The Great Depression Ahead

I had lunch last week with Harry Dent, the Harvard MBA economist and NY Times bestselling author, to discuss the impact that the age shift of the population will have on commercial real estate. For those of you not familiar with Harry’s work, he’s written a number of books including The Great Boom Ahead in 1993, The Roaring 2000′s in 1999, and The Next Great Bubble Boom in 2004. Each of these books detailed well in advance the enormous gains in both stock and real estate markets that we experienced and their eventual collapse. While predicting the confluence of so many forces on the economy is not an exact science, Harry nailed the overall concepts and general timing of both the run up and downfall of these markets. Unfortunately for the U.S. economy, the title of his latest book, The Great Depression Ahead, gives away a bit of the plot of what is in store for us.

I’ll admit that I have always been skeptical of any economist’s ability to accurately forecast the future and still have a hard time accepting some of the cycles that many insist are as certain and predictable as the four seasons. Harry’s primary theory, however, is based solidly on population numbers and more importantly, the shift in the age of that population. By looking at when people enter the workforce, marry, have kids, and retire, you can very accurately determine when they are will buy cars, houses, kid’s clothing, pay for college, and buy second homes. Any one individual might be hard to predict. Tens of millions of people as a group are as predictable as the results of flipping a coin a thousand times.

Harry’s firm, HS Dent Investment Management, studies these habits to the finest detail. They can actually tell you statistically the percent of the population that purchases potato chips and hundreds of other expenditures by age. Drop that data onto the bell curve of the Baby Boomer population (hint: we are on the declining side now) and unfortunately we are generally headed for a 12-14 year sag until the Echo Boomer population reaches the age where they’ll have some real money to spend.

So what does this have to do with commercial real estate? Plenty. The overall decline in demand for houses, cars, and potato chips will require less distribution space and less workers to manage the production and flow of those products. In addition, there will be more workers leaving the workforce for retirement than entering it, so demand for office space will be reduced. Finally, shifting migration between states will pick up the slack in some areas while causing severe vacancy in others.  It will be a good decade to be a commercial tenant, which is very good news for most of my clients.

If you are an office or industrial space user, understanding this long term shift and creating a strategic plan to capitalize on falling rental rates is critical. There will be significant amounts of landlord ownership change in the next few years, and not all of it will be voluntary. Make sure that your lease documents address all of the understandings that you have with your landlord, and that any third party coming in to interpret your rights will be able to clearly understand the responsibilities of each party. Having a right to self-correct any defaults in performance of the landlord might come in handy as well.

There will be many changes besides rate that will benefit tenants. Watch for automatic escalators to fall or be diminished as property values continue to decline. Tenants with cash for their own improvements will be able to drive even harder bargains. Any company, large or small, with a product or business model experiencing growth will be the 500 lb. gorilla.

You need to have a strategic plan for your business real estate.  Harry’s book, The Great Depression Ahead, is a good first step to understanding the changes that will effect your business in the near future, and is an interesting read. Getting the timing right on your lease can give you an advantage over your competition. And as a commercial tenant looking at space occupancy rates, Less is More.