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

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

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

June 17, 2010 

FedEx, considered a bellwether for the economy, yesterday reported strong results for its fiscal fourth quarter ending May 31^st. The company made a profit of $419 million or $1.33 a share on revenues of $9.43 billion, up by 20 percent from the year-ago quarter. FedEx forecasted earnings for its new fiscal year of $4.40 to $5 a share. Notably, it reported no slowdown in its European business despite the financial turmoil and economic concerns clouding the outlook for the region.

Another bellwether, the Conference Board’s index of leading indicators rose 0.4 percent in May while April’s reading was revised from -0.1 percent to flat – so no sign of a double-dip recession.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

 Canada did many things right before the run-up to the credit crisis and during the crisis itself, and now the Canadian economy is recovering more quickly than the U.S. and Europe. First quarter GDP grew at an annualized rate of 6.1 percent, the sharpest increase in more than 10 years and the fastest growth among G-7 countries. Total employment in Canada fell by 2.7 percent versus a peak-to-trough decline of 6.1 percent in the U.S. Since bottoming in August 2009, Canadian employers have added 115,000 net new jobs, recouping 28 percent of the 407,000 jobs lost in the downturn. More conservative financial institutions and a stable housing market helped cushion Canada’s economy from the crisis while global demand for commodities has given the recovery a leg up.

 Back in the U.S., The Wall Street Journal ran a must-read editorial yesterday on why fears of a double-dip recession are overstated. 

Robert Bach

SVP, Chief Economist

Grubb & Ellis

May 28, 2010

With prospects for Greece, Spain and the euro looking shaky, fears of a double-dip recession have grown. But one indicator says that’s not likely at least in the U.S. The yield curve, the spread between short and long-term interest rates, continues to point toward growth. A reliable predictor of recessions, the yield curve is in a normal position meaning that U.S. Treasury securities with longer terms have higher yields. This is normal because investors demand higher yields to compensate for the greater uncertainty (increased risk) of holding longer-term bonds. An inverted yield curve, which precedes a recession by four to six quarters, means that longer-term bonds have lower yields because investors expect a weakening economy to reduce inflation pressures and interest rates, causing bond prices to rise in the future. The current normal yield curve suggests the chance of a double-dip recession remains low.

For more information on the yield curve,

• Click here to view a graph from the Federal Reserve Bank of New York showing a 50-year history of the yield curve versus recessions. Note how the yield curve has fallen before every recession (the gray bands) including the one that began in December 2007 (not shown.) Note, too, the bottom graph indicating that the current probability of a recession remains low.
• Click here to view a “dynamic yield curve” from StockCharts.com. Wait a few seconds for the graphs to appear, then click on the “animate” button to view the relationship between the stock market and the yield curve from 2002 through yesterday.
• And finally, click here for a discussion of the yield curve in Q&A format from the New York Fed.

 Robert Bach

SVP, Chief Economist

Grubb & Ellis

 May 21, 2010

Many people I speak with are skeptical that the labor market recovery is real and sustainable. It’s true that the 573,000 net new payroll jobs created year-to-date is merely a down payment on the 8.4 million jobs lost in 2008 and 2009, but the trend is moving in the right direction. A particularly hopeful sign is that new business creation surged to a 14-year high in 2009. “Challenging economic times can serve as a motivational boost to individuals who have been laid-off to become their own employers and future job creators,” according to the Kauffman Foundation, the study’s author. Entrepreneurship is strongest in the West and South. Click here to view a summary of the study, and click here to listen to a story from American Public Media’s “Marketplace” radio show.

What kinds of jobs are being created? Moody’s Economy.com reports that the following sectors will see the biggest percentage gains in jobs added this year:

• Medical Services
• Industrial Services
• Computer Software & Services
• Restaurants
• Biotechnology
• Environmental Services
• Retail Stores – General
• Banking
• Medical Supplies
• Retail Stores – Specialty Lines

The American free enterprise system is working as advertised.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

March 7, 2010 

Some Fridays have more good news to share than others. Today – one day after a record intra-day point drop in the Dow – fits into the latter category. Was it caused by a “fat finger” (a technical glitch) or fears that contagion from Greece’s debt will spread to other countries, threatening the euro? The drama playing out in Europe eclipsed this morning’s blowout report from the Bureau of Labor Statistics that employers added 290,000 net new payroll jobs last month including 231,000 in the private sector. It was the best performance since February 2006 and well above the consensus for 175,000. On any other day, this might fuel a big stock market rally, but today, traders are focused on events overseas.

I was struck by editorials in today’s New York Times and Wall Street Journal that were in basic agreement, which is news in itself.

• In the Times, Nobel prizewinning economist Paul Krugman asks, “So, is Greece the next Lehman? No. It isn’t either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008. Whatever caused that brief 1,000-point swoon in the Dow, it wasn’t justified by actual events in Europe.” Click here to read the full article.

• The Wall Street Journal states, “… there is no good reason that sovereign debt problems in a country that represents only 2% of the EU economy should send the world into another financial crisis and recession… The world banking system is far stronger than it was two years ago, and… the world economy is also stronger than it was in 2008.”

It’s not unusual for financial markets to disconnect from economic fundamentals for periods of time. Consider the 23 percent plunge in the Dow on October 19, 1987 (Black Monday). The economy continued to expand, and employers continued to add jobs at a rapid pace for another 2 ½ years by which time the stock market had recovered its losses.

The 290,000 jobs added to payrolls last month is good news for commercial real estate because it shows that occupier demand for space is heading in the right direction. Financial markets remain fragile as the problems in Greece and the euro zone illustrate, but they don’t preclude a continuing recovery. It serves as a cautionary tale on two fronts:

• Investors should not abandon their analytical rigor as they compete for bargains in commercial real estate and other assets.
• Eventually the U.S. must get its own fiscal house in order.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

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