Economy shows 'signs of life,' but day of reckoning still to come

Experts discuss results of recent TMA survey

By Stephanie N. Rotondo

Portland, Ore., Jan. 18 - The economic crisis that began in 2007 is showing signs of improvement, but the storm has not yet past, according to a panel of restructuring experts.

Turnaround Management Association held a webinar entitled "2011 Industry & Economic Forecast - We Are Not Out of This Yet" on Tuesday in which the expert panel discussed the results of a TMA survey. The survey canvassed more than 200 participants, asking them their views on the economic recovery and which sectors were most likely to face trouble over the next year - and why.

"Most of the shock and awe has passed," said Kenneth R. Yager II, a principal of MorrisAnderson in Chicago and the webinar's moderator. However, "more industry issues are coming out of that cycle."

"There are signs of life," added Matthew S. Darin, a principal at Frontline Real Estate Partners. "But we are still far from being out of the woods; there are still a lot of open questions."

William J. Hass, chief executive officer of TeamWork Technologies Inc., remarked that there were "still a lot of clouds on the horizon. "We still have some companies that have not yet seen the worst."

Real estate a real problem

According to the TMA survey, commercial real estate faces the most struggles in 2011, garnering 64% of the responses. Residential real estate came in a close second with 40%.

"It's no surprise that commercial real estate ranked top of the list as one of the industries that will [face an uphill battle," Darin said.

He added that the sector has definitely improved since 2009: Overall commercial real estate transactions jumped 109% over 2009 comparables to $115 billion. Most of that activity, however, has taken place in "major metro-market projects," specifically class A-type assets.

But the sector by and large is still laboring under a giant umbrella of debt, with $1.4 trillion maturing through 2014, according to Darin. At least 50% of those companies with looming maturities are dealing with underwater properties. Combine that with a lack of access to the capital markets and those companies could potentially soon face their demise.

Darin noted that many market players believed that market "vultures" would swoop in to take advantage of the supply at the lower valuations, but thus far, that has not happened to the extent that was previously expected.

Instead, he said, banks are more willing to refinance and amend and extend, pushing off the problems "to a better day."

Another problem facing the commercial real estate arena is the ongoing issues in the retail sector. As stores have been forced to do business in a weakening economy, many have shuttered locations, leaving a lot of empty retail space.

"It's a train-wreck combination," Yager said of the bifurcation between the real estate and retail industries.

For residential real estate, it is the "same kind of story," Darin said. Foreclosures are expected to climb 55% in 2011 as home values are expected to drop another 5%.

"The government hoped the system would have flushed itself," he said.

But the current economic climate - high unemployment and decreasing home values - created an obstacle to the system flush. In Darin's opinion, dealing with those core problems are key to what will "drive any pickup in activity and stabilization of values."

The good news, at least according to Drain, is that the worst of the real estate crisis is over. Still, the foundation of the sector is "shaky," given the looming debt maturities.

"Will real estate drag us back down into the abyss?" posited Hass. With so many uncertainties, there is no solid answer as of yet.

No rest for retail

The retail segment placed third in the survey as one of the sectors expected to face trouble in 2011. According to Patrick C. LaGrange, managing director at Carl Marks Advisory Group LLC in New York, the thing driving that space is consumer spending, or a lack thereof.

"I think the key here is consumers still feel stressed," LaGrange said, pointing to "persistently high unemployment." He noted that while retailers have seen some improvement over the last year, it was not to the level people were hoping for.

"That will be a significant risk to the economy going forward," he said.

Small biz and Big Brother

Along with unemployment and a heavy debt burden, potential changes to health care laws - not to mention tax increases - could also weigh on economic recovery, particularly for small businesses.

"Anybody dealing with state and local government have been feeling the pain," said Hass. He pointed to a recent tax increase in Illinois that he expects will make it even harder for that segment to improve its bottom line.

Additionally, he said, small businesses have even less access to capital markets than medium- to large-cap companies and many finance their endeavors via home-equity loans.

"So if we are counting on small business to carry us out of this recession, it's a tough road to hold," he said.

Hass also noted that a new hotline has been set up for small businesses that are looking to ways to get financing. The hotline can also be used by businesses that feel they are being shut out of the markets.

The number is 1-855-FDIC-BIZ (1-855-334-2249).

Technology: the good, the bad and the ugly

One good thing to happen out of all this economic turmoil, however, has been the increase in technology available to small businesses, such as cloud computing.

"The cloud is a trend in technology," said Yager.

"It should help smaller businesses take advantage of these technologies" that can drive business, added Hass.

Even larger businesses, such as those in the health care arena, are taking advantage of this time to update and implement new technology that increase efficiency, thereby helping to reduce costs.

On the down side, however, this technology trend "will not be a friend to unemployment," Yager said. More efficient technology typically results in less need for actual humans to be manning the stations, so to speak.

"Technology has been a great sort of place for people who don't want to have to hire more workers," said Hass.

'Signs of life'

But even with all of the uncertainty and industry-specific issues, there have been "signs of life," as Darin put it, in certain sectors.

The TMA survey indicated that 37% of people think that the automotive industry will show the most improvement in 2011. Technology came in second at 32%.

But LaGrange thinks the survey results are a bit of a misnomer, considering where the automotive industry was just barely over a year ago.

"These are businesses that are coming back from so far down, it's easy for them to look like they are going up," he said.

Threats to consumer spending - and anything that could affect that, such as increasing or decreasing energy prices and the aforementioned unemployment - still exist, he said. And it isn't until that situation is addressed that these companies will really show what they are worth.

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