that will just sit back and collect interest for the next 10 years.

That is the big shift that is coming.  Lenders are going to have to hold the loans they make.  They won’t be able to resell it before the ink is dry, and they will have to really pay attention to their standards to make sure they are making loans to the right people.  During the last few years of easy and cheap credit, banks were just making loans and selling them to Wall Street right away.  They didn’t have to follow any standards because speculators were buying them up, no questions asked.

So, right here, right now, on December 3, 2008, I am calling the bottom in the architecture industry.  We’ve gone way past fundamentals and pro-formas and are being driven by fear right now.  I might be off by a few months, but I believe that someone is going to take that first step and start lending again.  And once someone tests the water and doesn’t get eaten by sharks, more and more will jump in.


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