Employment Demand Outlook: Need To Survive the Next Three Months

While Winter Employment Outlook Looks Dismal, Spring Could Bring a Thaw in Hiring Freezes

If landlords across the country can make it through the coming layoff season, (November - January), they may begin to see some stabilization in demand from commercial tenants for space. Looking out 12 to 24 months, business owners say they expect their companies to emerge from the recession well positioned for growth over the next two years, according to a crop of employment outlook reports issued this week.

The reports were a welcome reprieve following last week's announcement from the U.S. Bureau of Labor Statistics (BLS) that the U.S. unemployment rate has climbed to 10.2% as 7.3 million jobs have been lost since the start of the recession in December 2007.

The good news in the latest BLS report is that the number of job losses has been declining over the past three months. The bad news is that, if the BLS nine-year averages are borne out, job losses could skyrocket in the coming three months. Over the past nine years, the number of jobs lost in mass layoffs in November, December and January has been 61% higher on average than the number laid off in the previous months from February through October.

If that trend holds, employers could be laying off more than 1.1 million workers in the next three months. If this past week is any indication, the trend is likely to continue.

• 
  Adobe announced it would lay off about 680 in the coming year, which is about 9% of its workforce.
  
• Applied Materials announced late Wednesday that it planned to lay off from 1,300 to 1,500.
  
• Borders Group announced it was closing 200 of its mall-based Waldenbooks stores in January and would lay off 1,500.
  
• Electronic Arts Inc. announced it was closing several sites and would lay off 1,500.
  
• Pfizer Inc. announced it was closing six R&D sites in the U.S. and would lay off 2,000.
  
• Sprint announced that it plans to lay off another 2,000 to 2,500 employees.

While some economic experts say they believe that the recession is over, the job market remains bleak and small businesses - the largest employer group - fear the economy will not sustain the need for more employees, according to a recent poll by George S. May International.

A new survey of 830 small business owners across the United States found that 74% of respondents do not plan to increase employee headcount in the next 90 days.

"The term 'Help Wanted' has become obsolete in this recovery setback period," said Paul Rauseo, managing director of the George S. May International. "Small business owners feel they do not have the need for more employees and, in fact, see sizable portions of their staff as an unnecessary expense."

Among the respondents not hiring, 62% say they have no confidence in the economy sustaining the need for more employees, while 38% are simply replacing hours from employees cut by adding them on to existing employees' workloads.

The nation's high unemployment threatens to trigger loan defaults and drag on consumption next year, World Bank President Robert Zoellick told reporters this week in Singapore.

Zoellick warned that the U.S. unemployment rate would likely remain elevated in 2010.

Government stimulus spending will likely fuel economic growth through the middle of next year, Zoellick said. After that, consumer spending and business investment must take the baton to boost expansion, he said, adding that he did not see that happening.

"You're going to have problems with delinquencies of credit card loans, consumer loans, people won't be able to pay their mortgages," Zoellick told reporters in Singapore. "Some banks are going to continue to be troubled by bad loans."

Following This Winter of Discontent, However…

Looking beyond the short term, business owners are beginning to demonstrate some optimism. Guardian Life Insurance Company of America in a report released this past week reported that overall, 92% of small business owners expressed optimism about their enterprises, with 54% expecting to maintain business as usual and 38% confidently looking forward to expanding their businesses over the next 12 to 24 months.

The Guardian Life Index examined small business owners within 13 key industry sectors. Optimism varied across these sectors with respect to revenue projections for 2009. Sectors with the highest number of owners who anticipate stable or increased 2009 revenues are traditional health care (72%), financial services (68%), high tech products/services (66%), dining and accommodations (66%) and manufacturing (57%).

From a regional perspective, the South has the highest percentage of owners (62%) who project stable or increased revenues for 2009, followed by the Northeast (61%), the Midwest (59%) and the West (56%). Texas is the state with the highest percentage of owners (69%) who project stable or increased revenues for 2009. That optimism contrasts with California (51%), New York (49%) and Florida (49%).

