Grubb & Ellis Montana Commercial, LLC

Where to Begin?

March 5, 2010 

There is more good news out there than usual, making it tough to know where to begin.

•  Vacancy rates in two sub-categories of commercial real estate may have already peaked at year-end 2009. Medical office buildings recorded a fourth-quarter vacancy rate of 11.8 percent, unchanged from the third quarter while the vacancy rate for logistics buildings (a subset of industrial) was stable at 13.6 percent in the third and fourth quarters. Moreover, the vacancy rate for Class A logistics space with top-of-the-line features and functionality ended the year at 16.6 percent, down from 17.2 percent in the third quarter. A rebound in demand coupled with declining deliveries of new space was the winning formula for both property types.
• The Moody’s/REAL Commercial Property Price Index, based on repeat sales from the Real Capital Analytics database, increased in both November and December, the latest data available. This seems to support anecdotal evidence that cap rates have eased a bit lower in the last several months for high-quality properties most in demand by investors. Lesser quality properties in secondary and tertiary markets continue to struggle, however.
• In the big economic news of the day, the Labor Department reported that payroll employment fell by 36,000 in February while unemployment was stable at 9.7 percent. Although still in the red, the payroll number beat expectations for a decline of 50,000 and the Wall Street “whisper” number of minus 100,000, which were based on the harsh weather during the week of the survey. February could be the last month of job losses because the government will be hiring for the 2010 Census over the next three months. In the second half of the year, private sector employers likely will be ready to grab the baton and continue the momentum.
• Factory orders rose 1.7 percent in January, the fifth consecutive monthly increase. This means that more goods are flowing through global supply chains, which is behind the nascent recovery in demand for logistics space.
• The International Council of Shopping Centers reported that U.S. chain store sales rose by 3.7 percent last month, the best showing since November 2007 just before the recession began. This was in spite of the severe winter weather, which shaved a percentage point from the increase according to ICSC researchers.
• The potential for the Greek debt crisis to destabilize financial markets appears to be easing as the government successfully sold bonds valued at 5 billion Euros to refinance part of its debt.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Country of Big Shoulders

February 19, 2010

Manufacturing has been a source of anxiety since at least the late 1980s when Japan seemed ready to eclipse the U.S. as a production and economic colossus. The troubles in the automobile industry in general and Detroit in particular reignited those fears in recent years. But manufacturers are expanding again, leading the broader economy onto firmer ground. The most recent evidence is the January industrial production report, which showed total production rising 0.9 percent. It was the seventh consecutive month of expansion, which hasn’t happened since a stretch in 1997 and early 1998. Strength was widespread across many industries, led by technology.

Lean inventories mean that retailers, wholesalers and manufacturers need to rebuild stocks. But demand appears ready to move beyond inventory replenishment thanks to growth in exports, consumer spending and business investment. This is one reason why industrial space should be among the first commercial real estate sectors to embark on a recovery.

 Robert Bach

SVP, Chief Economist

Grubb & Ellis

Good News around the Edges

February 5, 2010

Today’s employment report for January from the Bureau of Labor Statistics revealed a loss of 20,000 payroll jobs last month, a little below analyst expectations. But, paradoxically, the unemployment rate fell from 10.0 to 9.7 percent, also contradicting many analysts who expect unemployment to rise as discouraged workers reenter the labor force before it begins a sustained decline. What’s up with that? Payroll employment and the unemployment rate are derived from two different surveys. The Current Employment Statistics (CES) survey covers 140,000 business and government worksites to derive payroll employment, hours and earnings while the Current Population Survey (CPS) covers 72,000 households to derive unemployment and other characteristics of the labor force. The two surveys don’t always move in lockstep. Many analysts believe the household survey is better at capturing changes in the labor force early in a recovery because it includes the self-employed, which is an important source of employment as laid off workers start up new businesses. Here’s the good news from the household survey: The decline in the unemployment rate from 10.0 to 9.7 percent occurred even as the labor force increased by 111,000. So the decline was not because fewer people were looking for work. The number of employed persons rose by 541,000, and the number of unemployed persons fell by 430,000. The U6 measure of unemployment, which includes persons who have stopped their job search and part-time workers who would prefer to work full time, fell to 16.5 percent from 17.3 percent. The payroll survey brought some hopeful signs as well: The average workweek rose slightly to 33.3 hours from 33.2 hours while temporary hiring surged again by 52,000. This suggests that employers are giving their existing workforce more hours and relying on temps, both leading indicators of permanent hiring. The biggest drag on payroll employment came from a loss of 75,000 construction jobs, but the unusually cold weather across the U.S. last month could have thrown off the seasonal adjustment factor, meaning that the losses were overstated. Expect sporadic months of job creation in the first half of 2010 followed by sustained growth in the second half. 

