Recessions have the powerful effect of accelerating shifts in technology to gain efficiency.  It is important to note the Federal Government and financial institutions are speeding up the adoption of standards for transferring electronic due diligence data in the quest to eliminate paper reporting and reduce error prone data duplication.  Driven by a business crisis, business leaders and software architects are meeting in committees, adopting electronic protocols, for structuring the transfer of real estate/facility information.  In the near future A&E Consulting Firms will be challenged to adopt transformational IT strategies to become integrate information providers.

A&E Consulting Firms have had little incentive, or tools, to streamline their work process.  From field surveys to reporting, many of the observation, data capture, analysis, and report generation techniques and process have changed little over the past 20 years.  The Federal government adoption of GASB 34 and a following executive order requiring all Facility Condition Reports to be delivered in a “data base format” have prompted creating IT architectural standards, such as Core Architecture Data Model (CADM), a government favored model designed to capture and transfer data following a standardized IT structure. 
 
New technology and software innovation are bringing a major disruptive software evolution to all industries, offering a genuine advantage of a new set of open source technologies to interconnect massive data transfers in live time, interrelating business practices across Client/Vendor domains.   New applications coupled with cloud computing can deliver powerful new business capabilities that can make substantial gains in productivity to warrant the cost and risk required for transformational change.   Being on the forefront of Enterprise 3.0 application development in the real estate / asset management industry, I have identified four key Enterprise 3.0 application components necessary to work interactively in the design of a successful due diligence Enterprise architecture model:

1. Content Publisher Application: Integrated data acquisition tools designed for the capture and conversion of a large volume of property data in a, “Content Publisher Application”, to develop structured data at the point of origin, making it immediately available for review by team members, and allow for information delivery across platforms, including RSS.  By developing structured information a company creates added value while decreasing acquisition costs. 
2. Centralized Data Store: Replacing document management with content management and interconnecting with other information stores allows for a "Google experience" where data is stored and discoverable based on secured permissions, allowing for self service data delivery as a service to clients which can be billed (SaaS), increasing revenues while decreasing costs of internal discovery, which are often grossly under estimated in the A&E industry.
3. Portfolio Project Management: Is where a group of current or proposed projects interact with management, business intelligence, and resources collaborate in real time to service the client.  The fundamental objective of the PPM process is to determine the optimal mix and sequencing of proposed projects to best achieve the organization's overall goals expressed in terms of hard economic measures while concurrently managing expected timelines, expenses and personnel schedules and the inter-dependencies with other projects in the portfolio.  At one firm I worked with there was a 40% increase in efficiency by implementing a PPM!
4. Enterprise communication: In a Enterprise 3.0 design communication is “social” and ubiquitous.  At any business core are person-to-person relationships, Enterprise 3.0 systems are designed to bridge all the channels of collaboration between people, either inside the organization or beyond its walls; videoconferencing, text messaging, email, VOIP phone services, web conferencing, allowing for employees to build the kinds of dynamic relationships around the natural interaction at work that individuals do already in social-networking sites. 

Software innovation is disruptive and Enterprise 3.0 is no different bringing both promise and risk.  It is a major investment at a cost today for creating benefits in the future.  The challenge of success is not in the technology, but in the internal ability to intelligently adopt and execute a long term IT reorganization plan backed with proper resources and the commitment of management to see it through.  My advice in the end: select the enterprise software architect that knows your business and the technology, not the promises of a consultant.   Remember: An enterprise system is only as good as the DESIGN.

The economic downturn is pushing the commercial real estate markets into a difficult period in this deepening recession.  Business bankruptcy are growing, a steady decline in commercial property yields make it difficult for many real estate groups to meet current debt-servicing commitments, creating a major problem for economic recovery. 

Recently Bernanke told the House Financial Services Committee that the commercial real estate borrowers are having difficulty refinancing their loans.  In an effort to shore up the market and the banks balance sheets, Bernanke is urging banks to help creditworthy borrowers refinance, while the central bank is trying to jumpstart the securitization market by accepting new and legacy commercial mortgage-backed bonds as collateral in its Term Asset-Backed Securities Loan Facility, or TALF. 

The banks get to hide their there troubled loans in a maneuver being called in financial circles "extend and pretend".   But do we risk repeating what happened in Japan’s economy which became paralyzed as banks failed to deal with their troubled real estate loans?  It is stunning after Timothy Geitner referred to the Japanese “lost decade” as what we would not do, that the U.S. banks are not cleaning up their books and are hoping real estate values rebound quickly.

Most commercial property loans are structured as balloon notes. Borrowers pay only interest for the first five or 10 years until the loans mature, and then the entire amount must be paid back.  The banks' willingness to extend loan maturities are hoping rental rates and building values return to levels seen during the peak of the real-estate market in 2007.  But what happens to the economy if it doesn’t?

On paper this plan looks like a plus; the bank extends’ the note to the borrower who pays a fee or agrees to pay a higher interest rate, or both, which allows the bank to grab fees and avoids having to foreclose or write down the loans as an impaired asset. They also can keep the loans on their books as if nothing were amiss.

The banks post quarterly results that are misleading, which now has become a different problem because the loans have greater risk than they are disclosing and can pretend things are better than they are.  That is what did happen in Japan during the 1990s.  After their debt-fed real estate bubble burst, Japan slid into the "lost decade", a time of economic and financial malaise.

Despite all the tough talk out of Washington and Wall Street the U.S. seems to be on course to repeat what happened in Japan, granting extensions to commercial real-estate investors, so they don't default. The hidden loans cause banks and especially regional banks to restrict their lending to business to build new facilities, do renovations, or make capital investment which can grow the economy.  What's worrisome is the lack of transparency in the over all system so we are not able to properly evaluate our banking system and make intelligent adjustments.  

So we are left to wonder; what happens in a few years from now if the loans are still under water?  We can only hope Bernanke and Geitner have the skills to maneuver this economic ship through torturous economic waters, to sound economic stability.

There are signs the commercial REO market is taking shape at the FDIC which is assisting the Treasury Department set up and run the Troubled Asset Relief Program funds to help private investors buy as much as $1 trillion in mortgage-backed securities and other holdings

Real estate investment companies are positioning themselves to take advantage of TARP funds to purchasing performing and sub-performing commercial real estate (CRE) note pools to take advantage of the coming commercial REO’s.  Treasury Secretary Timothy Geithner announced on Wednesday that the much anticipated toxic asset purchase program, Public-Private Investment Program (PPIP), will be running in six weeks, but details are still incomplete.

There seems to be a lot of private capital on the sidelines awaiting the Public-Private Investment Program since it was announced months ago, but investors have become skeptical about whether the government will be able to work out the kinks by July.  A lack of staff, pricing and institutional knowledge appears to slow down the actual implementation of the program.

Banks’ reluctance to participate as part of Treasury’s PPIP potential buyers and sellers has also held up the program over the prospect that lawmakers might change the rules.   Last month congress approved an amendment that would impose conflict-of-interest rules on managers of PPIP funds to ensure securities purchases are “arms-length” transactions.   Sheila Bair, head of the FDIC said, “The Treasury will need to issue regulations, to clarify these issues before we will have comfort by market participants.”

Yet unanswered questions remain as to whether banks will feel compelled to sell distressed assets in the PPIP program.  Or will the terms the government plans to give holders of distressed debt offer a cushion, giving them the option to hold and work out these assets, rather than try and sell them at distressed prices.  The Banks and investors are jockeying for position, while the elephant in the room remains; the wide discrepancy on price between buyers and sellers.

Meanwhile many investors and service companies are using this time to put plans into place in preparation for the program's launch in July.  Make no mistake about it; this $1 trillion program will have an impact.  The PPIP program calls for investors to partner with Uncle Sam to buy up troubled loans and securities stands an excellent chance of helping to value toxic assets and begin to move commercial REO’s to market. 

Since institutional investing has become a more dominant component of the commercial real estate market, and because of securitization, investors are more and more separated from the decisions concerning specific real estate acquisitions, due diligence is even more important.  The function of due diligence is to identify, ascertain and model a property's risks.  This is the Art and Reason for Due Diligence.

Today’s problems in the credit markets and the slowing economy are catching up with commercial real estate.  The Savings and Loan failure in the late 80’s was caused by the lack of property and environmental standard assessments.  In the early 90’s new standards that were designed to protect commercial real estate investment based on the knowledge and experience gained then.  In the age of real estate globalization how should our due diligence methods and deliverables evolve to meet the needs of the 21st century commercial real estate investor?...

As a data analyst we are constantly looking for new sources of data to build into predictive modeling.  The internet provides a huge volume of new key indicators to follow.  To help the reader better understand how a real estate IT architect might use key indicators for analysis, I have listed a few early results of key indicators we have an interest in following.  From the interrelationships between various key indicators we look for patterns to mathematize predictive results.  With improved tools and understanding we are advancing the science of predictive analysis.

Reviewing a number of searches conducted on the internet to evaluate interest across the property and environmental due diligence industry can provide an early source of information on the future activity in the market.  Search data provides early trend data in attempting to predict the future for the real estate due diligence industry.  The questions asked provide data points which interconnect with economic data to provide a knowledge advantage for our clients.  Following are a few data inquires:

Environmental interest in Phase 1 reports has risen substantially since the beginning of the year in the metropolitan areas of New York, Washington, Los Angeles and San Francisco.  Real Estate interest in Phase 1 reports reached an all time low the between Dec 14-20 2008 and has risen steadily showing a sharp increase since Mar, 15th.  Most of the current interest is centered in California which could be a reflection of the changes in state environmental policies.

Environmental interest in Phase 2 reports has been somewhat stable over the past 3 years leading one to speculate this market maybe less effected at this moment by the real estate down turn.  Most current interest is located in California with New York and Texas current interest lagging.  Interesting has shown a sharp increase in the past 30 days from within the real estate community particularly in California, a trend I will be interested in following.

The interest in Property Condition Assessments has fallen off the cliff, a point that reflects the sharp decline in commercial real estate transactions which have become something of a memory.  Yet the interest in commercial real estate sales remains fairly constant indicating people are watching the market with the same interest but are not engaged in the market today.  Investors it seems are evaluating the condition of the market with interest from the sidelines.

A bright spot is the increased interest in Facility Condition Assessments; the government version of a PCA Report which has remained steady with a definite increase interest since the new administration took office.  We might assume this increase in interest in facility assessments reflects the enactment of stimulus package which is channeling billions towards rebuilding the nation’s infrastructure.  The strongest interest not surprising is in the District of Columbia and Virginia, followed by states with large populations, Florida, Texas, California and New York.

Knowledge is abundant; the use of it is scarce.  Our future will rest with our success in understanding and acting on high quality information.   The competitive difference is the application of knowledge.

It does not take long to realize to fix the economy we first must divest the nations REO inventory beginning with housing.   With foreclosures at record highs, prices have had the biggest drop since the Great Depression, and nobody expected much of an improvement in the overall housing market until well into next year.  Yet sales of previously owned homes have unexpectedly increased during the first two months in 2009.

Fueled by lower prices, markets around the country have seen distressed properties supplies listed on MLS shrink in many of the most depressed markets.   Local investors recognizing opportunity are buying properties, installing renters, setting the stage for a housing recovery.  Ironically, many renters are sometimes former homeowners, as banks now are allowing owners to stay in the homes after foreclosure.

Changes in government policy and the Federal Reserve System are stepping up to feed life back into the housing market using FED fiat money buying the debt of Fannie Mae and Freddie Mac.  Mortgage rates are now under 5% and first time home buyers are receiving a tax credit.  U.S. central bankers decided last week to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to maintain low interest rates while recapitalizing the housing market.