The Conference Board Employment Trends Index released this week increased for the second consecutive month.

"The Employment Trends Index has likely turned a corner in September, and the historical relationship between the index and employment suggests that job losses will end in early 2010," said Gad Levanon, senior economist at The Conference Board. "While layoffs have certainly declined in recent months, we still expect to see employers adding hours to their existing workforce before hiring will strongly increase."

The latest quarterly results from the Wells Fargo/Gallup Small Business Index also showed optimism among small business owners improved during October, driven by improved outlook for revenue, capital spending and hiring.

The Spherion Employee Confidence Index, which measures workers' confidence in their personal employment situation and optimism in the economic environment, reveals that although fewer U.S. workers believe the economy is getting stronger, slightly more workers are optimistic in the future of their current employer.

"Our latest Employee Confidence Index suggests that workers remained concerned about the economy and job market as a whole," said Roy Krause, president and CEO of Spherion Corporation. "Although economic indicators seem to be pointing in a better direction, confidence levels are likely to bounce around a bit until workers see more definitive signs of a turnaround such as positive job growth. Undeniably, this downturn has many businesses operating in a 'doing more with less' mode, which may become standardized in a post-recessionary economy. Even though the appetite for aggressive hiring may not be seen for some time, companies are starting to talk about the need to potentially add new staff in order to maintain productivity. In a number of cases, this is tied to a desire to be fully 'battle ready' for the recovery and to augment teams that may struggle because recession cuts were perhaps a bit too deep."

Tig Gilliam, CEO of Adecco Group North America, which provides temporary staffing, permanent placement, outsourcing, consulting and outplacement, said his firm is seeing further steps toward the gradual improvement in U.S. labor market trends.

"A primary example of this can be found in the temporary job market which has historically been a leading employment indicator," Gilliam said. "For the first time since late 2006, the U.S. labor market created a significant number of temporary jobs in October, increasing by 33,700 positions."

"We are actively discussing workforce solutions and staffing needs for 2010 with our 100,000 clients around the world," Gilliam said. "What's clear from these conversations is that employers are focused on learning from the lessons of this recession, and now more than ever, they are embracing strategies to achieve workforce optimization and increased flexibility. We're being consulted to develop solutions for questions like how can I have an on-demand workforce that expands and contracts more easily, based on my business needs? How can I improve productivity while keeping the employees I currently have from being overworked and overstressed?"

"These approaches," he added, "represent a significant improvement in employer confidence and it marks a real shift from where we were just a few months ago when clients were asking, how can we effectively reduce our headcount? This shift in perspective suggests that we can expect these early improving job trends to continue."

By Mark Heschmeyer
November 11, 2009

Geithner Says Commercial Real Estate Woes Won’t Spark Crisis

Oct. 29 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said commercial real estate woes won’t set off a new banking crisis, in remarks to the Economic Club of Chicago.

“I don’t think so,” Geithner said, when asked whether commercial real estate could set off another banking meltdown. “That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult.”

The global economy has accelerated since the worst of the recession and banking crisis last year, Geithner said, noting a U.S. Commerce Department report today showing the economy expanded 3.5 percent in the third quarter.

“You can say now with confidence that the financial system is stable, the economy is stabilized,” Geithner said. “You can see the first signs of growth here and around the world.”

Going forward, the U.S. economy will need to be sustained with private demand without relying on government support, he said. In the meantime, he said, the existing bank rescue and fiscal stimulus programs will help the rebound gain momentum.

“This is going to have to come from private demand, private investment, for it to work and be sustained over time,” Geithner said.

The U.S. needs to bring its budget deficits down “dramatically” because they are too high in the medium term and “unsustainable” in the long run, Geithner said. Investors need confidence that the U.S. that is “going to have the will to do that as the economy recovers,” he said.

