Grubb & Ellis Montana Commercial, LLC

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

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

They’re Almost Here 

 March 26, 2010

The jobs that economists, commercial real estate landlords and everyone else have been anticipating appear to be just around the corner. Revised data from the Department of Labor showed an increase of 64,000 net new payroll jobs in November, but the trend dipped into the red again in December, January and February. We’ll know more next Friday when the department releases its Employment Situation report for March. In the meantime, the weekly jobless claims report is painting a hopeful picture. For the week ending March 20, the four-week moving average of new claims dropped to 454,000, its lowest level since the week ending September 13, 2008, which led up to the infamous “Lehman Brothers Weekend” when the firm filed for bankruptcy protection. That was when the recession took a sharp turn for the worse and the global financial markets began to quake. So the weekly claims data have retraced the worst of the recession. Continuing claims remain high at 4,648,000 for the week ending March 13, but this total has declined by nearly 1 million over the past year.

As we wait for next Friday’s big report from the Labor Department, take a look at these great interactive charts from USA Today and Moody’s Economy.com. Click on the various states to see the state-by-state employment outlook, and in the left-hand column, click on the various sectors to see which ones will be generating the jobs. Among the states, Texas is forecast to grow fastest this year, and among the sectors, education and health services will lead.

 Have a great weekend.

Robert Bach

SVP, Chief Economist

Grubb & Ellis

What Comes before Jobs?

 March 19, 2010

Job creation is widely considered to be a leading indicator of demand for most types of commercial real estate. Is there a good leading indicator of job creation? Corporate profits: If a company is profitable, it will have an easier time securing debt or equity capital to expand, which usually means buying equipment and staffing up in order to grow its earnings. Nearly three-quarters of the companies in the Standard & Poor’s 500 index exceeded earnings estimates in the fourth quarter. While some of this was due to cost-cutting efforts that included massive layoffs, companies can only pursue this strategy for so long. Eventually they need to expand in order to grow earnings and compete with their rivals, including competition for the best talent. Small companies are having trouble borrowing from their traditional lenders, the small banks, which are dealing with nonperforming commercial real estate loans still on their books. But large companies are able to tap the credit markets by issuing bonds, and this business has been booming. Companies have issued nearly $200 billion of debt year-to-date, up 17 percent from the same period last year. Can job growth be far behind?

Robert Bach

SVP, Chief Economist

Grubb & Ellis

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