Interesting Times

By Allison Abell Schwartz, Bloomberg, 9-2-10

A family walks toward the entrance to the Kohl's store in Round Rock, Texas. Photographer: Jack Plunkett/Bloomberg

U.S. retailers reported August sales that beat analysts’ estimates as back-to-school discounts and tax holidays lured consumers to malls.

Sales at Limited Brands Inc., owner of the Victoria’s Secret chain, climbed 10 percent, more than the 7 percent average of analysts’ estimates compiled by Retail Metrics Inc. Sales at Kohl’s Corp., the department-store chain, rose 4.5 percent compared with a 3.2 percent projection. Sales at Gap Inc. were unchanged, beating estimates for a 0.5 percent drop.

Confidence among U.S. consumers increased more than forecast last month, with the Conference Board’s index advancing from a five-month low in July. Seventeen tax-free holidays during August probably attracted extra shoppers to the mall, where discounts were deeper than those in the previous month, said Ken Perkins, president of Retail Metrics.

“The tax-free holidays really gave a boost,” Perkins said today in an interview. “Retailers came out of the gates strong on the promotional front in the last week of July and that carried through for basically the entire month of August.”

Limited, based in Columbus, Ohio, gained $1.48 to $25.75 at 4:01 p.m. in New York Stock Exchange trading. Menomonee Falls, Wisconsin-based Kohl’s, the fourth-largest U.S. department-store chain, climbed 91 cents to $49.31 and San Francisco-based Gap, operator of Old Navy and Banana Republic chains, added 22 cents to $17.43.

The figures reported by the companies are so-called same- store sales, a key indicator of a retailer’s growth because they exclude results from new and closed locations.

Same-Store Results

Same-store sales at 30 chains probably rose 3.5 percent last month, Perkins said. The results won’t be final until Walgreen Co. reports sales tomorrow. Analysts estimated a gain of 2.8 percent, according to Retail Metrics, a Swampscott, Massachusetts-based research firm. They rose 3 percent in July.

In recent years, many U.S. states have waived sales taxes during the back-to-school period to help Americans buy new gear for their children.

The number of tax-free holidays in August rose from 13 a year earlier, Perkins said. Illinois, Florida, Maryland and Massachusetts added tax-free holidays, he said.

The housing market and high level of unemployment may put pressure on September’s same-store sales, Perkins said.

Purchases of new homes fell 12 percent in July to an annual pace of 276,000, the weakest since data collection began in 1963, figures from the Commerce Department showed.

National Real Estate Investor, 8-31-10

New hiring is expected to lead to a decrease in apartment vacancies in California’s Inland Empire this year, making it the area’s first annual vacancy improvement since 2004, according to real estate services firm Marcus & Millichap.

By the end of 2010, multifamily vacancy is projected to decrease 50 basis points to 7.5%, following a 100 basis point jump in 2009.

The optimistic outlook for the Inland Empire’s multifamily vacancy rate follows improved fundamentals in the first half of 2010 that were driven in part by modest job gains, according to Encino, Calif.-based Marcus & Millichap.

However, the recovery is projected to continue at different paces in the two counties in the region, the company noted in its third-quarter report for the Riverside-San Bernardino market. Strengthened renter demand will most benefit densely populated submarkets along the western edge of the metro area, including South Ontario, Chino and Rancho Cucamonga.

Concession cuts expected

Positive net absorption is expected in those areas over the remainder of 2010, leading multifamily operators in close-in cities to begin to cut back on concessions as rents increase.

Communities far from major employment centers will continue to struggle with high vacancy rates, however, and will continue to offer concessions. Still, as renters reduce their living expenses by moving into the discounted complexes, apartment vacancy rates to the east and in the high desert region are expected to flatten later this year.

Severe market disruption during the downturn has challenged owners’ ability to operate profitably, presenting distress opportunities for bargain-seekers, according to Marcus & Millichap.

