Grubb & Ellis Montana Commercial, LLC

Moody’s/REAL CPPI
Dec. 2000 = 1.0
Commercial property prices continue to firm according to the Moody’s/REAL Commercial Property Price Index, up 3.6 percent in May. From its peak in October 2007 to its trough in October 2009, the index fell 43.7 percent, but it has risen 8.6 percent off the bottom. Real Capital Analytics confirms that the average cap rate for all commercial property sales in the second quarter declined by 10 basis points to 7.6 percent, and it declined for all property types except hotels. Core properties in primary, supply-constrained markets are commanding higher prices; investors have concluded that prices for the best properties have already hit bottom. Distressed assets still account for a relatively small portion of overall sales, though many in the industry expect that to change as banks and CMBS special servicers begin to release troubled properties to the market. As that occurs, distressed assets will comprise a larger portion of the sales, which may keep the index and average cap rates relatively flat for an extended period. The current cycle appears to be playing out much differently than the industry’s last recessionary cycle in the early 1990s. Building Knowledge, Grubb & Ellis’ blog on commercial real estate, compares the two cycles.
Source: Moody’s, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Bob Bach is our Senior Vice President, Chief Economist

Nation of Pessimists?

July 16, 2010 

Sometimes I get email from readers gently suggesting that I’m being too optimistic. I just-as-gently remind them that the title of this piece is “Good News Friday,” so I’m more-or-less obligated to look on the bright side. But beyond the obvious headwinds, I am genuinely optimistic about the prospects for the economy and commercial real estate, and I wonder sometimes why there is such a level of pessimism. Reading The New York Times this morning, I came across the following passage in an article with the headline “How to Tell A Nation Is at Risk”:

“In Washington, nobody seems to want to see good news… The left wants more stimulus spending, and sees economic optimism as playing into the hands of its opponents. The right wants… large Republican gains in November, and sees economic pessimism as in its best interests.”

I’m not implying that politics are the main reason for the pessimism. The strength of the economic recovery, high unemployment and burgeoning public debt are legitimate topics for debate and concern. But I think sometimes the pessimism is more intense than warranted by the economic indicators, which, taken as a whole, are pointing toward a sluggish recovery. Click here to read the full article.

In commercial real estate, leasing markets are turning the corner. Click here to read about it in Building Knowledge, Grubb & Ellis’ blog.

 Robert Bach

SVP, Chief Economist

Average Lease Size July 12, 2010

The average size of office and industrial leases signed in the first half of 2010 continued to shrink, ending the period at 9,333 square feet for office leases and 23,657 square feet for industrial leases. This indicates that tenants, although they are no longer frozen in place by the Great Recession, are exercising caution with their space requirements. Specifically, the smaller average lease sizes suggest one or more of the following situations: that tenants are not planning for future growth; that tenants are reducing their space needs after laying off employees during the recession; or that tenants, even if they didn’t implement layoffs, are using techniques to reduce their average space per employee and thus their occupancy costs. Office and industrial lease terms also drifted lower in the first half of 2010, another sign that tenants are taking a conservative approach to their space needs. Source: Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

A Big Wad of Cash

July 9, 2010

The Wall Street Journal recently published an article bemoaning the fact that corporations were sitting on a record $1.84 trillion of cash and liquid assets at the end of the first quarter, up 26 percent from a year ago and the largest amount since the Federal Reserve began tracking it in 1952. Cash accounted for 7 percent of total assets, the largest share since 1963. The article noted that companies remain hesitant to spend on hiring and expansion due to lingering doubts about the strength of the recovery. (Click here to read the full article.)

My colleague Pete Bolton who leads the new Phoenix office of Grubb & Ellis has a more bullish interpretation, In a recent note to his clients, Pete says, “The most important part of this article is buried in the text. Any of you who were around during the recession of 2001 and the jobless recovery of 2002/03/04 know that corporations were sitting on their wallets, and when they finally broke loose, we had a fabulous run in commercial real estate. Please know that this is going to happen again, and be in the right place and be ready with the right platform to take advantage of this next great run. Arguably, it will be the best we have ever seen.”

Now there’s an optimist! The economy continues to face a lot of headwinds, but fundamentally I agree with Pete that companies are primed for growth. They won’t hold onto that cash indefinitely.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

The Long Slog

July 2, 2010 

The Bureau of Labor Statistics released its anticipated monthly employment report this morning, revealing a modest gain of 83,000 private sector jobs in June and a top-line loss of 125,000 total nonfarm jobs. The Census Bureau laid off 225,000 temporary workers last month who were hired for the 2010 Census, causing the large gap between total and private sector jobs. April and May data were revised slightly higher by 25,000 total jobs and 15,000 private sector jobs. Other key points in the report:

• The unemployment rate fell from 9.7 percent in May to 9.5 percent in June, but this was largely because 652,000 people left the labor force, reducing the labor force participation rate from 65.0 to 64,7 percent. More people became discouraged and stopped looking for work.
• Average hourly earnings and the average workweek length were unchanged indicating that incomes have been slow to ramp up.

The June report reveals a labor market that is expanding slowly, and it confirms other recent economic reports on retail sales, manufacturing and housing showing that the recovery has lost some momentum. Reasons for this include European debt woes, the waning effects of the stimulus, lingering caution on the part of both businesses and consumers, and severe deficit problems in state and local governments.