Overhaul Bill
Earlier in the day, Geithner testified before a House Financial Services Committee hearing on a draft bill negotiated with the Treasury Department that would police companies for systemic risk and shift the cost of failure to the financial industry.

Geithner said congressional proposals for overseeing big financial firms would give the U.S. government “constrained power” to protect the economy without putting taxpayers at undue risk. The Treasury chief said Congress needs to pass legislation to make the economy less vulnerable to “catastrophic” damage from a major firm’s failure.

Geithner spoke at the Hyatt Regency Chicago, the same hotel where Barack Obama appeared on the weekend he announced his presidential bid in February 2007. The interview was conducted by John Rogers, chairman of Ariel Investments LLC and an Obama campaign fundraiser, before an audience of about 1,400.

As the event got started, Geithner singled out Edward Liddy, who until August had served as interim chief executive officer of American International Group Inc. after its collapse last year, for particular praise. “He just did a great job and I’m very grateful to him,” Geithner said.
Geithner, who was president of the Federal Reserve Bank of New York before joining the Obama administration, said reports of his 100-hour work weeks don’t do justice to his new routine.

“There is no typical day and it’s so much worse than you think,” Geithner said.

To contact the reporters on this story: John McCormick in Chicago at jmccormick16@bloomberg.netRebecca Christie in Washington at rchristie4@bloomberg.net Last

By Rebecca Christie and John McCormick

Reversal of Fortune? Apartment Investment Activity Picking Up

"The attitude towards multifamily has completely changed in the past year," said Dave Doupé, managing director of Jones Lang LaSalle’s West Coast Capital Markets team. "Financing from Freddie Mac and Fannie Mae has certainly bolstered the viability of this sector, but we’re also seeing buyers and sellers begin to come closer to a common ground on pricing discovery in the multifamily product category."

CoStar information confirms a number of multifamily property sales of $20 million or greater announced over the last couple of weeks across such diverse markets as Phoenix, Oklahoma City, Houston, Silver Spring, MD and North Manhattan. In the largest and most recent deal, Equity Residential closed on its purchase of the Metropolitan at Pentagon Row, a 15-story, 326-unit apartment complex in Arlington, VA, from joint venture partners Cornerstone Real Estate Advisers and Kettler in a cash deal for $100 million, or about $306,748 per unit, according to CoStar COMPs.

At the same time, development of new apartments, which virtually evaporated in 2009, is also making a reappearance. AvalonBay Communities, Inc. (NYSE: AVB) surprised analysts last week by announcing two new developments in the northeast totaling $66 million scheduled to begin in the current quarter.

Alexander Goldfarb, REIT analyst with Sandler O'Neill, said it's not surprising that AvalonBay revealed its intentions at this time, given the long lead time required to deliver new product.

"Assuming the job market begins to firm by the end of 2010, the balance of power begins to favor apartment landlords starting in 2011," Goldfarb said in an investment note. "Thus, [AvalonBay] would need to start building in earnest in 2010 to deliver into the front wave of the next cycle."

Meanwhile, Citi just upgraded Equity Residential (NYSE: EQR) from sell to hold based on an array of factors, including modest, tentative signs of stabilization in its markets, an improved outlook for 2010, attractive pricing for its shares, continued control of expenses and EQR's successful disposing of a number of properties that eventually will position the REIT for growth.

"It remains premature to call a plateau, however, as some markets continue to spiral, [for example] Phoenix. EQR appears to have traversed the steepest part of the macro slope and is increasingly positioned for recovery," Citi analyst Michael Bilerman said in a note to clients.

A pair of new reports also reveals signs of improvement in apartments. In a survey by Jones Lang LaSalle released this week, more than two-thirds of respondents said they expect multifamily will outperform office, retail, industrial and hotels in 2010 - and not by a small amount, as much as 30%. Also, nearly 95% of those surveyed said they expected to ramp up investment and development in the coming year. It's a marked reversal from a year ago, when 67% predicted that multifamily would underperform other commercial real estate sectors by virtually the same amount.

