22 Deals in One Month

No, that is not a typo. My month has been, well, let's just say it's been pretty encouraging. The tally consists of 3 leases (in excess of 11,000SF, retail and office only) and 19 closed commercial sales. Several of these were the purchase of non-contiguous foreclosed lots, an office building, etc. I am closing out the month of April with a small retail lease that was completed yesterday morning.

As far as I can tell right now, buyers are still able to obtain financing. I personally witnessed this occur several deals. I've also seen some banks behave as if they actually want to lend but make the process so arduous that it's all but impossible to get a loan. I would just prefer if these folks fessed up and not wasted everyone's time. It's going to be a while before I'll feel comfortable recommending them again.

Most of the leasing I've been involved with consists of new start-up business taking advantage of the current rental climate and companies shuffling to similar chunks of space where the rent is cheaper. I don't blame many of them as retail and office rents are down as much as 50%-60% in many places. The Sarasota vacancy report was released earlier in the week and the numbers are not good. Lots of negative absorption out there. I expect this to continue throughout the summer and am hopeful things will turn around in the fall.\

No, that is not a typo. My month has been, well, let's just say it's been pretty encouraging. The tally consists of 3 leases (in excess of 11,000SF, retail and office only) and 19 closed commercial sales. Several of these were the purchase of non-contiguous foreclosed lots, an office building, etc. I am closing out the month of April with a small retail lease that was completed yesterday morning.

As far as I can tell right now, buyers are still able to obtain financing. I saw this on several deals. I've also seen some banks behave as if they actually want to lend but make the process so arduous that it's all but impossible to get a loan. I would just prefer if these folks fessed up and not wasted everyone's time. It's going to be a while before I'll feel comfortable recommending them again.

Most of the leasing I've been involved with consists of new start-up business taking advantage of the current rental climate and companies shuffling to similar chunks of space where the rent is cheaper. I don't blame many of them as retail and office rents are down as much as 50%-60% in many places. The Sarasota vacancy report was released earlier in the week and the numbers are not good. Lots of negative absorption out there. I expect this to continue throughout the summer and am hopeful things will turn around in the fall.

I'm often asked why some properties are moving and others are not. There are a variety of factors in play here, but the most significant is pricing. If landlords and sellers aren't eager to make deals happen, there's no real point in even listing a property for sale at all. Yes, there is a lot of pain - and sometimes anger - involved in coming to terms with what your property may be worth. The problem is, it's only worth what someone will pay. As agents, we do not set the prices, the market does. And the market is changing on a daily basis. If you're a landlord, it's best to bring some some cash in than none at all. If you have a premium location you'll certainly be able to obtain marginally better rents.

Media's Effect on Spending

Not necessarily a post about commercial real estate per se, but I find it interesting how heavily the media plays into general economic fear. No doubt we are facing some strong economic headwinds, but one really needs to question how much worse the constant flow of instant information makes things. Interesting read. See link below for the rest of the article. From The Washington Post.

Frugality fuels recession's vicious cycle
Even those whose jobs are safe are spending less, which holds down growth
By Michael S. Rosenwald
The Washington Post
updated 4:57 a.m. ET, Thurs., April 16, 2009

WASHINGTON - Denise Kimberlin and her husband, Craig, of Woodbridge are government contractors who make nice livings. They recently got raises. They don't fear losing their jobs.

Yet, something is driving them to change their spending habits. They have cut back by at least $250 a week on clothes, dinners out and other discretionary spending.

So, too, has Bob Scanlon, a Brookeville executive with the Transportation Security Administration. He feels his job is secure. But recently he decided to lop $50 a month off his family's cable bill. When they dine at their favorite restaurant, they go on half-price Tuesdays.

The frugality of the Kimberlins and Scanlons and millions of other Americans who still have their good jobs feed back on the economy, holding down growth and encouraging other worried workers to trim their spending — causing the whole vicious cycle to run another lap.

"It really can become and does become a self-fulfilling prophecy," Denise Kimberlin said.

Psychological traps
Economists say many still-flush consumers are handcuffed by psychological traps that cause them to tighten their purse strings even though economic hardship is not their reality. Underscoring the crucial role that consumer psychology will play in turning around the economy, President Obama and Federal Reserve Chairman Ben S. Bernanke have both been on the hustings this week sounding notes of optimism.

"Traditional economics assumes that we are all rational, that we approach these things very rationally, take in all the information, and then weight it and make a decision," said Thomas Gilovich, a Cornell psychologist and co-director of the university's Center for Behavioral Economics and Decision Research. "To a behavioral economist that seems clearly untrue."

Denise Kimberlin said she began cutting back after the holidays, when at family gatherings and work parties she heard stories of people losing their jobs and people saving money around the edges. The stories made her wonder, "What if?"