Private hiring clearly has not yet reached the velocity needed to make the recovery self-sustaining, but the June report does suggest that the labor market and the broader economy continue to move forward. The odds of a double dip recession have increased; the question is being asked more frequently in the current environment than it was a few months ago, but the jury is still out. If the economy continues to lose momentum, then a double dip is more likely. But if the economy can stabilize even at this lower level, the recovery will remain intact. We’ll know more over the next few weeks.

Robert Bach

SVP, Chief Economist

Monthly Home Sales In Millions, Seasonally Adjusted Annual Rate June 28, 2010

Sales of new and existing homes fell in May as the homebuyers’ tax credit expired at the end of April. New home sales came in at a startlingly low annualized rate of 300,000, the lowest rate since the Census Bureau began tracking this statistic in 1963, while existing home sales slipped to an annualized rate of 5.66 million. Ongoing weakness in the for-sale housing market appears to be supporting demand for rental units. Reis reports that multifamily vacancy rates in larger, professionally managed projects ended the first quarter at 8.0 percent, unchanged from the fourth quarter of 2009. This makes multifamily the first of the major property types to see leasing market conditions stabilize. For all rental housing units, the Census Bureau reports a first quarter vacancy rate of 10.6 percent, down from 11.1 percent in the third quarter of 2009, which was the highest rate since the data series was initiated in 1956. Demand for housing depends heavily on the return of job growth, which would improve the outlook for both rental and for-sale housing. Source: Census Bureau, National Association of Realtors, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Halftime Pep Talk

 June 25, 2010

We are at the midpoint of 2010, and the economy and the commercial real estate markets are trudging ahead. It’s not a V-shaped recovery, unfortunately, nor does a double-dip recession appear likely – see the chart below showing GDP forecasts from economists at three large financial institutions. Real Capital Analytics says that property sales volume year-to-date through May is 56 percent higher than the same period last year though sales remain low by historic standards. Demand is focused at either end of the quality spectrum – core assets in primary markets or deeply discounted troubled assets. Broad pricing metrics such as cap rates and repeat-sale property indexes have stabilized. Leasing market fundamentals have stabilized for apartments while the office, industrial and retail markets are nearing a bottom.

Early in the year, the economy appeared to be firming rapidly and the stock market surged ahead, so it looked like the recovery would proceed quickly. But in the second quarter Europe swooned, the U.S. economy hit some speed bumps and Wall Street fizzled. When you average it out, we’re getting exactly what most analysts expected at the beginning of the year – a gradual recovery.

It doesn’t feel like a recovery, but neither did it feel like a recovery in 2002 and 2003 though the prior recession ended in November 2001. Nor did it feel like a recovery in 1992 and 1993 despite the fact that the prior recession ended in March 1991.

One big difference between now and the early 1990s is that today there is plenty of capital chasing commercial real estate or waiting on the sidelines to do so. The industry retains its popularity as an investment asset class, which was not really the case in the early 1990s when word on the street was that the market would not need any new space until after the millennium, a forecast that proved far too pessimistic.

Fear not, readers; though the economy is not roaring ahead, commercial real estate is attracting more investor interest than we could have hoped for a year ago while the leasing market is finding its footing. The recovery is going according to plan.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Ribbon Cutting Ceremony

June 25, 2010

On Tuesday, June 10, 2010, Grubb & Ellis|Montana Commercial celebrated moving into the Morrison-Maierle Building at 2880 Technology Boulevard West, with an Open House and Ribbon Cutting Ceremony provided by the Bozeman Chamber of Commerce.

The event was a barbeque catered by Olivelle.  About 60 invited guests attended. 

10-Year Swap Spread June 21, 2010

The 10-year swap spread is one of the more esoteric indicators that have been in the news recently. In an editorial on Friday in The Wall Street Journal, former Federal Reserve Chairman Alan Greenspan said the 10-year swap spread, which turned negative for a few days in March and remains very narrow, suggests a limit to the borrowing (and spending) capacity of the U.S. government. It is the difference between the yield on the 10-year Treasury note and the fixed interest rate that a private party such as a bank or corporation requires from another private party (the counterparty) in exchange for a series of floating-rate payments. The swap agreement lets one party eliminate interest rate risk while the counterparty gets a stream of fixed-rate payments. According to Chairman Greenspan and some other analysts, a negative 10-year swap spread indicates that bond investors would rather put their money in private corporate debt than in government debt with the same maturity, presumably because they think the private debt issuer has less risk of default than the debt-ridden U.S. government. However, there are other ways to interpret a negative swap spread. For example strong demand for corporate debt combined with a belief that inflation and, therefore, long-term interest rates will remain low, would encourage investors to accept lower fixed interest rates. An increased appetite for risk is apparent in commercial real estate as well as in the bond market. Over the past few months, real estate investors have driven prices up and cap rates down for core assets in particular, i.e. Class A properties in primary, supply-constrained markets. For a further discussion of swap spreads and their significance to the economy, check out Building Knowledge, Grubb & Ellis’ weekly blog on commercial real estate. Source: Federal Reserve, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist