Weekly Market Insight 11.2.09

Personal Consumption Expenditures

Office leasing activity through the third quarter is off by one-third from the same period in 2008, yet the share of activity by the size of tenant is surprisingly consistent. Office tenants leasing less than 10,000 square feet accounted for 29 percent of the total square footage leased this year while tenants needing less than 25,000 square feet comprised more than half of the total. Many of these tenants are branch offices of larger companies, but the importance of smaller tenants to the office market, particularly in non-headquarters cities, may affect the speed of the recovery. Small companies are the engine of job growth in the U.S., and the extent to which they have difficulty borrowing in order to expand could delay the recovery of both the labor market and the office.
Source: U.S. Bureau of Economic Analysis, Grubb & Ellis

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

9% + CAP Rate NNN Investment In Bozeman, MT

Weekly Market Insight 10.26.09

Office leasing activity through the third quarter is off by one-third from the same period in 2008, yet the share of activity by the size of tenant is surprisingly consistent. Office tenants leasing less than 10,000 square feet accounted for 29 percent of the total square footage leased this year while tenants needing less than 25,000 square feet comprised more than half of the total. Many of these tenants are branch offices of larger companies, but the importance of smaller tenants to the office market, particularly in non-headquarters cities, may affect the speed of the recovery. Small companies are the engine of job growth in the U.S., and the extent to which they have difficulty borrowing in order to expand could delay the recovery of both the labor market and the office.

Source: Grubb & Ellis

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Weekly Market Insight 10.19.09

Trade Weighted Exchange Index

Market conditions for the four core property types followed a similar path in the third quarter; vacancy rates increased but not as sharply as in recent quarters. This reflects the improving tone of economic data since last spring and the fact that construction pipelines are emptying. Although Federal Reserve Chairman Ben Bernanke and many other economists think the recession has ended, a leasing market recovery depends on job growth. The last recession ended in November 2001, but payroll employment did not rise above its post-recession level until April 2004 (a 29-month jobless recovery) and did not set a new peak until February 2005 (10 months after that). The recession before that ended in March 1991; the jobless period lasted 14 months, and a new peak was set nine months later. Assuming a jobless recovery of similar magnitude, the labor market would be stagnant until late 2010 and perhaps well into 2011. A jobless recovery of this length seems extreme for the current circumstances, but even so, it appears that leasing markets are unlikely to embark on a meaningful recovery before 2011.

 

Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis.

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Good News Friday 10.16.09

Elephants and Gorillas

One of the leading indicators of the recovery that we haven’t mentioned is the stock market, perhaps because it is so volatile and covered so thoroughly on a real-time basis. But, like the fabled elephant in the living room or the 500-pound gorilla, we can’t ignore it any longer because the Dow Jones Industrial Average crossed the psychologically important 10,000 threshold on Wednesday. Skeptics will note that the DJIA first crossed 10,000 in 1999, has crossed it 25 times since then and remains 29 percent below its all-time peak in October 2007. But the speed and magnitude of this latest rally merits a sigh of relief at the very least – up 54 percent as of yesterday from its low point on March 9^th. The rally has boosted the market for initial public offerings and bond issuance – important sources of capital for many debt-starved companies. Rising equity prices also have helped support business and consumer confidence, which is reflected in two other economic releases this week: 

• Initial claims for unemployment benefits fell by 10,000 to 514,000 for the week ending October 10^th. It was the lowest level since the holiday week of January 3^rd according to the Bureau of Labor Statistics.
• The Census Bureau reported that retail sales overall declined 1.5 percent in September, payback for the 2.2 percent increase in August due to the cash-for-clunkers program. But sales excluding autos and gas, called core retail sales, increased 0.4 percent in September, led by general merchandise stores (up 0.9 percent), food and beverage stores (up 0.7 percent) and clothing and accessories stores (up 0.5 percent). Along with a recent report from the ICSC on chain store sales, this report raises hopes for stable to slightly higher sales in the upcoming holiday season.

Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis.

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Weekly Market Insight 10.12.09

Trade Weighted Exchange Index

Economists are debating whether the falling dollar is helping or hurting the economy. Analysts who are worried (call them the pessimists) think the decline in part reflects doubt that the U.S. government can control long-term deficits. Those who are not worried (the optimists) see the decline as a sign that investors, who fled to U.S. Treasuries when credit markets were in disarray from September through March (driving up the dollar), are regaining their appetite for risk, putting money in stocks, oil and other assets they think will offer better returns. The pessimists fear that the retreat of the dollar, orderly so far, could turn into a rout at some point, forcing the government to pay much higher interest rates to buyers of its debt and sparking inflation. This camp wants the Federal Reserve to begin tightening monetary policy sooner rather than later and the government to control spending, moves that would support the dollar. They are willing to accept a slower recovery in exchange for inflation protection. The optimists think this course of action could repeat the 1930s when premature tightening pushed the economy, which had been recovering rapidly from the 1929-33 collapse, into a second recession in 1937-38. This camp points out that a weak dollar helps U.S. manufacturers by making exports cheaper for overseas buyers. The same dynamic is true for commercial real estate; a weak dollar makes U.S. properties more attractive to foreign investors. Moreover, a little inflation could be helpful for commercial real estate, which could, at some point, reprise its long-dormant role as an inflation hedge. But while a weak dollar might boost the U.S. recovery in the near term, a perennially weak dollar that reflects a lack of faith among investors is not in the best interest of the country or commercial real estate. Eventually the government will need to cut spending, raise taxes or both to control the deficit. Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis. 

 

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Good News Friday 10.9.09

Second Derivative (ugh!)

Smart Money called “second derivative” one of those “needlessly nerdy financial words.” In the context of the recession, it means that conditions are still getting worse but at a slowing rate – a prelude to bottoming out. A number of economic indicators have seen improvement in their second derivatives and some are signaling expansion. But because commercial real estate is a lagging indicator, we haven’t seen second derivative improvement… until now.

Preliminary third quarter data from Grubb & Ellis show an abatement in the pace of deterioration compared with the past two quarters. The national office vacancy rate appears to be about 50 basis points higher than in the second quarter, which would take it to just above 17 percent. By comparison, vacancy in the first and second quarters increased by 80 and 100 basis points, respectively. Negative net absorption and sublease space also appear to be moderating. What could explain this slowdown in the rate of decline? One theory is that panicked employers “over-fired” after the credit markets froze in September 2008. The faster deterioration in the leasing market during the first and second quarters likely reflected this panic. Now that the recession appears to be ending, tenants may feel less of a need to further slash their space requirements, although we won’t see positive absorption until job growth returns.

A couple of other notable data releases this week:

• The Labor Department reported that initial jobless claims fell 33,000 to 521,000 last week, beating analyst expectations. The decline, which was the fourth in the past five weeks, brought the four-week moving average to its lowest level since January 17^th. Continuing claims for the previous week slipped by 72,000 to 6.04 million.
• Chain store sales rose 0.1 percent in September according to ICSC, the first increase since July 2008. The increase was driven more by calendar and weather effects than by underlying strength in spending, but we’ll take what we can get.

Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis.

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Weekly Market Insight 9.5.09

Outstanding Commercial Real Estate Loans

Bank lending to commercial real estate has followed an interesting trajectory in recent years. After increasing steadily, the outstanding value of loans leveled off and began to decline in September 2008 when the bankruptcy of Lehman Brothers paralyzed credit markets. Then in the last week of September, loan volume spiked as panicked borrowers sought to tap their existing lines of credit to secure working capital. Since that time, loan values have leveled off and begun to decline; the number of loans maturing and not being renewed is greater than new loans being issued, which are few. With bank credit shrinking and the CMBS market still largely frozen, commercial real estate values have fallen by nearly 40 percent.  Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis.

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com.  www.MTcommercialRE.com

Weekly Market Insight 9.28.09

(CPI-U, % Change Year/Year)

An outbreak of inflation is unlikely over the next 12 to 18 months because the economy is burdened by excess capacity in the labor market, factories, houses and commercial real estate. In fact, disinflation (slower price gains) and outright deflation (falling prices) are more likely in the near term, particularly for commercial real estate. The average effective rents for office and industrial space, which include concessions such as periods of free rent and above-standard tenant improvement allowances, have declined by 36 and 35 percent, respectively, from their recent peaks. The Moody’s/REAL Commercial Property Price Index, which measures prices based on repeat sales, has slipped 39 percent from its peak in October 2007. Non-residential construction costs have declined by 7.6 percent over the past 12 months according to the Bureau of Labor Statistics while the average price of a development site has plunged by nearly 60 percent since December 2007 as reported by Real Capital Analytics. Though a near-term bout of inflation is unlikely, inflation could crop up as the recovery gains momentum. Under such a scenario, credit demand in the private sector could begin to compete with borrowing by the Treasury Department, which needs to finance a national debt that is expected to more than double over the next 10 years to $17.5 trillion according to the Office of Management and Budget. Federal Reserve Governor Kevin Warsh, in a speech last Friday, recognized this threat and suggested that the Fed will need to aggressively raise interest rates at some point down the road to head off inflation. If the Fed were to adopt such a policy, it would translate into a weaker recovery in return for lower inflation over the next few years.
Source: U.S. Bureau of Labor Statistics, Grubb & Ellis

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com. www.MTcommercialRE.com.

Good News Friday 9.25.09

What about Real Estate?

The economic news has been mostly encouraging lately. Even the labor market, a lagging indicator, is showing tentative signs of a rebound as initial claims for unemployment benefits fell for a third consecutive week. A number of analysts contend that the recession has ended, although we won’t know for sure until the National Bureau of Economic Research, a nonprofit organization charged with assigning dates to business cycles, makes the call sometime next year. If you think back to the financial chaos of last September and the mixture of fear and gloom that settled over global markets for the next six months, it certainly didn’t seem like the recession would end this soon.

For commercial real estate, perhaps the last industry to join the recovery, recent news hasn’t been so good. Both the investment and leasing markets appear to be stuck in molasses. For a more optimistic outlook, it helps to take a long-term view backward and forward.

• In the early 1990s, there was a feeling that commercial real estate was a permanently damaged asset class with market fundamentals unlikely to recover for a very long time. The market had been badly overbuilt, and respected analysts said that it would not need another square foot of space until after the millennium. There was a further sense at the time that computer and networking technology would suppress the need for, and value of, office, retail and even industrial space. That view proved to be far too pessimistic as most markets were on the road to recovery by the mid-1990s. Today there appears to be more confidence that the asset class will embark on a recovery within a year and feel noticeably stronger in the 2011-2012 time frame. For evidence of this relative optimism, look no further than the growing reservoir of capital being raised to target distressed assets. There has even been talk of too much capital, which could serve to put a floor under prices.
• Looking ahead, commercial real estate could be positioned to reprise its role as an inflation hedge, a role it last performed in the early 1980s – see chart on right. Inflation is unlikely to be a problem for the next couple of years, but the growing deficit, weak dollar and a potential reduction in the willingness of investors to buy U.S. government debt could spur a bout of inflation later on as the recovering economy sops up excess capacity in the labor market, factories, housing and commercial properties. This could coincide with a recovery of commercial real estate leasing markets – falling vacancy rates and rising rental rates – which would make the asset class look very attractive to investors. Analysts are divided over the potential for inflation down the road, but the timing of an outbreak, if one occurs, could favor commercial real estate.

Courtesy of Robert Bach, SVP, Chief Economist, Grubb & Ellis.

For a free consultation of your commercial real estate needs please contact Sean Thompson at 406.539.0082 or sean.thompson@grubb-ellis.com OR Joe Cobb at 406.579.2999 or joe.cobb@grubb-ellis.com. www.MTcommercialRE.com.