These perceptions are reinforced by the blare of the news media. When network news anchors Brian Williams and Charlie Gibson lead their broadcasts with bleak news about the economy and consumers clamming up, people who don't necessarily need to cut back decide to anyway.

In August, the three major TV network newscasts spent a total of 85 minutes covering economic news, according to the Tyndall Report, which monitors newscast content. In September, when the banking crisis began and layoffs spiked, the coverage totaled 403 minutes. In the same month, Gallup's polling shows upper-income consumers dropped their total daily spending to about $160, from a high of $185 in May.

By last month, after what must feel like an eternity of stories about creative ways strapped people are saving money, they had cut back further — to $101 day.

Click here for the rest of the story.

Local Retail Vacancies Soar

Space is tough to lease these days, no question about that. Here's an article which appeared this morning in the Sarasota Herald Tribune.

U.S. 41: DOWNTURN DRIVE
Tough times for Tamiami Trail businesses

By Lauren Mayk

Published: Sunday, March 29, 2009 at 1:00 a.m.

This is the first of four stories about how the recession is changing the way local businesses buy, sell and survive.

The economy has changed the Trail.

There are fewer dinners out, smaller staffs and weakened sales. At one beauty salon in North Port, there is even a post office.

When customers started stretching out the time between haircuts and color appointments, Stella Derby went after a contract with the U.S. Postal Service. She now takes mail and sells stamps in the front of her Modern Beauty salon on Tamiami Trail. Signs point patrons to separate entrances for the salon and post office. The idea was to increase exposure for the 30-year-old salon, and nine months later, it seems to be working.

"Every week I get a couple, two, three new clients," Derby said.

Her strategy is one among many that business owners along Tamiami Trail are cobbling together in the midst of a painful downturn that has given some of them the choice between creativity or closure. Traffic along the Trail drives the pulse of commerce and consumerism in Southwest Florida, and it has slowed to a crawl.

There are the obvious indicators: shuttered restaurants, liquidating big boxes and "out of business" signs, but there is also pain inside the businesses still open -- even some that have cars in the parking lot and sales on their books.

Owners are discounting heavily, taking double-digit sales hits and worrying about what comes after the tourist season.

"The whole idea of season is to build up a little bit of cash, and that's not going to happen," said Simon Mendez of Simon's Quality Used Furniture. "You think it's bad right now with people closing down? Wait for summer."

Last year, consumers spent $2 billion less in Southwest Florida than they did in 2007, data from the Florida Department of Revenue shows, with gross sales down 10 percent in Sarasota County, 10.2 percent in Charlotte County and 4.1 percent in Manatee.

For December, the most recent month available in detail, regional sales were down 9.9 percent. The drop-off was about 10.2 percent in Sarasota and Manatee and 7.7 percent in Charlotte County.

Figures for more recent months are not out, but Trail business owners will tell you that despite the tourist season, the (non)spending trend has continued. "This was the worst January I ever had," said Craig Cook, who has owned Amber's Jewel Box in North Port for 11 years. His January sales were off 60 percent.

The Herald-Tribune interviewed more than 50 business owners, employees, real estate professionals and business experts about life along the Trail these days.

There are bright spots and there is determination to evolve with the economy, but there is also an overwhelming feeling of tough times along Southwest Florida's commercial heart.

Vanishing customers

Kamlesh Kadiwar saw sales at his combination gas station, convenience store and deli at Tamiami Trail and River Road in south Venice start to nosedive in April 2007.

Countywide, the decline took a few more months to show up at gas stations, state data show, happening about the time gas was topping $3 in spring and summer 2007.

Sales at Myakka River Trading Co. dropped 25 percent from 2006 to 2007, then sank another 50 percent from 2007 to now.

Kadiwar's business also lost another bigger transaction. "We were under contract for sale for a while and when the recession hit, they backed out," he said.

The station and store, advertising a "1/2 lb. of our famous chicken wings" for $3.79, used to see a steady stream of construction workers, but Kadiwar figures traffic is down from 700 people a day to 300.

The staff has been halved. Kadiwar employs just three others, taking evening shifts himself.

Another challenge is looming, a requirement that stations change their tanks from stainless steel to double-walled fiberglass this year. Kadiwar says the switch would cost $275,000. "We're not going to be doing it. We're going to stop selling gas unless the situation changes," he said.

Stations like Kadiwar's in Sarasota County saw a 41.5 percent drop in sales in November compared with a year ago.

More broadly, the trend was negative that month in about 70 percent of the roughly 80 categories used by the state to break out sales for the county. Many dropped more than 20 percent, including automotive dealers at 32 percent and boat dealers at 52.8 percent.