JLL surveyed owners, developers, investors and commercial real estate service providers for its Cross-Sector Survey at the Urban Land Institute's Fall Conference this week in San Francisco. The company conducts the survey each spring and fall.

A second report, the latest quarterly survey by the National Multi Housing Council (NMHC), also finds evidence of improvement, with price gaps narrowing, apartment sales heating up and debt and equity capital more readily available. The council's sales volume index hit its highest level in four years, while the equity and debt financing indices were the highest in three years, according to survey results last week.

"The broad improvements in sales volume and debt and equity financing suggest the transactions market may finally be thawing," said NMHC Chief Economist Mark Obrinsky, adding that nearly half of respondents indicated that the gap between what sellers are asking for and what buyers are offering has narrowed.

However, the evidence of an upturn isn’t yet overwhelming. Employment markets continues to sag and demand for apartment residences continues to slip, according to the NMHC. An index measuring "market tightness" shows that vacancies remain high and rents depressed. The index improved from 20 to 31 in the third quarter, but it remains still well below 50, the tipping point between growth and decline.

AvalonBay was careful in its recent third quarter earnings call to emphasize that, despite modest signs of portfolio and capital markets improvement, it does not believe their markets are near a recovery or inflection point on the path to positive growth. However, the company is stockpiling capital and reducing leverage in anticipation of future growth opportunities, Bilerman said

"While not surprising in that construction is in [AvalonBay's] DNA, new starts are a risk," wrote Citi REIT analyst Michael Bilerman in an investor note. "

In addition to being among the active buyers, Equity Residential continues to sell aggressively at caps in the 7’s, with proceeds earmarked for debt retirement and investment redeployment.

Despite the overall upbeat tone, management expressed caution and noted that rents will continue to roll down for some time. Markets that were late to the downturn, for example, California and Seattle, are seeing the worst year-over-year comps now. Move-outs to home purchases appears to be increasing.

Rising markets include Washington, DC, Boston, South Florida and Orlando. Market still in the skids include Los Angeles, Orange County, San Francisco, Seattle and Phoenix. "The West Coast is in the early innings," REIT analyst Goldfarb said.

The sale of The Metropolitan at 1401 S. Joyce St. in the Pentagon City/Crystal City submarket of northern Virginia a vivid example of the D.C. market's strength. The Metropolitan, adjacent to Simon Group's 1 million-square-foot Fashion Center at Pentagon City complex and Federal Realty Investment Trust's 296,000-square-foot Pentagon Row retail center, is 95% leased.

In addition to the Metropolitan, recent transactions of +$20 million tracked by CoStar across the U.S. include the following:

Investment Property Associates (IPA) purchased the San Melia Apartments in Phoenix from TIAA-CREF for $47.82 million, or $98,000 per unit. Located at 14435 S. 48th St., the 493,192-square-foot multifamily property features 172 one-bedroom units, 244 two-bedroom units and 72 three-bedroom units. The property was reportedly 96% occupied at the time of sale. Brad Goff and Bret Zinn of Apartment Realty Advisors represented TIAA-CREF. Cindy Cooke and Brad Cooke of Colliers International in Phoenix represented IPA. (CoStar COMPS #1814971)

Cornerstone Development acquired three Oklahoma City area apartment complexes for $44.5 million, or $44,000 per unit, in the region's largest commercial property transaction so far this year. The portfolio included the 368-unit, 245,216-square-foot Watersedge Apartments in Oklahoma City; the 157-unit, 84,904-square-foot Gardens at Reding, also in Oklahoma City; and the 488-unit, 354,408-square-foot Oxford Oaks Apartments in Edmond. Andy & David Burnett with Sperry Van Ness-William T. Strange & Associates represented the seller in the deal, SIA Partners of Santa Barbara, CA. The deal closed less than five months after the portfolio went under contract. Existing Fannie Mae bonds were paid off and financing through a new HUD loan made the sale possible. (CoStar COMPS #1806686) .

