Sunday, October 23, 2011

Choices.....

Most people have no idea that economics is the study of choices.  Simply put, people's choices are guided by incentives.  When there is no incentive, growth disappears.  Worst of all, disincentive causes an economy to shrink on the margin.  This triggers pain for citizens and often incentivizes leaders to pursue more stringent and extreme measures as power threatens to slip from their control.

Taking this line of thought into consideration it is no surprise that the US commercial property market is in complete disarray.  During a cycle of easy credit, low rate short term loans were modeled with optimistic growth assumptions in order to justify a greater number of projects than would normally be needed.  Today we are left with a dramatic number of overpriced loans maturing.  Creditors are facing the reality that the income assumptions used are no longer accurate.

Lets have a look at this example noticed on a recent trip to Miami Beach.
This high-rise, beach-front building is overloaded with condos that were sold at the peak of the credit boom.  Most of the building is in foreclosure and the units must be auctioned or sold at a loss which takes time. The bottom floor of the structure is composed of retail space.  Starbucks is the anchor tenant but half of the space remains vacant.

Retail space remains vacant for only one reason; the price per square foot is too high.  In defense of this landlord, he would probably explain that due to the cost of construction and expenses associated with the building he can not budge on his asking rent.  He is telling the truth but the reason for this can be traced back to the local government not the developer.

These days the cost of cement and labor are in line with expected reality.  Where developers struggle is the overwhelming burden of insane regulation.  The American's With Disabilities Act required this particular developer to install a wheelchair lift to provide handicap patrons access to the shops.
The cost of this lift effects the overall cost of the structure and in turn increases the per square foot rental rate.  This is only one example of the excessive number of useless requirements that prevent productive use of assets today in America.  The citizens have asked for this level of regulation but seem to be unwilling or unable to support the increased operating costs associated with it.

Everything comes back to basic economic choices.  While the citizens turn to government for more regulation as an answer to every problem they should not be surprised that commerce continues to grind to a halt.  What we are left with is handicap accessible, lead free, eco-friendly, OSHA approved, code compliant buildings with no tenants.  

1 comment:

Darren said...

Love the blog (and great images, btw). If this were in say, Austin, ok. But Miami's problems, and I imagine the problems with this renting or selling in this condo, can't be traced back to chair lifts. What we had down there (and throughout the foreclosure hotbeds) was a game of hot potato that ran out of "greater fools."