Sales of household appliances took a 51.7 percent dive, while home furniture, furnishings and equipment -- tied closely to movement in real estate -- were down 20.15 percent. The bright spot was that some furniture retailers report a boost from customers who have just bought homes in the area. With home prices down, buyers have extra money to decorate.

On the other hand, some custom furnishings are ending up back on the sales floor after customers (who only paid for part of the total cost as a downpayment) fail to pick them up.

Traditional retail categories that depend on discretionary income continued to fall, with restaurants and bars showing pullbacks of 3.8 percent and 15.6 percent, respectively, and apparel and accessory stores down by 12.5 percent.

The numbers did spike for some areas in December, including spending on used merchandise (up 3 percent), transportation (up 42.1 percent) and utilities (up 14.8 percent).

While the state can paint a pretty vivid picture of how different industries and retail segments are faring, there are some surprises and some unknowns about what is behind the numbers.

They do not, for example, take into consideration what sales are doing to profit margins, nor do they reflect the evolution of businesses that have downsized by cutting jobs and expenses to stay healthy even while taking in less revenue.

Beauty salons, barber shops and personal appearance services come off looking quite popular in December, with a 31.7 percent year-over-year leap.

But anecdotal evidence suggests consumers are letting their hair grow a little longer, trying home perms and limiting their beauty budgets.

For Audrey's Towne Stylists salon in North Port, some customers just did not make it at all this year. "A lot of people haven't come down from the North," owner Audrey Fred said. "I've gotten a lot of calls and letters saying they can't afford it."

On a February day, Fred and an employee sat in the shop alone, no customers in the rose-colored salon chairs along the wall. Fred, who had run the operation since 1983, said that day that she would like to find a buyer who would let her stay on part-time.

Soon after, the shop closed and a "For Rent" sign showed up on the window.

Empty spaces

At Rico's, a pizza place on the North Trail near the Ringling Museum, business is down at least 20 percent and the staff has shrunk by more than half -- but those are not the only business hits Salvatore Dentici is taking these days.

In addition to a small string of Rico's restaurants, Dentici and his brothers own commercial space, with 11 units around the Rico's spot on North Trail.

"We were fully rented two years ago," Dentici said, peering out. "Now we have ... five."

That real estate once housed a mortgage company, a real estate agency and a Mexican store. "A lot of people just walked," Dentici said.

Vacancies along the Trail are striking, with clusters of leasing signs and closed-up shops punctuating large stretches of commercial space.

The Glengarry Shoppes, home to Barnes & Noble and a Best Buy, used to be flanked by two restaurants: Village Inn and Steak & Ale. Both have closed; one has been knocked down.

On a stretch of the Trail just north of Clark Road, an empty restaurant building is sandwiched between two vacant structures. Others only recently emptied, including a doomed Circuit City.

"There's probably more vacancies than I've ever seen, and it's going to take a long time to fill them," said Barry Seidel, whose name is a common sight on real estate signs along the road.

But Seidel is seeing some hope for the simple reason that his phone is ringing. It started with calls from outside the 941 area code, then from locals.

The glut of office and warehouse space tends to be the most difficult to move.

Tough as it is to lease, Seidel says sales are a bigger challenge.

Bill Clampitt has gotten a lot of interest in buying a property originally built as a Wendy's on the Trail, though a deal recently fell through. He is offering "owner financing" as an appeal to potential buyers concerned about the credit market.

Knights Inn owner Arvind Patel hoped to sell his hotel on the North Trail, but let a listing expire, figuring the market is too soft. Though he is no longer actively seeking a buyer, the listing can still be found online.

"If somebody brings in $4.4 million, they can have it," he said.

Landlords and Tenants Alike More In Favor of Short-Term Leases

From the NYT. Pretty similar to what is going on locally. Link to full article below.

Both tenants and landlords seem to be growing afraid of commitment these days. With the economic outlook murky at best, fewer of them want to tie themselves to long leases.

Tina Fineberg for The New York Times

In Manhattan, where office leases often last 10 years, there has been a noticeable uptick recently of leases lasting only one to three years. Some prominent landlords have begun playing up the availability of short-term leases in their buildings.

For example, Paramount Group is advertising two-year leases at 1633 Broadway, between 50th and 51st Streets. And the Kushner Companies sent promotional materials to brokers advertising one- and two-year leases for finished offices in 666 Fifth Avenue, a prime office tower that spans the entire blockfront of Fifth Avenue between 52nd and 53rd Streets.

In all of Manhattan, 21 percent of the office leases that were signed in the fourth quarter of 2008 were for three years or less, compared with 15 percent in the corresponding quarter a year earlier, according to Cushman & Wakefield, a real estate brokerage firm that compiles data on commercial transactions. Brokers say they expect short-term leases to become even more fashionable this year.

“There’s a lot of anxiety out there, and short-term decisions are easier to rationalize,” said David L. Hoffman Jr., a principal at Colliers ABR, a real estate services company.

