The Retail Market Research – Q3 – 2011

October 27^th 2011

Highlights

The U.S. Economy

National Retail Market

Orlando Retail Market

 

THE U.S. ECONOMY

It’s up. It’s down. And if there were only a few reasons to account for so much volatility in the financial markets, they wouldn’t be quite as scary. But they are, and this instability, combined with other factors, is continuing to make commercial real estate an attractive investment alternative – particularly when combined with today’s low interest rates and stabilizing property values. In addition, the roller-coaster market rides in August and September may lead to even more capital flowing into commercial real estate, particularly multifamily and retail.  Why? Compare fundamentals and returns and you have your answer.

Retail market research for the 2011 Third Quarter shows the U.S. economy is on much firmer ground as measured by retail sales, corporate profits and  cash reserves, exports and manufacturing. All  are at  pre-recession levels.

Yet equity markets have been on a wild ride, in contrast with numerous improving fundamentals for commercial real estate, making it an attractive alternative for investors with a five-to-seven year horizon. Add to this a pool of domestic and foreign capital sources that view commercial real estate favorably.

Despite recent threats, prospects are bright for the long term future of the U.S. economy and the retail real estate industry. “We see a two out of three chance that the U.S. economy will continue to grow” said Mark Vitner, Managing Director at Wells Fargo Securities at the ICSC conference in New York last month. “For commercial real estate, low interest rates and slow growth are good.”

Job Growth.  Europe’s debt issues and the political stalemate in the U.S. have not resulted in corporate panic  or large-scale layoffs, but the job market remains stagnant. However, the  potential  for job growth is evident, and the economy is showing a respectable level of resilience.

Distressed Loans and Sales.             The number of new distressed loans has slowed  considerably in the past three months. Workout activity exceeded inflows again in August and September as most lenders continued to reduce outstanding distressed loans. Distressed sales pricing is down 60% from the peak.

Commercial Real Estate Sales Trend.         Sales of significant commercial properties continue to rise but the rate of growth represents further slowing. Despite the recent loss of momentum, prices appear to be holding firm with cap rates stable across all property types.

Capital Markets.       Up until June, credit availability improved dramatically and was the biggest contributing factor for more than doubling in transaction volume in the first half of 2011. However, between June and August, the availability of capital has tightened and costs have increased for all but the most pristine properties, mainly due to the fact that CMBS spreads have significantly widened which affects prices and availability of key source of debt for acquisitions. CMBS loans originations are likely to remain slow for several quarters. In September, loan origination began to improve again with national banks and life insurance companies that have quietly turned on the lending spigot with their fixed rate lending.

THE NATIONAL RETAIL MARKET

At last buyers and sellers are also moving closer in their definitions of fair value and improved prices are motivating more sellers to bring their inventory to the market. Overall cap rates averaged over 600 basis points above the 10 year treasury at the close of the third quarter this year. This spread provides long term investors with a buffer against limited NOI growth and encourages modest risk tolerance. Many investors will begin to pursue yields in B class properties in primary and well-performing secondary markets.  Cheap money is fueling the Net Lease Market. So far this year over 15,000 single tenant retail properties valued at $15B have traded hands.

Dollar store retailers will expand further, as will automotive related retailers,  and hybrid grocery stores including drug stores that are looking to add food components. Big and mid-box retailers will reduce footprints by 50% and enter new markets with smaller and more competitive stores such as the Wal-Mart Neighborhood Center.

The recent acquisition by Blackstone of the Equity One portfolio of 36 shopping centers is a good sign for retail properties. These people know real estate cycles very well and it seems that they believe that we are in the beginning of another growth spur; the time to buy is now. According to the latest Moody’s investors report, “Looking forward, we do not envision significant price increase over the next year”.

In fact, in  my personal opinion, keeping in mind that interest rates are artificially kept low by the Fed until 2013, it’s only a matter of time until inflation pushes rates higher which will push cap rates higher.

Although construction is muted and not expected to improve soon, it will take several years until job growth and discretionary income increases enough (longer thanks to inflation) along with retailers expansion to significantly improve occupancy levels and start pushing rental rates higher.

THE ORLANDO RETAIL MARKET

The Orlando retail market experienced a slight improvement in the third quarter of 2011. Resurgent of national retailer’s expansion, renewal of job growth, a rise in households, 8% increase in retail spending, all represent a positive development in Orlando which will translate to lower vacancies in the next 12-18 months.

• Shopping Center market consists of 1,309 projects with 62,234,506 square feet of space. The vacancy rate declined to 11.6%. Rental rates average at $15.31/SF, down over the last quarter  from $15.88/SF.
• Power Centers vacancy rate is at 7.7%, down from 8.3% last quarter. Rental rates are at $16.4/SF.
• Mall vacancy rate is at 4.9% with rental rates average is at $23/SF.
• General Retail vacancy is at 4.1%, rental rates average is at $14.31/SF.
• Absorption  is stronger with 484,827 SF absorbed this quarter.
• Construction. 56,422 SF were completed this quarter, a total of 200,000 in  2011.
• Employment. 13,800 jobs are expected to be created in 2011, an increase of 1.4% from 2010.
• Multi-Tenant Retail. Sales volume of retail centers in 2011 was up compared to 2010. In the first 6 months 19 transactions closed with an average price of $96/SF.  
• Cap Rates. Cap rate of all retail centers that sold is higher this year. The average is 9.7%.  Best-in-class grocery-anchored shopping centers continue to see the mid-7% range.
• Outlook: Best in class properties will remain in high demand but the low supply is causing investors to start seeking B class properties in good locations. Confidence in retailers such as Winn-Dixie is growing.
• Single Tenant.  Best in class credit tenants such as drug store are trading at mid 6% cap rate and up to 7.5%-8.5% for lower credit chains, restaurants, dollar stores etc’. Average price is $210/SF.

ORLANDO’S SUBMARKET HIGHLIGHTS

Altamonte/Douglas     Inventory – 5,174,288 SF, Vacancy – 7.5%, Quoted Rate – $13.83.

Brevard County          Inventory – 29,429,337 SF, Vacancy – 9.8%, Quoted Rate – $11.74.

Casselberry                  Inventory – 6,504,316 SF, Vacancy – 9.5%, Quoted Rate – $16.

Downtown                  Inventory – 5,231,539 SF, Vacancy – 3.5%, Quoted Rate – $25.8.

Kissimmee                   Inventory – 7,536,751 SF, Vacancy – 8.1%, Quoted Rate – $13.87.

Lake County               Inventory – 15,328,714 SF, Vacancy – 7.2%, Quoted Rate – $15.96.

Lake Mary                   Inventory – 3,250,128 SF, Vacancy – 6.9%, Quoted Rate – $17.56.

Lee Road                    Inventory – 1,143,364 SF, Vacancy – 4.9%, Quoted Rate – $15.77.

Longwood                  Inventory – 1,855,723 SF, Vacancy – 10%, Quoted Rate – $12.91.

Maitland                      Inventory – 3,669,062 SF, Vacancy – 10%, Quoted Rate – $15.

Metro West                 Inventory – 2,065,253 SF, Vacancy – 8.5%, Quoted Rate – $15.34.

North Outlier              Inventory – 1,422,918 SF, Vacancy – 18.1%, Quoted Rate – $17.37.

Orlando Airport          Inventory – 857,712 SF, Vacancy – 10.5%, Quoted Rate – $21.77.