Home Properties Inc. sold the Morgan Crossing Apartments at 146 Chestnut Crossing Drive in Newark, DE, to Morgan Management LLC. Freddie Mac provided $24.72 million in financing. The loan features a 10-year term and a 30-year amortization schedule. The 432-unit, 371,520-square-foot multifamily community sits on 13 acres. Andrew Jonas of The Kislak Co. represented Home Properties Inc. in the transaction. (CoStar COMPS # 1799458)

Bankrupt developer Opus West sold McDowell Village in Scottsdale, AZ, to West Development Inc. for $24 million, or about $122,000 per unit. The 197-unit, 212,709-square-foot senior apartment community at 8300 E. McDowell Road was built in 2005 in the South Scottsdale submarket. Lisa Widmier of VantAge Pointe Capital Management & Advisory Inc. represented the seller. The buyer was self-represented. (CoStar COMPS #1813094)

Metrovest Equities sold the multifamily building at 1420-1428 Fifth Ave. in New York to L&M Development Partners Inc. for $21.93 million, or about $182,700 per unit. The six-story, 120-unit apartment building was built in 2007 and totals 115,728 square feet on two acres. The property is one of the largest remaining development sites in Northern Manhattan. The buyer plans to build a 180,000-square-foot to 260,000-square-foot multifamily building on the site. Shimon Shkury, Mike Tortorici, Victor Sozio, Ivan Petrovic and Christopher Lefferts of Massey Knakal Realty Services Inc. represented the seller, while the buyer was self-represented. (CoStar COMPS #1810887)

Nevins Adams Lewbel & Schell (NALS) acquired the 268-unit Colonnade Townhomes in Hillsboro, OR, from Prudential Real Estate Investors for $21.4 million, or about $80,000 per unit. The 289,426-square-foot multifamily complex at 20311 N.W. Colonnade Drive was built in 1996 and sits on 12.5 acres. The property consists of 140 one-bedroom/one-bath units, 96 two-bedroom/two-bath units, and 32 three-bedroom/ three-bathroom units. Kirk Taylor and Ann Blume of CB Richard Ellis represented the seller, while the buyer was self-represented. (CoStar COMPS # #1792352)

Mid-City Financial Corp. closed on the purchase of the apartment complex at 14120 Grand Pre Road in Silver Spring, MD, for $20.8 million, or about $108,333 per unit. Equity Residential was the seller. Aspen Crossing, a 192-unit garden apartment complex, was built in 1979. Its occupancy is about 96%. Bill Roohan, Mike Muldowney, Andy Boyer, Michael Rudolph and Brian Margerum of CB Richard Ellis's Washington, DC Multi-Housing team brokered the sale. The CB Richard Ellis Capital Markets Mid-Atlantic Debt & Equity Group, led by Maury Zanoff and Joe Donato, arranged the financing for the buyer. (CoStar COMPS #1789442)

The Flat, a 206-unit apartment complex at 750 S. Garland Ave in the City West area of Los Angeles, recently sold for approximately $20 million. (CoStar COMPS #1793349)

In new development, Bridgewood Property Co. and Harrison Street Real Estate Capital have begun construction of a 207-unit in The Woodlands, TX, master-planned community north of Houston. The project is scheduled for late-2011 delivery. The Village at The Woodlands Waterway is a senior living rental community providing assisted living, memory care and independent living units along The Waterway in The Woodlands Town Center.

By Randyl Drummer
November 4, 2009

Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters

Most Market Forecasters See a Pricing Bottom Next Year, and at Least One Prognosticator Suggests that Transaction Pricing for Institutional Investment-Quality Real Estate May Have Already Bottomed in the Third Quarter

Having reviewed the next round of commercial real estate surveys, forecasts and emerging trends issued this past week for 2010, about the only good news appears to be that the market has hit bottom -- or will soon. Rents and values have continued to fall across virtually every commercial real estate sector and across almost every market.