Mr. Hoffman is the leasing agent for some office towers in Manhattan whose landlords have recently signed short-term renewals with existing tenants. “There were tenants with one foot out the door, who were leaving spaces that required large capital improvements,” Mr. Hoffman said. “We decided it was more cost-effective to keep them in place.”

In recent months, he has negotiated five short-term lease renewals at 360 Lexington Avenue, a 24-story, 262,000-square-foot office tower on the northwest corner of 40th Street. Three of these renewals were for two years, and two were for one year.

Brokers say that smaller tenants tend to favor short-term leases now, while large office tenants still prefer the stability of long-term leases. For example, the short-term leases that Mr. Hoffman negotiated at 360 Lexington Avenue ranged in size from 2,500 square feet to 7,300 square feet. The tenants included a law firm, a technology firm, a small financial firm and two missions to the United Nations, which is nearby.

The building is owned by AEW Capital Management, a real estate company based in Boston, which bought it for $129 million in August. “We did not forecast higher rents when we bought the building, because the Bear Stearns building was nearby, and we knew there would be a shakeout in the financial sector,” said Jeff Furber, the chief executive of AEW Capital Management, which is a subsidiary of Natixis Global Asset Management, a French investment firm. Indeed, he said, “we liked the building because it didn’t have a lot of financial firms in it.”

Mr. Furber said that tenants were driving the demand for short-term contracts and that he would be happy to sign office leases for five years or more. “But business conditions are deteriorating so rapidly,” Mr. Furber said. “Tenants are saying that they’re just not sure how much space they’ll need in a year or two, so it is hard for them to commit.”

Matthew Astrachan, an executive vice president at Cushman & Wakefield, who represents both office tenants and landlords, said that the Manhattan office market had recently become a “tenants’ market,” meaning tenants now have the upper hand in negotiations with landlords.

The vacancy rate for the entire Manhattan office market as of the end of February had risen above 9 percent. But vacancy rates are even higher in the most expensive top-notch buildings, known in the industry’s jargon as Class A office space. The vacancy rate for Class A buildings in Midtown Manhattan has climbed to 10.6 percent, according to Cushman & Wakefield.

Mr. Astrachan said that in times like these, tenants can often negotiate with landlords for concessions — like long periods of free rent and capital improvement allowances — if they are signing 5- to 10-year leases.

But tenants signing leases of one or two years cannot negotiate as many perks. “They are slightly overpaying, in order to keep their flexibility,” he said.

Charlie Malet, the executive vice president in charge of national leasing for Shorenstein, a real estate company based in San Francisco, which owns several office buildings in Manhattan, said that short-term leases were attractive for both landlords and tenants now.

“Landlords don’t want to tie up space for what they perceive to be a low rent,” he said. “And if the tenants are a little uncertain about the long-term business environment, they don’t want to lock themselves into a 10-year deal.”

Mr. Malet said that Shorenstein recently signed a one-year lease renewal with Harbor View Advisors, an investment advisory firm, at 850 Third Avenue. Shorenstein bought this 39-story, 1.2 million-square-foot office tower last summer. The price tag was around $325 million, according to Real Capital Analytics, a New York research firm that tracks sales of office buildings.

Ken Perry, the chief investment officer and director of asset management for the Swig Company, a real estate concern in San Francisco, said the company had recently signed about half a dozen short-term leases at 1411 Broadway, one of several office towers it owns in Manhattan. Swig has had a 50 percent stake in this building since it was built in 1970, and is currently a co-owner with the Blackstone Group.

“This is the first time that I can remember when both landlords and tenants want to do short-term leases,” Mr. Perry said.

He said that usually one side or the other saw an advantage in this approach, depending on which direction rents were thought to be heading. “But with all of this uncertainty in the markets, neither side wants to go long term.”

LINK

Commercial Real Estate "Black Hole"

Thought it was relevant. Seems the worst is yet to materialize. I'm a glass half-empty kind of guy, so this is no real surprise. From an agent perspective, I find myself pushing back on more listings these days as owners can't/won't keep up with the dramatically changing landscape with regard to property. Apollo Management owns the brand I work for (Coldwell Banker Commercial).

Banks warned on commercial property ‘black hole’

VIEW THE VIDEO HERE

By Henny Sender in New York

Published: March 19 2009 21:06 | Last updated: March 19 2009 21:06

A “black hole” in the US commercial property market is set to put further pressure on troubled banks, the head of leading private equity firm Apollo Management has warned.

Leon Black, founder of the firm, said the extra costs of cleaning up the US banking industry could total as much as $2,000bn, putting further strain on the economy. He said the woes of the commercial property had not yet been reflected fully on bank balance sheets.