Central Park                Inventory – 9,291,921 SF, Vacancy – 8%, Quoted Rate – $12.93.

South Orange              Inventory – 3,942,440 SF, Vacancy – 7.8%, Quoted Rate – $15.16.

Tourism Corridor        Inventory – 13,017,838 SF, Vacancy – 6.9%, Quoted Rate – $ 20.38.

Winter Park                 Inventory – 4,622,728 SF, Vacancy – 3%, Quoted Rate – 21.04.

University                   Inventory – 4,947,898 SF, Vacancy – 5%, Quoted Rate – $20.

Research Park             Inventory – 732,789 SF, Vacancy – 5.8%, Quoted Rate – $20.64.

West Colonial             Inventory – 12,101,790 SF, Vacancy – 10%, Quoted Rate – $14.

The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Integra Realty sources, Reis Observer, Marcus & Millichap, CoStar Group, Inc., Data Quick, Economy.com, Federal Reserve, MBAA, NAR, Real Capital Analytics (RCA), Glenn Mueller, Trepp, U.S. Census Bureau, Urban Land Institute , ICSC, Retail Traffic, Sites USA, Claritas, Retail Planet, US Retail Centers, University of CFL, CBC Worldwide, Moody’s and more.

Sean Glickman is Vice President, Director of The Retail Investment Advisory Group at Coldwell Banker Commercial NRT. He specializes in retail properties in Central Florida and has a Global Real Estate background. His primary focus is on helping clients create wealth through real estate investments. He provides underwriting, advisory and disposition services to some of the largest property owners and developers such as Lamar Companies, Pelloni, Westgate Resorts, Casto Lifestyle, Phoenicia Development, Pelloni Development, The Northeast Companies and many more. | T- 407-571-5532 seanglickman@gmail.com  www.CBCworldwide.com

Positive Notes Amid the Wall Street Din

ORLANDO, August 15 2011.

“Lowering  the sovereign credit rating of the United States of America from AAA to AA+ creates another round of fear and uncertainty but soon it will be translated into another piece of good news for commercial real estate”  said Sean Glickman, Vice-President of Investment Advisory Group, Coldwell Banker Commercial NRT.

Good news such as?

• A week ago Real Capital Analytics reported that the U.S. has regained it top position as the most

active country for commercial property transactions in the second quarter and even after the downgrade,  investors proved that U.S. debt is still considered the safe-haven investment of choice. Immediately after the downgrade treasury notes rallied and brought the 10 Year Treasury benchmark to as low as 2.24%. “If the markets instability continues and treasuries remain so low, cash flow from long-term leases on quality retail assets will become more and more attractive and investment activity will only increase.

•             Forbes.com foresees a bright Orlando future: Forbes.com ranked Orlando number 10 in a report listing U.S. cities as the boom towns of the future.

•             The residential foreclosure market here showed significant declines in June: When compared to 2010, area foreclosures showed the following declines: Seminole County, 70.5% decline; Osceola County, 66.4%; Orange County, 62.6% decline.

Glickman concluded that properties will continue to stabilize in 2011, retail vacancies will decline and rents will inch up modestly. “Retail operations have only recovered slightly,” he said, “but store closures dropped from 4.7 million square feet to 2.7 million from the previous 12-month period. “

•             Multi-tenant property investment is also recovering. “More deals were executed over the past 12 months than in any year-long period since the recession started,” Glickman said. Best-in-class grocery-anchored shopping centers trade at cap rates in the mid-7% range.  Cap rates start at 8.5% for lesser-quality properties. The shopping center market in Orlando consists of 1,300 projects with an average vacancy rate of 12%. The power centers market consists of 23 centers with an average vacancy rate of 7.8%.

•             Retail property sales increased to $474 million; rents rose. “Sales volume of retail properties increased by 459%,” Glickman said,   “compared with the previous 12 months.” Effective rents rose 1.4% to $14.65/SF, following a 2.4% decrease last year.”  Interest in local assets remains keen, Glickman said, and will increase as investors set their sights on secondary markets. “Good news is out there; but sometimes it’s hard to hear it.”

Sean Glickman is a real estate investment advisor and a retail expert. Sean works with many of the top retail owners in the Orlando area. In his approach he offers clients a chance to determine how market conditions and other challenges affect their properties and the ramifications of these challenges on their future goals. Once this is clear, he helps clients determine a strategy that is appropriate to their specific situation and needs. He can be reached at 407-571-5532 or: seanglickman@gmail.com

Move Over, Spielberg

July 2011.

 “Hollywood doesn’t have a corner on drama,” says Sean Glickman. He was referring to the recent sale of Crystal Lake Plaza near downtown Orlando, which he brokered. It seems the only thing lacking in the $4 million sale was a car chase.  “It had everything else – high stakes, heartbreak, suspense, and ultimately – a happy ending,” says Glickman, Vice President of Investments Advisory Group at Coldwell Banker Commercial in Orlando.

Here’s a synopsis: Glickman listed the 52,000-square-foot property for sale in August, 2010. It was fully leased, but two of the tenants had been promised $200,000 in improvements to be paid for by the owner, who was unable to make them. (High Stakes!) The property was in gridlock, with the owner loosing $223,000 in gross income and unable to lease to another tenant.

            That wasn’t all. The property had two loans that had matured and were in default. Orange Bank of Florida was owed $4.1 million, and a second private lender was owed $430,000.  The lenders couldn’t come to terms, the property was foreclosed by Orange Bank, in January, 2011, and the second lender was wiped out. (Heartbreak!)  To add further interest and keep all parties on the edge of their seats, “the anchor store, Winn Dixie, had only a year left on its lease,” said Glickman. Five months later, following plenty of nail-biting and persuasion on both sides (Suspense!) Winn-Dixie signed a new five-year lease on 31,900 square feet a week before the closing.

            The buyer, who was procured by Glickman after the foreclosure, was Robert Zarin, who paid about $76 a square foot. The center, at 2950-3084 Curry Ford Rd., was built in 1987, and is 88 percent leased. The property traded at a cap rate of 8.5 percent. (Happy Ending!)

            “This,” said Glickman, “is a deal I will not forget.”

Sean Glickman is a real estate investment advisor who is first and foremost a retail expert. Sean works with many of the top retail owners in the Orlando area. In his approach he offers clients a chance to determine how market conditions and other challenges affect their properties and the ramifications of these challenges on their future goals. Once this is clear, he helps clients determine a strategy that is appropriate to their specific situation and needs. He can be reached at 407-571-5532 or: seanglickman@gmail.com.

Greenway Plaza Nets $2.2 Mil.

November 2010.

Sky Development Inc. of Florida sold Greenway Plaza shopping center in Sanford, FL, for $2.2 million, or less than $16 per square foot, to Seminole Land Holdings of Colorado. The buyer is based out of Denver Colorado.

The 143,000-square-foot retail center at 3101-3115 S. Orlando Drive was built in 1973 and renovated in 2008 in the E Seminole Outlying submarket.

Sean Glickman, Vice President of Investment Advisory Group at Coldwell Banker Commercial NRT represented the buyer and assisted him in securing the Seminole County CRA grant to renovate the center.

Westgate Resorts Sells Ramada in Kissimmee For $9 Mil

September 2010.

 

Carlos Slim, the Mexican Billionaire Purchases 500-Room Ramada Hotel In Kissimmee FL.

