A gloomy outlook for both the banking and real estate business was presented at a seminar sponsored by Alex. Brown Inc., the Baltimore investment banking firm.
Unlike past recessions, "the bottom is clearly not perceptible," said H. Furlong Baldwin, chairman and chief executive officer of Mercantile Bankshares Corp., a Baltimore bank holding company. Another strange feature of this downturn is that it is affecting middle management, white collar and service workers instead of the blue collar industrial workers, the victims of past recessions.
"We don't know the effect of a middle-management, white-collar recession," Baldwin told the audience at last night's seminar.
As for the banking industry, Baldwin sees bad news when fourth quarter reports are issued in January. "We're going to see massive write-offs in the fourth quarter," he said. "It's going to be clean-up time."
Baldwin disputed the frequent charge that money is not available from banks to businesses. "That simply is not true," he said. Commercial and consumer loans are available and some troubled banks are making more of these loans in an effort to work their way out of trouble, he said.
He said real estate loans are being more closely scrutinized. But the loans hardest hit are the unsecured loans that were made to developers to enable them to make payments on their secured loans. "That type of loan is dead and ought to be dead," Baldwin said.
Baldwin's Mercantile is considered a very strong bank and is one of only three banks that Alex. Brown is recommending that investors buy stock in, according to Sandra J. Flannigan, a bank analyst for Alex. Brown.
"When it comes to investing in bank stocks, you have to be very careful," Flannigan told the audience.
Besides Mercantile, the other two banks Alex. Brown is recommending are Norwest Corp. of Minneapolis, Minn. and Bank America Corp. of San Francisco. Beyond those companies, Flannigan said investors should stay away from bank stocks.
Even if the recession is shallow and mild, she said the banking industries will not be passed by because the business usually lags behind the rest of economy. "We do not believe bank credit problems have peaked," she said.
The downturn in commercial real estate, which has caused much of the banks' problems, will probably continue for the next two to three years in this area, according to Robert S. Frank, a real estate analyst for Alex. Brown.
He said real estate market is going through some basic changes. In the future properties will be valued on the income that they can produce, rather than their appreciation and tax benefits, according to Frank.
He said there will be a "window of opportunity" for investors to buy properties at depressed prices.
This drop in prices will not be limited to the United States, but will also take place is such markets as Japan and England. "There is a whole revaluation of real estate on a global basis," he said. "There is a bubble about to burst in a number of markets," he said.
Steven J. Guttman, president and chief executive officer of Federal Realty Investment Trust, said it will take 10 years for the office building business to recover. However, he is optimistic about the prospects for apartment buildings and strip shopping complexes.
Apartment building will be more popular because of a shift in the attitude toward home ownership. Strip centers will prosper because they can adapt to various market trends.
Federal Realty has 41 strip shopping centers and one enclosed mall. The property is in areas around Philadelphia, Washington, Baltimore and New Jersey.
With little debt and well-located centers, Guttman is optimistic about his own company's future. "We are extremely well-positioned to take advantage of the next decade," he said.