Major asset sales rise

Smaller, opportunistic buyers continue to explore outlying areas, where rent rolls have been slow to stabilize and owners cannot meet debt obligations. Smaller complexes purchased by less
sophisticated investors during the boom years comprise the bulk of the lender sales, but an increased number of larger properties
are trickling through the pipeline.

Over the last 12 months, assets containing more than 100 units accounted for 11% of sales, compared with less than 4% a year ago. With the median price for larger buildings falling 20% during the past year, more major cash investors will emerge in search of attractive deals.

Economists forecast that after more than 160,000 positions were cut locally over the past three years, employers will increase payrolls by 0.4% in 2010, or 4,300 workers.

Asking rents are projected to grow by 0.8% in 2010 to $1,014 per month, while effective rents will advance 0.7% to $955 per month. Last year, asking rents dropped 4.9%, and effective rents declined 6.9%, according to Marcus & Millichap.

CoStar Index Finds July Decline in Value Among Institutional-Grade Properties, While General CRE Market Shows Improvement

By Hui-yong Yu, Bloomberg, 9/1/10

By Greg Farrell and James Politi, FT.com, 8-29-10

Safeway: same-store sales have declined

Consumer spending in the US has turned into a tale of two cities in 2010, with an entire segment of consumers splurging confidently on the finer things in life, while another segment, concerned about unemployment and with little or no discretionary income, spends only on bare necessities.

By Robert Knakal, New York Observer, 8/26/10

Without a doubt, the most important economic indicator for the commercial real estate market is employment. No other metric more profoundly impacts the fundamentals of our market than the number of people who are productively working. Unfortunately, news on the jobs front, thus far in 2010, has been lackluster and well below most economists' forecasts. This is the main reason why momentum has been lost in what little traction the economic recovery had displayed.

The reason that the real estate industry relies so heavily on job creation is that if people have lost a job, or fear they may lose a job, they do not move out of Mom and Dad's house; they do not move from a one-bedroom apartment to a two-bedroom; they do not move from a rental unit into a purchased single-family home, a condo or a co-op; and companies that are downsizing do not need more office space, they need less.

For these reasons, participants in the real estate market should be watching this metric with a careful eye.

At the beginning of August, the Department of Labor came out with July jobs numbers indicating that the U.S. economy lost 131,000 jobs. The administration's interpretation of this dismal report led them to highlight two things that appear relatively positive on the employment front. The first was that the unemployment rate did not increase as it stayed at 9.5 percent. The second was that July was the seventh consecutive month of private-sector job growth. Neither of these arguments truly creates any reason for optimism. As we will see, the official rate of unemployment is of little value in understanding the employment picture, and while we have seen private-sector job growth, it has been far lower than is typical at this point in a recovery.

Let me explain each of these in more detail.

WITH RESPECT TO the official 9.5 percent unemployment rate, by now most of you are probably aware that this official rate is nearly irrelevant. During the Clinton administration, the calculation of our official unemployment rate was changed such that it does not include discouraged workers who have stopped looking for a job for more than 30 days. It also does not include workers currently in part-time positions who would rather be working full time. To the extent that these unemployed and underemployed people are counted, the true unemployment rate is somewhere between 16 and 17 percent.

So, you may intuitively ask, how can the unemployment rate remain unchanged with the economy losing 131,000 jobs? It is because scores of people who dropped out of the workforce are no longer looking for work and, therefore, are no longer considered unemployed. Forget about the official rate—look at net jobs created.

With regard to private-sector job growth, a closer examination is necessary. According to the Department of Labor, in July the private sector created 71,000 new positions, including a gain of 36,000 jobs in the manufacturing sector. This number, unfortunately, is somewhat misleading, as a majority of those manufacturing jobs were in the auto industry, which is receiving a significant amount of support from the federal government.

Not surprisingly, these figures are often revised, and when they are, they are often revised downward. When the July jobs report was released, the Labor Department also stated that the June numbers were far weaker than previously reported. Original estimates were that 125,000 jobs were lost. This figure was revised to 221,000. Private-sector activity in June was originally reported as 83,000 new jobs created when, in actuality, only 31,000 were created.

