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 The following is only one data point, but it reflects not just our views but also our experience. Once, we were in a building that was great until the new owners "zombied" it. They borrowed the maximum and tried to force tenants out to get higher rents. They eliminated maintenance along with other services and eventually half the building got up and left within 90 days. We didn't sue even though all leases were broken, as there wasn't anything left in the their corporation. The building has been 50% empty for the last three years we have heard. The owners were foreign, with very little equity, and little interest in doing much management.

Our present owners, also foreign, bought the current building 18 months ago. A Berkshire Hathaway division left this month, emptying 10% of the building. During our lease negotiations, the present owners held firm on raising the rent (I assume to make up for a lost tenant). The new lease we just signed today is half what our existing cost is per square foot, in a better building and better location. Prospective "zombies" could be easily identified based on how they handled the negotiation. We were amazed how many wouldn't acknowledge existing market conditions. For our non-West Coast friends, our town of Pasadena is also the headquarters of IndyMac and their newly downsized mortgage servicing operation (total space about 1.5 million sq ft) with a third of that space across the street from us. We'd suggest not renewing your lease, if the building you are in was purchased during the 2003-2007 time frame.

There will be many zombie buildings which will not have excess cash flow for maintenance and services, and will be desperate for new loans over the next 24 months. Given the lack of financing we anticipate for commercial properties, these loans will be forced to extend at the upcoming maturity date — usually at a penalty interest rate. This dynamic may mean the current commercial real estate down-cycle may be longer than the 1990s. Then it was regionally concentrated, now it is global. California residential properties in the $300,000 price points are beginning to get multiple offers, as they can be FHA financed with 3% down. We are also seeing money going into partnerships to buy these in bulk from banks. That is a good sign that the low end appears to be stabilizing.

P.S. - Wyndam (hotels) was just lowered to "junk" rating by Moody's based on profit pressures, according to Dow Jones.


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