 Bob Bach SVP, Chief Economist Grubb & Ellis

The Next Big Thing       

January 29, 2010

I’ve been on the speaker circuit this month to present my outlook for 2010, and the question I get most often is: Where will the new jobs come from? Many people think the U.S. could be facing an extended jobless recovery, a double-dip recession or, at worst, a “lost decade” similar to what Japan endured in the 1990s. The questioner can’t visualize the next hot growth sector that will jump-start hiring and lead the broader labor market to new heights.

Maybe we don’t want a next big thing. The hot growth sectors of the 1980s (commercial real estate), the 1990s (technology) and the 2000s (finance and housing) turned out to be bubbles, triggering recessions and massive investment losses when they burst. Maybe we want more gradual growth across all sectors fueled by prudent lending standards, and that may be what we are going to get. According to a recent report by Moody’s Economy.com, “By year’s end, all major industry groups will be expanding.” Job growth will be strongest, they say, in environmental services, medical services, biotechnology, restaurants, computer software & services and pharmaceuticals manufacturing. If there is a next big thing, it could be healthcare, but demand will be driven by underlying demographic trends (aging of the boomers), development of new treatments to keep people healthy, and an expansion of coverage to the uninsured, though what that will look like remains uncertain.

The labor market will recover at a gradual pace, and it will take several years to recoup the 8 million-plus jobs lost in 2008 and 2009. But the forecast by Moody’s Economy.com bears repeating: “By year’s end, all major industry groups will be expanding.” It will be a start.

Bob Bach

SVP, Chief Economist

Signs of a Market Bottom…

January 22, 2010

Office and industrial vacancy rates increased every quarter last year, but the rate of increase declined as the year progressed. In the four quarters of 2009, office vacancy increased sequentially by 80, 100, 50 and 30 basis points while industrial vacancy increased by 70, 60, 30 and 20 basis points. Absorption followed a similar trajectory: Totals were negative every quarter last year, but fourth quarter losses were the shallowest.

We are hearing about other signs of a market bottom:

• This could be the year of the long-term lease, replacing the one-year extensions prevalent in 2009. Tenants whose leases expired last year shied away from new long-term commitments given the bleak outlook. But the economy has started to grow again, and profits held up remarkably well through the recession thanks to corporate cost-cutting measures including employee layoffs. Tenants are becoming confident enough to lock in the great deals on offer from landlords.

•  Tenants’ top priority last year was getting the cheapest space, but many tenants are becoming receptive to upgrading their space, i.e. willing to pay a little more for better space. In the retail market, some tenants were shut out of the best locations during the boom. But vacancies have opened up even in the best centers, and retailers are looking at upgrading their locations.

• In a few markets, landlord psychology is beginning to shift. The office vacancy rate continues to rise in San Francisco, but some property owners have reduced their concession packages, believing the worst has passed.

• Industrial brokers in some locations including Tampa and Columbus are reporting increasing activity by tenants looking to take advantage of very low rental rates.

Robert Bach

SVP, Chief Economist

The Inventory Story

 January 15, 2010 

Following a lengthy 13-month liquidation cycle, business inventories grew by 0.4 percent in both October and November. Higher inventory levels among manufacturers and wholesalers in November more than made up for a slight dip in retail inventories. The inventory/sales ratio fell to 1.28, its lowest level since July 2008. With this ratio back to pre-crisis levels, businesses are poised to increase inventories this year, which will translate into higher levels of factory production. This is one reason why the industrial market is likely to be one of the first commercial real estate sectors to begin a recovery.

