A summer intern in real estate management having noted the very high occupancy due to recession inquired why the firm did not significantly increase rental rates across the board. After all, he pointed out, economic theory teaches us that if the demand exceeds the supply, prices will rise.
A successful industrialist was invited to attend classes at a prominent business school on the condition that he would not speak out in the class. His son explained that what was being taught was to identify a very healthy corporation, make a successful bid to purchase the stock and take the company private with money that could be borrowed against the company’s assets, ship jobs overseas and cut back on quality to create an earnings surge, and then sell the company to the public through a new stock issue. Whether it would survive under the new conditions after a few years was someone else’s problems.
Indeed the father did have to restrain himself when he attended the classes because they were a mockery of all of his life’s successful efforts along with others to create a company that well served the stockholders, employees, suppliers, customers and the community; that invested heavily in the future; and was likely to successfully continue to compete against domestic and foreign competition for decades to come.
The same applies to apartment complexes that are purchased at high prices, highly mortgaged, rentals escalated, and maintenance reduced. Resold to syndicates after a few years, they look attractive on paper. But their futures are not bright.
As for the apartment builder, he explained that there is more to success than short term profitability. A sudden major adjustment in pricing would drive out long term and highly desirable residents who not only take good care of their apartments but also attract their friends as tenants. Furthermore, occupancy moves in cycles. A stable base of long term and quality tenants is desirable for the long term.
Predatory acquisitions and mergers over the past three decades have enriched the financial sector while draining the nation’s capital base and ability to preserve jobs.
Tongue-in-cheek, the industrialist suggested we convert all of the business schools to engineering schools. Then the USA would again take the lead in manufacturing and job creation.
Alas, if it were only so simple!
A truly free enterprise system would quickly teach investors not to buy high priced, heavily mortgaged businesses. But as long as the government bails out rich, greedy speculators there is no reason not to buy businesses that have almost no chance of sucess.