Grubb & Ellis Montana Commercial, LLC

Seasonally Adjusted Annual Rate Households emphasized saving over spending in May according to the Personal Income report from the Bureau of Economic Analysis. Personal income surged by a robust 1.4 percent thanks to one-time stimulus payments of $250 to individuals receiving Social Security and other retirement benefits. Consumption, however, increased by just 0.3 percent. As a result, the personal saving rate increased to 6.9 percent of disposable personal income, its highest level since December 1993. Retailers are doing everything they can to entice consumers to part with some of their recent income gains, and indeed they had some success in May as consumption was positive. But overall, it appears that U.S. consumers are not going to lead the economy out of recession, at least not by themselves. They will need help from China and other emerging markets where recovering economies will create demand for U.S. goods and services, thereby boosting exports. For commercial real estate, this translates into a sluggish recovery for retail properties and perhaps a bit of a tailwind for the industrial sector. Source: Bureau of Economic Analysis, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Here are three hopeful indicators released just this week:

• The Conference Board Leading Economic Index rose sharply for a second consecutive month. Vendor performance, the interest rate spread, real money supply, stock prices, consumer expectations and building permits pushed the index higher in May, outweighing negative contributions from weekly hours and initial unemployment claims. Over the past six months, the index rose 1.2 percent, the first time the index has increased over a six-month period since July 2007.
• The Labor Department reported that continuing jobless claims fell by 148,000 to 6.69 million during the week ending June 6^th. It was the largest decrease in seven years and breaks a string of 21 consecutive increases. Initial jobless claims rose slightly during the week ending June 13^th, however.
• The American Bankers Association’s economic advisory committee, a group of economists for large banks, predicted that real GDP will turn positive in the third quarter, thus bringing an end to the recession. The committee also expects housing starts to move up later this year and home values to increase moderately in 2010. Here is a link to a Bloomberg article on the committee’s findings.

Not all recent news is optimistic, and not all aspects of these indicators are positive. But this is the norm when the economic cycle is shifting from recession into recovery. Do not be surprised if the data releases are positive one day and negative the next with a gradual migration toward positive news as the recovery approaches.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Big Picture

 Let’s take a moment to consider how far the financial sector has come since the credit crisis passed through its darkest period from September 2008 through March 2009.

• Analysts debated whether the government would end up owning the major banks and a good chunk of the entire financial sector, but that discussion has receded along with the likelihood of such an outcome. (From September through March, the words “nationalize” and “banks” appeared in an average of 17.5 media articles per day. From April through Thursday of this week, the two words have appeared in 5.6 articles per day.)
• Much criticism was heaped on the bank stress tests conducted by federal regulators, i.e. that the criteria were too lenient, or that the additional sums of capital required were too onerous (from the banks’ perspective), or that publicizing the results of the tests could, perversely, destabilize the banking system. Nevertheless, the stress tests laid the groundwork for banks to raise private capital. As a result, 10 of the nation’s largest financial institutions gained approval this week to repay $68 billion in TARP funds. Twenty-two smaller banks already have repaid their TARP funds.
• The TED spread, a measure of risk-aversion in the credit markets, has receded to pre-crisis levels, signaling that credit is more available. Click here to view an interactive graph of the TED spread from Bloomberg. (The TED spread is the difference between interest rates on 3-month Treasury bills, considered risk-free, and 3-month dollar Libor, a widely used index for lending between banks and for business and mortgage loans.)
• The commercial real estate industry is still in the early innings of recapitalization of both debt and equity, but publicly traded markets are giving commercial real estate a vote of confidence. So far this year, REITs have raised nearly $15 billion through 45 public equity offerings. Moreover, REIT share prices have rallied by 60 percent from their low on March 6^th.

There is much work left to do, but the financial system is in the process of righting itself, and the economy is showing signs of bottoming out. Consequently, the macro-environment in which the commercial real estate industry operates is becoming more hospitable.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

On Wednesday, May 27th, at noon in the TechRanch conference room, Sean Golliher of Future Farm, Inc. (a Bozeman Montana based website design company)will introduce you to the power of Internet marketing and will provide practical advice for driving traffic to your website. Small businesses may want to attend this course if they are interested in strategies to get their website on the major search engines. 

May 25, 2009

Dollar Vs. Currencies of Broad Group of Trading Partners
After rallying last fall in response to the global financial crisis, the dollar has been sliding again since early March. This is both good news and bad news. The good news is that investors are becoming less fearful, selling U.S. Treasuries in favor of riskier assets that will rise in value as the economy recovers, such as oil, commodities and global equities. The bad news is that the dollar’s recent slide is partly related to concern over looming budget deficits that will require massive new Treasury auctions. If our trading partners become less willing to hold dollars, it could drive up interest rates and inflation in the U.S. For commercial real estate, this is a wash. A weak dollar means that U.S. goods and services including real estate are cheaper for off-shore investors, and a little inflation could support property values. On the other hand, higher interest rates will drive up financing costs. If the dollar weakens further over the next few months, it could tempt foreign investors off the fence. Perhaps this will be one of the groups to kick-start the anticipated feeding frenzy for distressed properties and debt.

Source: Federal Reserve, Grubb & Ellis

June 1, 2009

Rising interest rates could create a headwind for the forthcoming economic recovery. The yield on 10-year Treasury bonds rose to a recent peak of 3.71 percent on Wednesday before receding to 3.47 percent on Friday of last week. This is up from a low of near 2 percent late last year but still below the range of 4 to 5 percent that prevailed before the recession. For bond investors, fears of a depression are receding, only to be replaced by fears of inflation. As the recovery takes hold, private demand for credit could begin to compete with the massive government borrowing necessitated by the stimulus package and the budget deficit, pushing up interest rates and sparking inflation. Having reduced the federal funds rate to zero, the Federal Reserve is trying to tamp down long-term interest rates by purchasing Treasury debt, a process called quantitative easing. The Fed already has purchased about $130 billion in long-term Treasury bonds and $480 billion in mortgage-backed securities, with plans to purchase hundreds of billions of dollars more. The recent spike in interest rates suggests that the Fed may need to step up its purchases or risk seeing the housing market recovery pushed further into the future. Commercial real estate is largely a bystander at this point because there is so little lending going on other than the extension of existing loans by banks that do not want to take back properties. However, lower interest rates and spreads certainly are preferable because they would support the return of investors to the property market.
Source: Federal Reserve

The Trend Is Your Friend

Job losses remain severe, but the trend is in the right direction. Employers eliminated 345,000 net payroll jobs in May, less than half of the 741,000 jobs eliminated in January at the trough of the labor market downturn. The education and health services sector added 44,000 jobs, of which 36,400 were in health care and social assistance. The leisure and hospitality sector also was a net gainer with 3,000 jobs created. The unemployment rate rose from 8.9 to 9.4 percent partly because more people, including recent graduates, entered the labor force looking for work. The labor market is a lagging economic indicator. Forward-looking indicators such as consumer confidence and the index of Leading Economic Indicators (covered in last week’s Good News Friday) already are pointing toward recovery. Expect job losses to dwindle gradually in the second half of 2009, setting the stage for a modest rebound next year.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Bozeman Daily Chronicle 5/24/09