Global Recession

What follows is a brief synopsis of my assessment of current market conditions and how I see a way forward.

Global Market Slowdown

There is no corner of the globe that hasn't been touched by the recession. In all likelihood this pervasive financial malaise will be categorized as a depression by history, but not until the current crop of politicians have gone into retirement. There are too many failed projects on the books for banks to release capital for new development. The cycle has turned from property back to commodities and will follow the well worn path through equities before again returning to property. This is leading to slowdowns of existing projects, stoppages of new projects, and scope reductions across the board. 

Civil Unrest

Amidst this economic uncertainty, with the Euro on the verge of collapse and the US Dollar losing its status as the reserve currency, billions of people  throughout the world remain stuck in poor living and working conditions. There is a pent up demand that the current supply is not adequately fulfilling. These substandard conditions have led to protests in various parts of the world causing political unrest exacerbating the economic crisis. Prudent developers are rightfully reticent to build anything under those circumstances.

Losing Value

While banks are reluctant to lend, private equity funds have been sitting on the sidelines with billions of dollars that need to be put to work. There are partially complete developments that lay empty, depreciating wildly, and are missing key components that prevent them from fulfilling their original visions. Investors are pulling out and banks are left holding the bag. Furthermore, most of these projects have incurred massive cost overruns and cannot be completed profitably. Capital may be available for the right projects, but these projects aren't right. For many developers and banks holding these underperforming and failed properties it is far better to hold out and hope for a turnaround or bailout instead of creating new projects that address the current problems by providing for the unmet demand. These selfsame groups are also in a position to stifle new development by retaining their approvals and commitments to existing capacity of utilities making it cost prohibitive for competitors to gain a foothold.

Opportunity

Despite the current dire circumstances there is still tremendous opportunity. How can it be that there is such demand in the world, massive labor forces, sophisticated procurement systems, and yet there is a tremendous need that cannot be provided for profitably? That is a situation that cannot stand. The world faces a multifaceted problem that only a holistic solution will solve. The present model of delivery for consultant services does not directly address these issues nor does it provide solutions to the problems vexing developers and financiers. Whichever firm can properly identify and resolve these problems will lead the way out of the current downturn.

Identifying the Problem

Pundits from across the globe have chimed in with their assessment. Some have blamed the audacity of the projects and their outrageous expense leading to developers pricing themselves out of their own market. Some have blamed the financial markets for being too liberal before and too conservative today. Some have even blamed the Mayan calendar. But what is the common denominator that all these problems share? Of all the ills that can be blamed few people can see beyond the symptoms and diagnose the disease. The root cause that will lead to slowdowns, stoppages, and scope reductions, quite simply, is time to market.

The need for better housing for the blue collar workers is immediate. Any solution that takes too long to deliver completed units will be too late to abate the protests. With the current beating of war drums it only seems prudent to wait until things come to a head before proceeding with construction.

Many cities have sprouted from nothing in the last ten years, yet it was ten years before they were habitable. There was plenty of activity during that decade, but there was no life there. No families could settle in, no businesses could take root, and they became places where construction companies built projects but people couldn't build a life. They missed their market.

Many large scale projects have complex infrastructure that needs to be constructed before the first buildings can start generating revenue to pay for it all. Patient capital can be found, but not for a depreciating asset. How fast can these projects be converted from money pits into revenue generating success stories?

Chicken v. Egg

There is a need that must be met within a finite time frame yet the time frame allotted does not allow for the satisfaction of that need at the scale required. 

Either the need goes unmet or the timeframe is too long, both of which lead to crisis. There are various ways forward, but they all boil down to two scenarios:

• Wait for the capital markets to free up and go back to business as usual.
• Cut a new path that solves the current problems and turns failed projects into successes.

The first is not only unlikely, but inadvisable in that if another firm solves the second scenario they will obviate a business as usual recovery. I've solved similar problems before by reworking the service delivery model of several architectural and planning practices. Their previous model was production oriented and was optimized based on a supply chain analysis. They were concerned most about producing enough to meet the demand. My approach is to do a demand chain analysis that revises the content of deliverables based on what the identified need is and by when it is needed. 

It's time to face facts and solve the problem with which we're faced. Yet what I see being proposed tends towards the sociopathic nightmares you'll find at MoMA's Foreclosed : Rehousing the American Dream. Instead of correcting course it appears they are stuck on stupid.

Posted via email from Kenneth Hitchens