Bob Bach is our Senior Vice President, Chief Economist

Monthly retail sales were lackluster in June, down 0.5 percent, while April and May data were revised lower. Core sales, which exclude autos and gasoline, increased 0.1 percent, however. Sales at auto dealers and gas stations fell by more than 2 percent as gas prices declined and rental car companies cut back on purchases for their fleets. Sales at sporting goods and hobby stores, furniture stores and building supply stores fell more than 1 percent while sales rose over 1 percent at electronics and appliance stores and department stores. Compared with a year ago, total and core sales are up by 4.8 and 3.9 percent, respectively. The report suggests that the economy continues to expand but very slowly. The headwinds are obvious: slow growth of employment and earnings, weak consumer confidence and continued problems in the housing market. Expect sales to remain sluggish in the second half of the year.
Source: Census Bureau, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

July 12, 2010 The average size of office and industrial leases signed in the first half of 2010 continued to shrink, ending the period at 9,333 square feet for office leases and 23,657 square feet for industrial leases. This indicates that tenants, although they are no longer frozen in place by the Great Recession, are exercising caution with their space requirements. Specifically, the smaller average lease sizes suggest one or more of the following situations: that tenants are not planning for future growth; that tenants are reducing their space needs after laying off employees during the recession; or that tenants, even if they didn’t implement layoffs, are using techniques to reduce their average space per employee and thus their occupancy costs. Office and industrial lease terms also drifted lower in the first half of 2010, another sign that tenants are taking a conservative approach to their space needs.
Source: Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

Monthly Home Sales
In Millions, Seasonally Adjusted Annual Rate

June 28, 2010 Sales of new and existing homes fell in May as the homebuyers’ tax credit expired at the end of April. New home sales came in at a startlingly low annualized rate of 300,000, the lowest rate since the Census Bureau began tracking this statistic in 1963, while existing home sales slipped to an annualized rate of 5.66 million. Ongoing weakness in the for-sale housing market appears to be supporting demand for rental units. Reis reports that multifamily vacancy rates in larger, professionally managed projects ended the first quarter at 8.0 percent, unchanged from the fourth quarter of 2009. This makes multifamily the first of the major property types to see leasing market conditions stabilize. For all rental housing units, the Census Bureau reports a first quarter vacancy rate of 10.6 percent, down from 11.1 percent in the third quarter of 2009, which was the highest rate since the data series was initiated in 1956. Demand for housing depends heavily on the return of job growth, which would improve the outlook for both rental and for-sale housing.
Source: Census Bureau, National Association of Realtors, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

10-Year Swap Spread

June 21, 2010 The 10-year swap spread is one of the more esoteric indicators that have been in the news recently. In an editorial on Friday in The Wall Street Journal, former Federal Reserve Chairman Alan Greenspan said the 10-year swap spread, which turned negative for a few days in March and remains very narrow, suggests a limit to the borrowing (and spending) capacity of the U.S. government. It is the difference between the yield on the 10-year Treasury note and the fixed interest rate that a private party such as a bank or corporation requires from another private party (the counterparty) in exchange for a series of floating-rate payments. The swap agreement lets one party eliminate interest rate risk while the counterparty gets a stream of fixed-rate payments. According to Chairman Greenspan and some other analysts, a negative 10-year swap spread indicates that bond investors would rather put their money in private corporate debt than in government debt with the same maturity, presumably because they think the private debt issuer has less risk of default than the debt-ridden U.S. government. However, there are other ways to interpret a negative swap spread. For example strong demand for corporate debt combined with a belief that inflation and, therefore, long-term interest rates will remain low, would encourage investors to accept lower fixed interest rates. An increased appetite for risk is apparent in commercial real estate as well as in the bond market. Over the past few months, real estate investors have driven prices up and cap rates down for core assets in particular, i.e. Class A properties in primary, supply-constrained markets. For a further discussion of swap spreads and their significance to the economy, check out Building Knowledge, Grubb & Ellis’ weekly blog on commercial real estate.
Source: Federal Reserve, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Bob Bach is our Senior Vice President, Chief Economist