 

Westgate Resorts which was represented by Sean Glickman sold the hospitality building at 7470 W. Irlo Bronson Kissimmee, FL, to Inmobiliaria Carso, S.A. DE C.V for $9 million, or $18,000 per room.Built in 1974, the eight-story hotel totals 303,592 square feet with 500 rooms. The property sits on 8.97acres and is in the Osceola Outlying submarket.Sean Glickman, Vice President of Investment Advisory Group at Coldwell Banker Commercial NRT represented the seller and the buyer. 

The Retail Market Research – Q2 – 2011

By:

Sean Glickman, Vice President – Investment Advisory Group

 

Highlights

 The U.S. Economy

National Retail Market

Orlando Retail Market

Orlando Rent Survey

 

THE U.S. ECONOMY

The U.S. Economic growth continues its sixth quarter of positive GDP growth and its fourth quarter of positive employment growth. It appears that the U.S. economy is better than half way through the recovery cycle. The U.S. economy has evolved firmly from an extended recovery phase to the threshold of expansion, as evidenced by improved momentum in the private sector job growth, GDP and retail sales. Retail Sales Remain Well Above Pre-Recession Levels. The recent rise in gasoline of 30% has clearly diverted expenditures from other industry segments. Total retail sales increased 7.6% in April on a year-over-year basis.

Job Growth.              Growth in the Private Sector continues to advance but the momentum is waning. Powered by 15 months of continuous growth, private sector employers have contributed 2.1 million positions to the economy. However, May additions fell significantly below recent trends to 83,000 private employer jobs. The unknown consequences of provisional monetary policies, the large amount of liquidity in the banking system, the withdrawal of fiscal stimulus and subsequent reduced demand from government and inflation risk, all add complexity to the national economic outlook.

Distressed Loans and Sales.             New accounting rules were issued by the Financial Accounting Standard Board could increase the number of loans that banks classify as troubled Debt. In addition, the banking regulators have also started cracking down on lenders to reclassify their troubled loans and stop the extend and pretend practices. Half of the commercial loans maturing in the next few years are anticipated to mature underwater which puts them at a high risk of being classified as Troubled Debt. May saw an improvement in distressed activity and lenders also made good prog­ress in resolving past issues as outstanding distress. That trend should extend near-term: June has typically been an active month for workouts as lenders clean up books for mid-year reports. Meanwhile, the level of sales associated with distress ranged from 15% of office to 34% of retail volume in May.

Home Prices               Home prices have dropped again to a new 8 year low, a fact that places a clear drag on the general economy. Schiller; “Nation’s economy could take another downward turn due to depressed housing prices, high foreclosure activity and lack of confidence. Tighter lending practices do not help either as lender have denied over 26.8% of the loan applications in 2010, an increase from 23.5% in 2009. According to Moody’s, the cuts in spending in the residential mixed investments account for more than 30% of the decline in U.S. GDP in recent years. On the other hand, most markets are now underpriced and as distressed loans are slowly clearing the market we are moving forward towards equilibrium. Together with low interest rate, affordability is high again. Once the housing market begins to recover it could stimulate an above normal demand in the economy and commercial real estate in 2012, 2013, 2014. This will be amplified in areas such as Las Vegas, Phoenix, Inland Empire, parts of Texas and Florida.

Commercial Real Estate sales Trend.          Sales and offerings surge. May marked an important benchmark as sales achieved their highest monthly total so far in 2011, rising to $15.6b and notching a remarkable 124% gain over the year-earlier month. The growth trend was broad, as every property type registered its most active month this year and both pending deals and new offerings point to a strong June. Although regional malls are quickly gaining currency, as evident not only in recent transactions but also in a spate of new offerings, including West­field’s 17-property US portfolio. The major markets have continued to dom­inate volume, with Manhattan, Washing­ton, DC, and San Francisco still represent­ing between 45% and 50% of total volume.

 Forecast.         The economy is expected to add 2 million jobs by the end of 2011, reducing the unemployment rate to the high 8 percent range; GDP is forecast to average 3.2% in 2011 before trending up the following year. Still, the U.S. economy faces numerous challenges:

With expectations of strengthening economic growth, healthy corporate profits, increasing demand and rising exports, business spending will power the recovery over the next year. The recent corporate rush to raise debt before the Fed ends the $600-billion Treasury-bond purchase program may indicate that companies finally are ready to invest rather than use the money to buy back stock, refinance existing debt or hoard cash. This suggests an imminent increase in capital expenditures, a boost in employment and commensurate improvement in commercial real estate.

Fundamentals for the industrial and office sectors have moved into recovery, while the apartment and retail sectors shifted squarely into expansion territory. Intense competition for core product and the availability of low-cost debt permits capital to flow into a broader range of asset quality and market tiers to take advantage of real estate’s long-term stability and steady income.

THE NATIONAL RETAIL MARKET

Sales of significant retail properties in May soared 185% year-over-year to $2.8b, making this the strongest month so far in 2011. The spike in activity was broad-based and not driven by any one deal or portfolio, cutting across all retail formats with strip center volume up 155% yoy in May and sales of mall and other properties up 206%. With over $7.4b of retail transactions currently pending, volume is expected to remain robust over the near term.

After bottoming in 2009, strip centers valuations have jumped 45% and are now 10% below their 2007 peak levels. There is a recognition that we are back in solid retail investment environment along with historically low interest rates which gives buyers the urgency to get deals done before the FED raises the benchmark. Rather than settle for paltry bond yields many private and institutional investors prefer to invest in retail properties that derive a steady cash flow from long term leases. Today, core assets in primary infill locations sell for cap rates as low as 5.5% and lower grade assets in secondary markets have become more attractive to value-add funds and opportunistic private equity firms. Those assets sell at an 8.5% – 9.5% cap rate.

Average cap rates inched up overall in May to 7.7%, on slight upward pres­sure from UN- Anchored strip centers that trade at an average cap rate of 7.2%. Median prices are between $143 – 167/SF.         An additional factor may be the higher percentage of distressed retail property sales in May, which equaled 34% of volume, well above the 23% averaged to date in 2011. Signs that capital is moving to higher yielding markets are also becoming evi­dent. Tertiary market activity is increas­ing at a much faster pace, with the Mid­west’s volume increasing faster than any region. Investors no longer limit their acquisitions to core, class A product. As competition pushes investors from primary markets there is a growing activity in the Class B and C assets in secondary and tertiary markets as well. In recent years investors have been focused on properties with a minimum of $400 per square foot in annual sales but today they are buying properties with $300/SF in sales such as Winn-Dixie anchored centers and getting a 7-8% yield without a lot of risk. Lenders also are now open to finance those properties.

Retailers expansion and lack of new construction boost occupancy. Nearly 65 Million square feet of retail real estate has been absorbed in the U.S. over the past 12 months. Retailers announced plans to expand over 40% from last year and contraction is subsiding with store closures down 53% from last quarter of 2010 compared to same period in 2009. This year many REITs are marketing non-core assets. Westfield is marketing 17 malls and Kimco expressed their desire to dispose of 150 shopping centers. Weingarten Realty and Ramco-Gershenson are pursuing similar strategies in order to improve the overall quality of their portfolio. Another reason is the fact that many of the properties have reached their sweet spot and maximized their value as cap rates recently approaching levels not seen since the boom years.

Foreign Investors.     Direct acquisitions by foreign investors rose 138% year over year in 2011 to $10.1 Billion. New investors from Asia and the Middle East along with repeat buyers from Europe, Canada, and Latin America all play a role in recent acquisitions of American assets. The trend is expected to grow as the spread between cap rates and interest rates is normally much lower in these countries compared to the U.S. The weak dollar and historically low interest rate only amplifies this investment opportunity for foreign investors.

Forecast.         As property income is recovering with improvement in occupancy levels and expected increase in rental rates, the values are expected to increase. The recent contraction in cap rate was derived mostly by sales of core class A assets in primary markets but we are already seeing investors buying class B and C properties in secondary and tertiary markets. Expectations are for higher inflation that may lead the FED to raise interest rates by next year. This will make commercial real estate less favorable compared to safe investments such as U.S. Treasuries.  This implies an upward pressure on cap rates in the near future.

THE ORLANDO RETAIL MARKET

Orlando was ranked number 10 by Forbes.com report that determines which U.S. cities were the next boom towns of the future based on job creation, growth in educated migration of population and overall attractiveness to immigrants. Orlando is the only Florida city to make the top part of the rankings. Central Florida is home to one of the largest universities in the U.S. The city has become the base of operation for several military, simulation, digital media and medical/life science businesses, professional sports franchises including the Orlando Magic etc’. In a few years Orlando will house two major economic boom facilities: the Amway Center and the Dr. Phillips Center for the Performing Arts in addition to the upcoming medical city in Lake Nona which is one of the largest in the world. Orlando’s foreclosure market showed significant declines in June and through the first six months of the year when compared to 2010. Seminole County — 70.5% decline, Osceola County — 66.4% and Orange County — 62.6% decline. As employment grows in Orlando so will the rate of population growth. Properties will continue to stabilize in 2011. Retail vacancy will decline and rents will inch up modestly this year as the local tourist trade recovers and employers expand. Despite the most significant job growth in any 12-month stretch in four years, retail operations have only slightly recovered thus far, lacking an appreciable rise in tenant demand. Store closures totaled about 2.7 million square feet over the past year, down from 4.7 million square feet in the preceding 12 months, but substantial numbers of new tenants have not yet emerged. Retailers such as the Aldi grocery chain have opened new stores and continue to scout locations but many others remain cautious regarding expansion. Multi-tenant property investment has recovered, with more deals executed over the past 12 months than in any year-long period since the recession started. Other assets in lower-visibility locations or with weaker anchors and in-line tenants typically demand higher equity commitments from the limited number of lenders willing to underwrite deals. As a result, investors require higher first year returns on these assets, with cap rates often starting in the mid- to high-8% range.

Sales Activity.     Sales volume of all retail properties this year totaled over $474 million. This is an increase of 459% compared to the prior 12 months with a median price of $125/SF.

Construction        Construction has virtually disappeared to 184,000 SF of retail space in 2010. Builders will complete 120,000 square feet in 2011, one of the lowest annual totals on record.

Employment.      Following a gain of 15,600 jobs in 2010, hiring will accelerate this year with the addition of 25,000 jobs, a 2.5% increase. Job growth will support a 4% rise in retail sales.

Multi-Tenant.       Sales of high-quality, well-located assets or distressed properties resulted in

near tripling of multi-tenant transactions in the past year, the most active 12-month stretch since before the recession.

Vacancy.               Steady demand growth and minimal supply-side pressures will lower the vacancy rate 70 basis points in 2011 to 10.2%.

Cap Rates.            Best-in-class grocery-anchored shopping centers trade at cap rates in the mid-7% range.  Cap rates starting at 8.5% for lesser-quality properties.

Rents                     This year, asking rents will advance to $17.18/SF, compared with a 1.7% drop in 2010. Effective rents rise 1.4% to $14.65/SF, following a 2.4% decrease last year.

Outlook:                Interest in local assets remains keen and will increase as investors set sight on secondary markets and class B and C properties.

Single Tenant.   Transaction velocity slowed about 15% over the past 12 months. More drugstore sales were executed during the period, however, and restaurant deals increased 61%. The median price was $209 per square foot, compared with a $174/SF median price last year.

Cap Rates.              Rates vary widely, ranging from about 7% for nationally branded drugstore chains to 8% or more for freestanding properties in strong locations net leased to credit tenants.

Outlook:              Sales of top-rated, net-leased assets with tenants secured under long lease terms will remain intense, but deal volume may be limited by a lack of listings.

Capital Markets.       The yield on the 10-year U.S. Treasury remained in the mid-3 percent range throughout the first quarter, where it will stay over the rest of 2011. Ongoing U.S. budget battles, unrest in the Middle East and lingering uncertainty concerning European debt could affect interest rates. Active lenders include life companies, commercial banks and other financial companies. CMBS staged a comeback in the first quarter, with $8.7 billion of new issuance, and will easily exceed last year’s total of $12 billion. Conduits continue to broaden their lending criteria as property operations stabilize.  Loan-to-value ratios generally range from 60% to 75%, depending on asset age and quality, location, tenant mix, and tenant credit rating. Multi-tenant assets with strong anchors and a stable mix of national in-line tenants remain preferred. Debt-service ratios range from 1.25 to 1.40. Financing for lower-quality but not distressed assets will stay limited until economic factors stabilize further and investor demand increases. Rates for five-year retail loans typically start below 5% range.

Distressed Retail    Nearly half of the distressed inventory in 2010 sold in the fourth quarter which is a good indication of lenders motivation to resolve their troubled mortgage portfolio while concentrating on avoiding fire sales but distress will continue to be a significant factor in the market well into 2011 and beyond. As of May 16^th 2011 there are 49 distressed retail properties totaling $608.8 million. In the past 12 months 19 distressed retail properties were offered for sale at an average cap rate of 8.5% and an average price of $115/SF. 12 distressed properties closed with an average cap rate of 9.3%. The price average was $69/SF.

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Sean Glickman  is Vice President of the Investment Advisory Group at CB Commercial NRT. He specializes in retail properties in Central Florida and has a Global Real Estate background. Sean Glickman – Profile . Please contact us for more in dept, localized market insight.

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The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Integra Realty sources, Reis Observer, Marcus & Millichap, CoStar Group, Inc., Data Quick, Economy.com, Federal Reserve, MBAA, NAR, Real Capital Analytics (RCA), Glenn Mueller, Trepp, U.S. Census Bureau, Urban Land Institute , ICSC, Retail Traffic, Sites USA, Claritas, Retail Planet, US Retail Centers, University of CFL.

The Real Estate Retail Market Q1-2010

April 19, 2010

National

Unprecedented government stimulus and intervention prevented the worst case scenario for the U.S. economy and may have helped bring the great recession to an end but over time, the conduct of the U.S. monetary and fiscal policy has also prompted an imbalance between supply and demand for U.S. Treasury notes and is causing the potential for interest rates to rise suddenly. China is the largest foreign holder of U.S. treasury notes followed by Japan and there are indicators that the balance between U.S. debt issuance and Chinese purchases is teetering. The Chinese government recently expressed concerns over their huge investment in American debt and as commercial real estate investors we can all attest that when lenders are weary of their borrowers spending practices, that relationship may sour… The 10 year rate recently closed at  3.9% which is the highest level since last June.

On a positive note, March indicators show that retail sales exceeded expectations and the job creation is the most meaningful since late 2007. Although the odds for a double-dip reception continues to decline the rate of growth in retail sales will likely be limited given record consumer debt and high unemployment that will persist through the end of 2010. The key to the next phase of recovery is corporate spending.