A new survey conducted by Knight-Frank found that a significant number of high net worth investors plan to increase their residential real estate investments over the next one to two years.  Liam Bailey at Knight Frank said, “In turbulent times the wealthy want their investments to be both tangible and transparent,” and recognize opportunity as conditions changed in the real estate market.

We are now in a recession the likes of which nobody has ever seen.   Recapitalizing the housing asset bubble is the first step to recovery.   Housing assets are being sold at "fire sale" prices, rather than fair market value, the difference between these two values is huge -- a good rule of thumb is 30% off.   If this approach gains momentum the discount for REO inventory will narrow, making today’s price attractive for the home buyer.  This will not turn the economy around on a dime, we have the commercial REO problem ahead of us.  But it is good news never the less, a critical first step in the right direction, and a key indicator to watch in the coming months. 

Talk shows are quick to blame the human side, wild optimism, greed and people buying more house then they need or could afford.  But I would argue the destruction and deregulations of our banking institutions over time lead to credit expansion, overprovision of credit, encouraged resources to flow into areas that distorted prices, causing an ultimate correction to take place; and the pain of this correction is "The Great Recession of 2008". 

Markets can cope with a certain amount of bad policy, and over time can adjust to bad policy and still have some pretty decent outcomes, but by piling up bad policy after bad policy, supercharged by technology and unproven theories, the market could no longer respond rationally.

Professor of Economics, Larry White writes, that those who blame the crisis on greed are wrong because "greed... is always around" and you cannot explain a variable result by a constant.  Greed and self interest are part of the fabric in American life; the difference is policy and regulations. 

Since 1932, the enactment of modern banking regulations, mortgage banking rules were built on the principles of localized banking.  Not long ago the economics of housing was all local.  To buy a house the borrower went down to the local mortgage bank, sat with the loan officer, filled out and application for processing.  Based on the amount of down payment, credit worthiness and local economic factors a decision was made to extend the borrower a mortgage and a long term relationship was established between people and the bank.  The local bank would hold the note, collect interest, and the local economy would grow on the basis of local economic factors.

Until the 1980's, housing finance was segregated from the overall capital market. With the explosion of information technology, digitized information travelling around the globe the banking system was transformed; replacing educated loan officers with digitized profiles and modern portfolio theories.  By the 1990's, the integration of previously segmented mortgage markets became part of global capital market place allowing for general interest rate declines to generate mortgage rate declines that both increased housing affordability and decreased the relative cost of housing while removing local knowledge and responsibility from the process.  The mortgage banker, who had been responsible for the satisfaction of the loan, was replaced by a mortgage processor and personal accountability was lost.

The advancement of technology out paced regulatory policy resulting in the securitization phenomenon, pouring trillions into housing instead of other kinds of investment, capital which normally would have gone into other innovations like; health, entertainment, manufacturing, business, engineering and technology development. Instead capital fueled mortgages which went in search for customers. 

It is nice to have more and bigger houses, but it was artificially introduced, prices out passed wages as the flood of capital overwhelmed housing prices. Between 1997 and 2005, the number of household mortgages increased by 20 percent, while the number of households increased by only 9 percent. Total mortgage debt increased by 250 percent, while nominal GDP increased by only 50 percent.  A perfect picture of a bubble, the result; prices needed to fall.

The speed and complexities of globalization, financial innovation and an out dated banking model caused new risks that were not encountered before and not appreciated.  Newly developed financial instruments create unforeseen dependencies and unlike other industries, banking did not beta test there new products, and the newly created financial instruments were released around the world without oversight to the unsuspecting public with devastating results.   

But I am optimistic, the American economy is surrounded by opportunities; global warming, toxification, energy management, rising populations, aging populations, income disparity, and the advancement of scientific knowledge.  Ingenuity and capital will tackle the problems of the 21st century and new economic leaders and solutions will emerge from the, “great rescission of 2008” leading the way to economic growth which will match the challenges we face.  A new commitment to innovation and renewal will spur the economy forward, and 2008 will become just another chapter of our collective history we will have learned from.