Why should commercial real estate professionals in the Pacific Northwest be concerned about what’s going on in Japan? 

Answer: Because the Japanese are determined to share their economic problems with the rest of the world.  In the years ahead, Japan’s economic problems will adversely impact both our economy and our investments.  How U.S. leaders respond wiil determine how much fallout there will be from Japan’s risky economic strategy.   

But let’s back up a moment and review what’s going on. 

·        Japan has suffered through 24 years of economic stagnation.  As a result tax revenues have been declining during this time period.  Revenues are now down to where they were in 1985.  In contrast U.S. tax revenues adjusted for inflation are more than double where they were in 1985. 

·        The declining tax revenues have resulted in a staggering amount of sovereign debt.  Japan’s current debt-to-GDP ratio is 245%; in contrast the U.S. debt-to-GDP ratio, which is gi-normous, is 105%.

·        Over the next 17 years Japan’s working age population will shrink by 17% from 81.7 million to 67.7 million.  With fewer people working, the burden of servicing the public-sector debt will be higher for each individual worker. 

·        During this same time period retired workers will increase from 23 per cent of the population to 32 percent putting an added strain on the Japanese entitlement programs. 

And we thought the economic situation in the U.S. was bad! 

·        A currency war is likely to result.  By reducing the value of their currency Japanese exports become more competitive.  Just in the past year the yen has depreciated 20% when compared to the dollar.  That’s good news for Japan’s export market.  However do you think South Korea or China are going to idly stand by and watch their export market to the U.S. slump because their products are not as competitive as they once were to their Japanese competition?  They too will be forced to respond by doing something similar.   

·        Seeds have been sown that likely will cause the eventual collapse of the Japanese bond market.  When it becomes apparent that a government is financing itself mostly with freshly printed money, institutional holders of bonds begin to lose confidence in government bonds.  When this occurs bond investors at the very least stop buying bonds.  In order to avoid a collapse in the government bond market the Japanese central bank will have to raise bond yields which they can’t afford to do.  Currently 20% of the Japan’s budget is allocated to pay the interest on their debt.  If interest rates on Japanese bonds were to rise to a mere 2.2%, 80% of tax revenues would go just to pay the interest on their debt.  This is an untenable situation.    

From time to time I get a phone call from a residential mortgage broker trying to place a commercial real estate loan through me. I try my best to be cordial over the phone but deep down I know 30 seconds into the conversation this isn’t going to end well. You see I’ve never closed a loan that a residential mortgage broker has presented to me, and for good reason. The way a residential loan is underwritten and processed is completely different than how it’s done for a commercial real estate loan.

In an effort to be helpful, in a tough love sort of way, I want to share my comments to the residential mortgage broker who wants to dabble occasionally in commercial lending.

• You’ve stumbled upon a client who unwittingly has asked you for a commercial real estate loan. You think to yourself, “How hard could this be?” You quickly calculate the commission you’ll receive and with the vision of receiving the single largest commission in your career you say to your client with a straight face, “Sure I can find you a loan.”
• If you had your client’s best interest in mind you would refer him to an experienced commercial mortgage broker and then get the heck out of the way. Most commercial mortgage brokers would gladly give you a 20% referral fee for just giving them the name and telephone number of your client. Instead you want to share equally in the fee and more importantly you want to control all access to your client.
• What you don’t realize is that you have no understanding of how to:
  • identify the issues that will either make or break this loan opportunity
  • identify the mitigating factors that will help overcome these issues
  • prepare a preliminary loan package that will best represent your client’s interest
  • identify which lenders would be most interested in this loan opportunity
  • contact lenders in such a way that they won’t quickly hang up on you once they realize you’re a lightweight (a dead give away is when you divulge your client’s FICO score to the lender as if that is the most important bit of information to determine whether or not to approve a loan)
• When the commercial mortgage broker decides to pass on your loan opportunity, please don’t have the audacity to ask them which lender you should go to. We don’t divulge our lending sources any more than an accomplished chef would divulge the secret ingredient in his award winning recipe.

I know no example of anyone who has successfully financed both home loans and commercial real estate loans. Not one. If you think you can dabble in commercial real estate lending, don’t even start. It’s all in or don’t even bother.

