Bob Bach is our Senior Vice President, Chief Economist

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

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

February 22, 2010 The Obama administration’s recently released budget for fiscal year 2011 forecasts some fairly hefty deficit and debt totals in the coming years. Publicly held debt as a percent of gross domestic product is projected to increase from 53.0 percent in 2009 to 63.6 percent this year and 72.9 percent in 2015. As retiring baby boomers drive up the cost of Social Security and Medicare, the ratio is projected to rise to 77 percent by 2020. There is not a specific threshold above which the debt ratio becomes a threat to the stability of the financial system and the economy, but economists generally seem to prefer ratios below 60 percent and are made nervous by ratios above 80 percent. Uncomfortably high levels of debt could undermine faith in the dollar, causing investors to shun U.S. Treasuries. This, in turn, could cause interest rates to spike as the Treasury would be forced to offer higher rates to attract investors willing to finance its debt, with higher inflation as a result. Debt levels rise during recessions as tax collections fall and outlays such as unemployment insurance increase. This is how it’s supposed to work as federal expenditures help stabilize the economy, although reasonable minds can disagree on the size of those expenditures. But the long-term rise in the debt-to-GDP ratio even after the economy recovers could pose danger to the financial system and will likely require increased taxes, reduced entitlement spending or a combination of both to return the ratio to a lower, more sustainable level. For commercial real estate, a financial environment featuring low interest rates and low to moderate inflation would offer the best climate for growth and rising property values.
Source: Office of Management and Budget, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

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

Bob Bach is our Senior Vice President, Chief Economist

Job Losses Related to Post-War Recessions

February 8, 2010 The January employment report from the Labor Department revealed an unexpected decline in the jobless rate from 10.0 to 9.7 percent, but other parts of the report were less hopeful. The Labor Department revised the number of jobs lost over the past year down by 902,000 in its annual benchmark adjustment to unemployment insurance tax records. Since the recession began in December 2007, employers have shed 8.4 million payroll jobs, a decline of 6.1 percent, which would make this the sharpest decline in employment associated with any recession since the Great Depression. Only the extended jobless recovery that followed the 2001 recession lasted longer. Despite the new benchmark, the labor market still appears to be bottoming out, and the question remains how long it will languish at the bottom. Surging labor productivity, strong temporary hiring and an increase in hours worked suggest that employers may soon begin hiring full-time workers. One theory is that employers slashed jobs so deeply when commercial paper markets froze in September 2008 that they will have to start rehiring those workers sooner than they did after the 2001 recession. Grubb & Ellis expects net payroll job growth totaling 500,000 to 1 million by year-end 2010, which, although a step in the right direction, would be just a down payment on the 8.4 million jobs lost since the recession began.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

Bob Bach is our Senior Vice President, Chief Economist

<!–Noah Shlaes is Managing Director of Grubb & Ellis’ Strategic Consulting Group
–>

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

February 1, 2010 The Institute for Supply Management’s purchasing managers index rose in January to 58.4, its highest level since August 2004. Index values above 50 indicate an expanding manufacturing sector, while values below 50 indicate contraction. The index is a composite of nine other indexes including new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. The production index increased to 66.2, its highest level since April 2004 while new orders, a leading indicator of production, rose to 65.9. Inventories remained below 50, a sign that production activity will remain strong for the next few months as manufacturers replenish their depleted inventories. A recovery in the manufacturing sector will boost demand for manufacturing properties, and it translates into more goods flowing through corporate supply chains, which will support demand for warehouse/distribution space.
Source: Institute for Supply Management, Grubb & Ellis  

Bob Bach is our Senior Vice President, Chief Economist

<!–Noah Shlaes is Managing Director of Grubb & Ellis’ Strategic Consulting Group
–>

Outstanding Commercial & Industrial Loans
All Commercial Banks, Seasonally Adjusted

January 25, 2010 The value of commercial and industrial loans, i.e. business loans, on the balance sheets of U.S. commercial banks has declined consistently since late 2008. This seems to corroborate the view that banks aren’t lending. Indeed, a separate survey of banks conducted quarterly by the Federal Reserve reveals that banks have been tightening C&I loan standards or increasing spreads since late 2007. But the survey also reveals that demand for C&I loans has weakened consistently since the middle of 2006. The same trend is evident in commercial real estate loans, with banks reporting tighter standards and declining demand for the past three years. The government debt and excess liquidity in the financial system that has built up since the recession began is like dry tinder. An economic recovery will bring stronger private sector loan demand and issuance, which could begin to compete with public borrowing needs and thereby ignite inflation.
Source: Federal Reserve, Grubb & EllisBob Bach

SVP, Chief Economist ]]> http://www.mtcommercialre.com/blog/weekly-market-insight-7/feed/ 0