The Great Recession has accelerated a wave of retail failures such as Linens-n-Things, Circuit City, KB Toys and Mervyns and thousands of regional and national retailers have also shuttered their doors. Other chains are adjusting their franchise offerings and business models, closing stores, online retailers are growing at lightning speed and consumer confidence and spending plunging in the wake of the housing and financial crisis. Consumer changing habits and lifestyle will dictate where the sales transactions are going to take place and more often than before, it is not the suburban mall or strip center. In addition, there is simply too much unoccupied shopping space with too few legitimate retailers to occupy it. Redeveloped downtowns and suburban villages with urban like amenities are proven to be a successful model. All these trends will result in negative rental growth and vacancies continue to rise in shopping centers across the country for all but class A and In-fill urban locations for the foreseeable future.

Distress levels are rising but the expectation for a flood of REO has faded for now.  Quality properties have not hit the market due to the lenders avoiding foreclosures on performing assets that have reasonable prospects of stabilizing but the distress levels are expected to increase this year as occupancy and rents continue to weaken in most major markets.

Giving the fact that approximately 1.4 Trillion Dollars of commercial real estate loans are coming due over the next three years and about half of these loans were originated between 2005 and 2007 when prices were near peak levels and high leverage loans were commonplace and  therefore,  the owners owe more than the properties are worth. This situation combined with tighter lending criteria with a minimum of 1.3 debt coverage ratio will make it very difficult for owners to refinance maturing debt or even meet debt service obligations. If banks are forced to take major write downs on these loans many of them will fail which will further harm the nation’s financial system but on the other hand, until billions of dollars of these loans are written down no meaningful recovery can begin.  

Another risk is the inevitable inflationary pressure that will result from doubling of the money supply in the U.S. This will significantly pressure the lenders to increase mortgage rates which will push cap rate higher. Any savvy investor will demand a minimum spread between the cost of money and the immediate return on investment regardless any value added potential a certain property may offer. When cap rate move higher and are expected to remain high for the foreseeable future while lower rents and higher vacancies push NOI downwards, property values cannot go anywhere but down.

In addition to financial distress there are several concerns for this year’s economy that cause owners to sell such as the lack of confidence in our economy due to government spending, the national deficit, weakness in our currency, anticipated increase of capital gains tax to 20-30% , the possible effects of the healthcare reform and more. Several other properties have been maxed out and sustain a diminishing return on investment (ROI) every year that goes by. Other owners see 2010 and 2011 as the best buying opportunity since the great depression and want to release their equity. During 2010 supply of distressed properties is expected to increase and when it does it will exert significant downward pressure on values. After all, the key to successful commercial real estate investing is the ability to buy low, lock in long term low interest, fixed rate debt and hold on until the next cycle kicks in. As inflation kicks in it will drive up the value of the asset and the advantageous debt terms will create an even better performing asset. Another key point to remember is that we entered this cycle without the massive speculative construction that we had during the previous Savings and Loan crisis and the fundamentals were in a better shape going into this current crisis compared to the previous crisis. When the market does recover (when?) it is expected to reach new heights.

Development is reaching an all time low as it responds to softened demand for space. This decrease in supply will result in a far less volatile year for property performance; vacancy is expected to increase to 10.6% while effective rents will drop 4%. A few successful debt reorganizations and loan restructuring such as Developers Diversified Realty, Inland Western Retail and General Growth effort to emerge from bankruptcy thanks to a 6.55 Billion Dollars of new equity investment by Brookfield, Pershing Square and Faiholme Capital eased concerns that greater than expected losses were in store for the CMBS market and is seen as a template that will be replicated in many other situations. Thus, many defaults and asset sales anticipated by a tsunami of upcoming maturing debt can be avoided or at least deferred for a few years.

Investment activity is poised to begin recuperation in the second half of 2010 as investors realize that the flood of REO properties is unlikely to hit the market and a reported $75 Billions of equity has been raised by opportunistic funds and REITs and very little of it has been deployed. These investors are getting anxious and are ready to execute on their investment strategies. Long-term investors are attracted to top tier properties and opportunistic buyers will focus on limited volume of distressed properties sold by financial institutions but those institutions have favored workouts and extensions to allow owners additional time and flexibility to help them recover. Demand for small and mid-size retail centers is expected to move off the bottom as the confidence in the economy grows over the course of 2010.

Foreign interest in U.S. properties is high and will continue to grow in 2010 as Asian investors will provide new capital mostly to the west coast whereas European investors tend to prefer the east coast. Potential changes to the Foreign Investment in Real Property Tax Act (FIRPTA) could remove more barriers from foreign investors. U.S. assets are particularly attractive to foreign investors since prices in Asia, Europe and Israel are already rising and the Dollar remains weak.

The credit crunch is starting to ease and financing for quality assets is becoming more available. The market has already priced in the poor outlook for fundamentals expecting the worst, thus there is only upside since the expectations were so low. Core buyers of top tier stabilized, cash flowing assets are advised to move quickly while cap rates are high and interest rates are low. Cap rates on highest quality assets in core markets are already beginning to fall. Opportunistic buyers targeting value add and distressed assets do not need to move so fast. Very few distressed sales have actually occurred and there are plenty that must be sold and recapitalized. Finding debt for these distressed assets remains tough, serving to keep prices down for a while but opportunistic buyers need to realize that the RTC like fire sales and huge discounts they hoped for are not likely to materialize.

On a positive note, The Health care reform may have positive effects on the medical office market due to the addition of 32 Million Americans to the ranks of the insured. The formula calculating the need for medical space holds that a healthcare system requires 1.9 square feet of medical space per patient which equates to the potential demand for 64 Million square feet of medical space.

March’s job gains of 162,000 are the strongest monthly gain since 2007 and the latest indication that the choppy economic recovery continues to make headway although some sectors, such as financial and information, continue to decline. The unemployment rate remains high and unchanged at 9.7%. A total of 2.3 million jobs have been lost since February 2009.

The Consumer Confidence Index rebounded to 52.5 in March after falling sharply to 46.4 in February from January’s 56.5, the highest index reported since September 2008. February retail sales were up very slightly—a 0.3 percent increase, following a 0.5 percent increase in January. February’s retail sales are the highest monthly sales since September 2008.

Overall, many economic indicators are improving or stabilizing, but until job growth presents consistently positive monthly numbers and is based on permanent full-time jobs, it will still feel like a recession for many.

Capitalization rates in general remained steady at 7.77 percent in February. Cap rates are well above the 6.39 percent of June 2007 and just above the historic norm of 7.6 percent (since 2001).

Retail vacancy rates stood at 19.2 percent in the fourth quarter of 2009, up from 18.6 percent in the third quarter.
Forecast; muted recovery is expected in 2010 and upside surprise is expected for second half of 2011. Commercial property sales volume dropped back to the lower levels of the past eight months after one month’s sharp increase. However, other bright spots continue to appear, continuing the pattern of mixed signals that we have experienced for some time now—REIT and S&P returns, retail sales and housing starts.

Real estate capital markets remain in poor condition but are showing improvement and signs of increasing stability. The REIT sector provided solid performance again in February, CMBS issuance in January continued to show signs of life and capitalization rates remained steady at 7.92 % in January.

Orlando

The Orlando retail market did not experience much change in market conditions in the last quarter. High profile vacancies created by Linens N’ Things and Circuit City have created market entry opportunities for several retailers at current rental rates. Fast food and casual dining restaurants are also actively looking at new sites, albeit at greatly reduced rates.

 

Vacancy. Vacancies will rise again in 2010 partly as a result of significant blocks of vacant space in properties built in the past few years and  the lingering effects of retailer bankruptcies and weak consumer spending weigh on the retail sector shopping centers recently constructed topped over 20% last year and general retail vacancy is expected to reach 12.4%. Vacant subleased space increased by 9,667 square feet.

 

Rental Rates.  Market wide effective rents slipped to levels last recorder in 2005 and additional decline is expected in 2010. Quoted rental rates decreased from third quarter 2009 levels, ending at $16.59 per square foot per year. That compares to $16.63 per square foot in the third quarter 2009 and $17.23 per square foot at the end of the first quarter 2009.

 

Effective Rents. Effective rents dropped to $14.04 per square foot. The largest lease signings occurring in 2009 included: the 51,250-square-foot deal signed by West Oak Charter School at Former Service Merchandise; and the 45,000-square-foot lease signed by Publix Super Markets at University Plaza.

 

Unemployment. Orlando’s unemployment rate increased last year from 7.8% to 10.8%.

 

Distressed Properties. Distress level in Orlando’s retail market is approximately $41.8 Billion which is the highest of all property types. During the past 12 months, eight transactions worth $72MM closed with an average price of $118 per square foot. Fourteen properties were offered with an average price of $203 per square foot and an average cap rate of 7.9%.

 

Construction. Construction completions will drop from 900,000 square feet in 2009 to 300,000 square feet in 2010 and low construction levels may persist for several years due to lower rents and higher vacancy rate.

Equity Pricing. Investors are seeking best in class assets and are underwriting accordingly for anything that falls short. Cap rates are being driven by positive leverage and most investors are focused on the current cash-on-cash yields rather than internal rates of return (IRR); Cap rates for core assets: 9% -11%, Value Add assets: 12% -15%, Opportunistic: 15% – 20%.

Debt Pricing.  Loan to Value: 60-75% spreads over 10 Year Treasury: +/- 350 bps with a minimum implied loan constants of 8.4% to 8.9%. Debt coverage ratio is 1.3 – 1.4.

 

Orlando’s Economy. Orlando is considered to be the most stable economy in Florida with a wealth of attractions for visitors and residents alike and consistently ranks as a leading place to conduct business. This Central Florida city has a number of significant new projects underway in addition to being the tourist capital of the world, having the nation’s leading research park that includes many international, simulation, training and imaging industries. Projects like the new medical city at Lake Nona featuring the UCF College of Medicine and Burnham Institute for Medical Research. This 600-acre site will also be home to the $656 million Orlando VA Medical Center, UCF’s Medical School, Nemours Children’s Hospital, MD Anderson’s Orlando Research Institute, Burnett School of Biomedical Science and a UCF Research Center. The project is projected to be one of the largest medical cities in the world and have an impact of billions of dollars to the local economy as well as generate thousands of jobs. Orlando is home to the University of Central Florida, the third largest university in the United States and the fastest growing university in the country. The Sun rail project that was approved and funded in December 2009 will turn 61 miles of the existing CSX rail tracks into a commuter rail system running from Deland, north of Orlando to Poinciana south of Kissimmee. Service is expected to begin in 2012 just as the Department of Transportation starts a major I-4 reconstruction project through the area. Orange County is offering incentive to developers that would focus on several Infill Master Plan Development, the City of Orlando is planning an expansion of the successful Lynx system and a major redevelopment project of the new Creative Village that will be created in the old Amway Arena surroundings, Seminole County is offering to fund up to 20% of any new or renovated project cost as a part of their U.S.17-92 CRA Grant Program and additional 75% of any environmental cleaning costs and more.

 

Forecast. The Orlando retail sector is likely to emerge from the current recession without widespread bankruptcies or closures. This coupled with Florida’s population growth prospects, which are stronger than ever given the renewed housing affordability, continued quality of life attributes and a lack of recent or planned new development, should provide stability to Florida’s retail market in the coming years. Sales of single tenant assets will dominate activity in 2010 with buyer’s conservative return objectives sustaining interest in national brands of drugstores, fast food restaurants and discount stores. Transaction volume will likely pick up in early 2010 driven by greater visibility in fundamentals and more available financing. Additional ‘distress’ will cause sellers to close the bid-ask gap, and buyers will have more confidence that the current rent rolls already reflect tenant failures and rent reductions. As always, the sector will recover and it will turn quickly when it does. Once the Florida and broader economy awakens, fueled by unprecedented stimulus, the supply / demand dynamic in 2012-2015 will be favorable. Cap rates will moderate once transaction volume stabilizes, but will not fall to the aggressive leverage fueled levels of 2006 and 2007. Cap rates will fluctuate with changes in financing costs, but will be driven by positive leverage and will reflect more historical risk premium spreads over US Treasuries.

 Sources:           ULI, ICSC, M&M, Costar, NREI, CPN, RCA, and more.

______________________________________________________________________________

 Sean Glickman is a real estate investment expert and a strategic advisor with Marcus & Millichap, the largest real estate investment brokerage services firm in America. Glickman represents institutional and private owners, lenders and investors and provides decision analysis services to help the client determine and execute the best strategy for each property while maximizing the value for the owner. Our commitment is to help our clients create and preserve wealth through real estate investments by providing them with the best real estate investment analysis, financing, research and advisory services available. Glickman is exclusively representing several of the largest developers in Central Florida with over $120 Million worth of real estate, has over 10 years of experience as an international real estate investor and has owned and developed projects such his latest, a $100 Million golf course community in Louisiana.         Since 1971, Marcus & Millichap Real Estate Investment Services has been the premier provider of investment real estate services. In 2008, Marcus & Millichap closed over $13.1 Billion worth of transactions for private and institutional investors and has established itself as the number one investment real estate company in the U.S. both in volume and number of transaction. 1,400 experts in 72 offices specialize 100% in investment real estate with a specific property type and local market expertise, therefore proving the client with superior market knowledge and transaction expertise targeted specifically to the unique requirements of each client.

 Sean Glickman

Marcus & Millichap Real Estate Investment Services

Phone:  407-557-3821, Email: sean.glickman@marcusmillichap.com

www.marcusmillichap.com  http://www.zacharybusiness.net/pdf/2007/july/July2007CS.pdf

Distressed Nation – The Biggest Crash Is Still Ahead Of Us

If anyone still has any doubt about how severe the problem is with the real estate market and if you are wondering how long it will take to get out of this mess please look at the attached video. This is an era that all of us will never forget for the rest of our life.

NAR statistics show that the supply of unsold homes in the U.S. has grown from 2.2 Million three years ago to over 4.5 Million homes in 2009.

South Florida has officially become the world’s worse real estate market with over 110,000 properties for sale, 55,000 foreclosures, 19,000 bank owned properties and over 68% of the existing inventory that is in some king of distress.

If this is not a total unprecedented disaster I don’t know what is !

This clip is going to make your head spin…  http://www.propertytalk.com/forum/showthread.php?t=19009

On the other hand, the few of us that positioned themselves with cash and are able to put it to work in the next 12 months will be taking advantage of the biggest real estate opportunity that this country has ever seen and most likely become multi Millionaires or Billionaires in the next 5-10 years.

Home and condos that sold for $250,000 are selling for $35,000-$50,000 and producing a gross income of 25% !

Condo and single family home projects are sold by distressed developers at 50% of the replacement cost and the land is given away for free. We all know that the cost of labor, commodities and materials are not going to be cheaper 5 years from now.

Fully entitled land in good locations is selling at a price that does not even cover the infrastructure cost…

Remember, even though it may not look like that today, this is still the greatest country with the biggest economy in the world, demographics are very strong for the next 10-20 years, the Y generation, students, immigrants and baby boomers are not going anywhere and this access inventory will get cleaned out eventually.

Given the fact that no sane developer is going to start any new residential project in the near future  (most are out of business and who is going to finance them anyway, the rest will take years to get out of their shock before taking another chance…), this inventory is going to get cleaned out eventually and then we will start seeing an increased demand and a low supply.

I predict that it will take this country another 5-6 years to get back to a well balanced supply and demand ratio but 5-6 years is a very short period in a man’s life…  most of us will be around anyway so we might as well take advantage of this opportunity if we can.

I am not a financial expert but it seems to me that when you have a rare combination of circumstances such as this…

A.      All time low real estate prices,

B.      All time low interest rates,

C.      Probably the worse stock market crash since the great depression,

D.     Millions of people who lost 50% of their 401K plans and will not go back to the stock market any time soon,

E.      A government that is getting ready to spend more money on a stimulus plan that was ever spent on all wars combined…

… it may, just may be a good time to start thinking about investing in real estate…

I would love to hear your comments and please visit me at:

Bulk Deals :     www.glixus.com

Press :              http://www.stirlingsir.com/eflyers/glickman/images/SSIR_Sean_Glickman.pdf

Auctions :        http://www.stirlingsir.com/eflyers/auctions/commercial/com_121ub-epro.html

 

Global :            www.globalgalleryusa.com

 

My Blog :         www.seanglickman.wordpress.com

 

Projects :         www.themeadowsatbeavercreek.com

 

Happy Holidays !!!

 

Sean Glickman    CIPS , TRC , CSP

Commercial Investments, International auctions

Stirling Sotheby’s International Realty

561-488-7766 , 407-902-6660 , F – 888-504-4170

seanglickman@gmail.com

 

Worldwide Auctions

Our company, Stirling Sotheby’s International Realty conducts a worldwide auction of proerties of any type at least once a month.

We do luxury and waterfront properties, Home Builders Association in Central FL , Central America and the Carabbeans, Florida commercial properties and more.

If you are connected to developers and builders that want to move a big part of their inventory in 60 days paying  a fraction of a standard commission please feel free to contact me.

Our website gets 40,000 new hits per month from 25 different countries thanks to our worldwide marketing and we have over 10,000 investors and end buyers on our data base.

Please contact me for more details.

www.glixus.com

Sean Glickman

Stirling Sotheby’s International Realty

seanglickman@gmail.com

561-488-7766

U.S. Property Prices Still Plummeting

The U.S. economy is expected to stall as the recession worsens, providing no relief to the housing market as demand for homes continues to fall and prices follow accordingly. House prices continue to plummet, despite multi-billion government bail-out packages for the financial market.

In the year to end-Q3 2008 there was a 16.6 percent y-o-y drop in U.S. property prices (-20.8 percent in real terms), according to the S&P/Case-Shiller® national house price index. The ten major cities composite index (SPCS-10) plunged by a larger 18.6 percent. The broader 20-city home price index (SPCS-20) dropped 17.4 percent.

A more muted picture of the downturn comes from the purchase-only house price index of the Office of Federal Housing Enterprise Oversight (OFHEO), which reports average price of single-family homes falling only 4 percent during the year to end-Q3 2008, or 8.8 percent inflation-adjusted.

The median price of existing homes was $183,300 in October 2008, down 11.3 percent on a year earlier (the largest drop since 1968), according to the National Association of Realtors (NAR).

The subprime mortgage problems began as far back as 2006.

Since then, the crisis has spread to the financial market. As mortgage delinquencies and foreclosures rose, banks and other financial institutions wrote off substantial losses. The crisis of confidence spread to the entire economy, leading to a credit freeze, rising unemployment and low consumer confidence.

The crisis has spared very few financial institutions. American Insurance Group, the world’s largest insurer, has been partly nationalised. Mortgage giants Fannie Mae and Freddie Mac were nationalised. Several financial institutions were either allowed to collapse or sold to competitors through government-sponsored deals. Leading banks were given financial support through the Troubled Asset Relief Program (TARP). The government has also implemented economic stimulus packages, whose effects remain to be seen.

The end of the economic and financial meltdown is nowhere in sight. House prices are expected to fall until end-2010 or mid-2011.

Consensus as to the causes of the recent crisis is still lacking. Our best guess is that the crisis was caused by:

• A long period of low interest rates, stoked partly by trade imbalances encouraging massive Chinese purchases of U.S. Treasuries, and Japanese carry-trade purchases;
• A reluctance of the authorities to explicitly target house prices;
• A regulatory vacuum, at a time of rapid financial market development. Some part of the blame probably falls both on the government and the Federal Reserve, both ideologically committed to free market principles;
• Special-interest lobbying to expand the mandate of Fannie Mae and Freddie Mac to increase support for first-time homebuyers.

House price bubbles in many areas were stocked by reckless lending by banks and other mortgage companies. The eventual result was a financial meltdown, causing an economic crisis unparalleled since the Great Depression.

Change we can believe in

Unfreezing the credit market and restoring economic confidence are high on the list of the priorities of new president-elect Barack Obama.

Although Barack Obama, elected on Nov 4, will not take office until Jan. 20, 2009, he is already filling the leadership vacuum left by a lame duck president.

In addition, Obama has announced a two-year economic aid plan which includes massive spending, new tax cuts and the creation of around 2.5 million jobs (estimated to cost $1.1 trillion). He has said that if the current administration will not do it, he will pursue the plan as soon as he takes office.

“The consensus is this that we have to do whatever it takes to get this economy moving again, that we have to—we’re going to have to spend money now to stimulate the economy,” said President-elect Obama.

Recession blues

The U.S. fell into recession in December 2007, officially announced by the National Bureau of Economic Research (NBER) on December 1, 2008.

NBER defines recession as a significant decline in economic activity which lasts for more than a few months. It looks at broad economic measures (GDP, gross domestic income, real personal income, employment, real manufacturing sales, wholesale-retail sales and factory output) to determine if the economy is already in recession.

“The committee determined that the decline in economic activity in 2008 met the standard for a recession,” NBER said. “All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion,” it adds.

Real GDP contracted 0.5 percent during the year to end-Q3 2008, according to U.S. Commerce Department. The U.S. economy is expected to contract well into 2009.

“The U.S. recession is set to get worse—a lot worse—in the next couple of quarters,” writes Nariman Behravesh, chief economist at the IHS Global Insight.

• In 2008, U.S. GDP growth is expected to slow to 1.6 percent.
• In 2009, the U.S. economy is projected to grow by a negligible 0.06 percent.

Unemployment rose to 6.5 percent in October 2008, the highest level since March 1994, from 4.6 percent in 2007. Unemployment in the U.S. is expected to rise to 7.6 percent by Q3 2009.

Real gross domestic purchases by U.S. residents dropped 1.3 percent in Q3 2008, according to Bureau of Economic Analysis (BEA).