However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.

Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.

At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.

The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.

Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.

Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.

A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.

Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."

"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases” from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.

Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.

The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are “largely dead” and drop to new depths and practically to “abysmal” levels for office, retail and hotels. Warehouse and apartments scored only marginally better at “modestly poor.”

Markets to Watch

Washington D.C. was the hands-down favorite market among respondents, with normally tight-fisted insurers and banks providing financing for new deals. Bethesda, home to the National Institutes of Health, should benefit from increased biomedical spending and inside-the-Beltway Virginia markets are expected to suffer only modest erosion relative to past downturns.

San Francisco. Despite volatile prices, occupancies and rents, the Bay City's expanding tech industry fed by nearby Silicon Valley ranks the city as one of the top buys for apartments, warehouse, office and hotels.

Austin. Investors expect the Texas capital's low state taxes and a pro-business environment to fuel future growth and corporate relocations.

Boston. The city's universities, life science and high-tech companies make Beantown a long-term favorite, with a tight downtown apartment and condo market.

New York. The recovery pace depends on the hammered banking industry, and Midtown availability rates are expected to skyrocket from mid single digits into the mid-teens as office rents fall 40% or more.

Rounding out the top 10 markets to watch are Houston, Seattle, Raleigh/Durham, Denver and San Jose - all of which are strong in some combination of green technology, high-tech and life science.

One of the main questions appears to be what constitutes a market bottom and when will we get there, particularly with regard to CRE prices and values? Most of the forecasts call the pricing bottom for next year, and sooner rather than later, but the MIT Center for Real Estate suggests that transaction pricing for institutional real estate at least may have already bottomed in the third quarter.

Here are some other highlights (or lowlights depending on your perspective) from this week's forecasts and surveys:

Commercial property markets remain extremely stressed with high unemployment pushing up vacancies, no credit capacity and values still plummeting with little prospect for significant near-term improvement, according to Real Estate Roundtable's latest quarterly survey of the sentiments of senior commercial real estate executives.

Despite shrinking rents and values, some developers, owners and investors are optimistic that 2010 will bring slight growth in national productivity and improved liquidity in credit markets, according to NAIOP's annual Vital Signs survey, with 44% of respondents predicting that borrowing will improve somewhat in the coming year.

For the first time in more than a year, transaction prices in commercial property deals sold by institutional investors rose in the third quarter, suggesting that the U.S. market may have found a bottom, according to the aforementioned MIT Center for Real Estate in Cambridge, MA. The center’s transactions-based index (TBI) rose 4.4% in the third quarter from the second quarter, the largest jump since before the start of the mid-2007 market downturn.

NAIOP: Confidence Will Improve - Slightly

Respondents to the NAIOP Vital Signs report, a survey of nearly 400 developers, owners and investors conducted in early September, said an increase in consumer and business confidence will likely bring higher household and corporate spending throughout 2010. Lenders, chiefly banks, private investors and insurers, will loosen their purse strings a bit in 2010.

For 2009, 64% of NAIOP respondents felt that borrowing money was the same or somewhat easier than a year ago. But confidence improves a bit for 2010, with 80% of this year’s participants indicating that loans will remain difficult or become somewhat more available. Almost 32% of respondents feel that industrial rents will improve in 2010 as availability rates start to level off. But they noted that new industrial development remains slow in 2009 and will be almost non-existent in 2010.

"Obviously the volatile markets of the last year have created great concern for those seeking capital, and the decline in development is the consequence," said Douglas Howe, chairman of NAIOP and president of Touchstone Corp. in Seattle. "While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2010."

Almost all NAIOP respondents saw office rents deteriorate in 2009, and most expect rents to level off next year, with a few markets expecting a slight increase. Vacancy rates are expected to continue to increase in 2010 -- especially in markets heavily impacted by the residential meltdown -- and begin leveling off by the end of the year. Virtually no one in the NAIOP survey had a positive take on office or industrial development -- a far cry from the boom years when development interest was in the mid 40% range.

RE Roundtable: 'Grim Reality Sets In'

The three indices tracked by the Real Estate Roundtable Sentiment Survey have risen considerably since the near-collapse of financial markets last fall -- a reflection of respondents' collective sense of relief at having survived the worst of the turmoil. However, the latest numbers, based on a survey of more than 100 respondents, remain well below the ideal of 100, with the "current conditions" index standing at 56. An index of 100 means all survey respondents have answered that conditions today are "much better" than they were a year ago and will be "much better" 12 months from now.

"The problems now are more clearly defined and there's a grim sense of reality setting in, but that's a long way from saying markets are stabilizing or that conditions are on the mend," said Roundtable President and CEO Jeffrey DeBoer."

Though the percentage declined to 77% from 93% in the previous quarter, a large majority of respondents still noted that property values are down versus a year ago. And they aren't optimistic about the future, with 71% saying they expect values to remain "about the same" or to erode even further in the next 12 months.

Although capital market conditions remain "extremely fragile," the survey shows some somewhat improved outlooks for 2010. On the debt side, 28% of those polled said credit availability is worse today than a year ago, compared with 71% who said so in the previous quarter.

Echoing the Federal Reserve's latest Beige Book report last week, DeBoer cautioned that any signs of improvement or a leveling off in the rates of decline should be looked at in the context of where things stood 12 months ago.

MIT: Prices May Have Bottomed

The new report by the MIT Center for Real Estate notes that not only did the transaction price index (TPI) show gains, but transaction volume grew markedly for the second straight quarter in a row. Together, the report yields the first increase in market sentiment in two years. Prices that buyers are willing to pay, MIT's so-called demand index, posted a 12% increase after eight consecutive quarters of decline.

"One quarter does not a trend make, and we are still well below normal trading volume," acknowledged MIT center research director David Geltner in a press release. "Nevertheless, this is the strongest sign of a bottom that we’ve had in two years."

For its indices, MIT uses transactional data from the National Council of Real Estate Investment Fiduciaries (NCREIF), a trade group representing institutional real estate investment companies.

By Randyl Drummer
November 4, 2009

Lenders Recovering 60 Percent on Defaulted Mortgages

(October 16)—Lenders are recovering approximately 60 percent of the outstanding balances on defaulted commercial real estate loans, according to an analysis conducted by Real Capital Analytics (RCA).

RCA’s study looked at 145 defaulted loans with outstanding balances totaling $3.2 billion. The researchers determined that the mortgage originators had received $1.9 billion in gross proceeds from the liquidation of the loans.

(RCA’s recovery rate reflects the gross proceeds recovered by a lender after a mortgage has defaulted, and it does not include fees and costs associated with the transaction.)

RCA noted, however, that recovery rates varied dramatically based upon the purpose of the loan. For example, mortgages on development properties yet to be completed brought in slightly more than 30 percent of their balances. Acquisition and refinancing loans, meanwhile, had a recovery rate of nearly 70 percent.

RCA’s statistics show that loans in default, foreclosure or bankruptcy currently total roughly $130 billion. “To date in 2009, lenders have taken control and forced the sale of mortgages totaling $9.5 billion, but in the vast majority of troubled situations, a workout is still ongoing or the loan has simply been extended or modified and remains on the lender’s books,” RCA said.

RCA pointed out that the higher the percentage of the loan relative to the underlying value of the property at the time of origination, the lower the recovery rate. For instance, a loan for 50 percent of a property’s value typically yielded 75 percent of its balance, while lenders recovered 57 percent of the outstanding balance on loans of 100 percent or more of the property’s value.

Among property types, office buildings have shown the lowest recovery rate, 53 percent, according to RCA.

By Allen Kenney