“You have the black hole of commercial real estate and that hasn’t happened yet,” said Mr Black in a wide-ranging interview on FT.com.

“There you are sitting with $4 trillion of debt and you know not all of it’s bad but a lot of it is diminished and that really hasn’t yet been addressed.”

He warned it would be 12 to 18 months before there are lasting signs of US economic recovery.

Apollo, a firm established in 1990 that combines buy-out activity with investing in the debt of troubled companies, is in better shape than many of its competitors. It has at least $13bn to invest at a time when it is almost impossible to raise new money.

Largely because the banks are not providing financing and the capital markets are not open, Mr Black conceded that “conventional private equity right now doesn’t exist ... Conventional buy-outs are really not on the table right now”.

Mr Black warned in February that traditional buy-outs were “essentially dead for the time being” and claimed “the big public-to-privates are gone the way of the dodo”.

During the boom years, which ended abruptly in 2007, Mr Black took advantage of cheap and flexible debt to buy companies, pay his investors dividends and then sell these acquisitions as he did with Intelsat.

Now, as some of the companies he owns, such as Harrah’s Entertainment, have been hard hit by the recession, he is spending much of his time reducing their debt burdens.

“The name of the game is survival, it is too live to play another day,” said the veteran of now defunct Drexel Burnham Lambert, which pioneered the business of raising debt for less creditworthy firms.

While many private equity firms are looking at investing in debt of troubled firms – an area that Apollo has long been involved with – Mr Black is exploring the market for non-performing loans in Europe.

Copyright The Financial Times Limited 2009

Vacancy Report (2/1/09)

The Sarasota EDC numbers are in (as of 2/1) and they are as follows:

Downtown: 11.06%
University Parkway Area (includes Lakewood Ranch): 17.96%
I-75 Fruitville S to Clark: 21.32%
Venice: 22.03%
North Port: 35.13% (!!)
Suburban & South Trail: 26.65%

Area Average: 17.82%

Download Full Report Here (58kb)

Sarasota County Office Vacancy Report (1/1/09)

The Sarasota EDC numbers are in and they are as follows:

Downtown: 10.69%
University Parkway Area (includes Lakewood Ranch): 19.24%
I-75 Fruitville S to Clark: 21.32%
Venice: 22.03%
North Port: 35.13% (!!)
Suburban & South Trail: 27.06%

Area Average: 17.97%

CLICK HERE for a copy of the report (200KB PDF)

Reuters: Values of Institutionally-Bought Commercial Property Post Decline

Note that this is for institutional investors only. Here we go:

By Ilaina Jonas

NEW YORK (Reuters) - U.S. commercial property prices by institutional investors posted their greatest quarterly fall in 22 years, according to an index developed by the Massachusetts Institute of Technology Center for Real Estate.

The transaction-based index, which MIT developed in 1984, fell 10.6 percent in the fourth quarter, surpassing the record fall of 9 percent seen in the fourth quarter 1987.

The index tracks the prices that institutions such as pension funds pay or receive when buying or selling commercial properties like shopping malls, apartment complexes and office towers.

"It now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," Professor David Geltner, director of research at the Center for Real Estate, said in a statement.

The index fell a record 15 percent in 2008, and easily surpassed the 9 percent decline seen in 1991 and the 10 percent drop in 1992.

That period marked one of the most severe recessions in commercial real estate recession and was the result of the savings and loan debacle and U.S. tax code changes in 1986.

The current downturn in commercial property is the result of the credit crisis, which has cut off debt financing for sales. The U.S. recession has also dealt a blow to commercial real estate returns, as business tenants cut staff and office needs, cut hotel demand, or close stores.

The index declined a total of 27 percent from 1987 through 1992, with most of the decline occurring in 1991 and 1992.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

The MIT Center for Real Estate also compiles indexes that gauge movements on the demand side and the supply side of the market that it tracks.

The demand-side index, which tracks prices potential buyers are willing to pay, has fallen for the past six quarters, and is down 23 percent for the year and 31 percent since its mid-2007 peak.

LINK

Demand For Industrial Virtually Non-Existent

From CoStar this morning. We're seeing a dramatic slowdown in interest across all types of property, industrial in particular is one of them. There's a lot of nice space out there that is cheaper than anything I've ever seen and a lot of it is sitting there. I'm talking about lease rates specifically, some of which are dirt cheap right now. Doesn't seem like there is going to be any relief in this sector, at least for the first two quarters of the year. Direct link to article below.

