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Wall Street Journal Letter...

�After the subprime meltdown, commercial is next�

By: Joseph R. Bonora, CEO

Joseph Scott Financial

March 14, 2007

�Those who do not remember their past are condemned to repeat their mistakes.� There is no other quote more relevant to cyclical markets, such as real estate, than this. It seems as if we are gluttons for punishment when it comes to hot markets and the quick money that they produce. Why is it that we cannot look at our pasts and recognize the bad decisions we made, in an effort to avoid making those same mistakes again?

I remember writing an article back in early 2005, right at the height of the real estate boom, comparing the hot market to that of the tech stock boom of the late 90's. It was eerily similar, with all of the same signs and red flags we saw right before the bubble burst happening again. From the conversations I heard in the grocery store line about hot �tips� and fast money being made, to the teachers, garbage men and other hard-working �9 to 5'ers� quitting their jobs to get in on the action.

My comparison, as it turns out, wasn't too far off. The residential real estate market is now experiencing the equivalent of the stock market meltdown of 2000. Sellers, many of them novice or first-time investors, are panicking, trying to dump properties or simply letting them go into foreclosure for the banks to deal with. �Professional� real estate investors, much like the day traders of the late 90's, are going back to their day jobs, and the late night infomercials are now changing their pitch from real estate to FOREX and day-trading strategies again.

So here we are, with the word �subprime� on the cover of every publication and news headline, and everyone asking �what's next?� Look no further than commercial real estate. While everyone's attention is turned to the residential market's woes, the commercial real estate market is experiencing the same irrational exuberance that tech stocks and residential real estate did. The word �speculation� is now creeping into conversations regarding office and retail space, and Cap Rates are falling below money market rates in some areas. Additionally, lenders are tripping over themselves to provide high-leverage loans, with mezzanine lenders stepping in where the buyers' equity used to be. And, much like the residential loans, commercial loans are being packaged and sold as commercial mortgage-backed securities (CMBS) and collateralized debt obligations (CDO), allowing lenders to loosen standards as hedge funds, investment banks and foreign investors gobble up higher risk loans in search for higher yields. Sound familiar? Couple these factors with the influx of inexperienced investors and you have a recipe for a serious correction.

Is there still time to avoid this fate? Maybe not, but there is time to make the affects of the correction less severe than what we are experiencing now in the residential real estate markets, and have experienced in the past in the stock market. If we do a little more due diligence and pay more attention to the past, the hangover could be less painful for us tomorrow. Cheers.