One of the problems that I have with the figures coming out of the Labor Department is the method they use to estimate job creation. The department uses a computer program that estimates new company formation during each month, including guesses as to the number of companies created and the number of jobs that these hypothetical companies are creating. The justification for this is that these new small companies may not be reachable by the department during its surveying process. So it simply makes the assumption that these firms are out there.

Thus far in 2010, approximately 600,000 jobs are assumed to have been created but yet no one can prove that they actually have been; and only with subsequent revisions, based upon real data, will we know whether they have been created or not. For instance, the Labor Department estimated that private-sector job growth in 2009 was very positive; however, by February of 2010, it admitted that it overestimated the number of jobs created by 1.4 million. This is not an insignificant revision.

During the last recession, the U.S. economy lost about 8.5 million jobs. Based upon population growth, approximately 1.8 million Americans enter the workforce each year; 600,000 drop out. This means that our economy needs to see 100,000 jobs created per month before we start regaining any of the 8.5 million jobs that were lost.

On a national basis, we have not come close to seeing job creation at the rate necessary for real estate fundamentals to improve. This is remarkable given the massive and unprecedented amount of stimulus injected into the economy by the government. The U.S. federal balance sheet has ballooned based upon spending that has produced very little in the way of tangible results given the magnitude of support. It is remarkable to see how weak the recovery has been after this unprecedented fiscal and monetary stimulus.

Last week, more bad news for the job market was unveiled as first-time jobless benefits claims rose by 12,000, to 500,000, representing the highest total since November of last year. This presents a clear warning that official job-creation numbers are probably overestimated. The level of these claims had fallen steadily for many months, indicating that the job market may have been tangibly improving. Last week's claims number indicates that the recovery may not be coming too quickly.

Add to this disappointing jobs data an increased likelihood of a double dip in the national housing market, and cause for concern increases. Consumer confidence has reverted back to prior lows, leading to a savings rate in excess of 6 percent. This 10 percent swing (the savings rate was -4 percent three years ago) causes about $1 trillion of gross domestic product to evaporate. G.D.P. estimates, which have been revised downward for past periods, are being revised by most economists down to 2.5 percent, or less, for the balance of 2010 and 2011. These growth levels are far below the 6 to 8 percent levels normally seen when our economy emerges from a recession.

SO WHY IS THE jobs market so sluggish? There are a number of reasons, not the least of which is the fact that there is tremendous uncertainty present today. Markets dislike nothing more than uncertainty. Economic uncertainty is extraordinarily high based on federal, state and local budget deficits. Very few Americans believe that their tax obligations are going to be lower in the future than they are today. Unfortunately, there is no clear direction in terms of what tax policy will be. Will the Bush tax cuts sunset or will they not sunset? Will they sunset for some of us, but not for others? Will they sunset and will additional new taxes be cast upon us?

In addition to the tax horizon, there are other policy issues that are creating tremendous uncertainty. Most employers believe that the new health care program will add significantly to their costs. No one really knows or can quantify what this cost increase will be.

Similarly, the economic impact of financial regulation is something that has not been quantified either. Other major policy issues that have been discussed and are looming include a value-added tax and cap and trade. These initiatives, if passed, will also add significantly to the expense burdens faced by businesses.

With all this uncertainty, how are employers going to have the confidence to go out and create the jobs that are so desperately needed for our economy and for our real estate market? Is it any wonder that balance sheets are bloated with cash yet, on the hiring front, decision-making inertia has set in?

The government just can't keep spending without having a plan to reduce budget deficits. These deficits are simply a representation of bills to taxpayers that are in the mail. We know they are coming and we know who has to pay them. What people in Washington don't seem to understand is that if you give someone resources, then you are taking them from someone else. The government doesn't create resources, it merely redistributes them. Whenever the government gives someone something, the government has to take that something away from someone else. Employers and consumers are aware that they will hear a knock on their door at some point in the future.

