Having moved into 2010, lets pause and look back for just a moment in our rearview mirror to determine what we can learn from 2009.

A general consensus has developed that the Economic Tsunami that hit us last fall, generated from an extended credit expansion, fueled both by government and private industry, has receded. We have begun to rebuild the foundation for growth, but credit and lending policies will be much more conservative going forward.

Even with growth on the horizon, we will still be rocked by continuing ripples. With several local business closings over the past couple of weeks, we are reminded of Warren Buffet’s adage, ” You don’t know who is swimming naked until the tide goes out”. Growth may return, but many companies have already become too weakened to survive. Don’t be surprised to see additional headlines on the Banking industry, and even local banks in early 2010.

Our local economy cannot rely on the housing construction industry or consumer spending levels to return to levels seen in the last decade. Steven Roach, with Morgan Stanley has stated that American consumption levels had risen to 72% of income, debt had increased to 133% from 90% of personal income while savings had dropped to zero or even below during the years 1995-2007. Historic levels for consumption the previous 40 years were 67%. Americans will be more discerning with their expandable dollars. Take this to mean that developments centered around retail, hotel and restaurants will face challenges in the upcoming years.

This sluggish growth environment should bode well for companies pursuing acquiring their own business property. Prices should remain stable for both land and existing properties, and the occasional very good deal will pop up. The ongoing climate of tight money with the lending communities should reinforce this price moderation.

We will see a steady diet of headlines about Commercial real estate issues over course of 2010, and beyond. The FDIC has begun laying the foundation for a process to allow reworking of loans as they come due, and that will help stage the process over a longer period of time. An in depth analysis off this situation is provided by Milton Ezrati, Senior economist with Lord Abbott funds, and forwarded to me by my friend Will Sappenfield of Edward Jones. There will be plenty of pain, but we will work through it. Going back to the S&L rises in the early nineties, it took nearly four years to work through all the issues and properties. Expect this one to have a similar time line.

Keep uppermost in our mind the specter of inflation on the horizon. While there are good purchasing opportunities in our market place, don’t be complacent. County and City governments have reduced staff in response to budget woes. The development or refurbishment process may still be lengthy, perhaps taking 18 months, which puts you well into 2011.

We referenced Mr. Buffet’s concerns on inflation in our January issue. This was reinforced by Dr. Alan Beaulieu, during his October 25 talk to the CREDC, and he made a startling clear prediction on inflation, as we get into mid 2011 to get as high as six percent for perhaps a year or longer. He stated a key strategy to combat inflation is to find ways to lock in costs for the long term. That can be key commodity costs, maintenance contracts or vendor agreements. We suggest you review your real estate and financing costs. For many small companies real estate can be the third or fourth largest expense on their P&L, yet it is one they seldom actively take a long term view on how to control. Reviewing your lease agreements, or the idea of
acquiring your own commercial property with a longer term fixed payment is something you should move up your priority list.

2009 was a year of rebuilding and repair. We’ll see more of that, slow growth spurred by new entrepreneurial activity, continued frustration from tight lending, but probably most important more opportunities for strong companies to move forward.