But if you are seriously considering becoming a commercial mortgage broker then that’s a different story all together. I have these suggestions:

• Realize that the average commercial mortgage broker is his late 50s, early 60s and has 25 or more years in the business. They will eat you alive and enjoy doing so if you come off as a newbie.
• Find yourself a mentor who can help train you in the commercial mortgage business. The best way is to work as an analyst for a few years. The pay is not great but it’s the best way to learn the business.
• Educate yourself as quickly as you can. The CCIM Institute has an excellent educational program.
• Burn your bridges. Once you’ve committed to becoming a commercial mortgage broker don’t look back. Don’t waver in your decision. Those who waffle fail.

Commercial real estate is a very cyclical business. It has its joyous highs and its very deep lows. There are no statistics to back this up but I would guess that there are 1/3^rd fewer commercial mortgage brokers in the Portland area than prior to the Great Recession. This business can be brutal at times but if you can make it in this business, it is both a financially and emotionally rewarding career.

So do you really want to get into this business?

Over the past Christmas holiday I wrote a blog post titled, “Lessons from My Father.” If you didn’t read it I would encourage you to do so. My father was the quintessential Ward Cleaver of the 1950s TV show, “Leave it to Beaver.” Since last Sunday was Mother’s Day I thought it appropriate to write about the lessons I’ve learned from Mom.

My mother, who passed away in 1994, was no June Cleaver. Far from it. She had very little maternal instinct and she was quite scary to my friends as she barely tolerated kids in general. Her motto: “Kids should be seen, not heard.” In reality, she was harmless but my friends didn’t know that. So what lessons did I learn from my mother? A lot. Here are three:

• When confronted by a bully don’t back down. While in grade school a kid who was a couple of years older than me began bullying me. I told Mom about it and she told me to fight back. “Don’t take his crap” (her words, not mine). So the next time I went toe to toe with the bully and because I didn’t take his crap he started picking on someone else who would. That lesson has served me well over the years. I have had several bosses and clients who have been bullies. They purposely tried to intimidate, not only me, but everyone around them. I have learned the best way to approach them is not to back down. Tell them what they need to hear and even if they don’t follow your counsel, they grudgingly respect you. The problem with that approach is in business you don’t advance up the corporate ladder that way. Ain’t gonna happen. There’s a reason why I’m self-employed. J

• Life is not fair so get over it. “Quit your bellyaching” was a favorite saying of hers. Mom was not a nurturer. She was in short supply of sympathy and empathy. Having come through the Great Depression, Mom had first hand experience with real deprivation, not the trivial things I was whining about. I remember early on how much more stoic I was than my friends when something went wrong. They would be blubbering feeling sorry for themselves and I would be rolling my eyes thinking, “suck it up.” In reality life is not fair. We all know that but the sooner we come to that realization, the sooner we learn to be thankful for those many blessings we do have. The alternative is to become bitter at every slight, real or imagined, that happens to us throughout the day.

• Diplomacy is for sissies. My mom was an excellent judge of character. And although she was often too critical of the faults of others she really was right on her assessment of the situation or the person. She did not “Suffer fools gladly.” She had no problem telling people what she was thinking with little consideration for their feelings. Unfortunately I’m not much better in this regard. I too am known for being brutally honest with people. I really don’t know any other way to be. It would be so much easier if I had the ability to tell those little white lies that smooth over difficult situations but unfortunately that’s not who I am. How many times in a week do I get a telephone call from a prospect who needs to hear that his property, as it stands now, is not financeable? He has called more people than he can count but none have told him the truth. Instead, to get him off the phone quickly, they refer him to another lender or mortgage broker and he eventually ends up calling me, only to hear the honest truth no one else was willing to say.

I learned many lessons from my mother and for good or ill she has influenced me much more than my kind-hearted, well-liked father. She was seriously flawed in many ways but in hindsight I am so very grateful that she toughened me up to take on life’s challenges head on. And if she were alive today, I would sincerely thank her for that. And though my mom was a difficult person to be around it was obvious she loved her family. She just showed it differently. So do I love my mom? You bet, but as the saying goes, “It’s complicated.”