In the face of collapsing demand, consumer prices fell 1 percent in October 2008, the steepest decline since 1947, according to the U.S. Labor Department. In 2007, inflation was 2.9 percent. Inflation is expected to be around 4.2 percent in 2008 and will stabilize to 1.8 percent in 2009.

The higher they rose, the deeper they fell

Coastal and/or sunny cities have experienced the biggest property prices drops.

Of the 20 cities in the index, Dallas (-2.7 percent) and Charlotte (-3.5 percent) saw the lowest house price declines.

The Pacific Division, especially California, registered the highest house price declines, according to the purchase-only HPI from OFHEO. Average single family house prices plunged 20.5 percent in September 2008 from a year earlier.

The West South Central Division has been least affected by the crisis, with house prices rising 0.51 percent over the same period.

Areas that experienced the biggest house price gains during the past decade also registered the biggest declines when the bubble finally burst. House price growth from 1996 to 2006 was highest in Los Angeles (264 percent), San Diego (232 percent), Miami (219 percent) and San Francisco (209 percent), using the S&P/Case-Shiller® monthly house price indices.

Sales and supply are plummeting

Sales of new one-family houses dropped 33.1 percent in the year to September 2008 to 464,000 units (seasonally adjusted), according to the U.S. Census Bureau and the Department of Housing and Urban Development.

The Northeast Region registered the highest decline of -65.1 percent from a year earlier. The West Region (-37.9) and Midwest Region (37.5 percent) followed, while the South Region (-23.8 percent) had the lowest drop in home sales.

Total privately-owned housing units completed fell to 1,043,000 in October 2008; 25.6 percent down from a year earlier, according to the U.S. Central Bureau. Single-family housing completions were 760,000, 7.7 percent below the September 2008 figures.

Permits to build new homes, an indicator of future activity, fell to a 48-yr low at 708,000 in October 2008; 40.1 percent down from a year ago. Privately-owned housing starts dropped 38 percent to 791,000 (seasonally-adjusted).

Interest rates and the crisis

From a high of 16 percent in the early 1980s, mortgage rates have been below 10 percent for the entire 1990s. The Fed funds rate, the key rate used as basis for most mortgages, was at historic lows from 2002 to 2004 – notably, at 1 percent from June 2003 to May 2004. The average interest rate for 30-year fixed rate mortgages (FRM) was 5.8 percent while the average rate for 1-year adjustable rate mortgages (ARM) was 4.05 percent from 2003 to 2005.

As a direct result, from 1996 to 2006 house prices rose more than 200 percent in major cities like Los Angeles, San Diego, Miami and San Francisco, using the SPCS-20 Index.

However in early 2006, the Fed, headed by newly-appointed Chairman Ben Bernarke, raised interest rates to contain the inflationary pressures caused by higher energy and commodity prices.

• The 30-year FRM rate rose to 6.8 percent in July 2006 (from 5.7 percent in July 2005)
• The 1 year ARMs rate rose to 5.8 percent (from 4.4 percent in July 2005).

Households with ARMs were immediately affected. More than 30 percent of loans were ARMs in 2004-2005. Many households, especially subprime borrowers, defaulted on their amortization, and foreclosures rose.

In Q2 2008, there are around 739,714 properties with foreclosure filings in the U.S., up 121.4 percent from a year earlier. Nevada (146.8 percent), California (197.8 percent) and Arizona (272.3 percent) had the highest foreclosure rates, based on RealtyTrac’s reports. In 2007, around 1.3 million residential properties were subject to foreclosure, up 79 percent from 2006.

In response, the Fed frantically lowered interest rates. The key interest rate was reduced three times in 2007, from 5.25 percent in August (its level since June 2006) to 4.25 percent in December. In January 2008, the rate was slashed twice to 3 percent in response to the stock market turmoil. In March 2008, the Fed cut key rates by another 75 basis points, bringing them down to 2.25 percent. On April 13, the fed funds rate was 2 percent. In October, the Fed cut the key rate in 2 steps to 1 percent.

Despite the interest rate cuts, mortgage rates barely changed due, to the credit freeze imposed by lending institutions. Interest rates for 30-year FRMs even rose slightly to 6.2 percent in Oct 2008 from 6.1 percent in Dec 2007. One year ARMs moved from 5.5 percent in Dec 2006 to 5.21 percent in Oct 2008.

Mortgage markets and the crisis

In the early 2000s the U.S. mortgage market expanded rapidly, as mortgages were made available to individuals with low credit ratings (referred to as sub-prime mortgages), . Some were offered with little or no collateral.

Ninja loans (‘No Income, No Job, (and) No Asset’) became common during the bubble’s height. Poor lending practices allowed these loans to be approved without proper verification that the applicant was reasonably likely to adhere to the loan payment terms.

The mortgage market grew sharply from 65 percent of GDP in 1998 to 106 percent of GDP in 2007.

In Q1 2007, the estimated value of subprime mortgages was around $1.3 trillion. 2.5 percent of all mortgages were in foreclosure by Q1 2008; 50 percent of which were subprime mortgages.

About half of the total outstanding mortgages in the U.S. were owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises (GSEs) that function as the biggest intermediaries in the U.S. secondary mortgage market.

In the first half of 2008, it became evident that these GSEs would be unable to handle the growing delinquency rates. In September 2008, the government placed the two GSEs into conservatorship, and will infuse up to $200 billion in additional capital to Freddie Mac and Fannie Mae.

Sluggish rental market

The U.S. rental market has grown only sluggishly during the past decade. Median asking rents rose by only 48 percent from 1997 to 2007, based on the figures from the U.S. Census Bureau.

In Q3 2008, median asking rent rose by 8.45 percent to $719 from a year earlier. Vacancies for rental houses rose slightly in Q3 2008 to 9.9 percent (from 9.8 percent in Q3 2007).

Help is on the way

The U.S. government’ actions to infuse to stimulate the ailing financial and housing markets include:

• Economic Stimulus Act of 2008 (enacted February 13). This provides tax rebates (worth $152 billion) and business tax incentives (worth $44.8 billion). It also makes the mortgage market more accessible to homeowners who need to refinance to stay afloat.
• Housing and Economic Recovery Act of 2008 (enacted July 24). Designed to restore consumer confidence in Fannie Mae and Freddie Mac through nationalization of the two institutions. The Federal Housing Administration (FHA) was authorized to guarantee up to $300 billion in new 30-yr FRMs for subprime borrowers.
• Emergency Economic Stabilisation Act of 2008 (enacted October 3). Better known as the bailout of the U.S. financial system. The law authorizes the Secretary of Treasury through the Troubled Asset Relief Program (TARP) to purchase and insure MBS and other distressed assets up to $700 billion. In November 12, 2008, $290 billion of the initial $350 billion allotment funds have already been used for bank equity infusions.
• The Fed announced another stimulus package worth $800 billion in November 25, 2008. About $600 billion will be used to buy MBS while the remaining $200 billion will be spent to unfreeze consumer credit lending in the U.S..

A bleak medium-term

The U.S. housing market has not yet reached bottom. “We continue to believe that it is unlikely that we are anywhere near a bottom in nationwide home prices,” says Joshua Shapiro, chief domestic economist at the research firm MFR.

Nearly half of all home sales were foreclosed properties by October.

“Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions,” says Lawrence Yun, National Association of Realtors (NAR) chief economist.

House prices will only stabilize when the inventory of unsold houses, now at 10-months supply, is brought back to normal levels.

In addition, we need an economic recovery, and the unfreezing of credit, before things return to normal.