"Value" is the Question

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Today in commercial real estate we see a lack of clarity regarding "value". Not only in commercial real estate investing, but also in a closely related enterprise, commercial real estate leasing, we find frequent discrepancy, and sometimes wide variations of thought, as to what represents value. For more than a decade now investors and managers have been increasingly finding themselves in a world that has been significantly shaken up. Decisions involving relatively long-term commitments have become complicated because business people struggle with the question of what is value.

In past business cycles we believe it was easier to make those decisions because, as we had learned in business school, those periods of boom and bust ran about 4 years. In our world today, that model has been challenged. Whereas in earlier days, forecasting for future growth, and thus an organization's commitment of its capital and credit, was undertaken with more aplomb, today's outlook is partly cloudy with a chance of storms.

So it has become demonstrably more comfortable for decision makers to sit on those funds, to not make decisions, understandably, to not take risk. This has happened alongside two very important currents, which have been in motion for a long time. Those currents are:

(1) Inflation in the U.S. continues to march forward, although at a rate that is not easy to ascertain, regardless of how one sees the efforts of the U.S. Bureau of Labor Statistics. Their rate of annual inflation for 2011 was reported at 2.9% (CPI-U). Thus far in 2012 the rate has fluctuated on a monthly basis from .3% to .8% (annual of 3.6 to 9.6).

(2) The second current eroding the purchasing power of the dollar is our rising level of national debt, and the attendant loss of value versus other developed countries' currencies. We do live in a global village, and since 2001 U.S. dollars have been declining individually against the Chinese Yuan, Swiss Franc, Japanese Yen, Australian and Canadian Dollars, and others. Along the way there have been cessations of these trends, but the overall pattern has been down. The trend versus the Euro has recently reversed as the debt problems of Greece, and to a lesser extent Portugal, Spain and Italy, have had a dramatic effect on the EU. When your neighbor's boat is sinking more slowly than your own, it's overly tempting to make a move for his; and it appears that until the problems of the PIGS countries are resolved, or they leave the EU, there could be a continuing preference for the USD versus the EUR. However, to feel safe in a slight improvement in the position of dollars versus Euros would be, in our opinion, foolish. All that's needed to help a businessperson decide on the advisability of sitting on U.S. dollars is to pull up a 10-year chart of the U.S. Dollar Index. Thus, we believe that alternatively, dollars should generally reside in adjustable, flexible assets such as income-producing real estate, hard assets, or be invested in the businesses of Americans, serving Americans.

Taking risks has always been a part of the business equation. The experienced and capable lender, who by nature is primarily passive, has throughout time recognized this component of his economic life and has priced the use of his money accordingly. His proposition at any given point is perhaps the best indicator of what value is, or should be. It is up to entrepreneurs and company builders to wisely underwrite their efforts, and then, based on their prudent assessment, step out onto the street and bet on themselves. Failure to do so only leads to a stagnation and decay that is simply a slower version of the failure feared.

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