Demand for Industrial Space Enters the Red Zone

CoStar’s First State of the Industrial Market Review and Outlook Finds Weakness in Virtually Every Metric with Conditions

By Randyl Drummer
February 4, 2009

A wide array of economic factors that typically boost commercial real estate growth have gone south over the last 18 months, creating a "perfect storm" scenario for industrial property fundamentals, noted Jay Spivey, senior director of analytics for CoStar Group Inc. Spivey projects demand for industrial real estate in 2009 will likely reach its lowest ebb since the last recession in 2001-02, caught in an economic maelstrom of shrinking U.S. manufacturing and consumer spending, retail store closures and diminishing global appetite for U.S. products

Spivey's findings were presented in CoStar's first-ever 2009 State of the Industrial Market review and outlook, webcast to CoStar clients across the country from the company’s Bethesda, MD, headquarters.

"Economic growth is negative. The stock market is in a free fall. The credit markets are frozen. No one wants to invest because they are scared," said Spivey. "We’re not seeing huge negative absorption yet, but given the state of the economy, we can expect things to get worse before they get better."

Spivey pointed to a now-familiar list of economic stats and facts that bode ill for commercial real estate in 2009. The S&P 500 is down 40% and initial public offerings that fund new companies and business growth have dried up. Corporate borrowing has evaporated and the commercial mortgage-backed securities (CMBS) market is shut down. The "fear index" measuring investor sentiment and market volatility has spiked to an all-time high. And most significantly, job losses this year are expected to exceed the previous downturn eight years ago, when a combination of overbuilding and the collapse of Internet-based companies, among others, caused vacancies and negative absorption to soar.

Following are highlights of CoStar’s comprehensive industrial review and outlook. To add a human dimension to the cold numbers, CoStar invited industrial brokers and other CRE professionals to offer their own analysis and anecdotes on the market just over a month into 2009. One respondent summed up sentiment this way: "It will be a tough year, but not a bloodbath."

CRE Price Bubble

Office, flex and industrial assets are following basically the same pattern as the housing run up and bubble that burst in mid-2006. Overlaying prices for flex and industrial space onto the 10-city Composite of the S&P/Case-Shiller Home Prices Index, Spivey demonstrated a similar escalation and impending collapse of commercial prices.

Virtually every factor in the larger economy affecting demand for warehouse and distribution, flex and general industrial space is pointing downward. The U.S lost 2.6 million jobs in 2008, including large losses in the manufacturing, retail and wholesale trade sectors that drive industrial demand -- 44% more than were lost in 2002 following the dot-com bust. Economy.com predicts the country could lose as many as 3.1 million jobs this year and see a national unemployment rate as high as 9.2%.

Many of those losses are in manufacturing, retail and wholesale sales, construction and other sectors that fill warehouses and factory buildings. Recently released government figures show that real GDP, which correlates closely with demand for industrial space, fell at a 3.8% annualized rate in the fourth quarter -- the steepest decline since 1982. Most economists think the first quarter will be even worse.

U.S. freight carriers that keep the supply chain moving are reporting record declines in traffic in recent months. Imports and exports, an accurate barometer of industrial space demand, are down 23% and 19%, respectively, since July.

The weak dollar helped the U.S. industrial market over the last few years by bolstering export activity as U.S. goods became cheaper around the world. But the dollar gained strength toward the end of the year, dealing another blow to already reeling U.S. manufacturers by making their goods more expensive overseas.

"While the consumer has been in retreat for the past several quarters, the export sector -- which up until recently had been a bright spot -- is now experiencing the downward trajectory that's been felt for quite some time in other areas of the economy," said Ross Moore, executive vice president and director of market and economic research at Colliers International. "That said, the promise of a significant uptick in infrastructure spending, as mandated by the Obama Administration, could provide a much-needed jolt for the warehouse market."

The Industrial Production Index, which measures real output of manufacturing, mining and utilities companies, is even more closely correlated with industrial demand than GDP, Spivey said. The index has increased steadily for more than 20 years, with the exception of the 2001-02 period and the current downturn. Since 2007, the index has dropped 8.8 points.

Dave Burback, executive vice president and national director of Grubb & Ellis’ industrial practice, found some room for optimism in his assessment. Businesses consider industrial space an integral part of their supply-chain strategy, and their constant quest for cost-savings and efficiency should prop up demand this year despite the weak economy, he said. Burback acknowledged that nationally, supply is still expected to outpace demand with absorption continuing to flow into the red and vacancies rising as much as 60 basis points as the construction pipeline empties out.

New Industrial Supply Under Control

If there’s some good news, it’s that the supply of new buildings appears to be reasonably in harmony with demand, Spivey said. Over the last seven years, the amount of new space has exceeded the 50-year average only once, by a scant 14 million square feet in 2006. Space under construction has fallen every quarter since third-quarter 2007.

By comparison, between 1984 and 1990, the amount of new space delivered was above the average every year for a total of 479 million square feet, or 4% of total inventory. In the last building boom from 1996-2001, the excess totaled 461 million square feet, also 4% of industrial stock.

