Grubb & Ellis Montana Commercial, LLC

Bob Bach is our Senior Vice President, Chief Economist

Thawing

April 23, 2010 

Equity investment capital targeted for commercial real estate has been sitting on the sidelines for well over a year. A number I heard at last week’s Urban Land Institute conference was $150 billion, which could be leveraged higher if only leverage were available. Now it appears that debt is coming back according to an article posted this week on LoopNet (click here). Traditional lenders are offering better terms while new players are entering the market. According to the article, “While trophy properties in major markets are seeing most of the increased lender interest, assets in secondary markets are also attracting stronger interest.”

This graph from Real Capital Analytics seems to support that view. Cap rates have already turned lower in primary markets and seem poised to turn lower in secondary and tertiary markets. This trend is based on low deal volume, but volume is starting to rebound, up 25 percent in the first quarter compared with the very low base in the first quarter of 2009.

 It’s hard to believe because the market seemed frozen as recently as six months ago, but buyers, sellers and lenders, while not all on the same page yet, seem to be moving in that direction.

Have a great weekend.

Best regards,

Bob

Robert Bach

SVP, Chief Economist

Grubb & Ellis

CRE Bank Delinquencies vs. Property Prices

Sometimes it is difficult to reconcile different data sets. Compare commercial real estate loan delinquencies at banks, which are increasing according to the Federal Reserve, with commercial property prices, which have stabilized and even come up a bit in recent months according to the Moody’s/REAL commercial property price index. Can prices continue to move higher if loan delinquencies in banks, CMBS and other lenders continue to rise? If there is enough investment capital chasing a limited supply of properties, then prices are unlikely to fall much further. But there are differences in property quality and location. Private investors appear willing to pay up for Class A properties in primary markets, bidding up prices even as institutional investors hang back because their models assume a tepid recovery in rental rates. A similar scenario is playing out in the residential property market as foreclosures rise while the major price indexes have stabilized or increased slightly in recent months. First-time homebuyers compete with aggressive investors in hard-hit markets with decent growth prospects, which puts upward pressure on prices for entry-level homes. Source: Federal Reserve, Moody’s REAL CPPI, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Approaching Takeoff Speed

Browsing an airport newsstand early this week, I couldn’t help but notice the bold red, white and blue cover on Newsweek featuring the story, “The Comeback Country,” describing America’s economic resurgence (click here). Business Week offered a similar upbeat cover story on the economy (click here) while Thursday’s Wall Street Journal included a front-page article titled “Evidence Mounts of Strong Recovery” citing the growing sense among economists that the recovery could be more robust than previously believed.

 I’m attending the Urban Land Institute Spring Council Forum in Boston this week, so today’s “Good News Friday” will be brief. But for more good news, allow me to direct you to my new blog where I just posted a summary of a ULI roundtable on the businesses that will lead job growth in the coming expansion (click here). Virtually every sector of the economy will see opportunities.

Have a great weekend.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Office Vacancy vs. Total Payroll EmploymentApril 13, 2010

Signs of an economic recovery abound, but they haven’t yet shown up in the U.S. office market as the vacancy rate gained another 50 basis points to end the first quarter at 17.9 percent. This means that the rate of softening accelerated from the fourth quarter when vacancy rose by 30 basis points. Nevertheless, a recovery is likely to begin in the next three to four quarters. Following the 2001 recession, quarterly employment (the average of the monthly payroll numbers) bottomed out in the second quarter of 2003, while the vacancy rate peaked in the first quarter of 2004. Following the 1990-91 recession, employment bottomed and vacancy peaked simultaneously in the third quarter of 1991. In the current cycle, quarterly employment appears to have hit bottom in the fourth quarter of 2009. If the pattern after the last recession holds, vacancy could peak as early as the third quarter. Other dynamics besides employment will influence this timing such as the amount of shadow space (unoccupied space not officially counted as vacant) that will have to be filled before tenants need new space. Nevertheless, if employers continue to hire in the months ahead, which seems likely, vacancy should top out by the end of this year. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Grand Slam of Good News

April 9, 2010

 Maybe it’s just that spring has arrived along with its sense of rebirth and optimism (especially for Cubs fans, whether it’s warranted or not), but it really seems like the news keeps getting better.

 Last Friday the Bureau of Labor Statistics reported that payroll employment rose by 162,000 in March including 123,000 in the private sector, the best performance in three years. That number comes from the establishment survey. Less noticed was that the household survey, from which the unemployment rate is derived, reported that 264,000 more people were employed in March than in February following an increase of 308,000 the previous month. Coming out of a recession, the household survey is believed to be the more reliable indicator because it picks up hiring by start-up companies.

• Thomson Reuters reported yesterday that same-store retail sales rose 9.1 percent in March, the strongest monthly gain since 2000 when the company began tracking the data. The gains were spread across all merchandise categories. March sales benefited from warm weather and because Easter occurred a week earlier this year, pushing holiday-related shopping into March. Nonetheless, this performance handily beat expectations for a 6.3 percent increase and seems to signal that consumers are getting back in the game.
• The Institute for Supply Management’s non-manufacturing index, which tracks the service sector, increased to 55.4 in March. Like the more widely publicized manufacturing index, values above 50 indicate expansion. The manufacturing index has been above 50 for eight consecutive months as business capital spending began to grow again, but the non-manufacturing index has been slower to rebound. The recent strength suggests the recovery is broadening out across the economy.
• If you didn’t catch it last night, Jim Cramer gave a ringing endorsement for commercial real estate on his CNBC show, “Mad Money.” Click here to read the summary and view the video.

 Lastly, if you can’t quite believe that all this good news is for real, take a look at this article in today’s New York Times on why people remain skeptical about the recovery. Economic weak spots persist, but psychological and political factors are at work, too.

 Robert Bach

SVP, Chief Economist

Grubb & Ellis

Job Losses Related to Post-War Recessions April 5, 2010

Job losses appear to have bottomed out thanks to the creation of 162,000 net new payroll jobs last month including 123,000 in the private sector. Moreover, January and February data were revised higher by a combined 62,000. But it will take a long time to regain the 8.4 million jobs lost in 2008 and 2009. The last three recessions – 1981-82, 1990-91 and 2001 – were followed by progressively longer recovery periods before employment returned to neutral. Measured from the beginning of the recession, the labor market required 28 months to recoup its losses after the 1981-82 recession. The convalescent periods from the 1990-91 and 2001 recessions lasted for 32 and 48 months, respectively. In the current cycle, total payroll employment did not hit bottom until December 2009, 24 months after the losses began, and it is unlikely to return to equilibrium for at least another three years. This recovery span understates the pain because the labor market needs to generate 100,000 to 125,000 net new jobs per month to accommodate the growing labor force, which is why the unemployment rate, currently 9.7 percent, will decline painfully slowly even as employers begin to hire again. Nevertheless, the 162,000 new jobs in March are a welcome change and suggest that the labor market is finally headed in the right direction. Renewed hiring will boost commercial real estate leasing activity in the second half of 2010 with vacancy rates expected to peak by year-end. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist