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Commercial Real Estate Weathers Turbulent Times
National Real Estate Investor :: November 7, 2011
Despite the Standard & Poor’s downgrade of U.S. debt, a worsening European sovereign debt crisis and rising stock market volatility, the U.S. economy continues to expand and create new jobs, supported by strong consumer spending and business investment. Over the past 12 months (as of the end of October), payroll employment has increased by an average of 125,000 jobs per month. However, the pace is not fast enough to lower the unemployment rate. As a result, we do not expect employment to return to its prior peak until 2016. Overall, employment growth appears to be strong in health care, high tech and energy, but is disappointing in finance, government and construction. Commercial real estate performance generally lags in economic growth by about four to six quarters. U.S. commercial real estate fundamentals continue their recovery path. Demand for commercial space and net absorption has increased, although general leasing activity slowed moderately during the third quarter of 2011. In almost all property sectors, occupancy rates are improving, concessions are declining and effective rents are rising in many markets. On the supply side, with vacancy rates relatively high, financing limited and rents below levels necessary to justify new construction, supply pipelines are well below long-term averages. The next three years should see a limited amount of new deliveries, which is a positive for further real estate recovery.
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Commercial Real Estate Continues to Weigh on Banks
The Wall Street Journal :: November 7, 2011
Commercial real-estate distress shows few signs of abating and continues to push U.S. banks to—or past—the brink of collapse. Troubled commercial real-estate loans accounted for more than 65% of problem loans among the 11 banks that failed in October. While the number of failures was up month over month in October, the percentage of troubled commercial real-estate loans was lower, as the six banks that failed in September saw an 82% percentage of commercial loans among all problem loans. The data, which were laid out in a report released Monday by commercial-mortgage-data firm Trepp LLC, show the continuing drag of the real-estate slump. Last month's 11 failures brought the year-to-date total of failed banks to 85, according to Trepp, with many owing their distress to commercial real-estate problems. "It was a profitable place to be when times were good," Matthew Anderson, Trepp's managing director, said in an interview Monday. But during the downturn, "construction loans turned into a particular albatross, and even the commercial mortgages have turned into a problem area for a lot of banks."
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Global Fears Overshadow U.S. Economic Strength
GlobeSt.com :: November 1, 2011
The last batch of critical U.S. economic indicators has gone a long way to alleviate worst-case scenario concerns regarding the U.S. economy. Even amid the worst of the recent turmoil triggered largely by the U.S. debt downgrade in August, the private sector kept adding a modest number of jobs, retail sales increased and manufacturing regained some strength. These factors culminated in a better-than-expected reading in U.S. Gross Domestic Product (GDP) of 2.5% during the third quarter. All of these factors combined confirm that the U.S. economy remains on strong footing and far from recession, even though it lacks any measurable forward momentum.
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The Have and Have-Not World of Retail
National Real Estate Investor :: November 8, 2011
While other property types, like multifamily and office, have shown consistent signs of recovery, retail has yet to do so. Why is retail recovery lagging, and are there specific retail subsectors that are bucking the trend and posting gains? It doesn’t matter which property types are examined: National numbers imply vacancies moored at levels unseen in at least a decade. Neighborhood and community center vacancy rates have been stuck at 11 percent for the last two quarters, just 10 basis points shy of the 11.1 percent all-time high record last observed in 1990. Regional mall vacancies notched another slight increase in the third quarter, rising to 9.4 percent, the highest level on record since Reis began tracking this property type in 2000. Power centers are doing relatively better, with vacancies at 7 percent as of the third quarter. This is a welcome decline from its cyclical high of 7.6 percent back in the second quarter of 2010. Still, power center vacancies have to decline by more than 200 basis points before it approaches the mid-4 levels at which rates hovered in early 2008, before the downturn gained steam. Across property types, rent growth have remained close to zero or mildly negative, knocking rents back to levels last observed three to four years ago.
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Export Boom Threatened By International Turmoil
The Wall Street Journal :: November 11, 2011
European turmoil and slowing growth in Asia are threatening the export boom that has helped prop up the shaky U.S. economic recovery. Exports have been a source of strength in the U.S. economy in recent years. Facing anemic demand for their products at home, U.S. companies increasingly targeted customers in fast-growing overseas markets like China. New data Thursday underscored that strength. U.S. companies sold a record $180.4 billion in goods and services to foreign customers in September, up 1.4% from the prior month, the Commerce Department said. Exports now make up their largest share of the total U.S. economy in at least three decades, according to a separate Commerce Department estimate. But as the European debt crisis spreads, economists are growing increasingly pessimistic that such growth can continue. U.S. exports to the 17-country euro zone already show signs of slowing, growing just 0.5% in September from August, down from 5.9% growth the previous month. Compared with the previous year, such exports grew at their slowest rate since June. "I just can't really see [exports] continuing to perform as well as they have done," said Paul Dales, an economist with Capital Economics, a consulting firm. "It's pretty clear that things aren't going well from a trade point of view, and that the slowdown in the euro zone is starting to have an effect on the U.S."
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Home Prices Keep Dropping
The Wall Street Journal :: November 10, 2011
U.S. home prices fell in nearly three-quarters of metropolitan areas in the third quarter and the national median price dropped 4.7% as the housing market continued to show weakness. The median price for previously occupied homes sold in the July-to-September quarter declined when compared with last year in 111 out of 150 metro areas tracked by the National Association of Realtors, the trade group said Wednesday. Prices rose in 39 metro areas. The results were roughly even with the second quarter, in which median prices fell in 109 out of 151 cities tracked by the real estate trade association. The national median price for single-family homes sold in the third quarter fell to $169,500 from the same quarter a year earlier. With the economy weak and many Americans reluctant to commit to a home purchase, the housing market has been slow to recover from the worst downtown in decades. The Realtors' group said last month that the number of people who signed contracts to purchase previously occupied homes in the U.S. sank in September to the lowest level in five months..
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Law Firms Stay, Shrink
GlobeSt.com :: November 10, 2011
Law firms are reading the signs of the current economic slowdown, and have been for the most part just renewing in place to gain the best lease deal. While easy-to-move tenants that have 50,000 square feet or less have some advantage with a lot of availability, most firms with leases due are adopting a more passive approach to growth, according to Jones Lang LaSalle’s recently released annual Law Firm Office Perspective report. Tom Doughty, head of the locally-based company’s Law Firm Group, tells GlobeSt.com that nearly two-thirds of all national firms with leases expiring are deciding to stay in their current location. He said law firms tend to lag the rest of the office market. For example, nationally, firms cut about 600 jobs from October 2010 to April 2011, but added 400 jobs in the late spring and summer months this year. “Today law firms are more on the risk-averse end of the scale,” he says. “Most firms have had a better year than 2010, but they’re now going to carefully guard cash, and strike a deal that will either preserve rent at the same level or drop it a little.” There are law firms of less than 50,000 square feet that are relocating, but these are usually the companies that were able to get a good enough deal to outweigh the cost of the move, Doughty says. “Most firms today don’t want to spend the cash it would take to share the new space renovation costs,” he says.
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