"It is probably a stretch to even call the most recent cycle overbuilding," Spivey said. "As the market started turning the last couple of years, it really reacted quickly and decisively. The market was very disciplined in this latest cycle, which should bode well as the market starts to improve."

The amount of excess supply in local markets varies. For instance, the Inland Empire market in Southern California delivered 23.9 million square feet more than it absorbed last year. Los Angeles, South Florida, Chicago and Dallas/Fort Worth also posted more than 10 million square feet of excess space.

Nationwide, construction of 1,173 properties totaling 74 million square feet of space, only 0.3% of the industrial inventory, is under way. However, only 16% of that coming space is leased, and the new properties coming on line could face serious trouble.

Though relatively modest by historical standards, the emptying of the construction pipeline is likely to drive up industrial vacancy rates, which declined steadily from 2004 to 2007 but rose by an average of 20 basis points per quarter during 2008. The national rate ended the year at 8.9%, the highest since 2004, and seems poised to shoot past the decade high of 9.5% in 2003.

"The consensus is that the troubles which have plagued the second half of 2008 will persist, and possibly worsen into 2009," Burback said. "Consumers have significantly pulled back spending and the reverberations are filtering down all the way to the industrial market as retailers cut their orders for merchandise that once filled warehouse distribution centers to capacity."

Total available space, either vacant, offered for sublease or expected by its owner to become vacant -- has swollen from 1.4 billion to 2.3 billion feet over the last two years. According to Burback, one of the big stories is the growing gulf between the direct vacancy rate and the availability rate. Sublease space is usually offered at a discount to direct space, tending to depress overall asking rates.

Absorption Goes Negative

While the national office market has not yet experienced negative absorption, industrial leasing started to turn negative in 2008 for the first time since mid-2002 and appears likely to exceed the last recession. Tenants gave back a modest 6 million square feet of space in the fourth quarter, compared with the decade peak of positive 63 million square feet absorbed in third-quarter 2006.

That said, leasing would be one of the relatively safe job descriptions in the next few quarters, Spivey said. "Even in a downturn, companies need space and will have lease renewals. I am sure there will be a lot of companies this year looking to find space to lease that is cheaper than what they are currently paying."

Job losses will be a big negative for industrial absorption this year. But fortunately, deliveries of new supply will be down 40% in 2009 and even more next year. Combining the job growth projections with the new delivery projections, CoStar projects that the vacancy rate will rise from its current 8.9% to 11% over the next two years. In turn, rents will likely drop 15% over the next few years -- even worse than the 9% decline during the dot-com downturn.

Slumping Investment Sales

Researchers added 18,000 industrial sales to the CoStar COMPs database last year, down from 22,000 in 2007. Both portfolio and overall sales dropped in 2008 and volume is at its lowest level since 2003. For-sale properties are sitting on the market almost 100 days longer now than in 2007, Spivey said.

Like the office and residential markets, industrial prices spiked to historic highs before starting to fall last year. Fueled by compressed cap rates, dollar sales volume shot up 300% earlier in the decade, only to fall 67% in 2008.

"Investment sales brokers have killed it the last five to seven years," pointed out Christopher J. Skibinski, managing director of industrial/supply chain & logistics solutions for Jones Lang LaSalle’s Charlotte, NC office. "This year will not be good for them. However, not every market experienced the same build up of inventory and growth like the Inland Empire (CA) and the investment sales markets. So relatively speaking, it will be a down year across the board, but not catastrophic."

Uncertainty in cap rates will continue to undermine sales prices. In the San Diego market, for example, prices and number of transactions went up together almost at the same exact rate during the boom market. Conversely, price declines will almost certainly result in further drops in volume.

One consolation is that fewer industrial loans appear to be in trouble. Between 77% and 80% of loans in special servicing or in danger of defaulting are for multifamily, retail and office properties, while only 4% are for industrial.

Tales From the Trenches

CoStar asked more than 100 brokers whether the outlook for the industrial market in 2009 is the worst they’ve ever seen. Though answers varied based on the respondent’s market, most see rays of hope through all the bad news.

"As bad as it appears to be, the recession of 1990/1991 seemed to be worse," said JLL’s Skibinski. "The difference today is that there is more information being reported to the market via negative news, so you have a negative information loop which seems to then drive sentiment deeper and quicker. The pace of change this time has been much more severe but I also believe that the recovery will occur quicker as a result of better information flow."

"While the recession has created a lot of financial headaches for most of the companies and landlords, it has also created a lot of opportunities in the market," said Dan Dokovic industrial sales and leasing broker with Sansone Group in St. Louis, MO. "For example, lower rents and property prices have enticed numerous companies to get into the market and take advantages of these conditions. While transaction value will most likely not be up in the next year, I believe that the volume will pick up and partially make up the difference. Also the limited supply of new buildings in the market will stabilize the market despite the current turmoil."