Another type of inventory – the inventory of office space available for sublease – fell in the fourth quarter, closing out 2009 at just under 120 million square feet. This was the first decline following nine consecutive quarterly increases. Some of this inventory reverted back to the landlord as the leases expired and will show up as direct lease space, but much of the decline came as tenants subleased space at market-clearing prices. Falling sublease inventories typically precede the beginning of a broader market recovery.

Robert Bach

SVP, Chief Economist

Silver Lining in the December Jobs Report

January 8, 2010 

The U.S. Bureau of Labor Statistics this morning reported a loss of 85,000 payroll jobs in December, a disappointment compared with the consensus for zero jobs gained or lost. The unemployment rate was unchanged at 10.0 percent. After the announcement, short-term Treasury prices rose a bit (interest rates fell), suggesting a longer period before the Federal Reserve begins to raise interest rates. Oil prices fell, consistent with the scenario for a sluggish recovery. This shouldn’t be viewed as too much of a surprise. November’s gain of 4,000 jobs (revised upward from the previously announced loss of 11,000 jobs) was an abrupt change from the trend, and the labor market gave a little of that back in December. The average monthly job loss receded every quarter last year, from -691,000 in the first quarter to -69,000 in the fourth quarter.

 A slower pace of recovery could be better for the long-term health and balance of the economy by keeping a lid on inflation. The Federal Reserve has flooded the financial system with liquidity at the same time that the government has spent heavily to stabilize the economy. The excess liquidity and deficit spending is like dry kindling that could lead to an outbreak of inflation if money begins to circulate faster through the economy, i.e. households and businesses raise their spending quickly. A gradual pace of recovery will reduce the chances for an outbreak of inflation down the road.

 Have a great weekend.

 Robert Bach

SVP, Chief Economist

Grubb & Ellis

Concluding Thoughts for 2009

  December 18, 2009

Economic downturns can be an opportunity for savvy businesses to grab market share according to a story this week on NPR’s Morning Edition (click here to listen). The story notes that company market shares change more during a downturn than at any other time.

 But this downturn is coming to a close. Former Federal Reserve Chairman Alan Greenspan, appearing on Meet the Press last Sunday, said that the recession probably ended in July or even in June. He went on to say that employers “presumed that the economy was going to go down far more sharply than it actually did… What this means is that we have a level of employment at this stage which is barely adequate to staff the level of output, and… it seems to me virtually inevitable that if nothing else were to happen that employment would start to come back fairly quickly.”

 Alan Blinder, professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve Board, makes the same point in an op-ed article in The Wall Street Journal this week titled “The Case for Optimism on the Economy” (click here). He notes that “Fearful businesses pared payrolls to the bone… Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.”

 This is the 39^th edition of Good News Friday. The first one came out on Friday, March 20^th during the depths of the credit crisis and the recession. But we were already past the low point. The Dow Jones Industrial Average hit bottom on March 9^th and embarked on what turned out to be a 57 percent rally as of yesterday, while net monthly job losses had peaked at 741,000 in January and were down just about every month since then, to 11,000 last month. Problems remain, of course, but the economy proved to be far more resilient than just about anyone thought.

 Have a great weekend and a wonderful holiday. We look forward to bringing you more good news in January.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

Office Vacancy vs. Class A Rent* December 11, 2009

It’s a simple equation: The office market will not begin to recover until employers start hiring again. Friday’s employment report from the Labor Department showing that just 11,000 payroll jobs were eliminated in November and the unemployment rate fell from 10.2 to 10.0 percent is a hopeful sign, but one data point isn’t enough to change the outlook for a slow recovery. Expect office leasing market fundamentals to soften in 2010 with vacancy ending the year at 18.7 percent, up from 17.1 percent in 2009-Q3. The asking rental rate for Class A space is likely to fall another 5 percent next year. The market is expected to turn in 2011 as the vacancy rate embarks on a slow descent, though asking rent may slip a bit further due to the abundance of excess space that will remain on the market in the early stages of the recovery. Source: Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist