Blogging Break

Economic Crisis Explained

For a brief explanation of where this crisis came from, watch the first 10 minutes of this video from the Economic Department of Princeton University.

You will see just how "fragile" the economic structure of the failed companies are.

It is almost the corporate equivalent of living off your credit cards and using one card to pay for another cards monthly payment, using the proceeds to flip paper and hopefully make enough money for profit and paying next months payments.

This is of particular importance to the real estate market for pricing support, this type of short term credit which allowed properties to be flipped has become severely contracted, which will hurt prices (correct prices) for properties.

More than ever, debt to cash flow ratios will decide who survives in real estate.

You should be doing all that you can to improve cash flows.

BOMA Market & The Banking Crisis - What's Ahead

THE RACE FOR TENANTS

The fallout from the banking crisis is coming. For the BOMA market in the GTA it is time to take action in preparation for the consequences for owners and managers.

Quality tenants and vacancy rates are going to be an issue on profitability for the next several years.

Recent & Expected Events in the BOMA Market

• Several malls in multi-use complexes in the U.S. have seen bankruptcies by major anchor tenants. Larger retailers and food chains have simply closed up.
• Financing/refinancing for current and planned projects just got a lot tougher to get, and more expensive putting pressure on profit margins when rents will be softening.
• Insurance underwriting dollars just became more scarce and expensive which could also lead to financing difficulties (make yourself the best risk!)
  
• Consolidation in the banking and insurance industry will inevitably lead to those businesses rethinking their space and facility strategies to reduce costs. This will have a major effect in the class "A" buildings as expansion plans are stalled, reductions or terminations of leases are on the table.
  
• In the GTA new building stock is coming on line that will drive the vacancy rate from it's current rate of 3.9% to over 12%
• Renewing tenants are going to be looking for better deals, and are going to be offered better deals by the competition.

Now is a good time to start shoring up your value proposition, looking at your costs, your vendors, and your facilities for how you can attract or retain quality tenants.

Remember the Chinese word for crisis, is made up of two words......Danger & Opportunity, this will be a time for smart operators and owners to profit.

THE OIL BUBBLE - THE RISK ASSESSMENT

We are seeing dramatic changes in the economy as a result of skyrocketing oil prices.

Airlines are grounding planes and laying off workers. GM is closing truck plants and laying off thousands of workers.

Car manufacturers are setting up alliances to spend huge amounts of capital to build battery plants.

Companies who use a lot of fuel are having their budgets ripped from projections they have made.

How is your company managing the risk to your business from the oil bubble? (more on the bubble later)

Are you asking the right questions of all your department heads?

1) How does this affect us?
2) How does this affect our customers?
3) What are our plans to mitigate this risk?

For Commercial Building owners and managers, where is our property located, how far do people have to commute to get to our building? If the price of oil stays high does our building become more unattractive as a place to lease? How vulnerable are our tenants (especially anchor tenants ) to the price of oil, how does or could this affect our financing, our property value, our unit holders?

Should you renew key tenants quickly? Talk to local transit about getting a better connection to your building?

This is an example of some of the questions for one industry.

But, back to the bubble. According to George Soros, a man who has made over a billion dollars in one day by betting on bubbles, he predicts that oil is in a bubble, it could and likely will cause a recession in both North America and the United Kingdom, this will cause oil prices to plummet as demand and the ability to pay will no longer be there.

(click on the title to this entry to see the article on Soro's predictions)

So what happens to the auto industry now if all of a sudden it is cheap to run a big truck on gas, and suddenly the pricey little hybrid is no longer economical? You have closed your truck plants and sank millions into little cars! You have to be careful when assessing risk, you could be setting yourself up for bigger problems if you guess wrong, or take a knee-jerk reaction to a threat.

You need to look at both possibilities for your business.

Business Continuity in Multi-tenanted Buildings

If you own, manage or are a tenant in a commercial building

PAY ATTENTION!

No where is there more dramatic opportunity for loss of revenues then in a commercial office building that has not prepared for business interruption.

Each situation is unique in its risks for the owner, and the tenant, each property its own profile, the answer lies in evaluating by the right questions and planning for the right contingencies, either through mitigating the risk, or outsourcing it to a 3rd party through proper insurance coverage.

For the Owner/Manger

• insurance risk, tenants may not disclose or have sufficient insurance for repairs to tenants on the adjoining floors or units, you will be named
• asset preservation - from the loss of the structure, to interruption from major transportation routes, insufficient insurance
• leasing - new tenants especially U.S. based companies require the base building to have a business continuity and disaster recovery plan
• tenant retention, in a tight market it is a value added service to tenants that you need to provide for yourself and the tenants, but by insuring they have a plan, you reduce your risks as well
• maximizing revenue - if a building or a major tenant is out of commission long enough the tenant will miss rent, or go bankrupt. Studies have shown many businesses that have to close for 3 weeks, never recover. Their customers go to number 2, or insurance or the banks will not provide the funds to recover.

For the Tenant or Prospective Tenant

• you rely on the base building for the necessities, from communications (how many trunk lines into your building, what if one is cut by a back hoe, or as I.T. professionals call them cable seeking devices), water, hydro, elevators, parking
• your insurance coverage must protect you from other tenants actions and activities
• never is the opportunity greater for events out of your control, to control your destiny, prepare by having a plan yourself, and integrating it with your landlord

For more information contact ross.mclean@rossmcleansecurity.com

Life, Death, Nuclear Power & Business Continuity

How are these 4 connected?

Recently there has been an international shortage of nuclear isotopes used for many tests that are used in diagnosing and operating on many diseases, cancer amongst the leading disease.

The international health care industry has relied on a single source for the vast majority of these isotopes. A Canadian nuclear facility.

There was recently a world wide shortage due to the shut down of the facility, and it seems no-one was prepared or understood the linkages and the effects of the interruption of the business.

It's a complicated story, but simply put the players are the ownership group of the facility, the regulatory body to ensure nuclear safety (not a small responsibility!), the government and the health care industry.

The regulator said upgrades were necessary years ago to ensure safe operation, the facility said it was "working" on implementing the upgrades - they apparently never did.

The regulator shut them down for non-compliance, the flow of the isotopes stopped and everyone had a Public Relations nightmare on their hands.

The government was embarrassed, it stepped in and over ruled the regulator, and allowed the facility to restart without the safety upgrades, saying it knew it would be safe. (Interesting to know how they would know and guarantee that, or were they just taking a flyer that nothing would go wrong!).

The reactor fired up and started producing the isotopes.

No one saw the linkage of all these events prior to them happening, or at least no one acted on the knowledge, there was no plan.

What you get is a knee jerk reaction, and potentially compromised nuclear safety with a weakened regulator.

A proper review would have revealed all of these problems in advance and the whole mess could have been averted.