"Every day seems to be getting worse," reported Jack Haley, principal with Lee & Associates -- Orange, Inc. in Orange County, CA. "Since Jan. 1, I have been talking to all my largest clients about how to weather the storm in their industries. I am engaged as a consultant with many of them, re-negotiating their leases with the landlords, trying to find a way to reduce rents for the next 12 to 24 months. Landlords have been pretty receptive. Who wants another vacant building right now?"

"I do not think 2009, especially with the credit market crazies, will be a great year," says Michael J. Stich of Houston-based National Realty Group, Inc. "But it certainly will not be the worst industrial market year ever in Houston. 2009 will not be the year to acquire or even determine upside returns until the national economic turbulence has been settled."

"Quite possibly, 2009 will see the greatest market correction ever. That being said, brokers will have to work three times as hard as they used to," said Tom Dunsmore, senior associate of industrial sales and leasing with the Minneapolis/St. Paul office of Colliers Turley Martin Tucker.

LINK

Circuit City ripples go beyond vacancies, layoffs

Very good dissertation on the ripple effect Circuit City closings will have throughout the nation. The article is actually incorrect...the company, DJM, who is handling the subletting of the existing Circuit City sites claims over 27-million square feet of "project" encompassing over 600 locations. Click here for info on that.

Link below for the entire article. From MSNBC.

Circuit City ripples go beyond vacancies, layoffs
Pain to be felt by mall owners, suppliers, local businesses, even newspapers
The Associated Press
updated 4:57 p.m. ET, Wed., Feb. 4, 2009

Circuit City will finally flicker out when its last 567 stores close this year, but the bankruptcy of the nation's second-largest electronics retailer will ripple across the U.S. economy for years.

In its wake will be 18.71 million square feet of vacant space in a faltering real estate market. More than 40,000 workers will be jobless, including 7,000 laid off last year.

Shopping centers will lose rental income. Suppliers will lose display space. Newspapers already struggling with falling ad revenues will have one less glossy insert in their Sunday editions.

Circuit City is bigger than any other retailer that has gone under in the current recession. The job outlook for its workers is worse. The prospects for suppliers finding other customers is grim, and a larger pool of creditors are likely to go unpaid.

"The situation today is so different than" during other downturns, said Jerry Mozian, a restructuring expert at Tatum LLC. "It wasn't the whole economy. Here, we've got a worldwide recession."

Other big retail bankruptcies, like Macy's in 1992 and Kmart's in 2002, ended in reorganizations or buyouts rather than liquidation.

Circuit City initially hoped to reorganize when it filed for Chapter 11 protection in November. It was sagging under the weight of $2.32 billion in debt and dismal sales as consumers cut back. But the 60-year-old company couldn't work out a sale or secure new financing, and on Jan. 16 announced it would close for good.

The chain owes nearly $625 million to its 30 largest unsecured creditors — mostly vendors who supply the DVDs, flat-screen TVs and headphones on Circuit City shelves. They must wait to be paid until secured creditors such as bank lenders are satisfied.

That's hitting electronics makers when they can least afford it. Hewlett-Packard, which is shedding 8 percent of its work force after a big acquisition, is owed nearly $120 million. Samsung, which posted its first ever quarterly loss Friday, is owed roughly $115 million. And Sony, which saw its net profit fall 95 percent in the October to December quarter, is owed $60 million.

Smaller businesses also got burned. Freelance photographer Scott Brown had worked for Circuit City's corporate office in Richmond, Va., for two years, shooting photos of people and products for the company's advertisements. The account grew to represent a quarter of his business.

The 41-year-old delivered his last project just four days before the company filed for Chapter 11. At the time, Circuit City owed him nearly $30,000. Brown listed himself as a creditor with the courts and hired an attorney. But the lawyer advised him he would probably never get paid.

"It was huge," Brown said of the loss. "It added to the stress of the daily business like you wouldn't believe."

The vacant stores leave a huge hole for shopping center owners to plug. The 18.71 million square feet of space is like the Raymond James Stadium in Tampa, Fla., where the Super Bowl was played — multiplied by 11.

Finding new tenants is increasingly difficult, as chains like Linens 'N Things, Mervyns and Steve & Barry's also go out of business. Other companies such as Starbucks and Ann Taylor are retrenching from an era of swift expansion.

Making matters more difficult is the size of most Circuit City stores, which range from nearly 17,000 square feet in Steubenville, Ohio, to more than 66,000 square feet in El Paso, Texas. Very few retail tenants require such large spaces, said Green Street Advisors analyst Nick Vedder.

"The anchors are really one of the most important pieces of the center," Vedder said. "They bring in the traffic, they are the lifeblood that (other) tenants rely on to bring customers to the stores."

Read rest of the story...