10-Year Treasury Rate

June 7, 2010 The yield on the benchmark 10-Year Treasury note ended Monday at 3.17 percent, its lowest level since May 15th, 2009. Investors are fleeing riskier assets while embracing the perceived safety of U.S. government debt, pushing prices up and yields down. This is in response to the well-publicized deficit problems in Greece and other euro zone countries, the disappointing pace of job creation in the U.S. and slowing growth in China. Not coincidentally, these fears have pushed the S&P 500 lower by 13.7 percent since April 23rd. The silver lining is that low interest rates are putting downward pressure on mortgage rates and oil prices, which is helpful to the U.S. economy in general and the housing market in particular. The impact on commercial real estate is mixed but mostly negative particularly if the recovery does indeed stall and tenants and real estate investors turn more bearish. The likelihood of a double-dip recession still appears to be less than fifty-fifty. The recent return of investment capital to commercial real estate has targeted the least risky assets – core properties with solid tenant rosters in primary markets and, at the other end of the quality spectrum, distressed properties that have been sharply discounted because the owners and lenders want to move on. This suggests that investors will stay in the game unless conditions turn much worse.
Source: Federal Reserve, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

June 1, 2010 The manufacturing sector continued to hit on all cylinders last month according to the Institute for Supply Management’s purchasing managers index, which came in at 59.7. This was just a shade lower than April’s 60.4, the highest level in nearly six years. Index values above 50 indicate that the manufacturing sector is expanding, while values below 50 indicate contraction. The new orders index, one of the nine composite indexes that constitute the PMI, scored a robust 65.7 for a second consecutive month, which is significant because it is a proxy for future production. At the same time, businesses kept inventories lean, suggesting that the strong order flow will be met primarily through production activity and less by dipping into existing inventories. The May index is evidence that domestic manufacturing activity has thus far weathered the turmoil in Europe, though readings over the next few months will provide more conclusive evidence on whether the U.S. economy can continue to expand. Strong manufacturing activity translates into more goods flowing through corporate supply chains, which will generate demand for warehouse/distribution space.
Source: Institute for Supply Management, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

May 24, 2010 Core inflation, which excludes food and energy, rose by 0.9 percent in April compared with April 2009. This was the smallest year-over-year increase in 44 years and well below the Federal Reserve’s informal target of 1.5 to 2.0 percent. Inflation is low due to excess capacity in the economy resulting from the recent recession, specifically such factors as high unemployment, low factory utilization, excess housing supply and high vacancy rates in commercial properties. The slowing rate of inflation gives the Fed plenty of cover to maintain low interest rates and postpone the sale of government and agency debt that it purchased over the past 18 months to keep credit markets liquid (a strategy called quantitative easing). Low yields on cash have encouraged investors to assume more risk in search of higher returns across all asset classes. In commercial real estate, this trend is evident in investors’ willingness to compete aggressively for core properties in primary markets, driving down cap rates. Though overall inflation remains in check, global demand is pushing commodity prices higher at a faster clip, which helps explain the 5.1 percent increase in construction costs for nonresidential buildings over the past 12 months even though construction starts in the U.S. are minimal. The increase in construction costs translates into rising replacement costs, which, if the trend continues, will make existing properties look more attractive to investors. This is one reason why real estate is viewed as an inflation hedge along with the fact that landlords can raise rental rates to keep pace with inflation. Though inflation is dormant now, many investors expect it to rise as the economy recovers and private demand for credit begins to compete with government borrowing required to finance growing levels of debt.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

May 17, 2010  The Greek debt crisis continues to roil financial markets and test the stability of the euro. The specter of Greece and other highly indebted countries being forced to restructure their sovereign debt raises the possibility of losses at banks that bought the government bonds and a growing reluctance among banks to lend to each other for fear of incurring losses — another contagion, at its worst. Those fears are beginning to show up in the TED spread, a gage of risk-aversion in the credit markets. This is the difference between interest rates on 3-month Treasury bills (“T”), considered risk-free, and the 3-month Eurodollar futures contract (“ED”) as represented by the London interbank offered rate (Libor), which is used for lending between banks. When financial markets are stressed, lenders charge higher rates to make loans (Libor) while lenders and investors park their cash in U.S. short-term debt obligations until the stress subsides, driving down those rates. Thus, Libor goes up while T-bill rates go down, widening the TED spread. The spread ended Monday at 31 basis points, up from a recent low of 11 bps in March. The good news is that this spread remains within a safe range and is well below the levels during the peak of the crisis following “Lehman Brothers weekend” in the fall of 2008. The nearly $1 trillion rescue plan from the European Central Bank and the International Monetary Fund helped shore up confidence at least temporarily, though some analysts remain skeptical that the European Union can get through this without losing some of its weaker member countries or seeing the debt from those countries restructured. If lenders and investors once again become more conservative, it could reverse the newfound availability of investment capital for commercial real estate.
Source: Bloomberg  

Bob Bach is our Senior Vice President, Chief Economist