To help loosen the purse strings of employers and the all-important consumer, certainty with regard to policy should be a priority. Even if participants disagree with policy, knowing what the policy is will provide an understanding of the rules of the game. Jobs can't be created and the economy can't tangibly recover until businesses and consumers regain confidence and become interested in investing and spending again.

In New York, we have been lucky that our employment picture has been somewhat healthier than we have seen on a national basis. Our local unemployment rate has dipped to 9.4 percent, a 10th of a point below the national average. We need to see monthly job creation in order to see our real estate fundamentals become enhanced. Let's hope we see those jobs created consistently, as they will lead to much better days ahead for our commercial real estate marketplace.

Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to many government employees.

By ARNOLD SCHWARZENEGGER, Governor of California, 8-27-10

Recently some critics have accused me of bullying state employees. Headlines in California papers this month have been screaming "Gov assails state workers" and "Schwarzenegger threatens state workers."

I'm doing no such thing. State employees are hard-working and valuable contributors to our society. But here's the plain truth: California simply cannot solve its budgetary problems without addressing government-employee compensation and benefits.

As former Speaker of the State Assembly and San Francisco Mayor Willie Brown pointed out earlier this year in the San Francisco Chronicle, roughly 80 cents of every government dollar in California goes to employee compensation and benefits. Those costs have been rising fast. Spending on California's state employees over the past decade rose at nearly three times the rate our revenues grew, crowding out programs of great importance to our citizens. Neglected priorities include higher education, environmental protection, parks and recreation, and more.

Much bigger increases in employee costs are on the horizon. Thanks to huge unfunded pension and retirement health-care promises granted by past governments, and also to deceptive pension-fund accounting that understated liabilities and overstated future investment returns, California is now saddled with $550 billion of retirement debt.

The cost of servicing that debt has grown at a rate of more than 15% annually over the last decade. This year, retirement benefits—more than $6 billion—will exceed what the state is spending on higher education. Next year, retirement costs will rise another 15%. In fact, they are destined to grow so much faster than state revenues that they threaten to suck up the money for every other program in the state budget. (See the nearby chart.)

I've held a stricter line on government employment and salary increases than any governor in the modern era (overall year-to-year spending has increased just 1.4% on my watch). Nevertheless, employee costs will keep marching upwards because of pension promises, and they will never stop doing so until we get reform.

At the same time that government-employee costs have been climbing, the private-sector workers whose taxes pay for them have been hurting. Since 2007, one million private jobs have been lost in California. Median incomes of workers in the state's private sector have stagnated for more than a decade. To make matters worse, the retirement accounts of those workers in California have declined. The average 401(k) is down nationally nearly 20% since 2007. Meanwhile, the defined benefit retirement plans of government employees—for which private-sector workers are on the hook—have risen in value.

Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives.

In 2003, just before I became governor, the state assembly even passed a law permitting government employees to purchase additional taxpayer-guaranteed, high-yielding retirement annuities at a discount—adding even more retirement debt. It's as if Sacramento legislators don't want a government of the people, by the people, and for the people, but a government of the employees, by the employees, and for the employees.

For years I've asked state legislators to stop adding to retirement debt. They have refused. Now the Democratic leadership of the assembly proposes to raise the tax and debt burdens on private employees in order to cover rising public-employee compensation.

But what will they do next year when those compensation costs grow 15% more? And the year after that when they've risen again? And 10 years from now, when retirement costs have reached nearly $30 billion per year? That's where government-employee retirement costs are headed even with the pension reforms I'm demanding. Imagine where they're headed without reform.

My view is different. We must not raise taxes or borrow money to cover up fundamental problems.

Much needs to be done. The Assembly needs to reverse the massive and retroactive increase in pension formulas it enacted 11 years ago. It also needs to prohibit "spiking"—giving someone a big raise in his last year of work so his pension is boosted. Government employees must be required to increase their contributions to pensions. Public pension funds must make truthful financial disclosures to the public as to the size of their liabilities, and they must use reasonable projected rates of returns on their investments. The legislature could pass those reforms in five minutes, the same amount of time it took them to pass that massive pension boost 11 years ago that adds additional costs every single day they refuse to act.

And after they've finished passing those reforms, they could take another five minutes to pass legislation terminating the annuity give-away they passed in 2003 and ending the immoral practice of pension fund board members accepting gifts or even campaign contributions from lobbyists, salesmen, unions and other special interests.

Reforming government employee compensation and benefits won't close this year's deficit. It will, however, protect the next generation of Californians from overwhelming burdens. The same is true with respect to the other reform I'm demanding—the establishment of a rainy-day fund so that legislators can't spend temporary revenue windfalls.

All of these reforms must be in place before I will sign a budget.

I am under no illusion about the difficulty of my task. Government-employee unions are the most powerful political forces in our state and largely control Democratic legislators. But for the future of our state, no task is more important.

By JOE NOCERA, New York Times, 8-27-10

You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.

The Drop in Home Sales

On Tuesday, the self-proclaimed “voice for real estate” released its “existing home sales” figures for July. They were gruesome. Sales were down 27 percent from the previous month, and down 26 percent from a year ago. Annualized, the July sales figures would translate into fewer than 3.9 million homes sold this year — a staggeringly low figure. (The record high occurred in 2005, when more than seven million houses were sold.)

By David Bodamer, Retail Traffic, 8-24-10

The Moody/REAL National Quarterly Retail Index dove by more than 14 basis points in the second quarter indicating that retail property values are now at their lowest level since the fourth quarter of 2002.

The index, which stands at 118.58, experienced its second largest quarterly decline since reaching its peak during the third quarter of 2007. Only the first quarter of 2009—with a 22 basis point drop—showed a greater drop. The retail index overall is down 39.3 percent from its high point of 195.19.

Click for larger image.

Among property types, the drop in retail is worst of the four property types the Moodys/REAL indices track. Apartment prices are down 30.5 percent from their peak, office prices are down 30.8 percent and industrial prices are down 35.3 percent.

Retail is also the worst sector in the past 12 months. The national retail index is down 14.3 percent during that period compared with a 5.1 percent drop in the industrial index , a 4.7 percent decline in for office prices and a 2.5 percent increase in apartment values.

The picture is a bit different when looking at the top 10 MSAs. In those markets, the retail index actually rose 2.0 percent during the quarter, edging out the industrial and office and indices while trailing a 6.0 percent increase in the apartment index. That result followed a 19.3 percent decline in the first quarter. Prices in the top 10 MSAs peaked in the last quarter of 2007 and are currently down 35.5 percent.

Click for larger image.

By region, retail properties in the East have fared the best. The index there stands at 175.85 compared with 133.99 in the West and 126.92 in the South.

Overall, the Moody’s/REAL All Property Type Aggregate Index showed a 4 percent drop in June as that index continues to bounce along a bottom. The index, which stands at 112.51, is still above the low point of 107.98 reached in October 2009. Since then it has risen in five months and declined in three. Since the market peak in October 2007, commercial real estate values measured by the index have deflated by 41.4 percent.

“We expect property prices to remain choppy for some time as commercial real estate markets and the broader economy continue their slow recovery from the recession,” Moody’s researchers wrote in their August report. “Sovereign debt problems, lingering unemployment in the United States, and heightened concern about a double dip recession and even deflation operate as a drag on investment activity, notwithstanding historically low interest rates.”

On the positive side, transaction volume is increasing. According to the report, “The number of repeat sales transactions increased significantly in June. There were 153 transactions in June, up from 107 transactions in May. The total dollar volume also increased, to $2.1 billion, from $1.5 billion in the prior month. The increase in dollar volume in each of the past two months, taken together with this month’s 43 percent increase in the number of repeat sale transactions, may be an early indication that buyers and sellers are starting to agree on market clearing prices.”