Grubb & Ellis Montana Commercial, LLC

Monthly Payroll Job Change Seasonally Adjusted         May 10, 2010

Employers added a robust 290,000 net new payroll jobs in April while February and March numbers were revised higher by a combined 121,000, bringing year-to-date job growth to 573,000. Private sector hiring accounted for 231,000 of the jobs created in April, led by professional and business services with 80,000, leisure and hospitality with 45,000 and manufacturing with 44,000. The unemployment rate increased from 9.7 to 9.9 percent as people who had given up looking for work re-started their searches in response to more opportunities. As a result, the labor force expanded by 805,000, raising the labor force participation rate, which had dropped to a low of 64.6 percent in December, to 65.2 percent in April. Unemployment remains distressingly high, but April’s uptick, caused by more people actively seeking work, suggests a more hopeful outlook. Job growth is the last piece of the economic puzzle necessary to put the recovery on a sustainable course. For commercial real estate, the April employment data combined with the emptying construction pipeline signals that leasing market fundamentals are close to bottoming out. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Bob Bach is our Senior Vice President, Chief Economist

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

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

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

10-Year Treasury Rate March 29, 2010

Rising interest rates raised eyebrows last week as the 10-year Treasury yield rose nearly one quarter of a percentage point to 3.91 percent on Thursday, its highest level since June 10th, before falling back slightly to 3.85 percent on Friday. The increase was due to tepid demand at two government bond auctions, which suggested that bond investors will eventually grow tired of the low yields offered by U.S. government debt. Analysts seem to be divided on whether rates will fall back due to the excess capacity in the labor market, housing, factories and commercial real estate or whether rates will continue to increase as private demand for credit recovers and bond investors demand higher yields. Higher interest rates are to be expected at some point as the economy recovers and the Federal Reserve begins to drain the excess liquidity that it provided when credit markets seized up in late 2008 and through much of 2009. But if rates rise prematurely, it could provide an additional headwind for the housing market, which continues to struggle. The broader economy is at a delicate point in the recovery, the hope being that the private sector can continue the momentum that was started last year by government spending and Federal Reserve credit facilities. Higher interest rates could disrupt that momentum. Source: Federal Reserve, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Average Lease Term March 22, 2010

With rental rates at their softest levels in years, now is an excellent time for tenants to lock in a long-term lease. But that doesn’t seem to be happening yet as the average lease terms for office and industrial deals signed thus far in 2010 continue to set new record lows, down to 44.4 months for industrial leases and 52.6 months for office leases. Part of this dynamic might be due to the fact that sublease deals are beginning to pick up, and those typically have shorter terms left on their leases. But it may be that tenants remain in a defensive mode, preferring to hedge their bets with short-term extensions rather than locking in a full five-year term even if they can get better rates. These tenants are willing to pay a little extra to keep their options open in case the recovery falters. The average lease size also has continued to dip this year, a sign that tenants aren’t paying for extra space to accommodate future growth. Source: Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

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Retail Sales Monthly % Change, Seasonally Adjusted   March 15, 2010

Retail sales surprised on the upside last month despite severe weather in many parts of the U.S. The Census Bureau reported that total retail sales increased by a seasonally adjusted 0.3 percent while core sales, which exclude autos and gas, jumped by 0.9 percent. Over the past 12 months, total and core sales rose by 3.9 and 2.0 percent, respectively. Electronics and appliance stores, miscellaneous retailers, grocery stores and sporting goods and hobby stores all posted strong growth. Even sales at building supply stores and restaurants increased, which is rare during periods of severe weather. This raises the possibility that these data could be revised lower next month, as the January numbers were. Nevertheless, the report suggests that consumer spending could be on firmer footing than previously believed due to a combination of pent-up demand from months of economizing and the rapid run-up in equity prices over the past year. The headwinds are still in place – high unemployment, a housing market that has yet to stabilize, and the need for consumers to save and pay down debt. Overall, the sales increase is good news for retailers, shopping center landlords and the broader economy, but consumers are not yet in a position to lead the economy into a stronger growth cycle. Source: Census Bureau, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

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Monthly Change in Total Consumer Credit Seasonally Adjusted Annual RateMarch 8, 2010

Overshadowed by Friday’s employment situation report from the Labor Department, the Federal Reserve released its G19 report, which stated that total consumer credit increased by 2.4 percent in January, ending a string of 11 consecutive monthly declines. This report, together with last week’s report from ICSC that chain store sales rose by 3.7 percent in February, suggests that consumers are beginning to climb out of their bunkers and cautiously make some purchases that they put on hold last year. If the trend continues, it would be good news not only for retailers and shopping center landlords but also for overall GDP, 70 percent of which is fueled by consumer spending. Source: Federal Reserve, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

Monthly Home Sales In Millions, Seasonally Adjusted Annual Rate March 1, 2010

Sales of both new and existing homes have slipped in recent months, raising doubts about the durability of the housing market recovery. January new home sales fell to a seasonally adjusted annual rate of 309,000, the lowest level on record (since 1963), while existing home sales of 5.05 million retreated to mid-2009 levels. Extreme weather played a role as did the tax credit for first-time buyers, which was scheduled to end in November until Congress extended and expanded it to include repeat buyers. Sales are likely to bump up in the spring as a follow-on wave of buyers seeks to take advantage of the extended tax credit before it ends in April. Besides the impending expiration of the tax credit, the housing market is facing other headwinds. Approximately 7.7 million homeowners are behind on mortgage payments, and over 4 million are now delinquent and going through foreclosure. This will be a destabilizing force on housing prices and add to the shadow supply of rental units. Moreover, the Federal Reserve is scheduled to complete its purchase of $1.25 trillion in mortgage-backed securities by the end of March, a program that has kept mortgage rates low. On the positive side, the return of employment growth this year will support housing demand. Look for the market to firm up gradually but fitfully over the next few years. Source: Census Bureau, National Association of Realtors, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist