End of A Year Gone Bad

I am working on my newspaper piece for January. It will have the same title and I am putting off real work, hoping to drum up ideas for the piece.

I personally love New Years and I am looking forward to it. It is the end and the beginning, and only has as much meaning as you want to give to it. Which for most people simply involves staying up late and getting drunk. I admire it for it's simplicity and directness.

This is the perfect opportunity to look back on all the things you wished you had done over the past year, the accomplishments of you and your peers, perhaps finish some loose ends before the opportunity to affect change this year draws to a close forever. This is the time to take an inventory of you life as you lived it and compare it against how you wanted to live it.

There are no fresh starts in life, all the baggage you had in 2008 will carry over to 2009. But for a brief couple of days, the year seems crisp and new and the possibilities endless as if you had been reborn.

I also like tax season. You get to see how you spent your time over the past year, how you earned and spent your money. Everything gets summed up on a few pieces of paper and collected by the government.

Your entire year's work, collected, processed and forgotten.

Here is to looking back on all the crap the last year threw at us, and a wish for better times ahead.

Unemployment and why it is OK

Came across this yesterday: http://www.reason.com/news/show/122019.html

The article talks about some misconceptions "normal" people have of economics. I wanted to talk about the make-work bias and how those people who are unemployed now may be better off in the future. This assumes a very neo-classical view, workers who were laid off are not an essential part of the company they are working for, so they can take the hint and use their time off learning a useful skill, provided they do not starve to death.

Most people believe that having a job is a good thing, as it provides them a means to feed and clothe themselves. This is false.

Not everyone needs and deserves a job, (so unemployment is actually a beneficial thing since it purges the system of useless people).

Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right. The crudest form of make-work bias is the Luddite fear of the machine. Common sense proclaims that machines make life easier for human beings. The public qualifies this “naive” position by noting that machines also throw people out of work. It forgets that technology also creates new jobs. Without the computer, to give one obvious example, there would be no jobs in computer programming or software development.

But the fundamental defense of labor-saving technology is deeper than that.

Employing more workers than you need wastes valuable labor.

After technology throws people out of work, they have an incentive to find a new use for their talents. The Dallas Fed economist W. Michael Cox and the journalist Richard Alm illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most striking example, the drastic decline in agricultural employment:

“In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3. The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services.”

Many economists advocate government assistance to cushion the displaced workers’ transition to new jobs and to retain public support for a dynamic economy. Other economists disagree. But almost all economists grant that stopping those transitions has a grave cost.

Exasperating as the Luddite mentality is, countries rarely accede to public anxieties and turn back the clock of technology. But you cannot say the same about another controversy infused with make-work bias: hostility to downsizing.
Inside of a household, everyone understands what Cox and Alm call “the upside of downsizing.” You do not worry about how to spend the hours you save when you buy a washing machine.

Make-work confusion can arise only in an exchange economy. If you receive a washing machine as a gift, the benefit is yours; you have more free time and the same income. If you get downsized, the benefit goes to other people; you have more free time, but your income temporarily falls. In both cases, though, society conserves valuable labor.

The danger of the make-work bias is easiest to see in Europe, where labor market regulation to “save jobs” has produced decades of high unemployment. But we can see it in the U.S. as well, especially in our massive employment lawsuit industry. The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

I am not sure I subscribe to this line of thinking, as it seems a little brutal. And it eliminates a certain psychological element that I think is important.

It is a little something I like to call, the Weakest Link Syndrome. (If you don't recall it, "You are the weakest link - Good Bye!", should refresh your memory)

On the show, very rarely did the smartest person win. Usually, the dumb people would be let go first. This follows the above economic theory in that competition will drive out the dead wood.

After about 1/2 way through the game however, the dumb people would start to conspire against the smarter person, voting them off even though they screwed up the least. This was because the dumb people knew they could only win if they eliminated the strongest competition.

If this were to translate into the current workday environment, I believe that the smartest/ hardest working people will not be the ones left standing at the end. They are too busy working to lobby for their jobs.

You can think of it this way, Dilbert would be fired before his idiot manager, not because he is less qualified, but because the idiot manager knows how to throw others under the bus.

While the benefits of a recession and job losses are beneficial according to economic theory (they eliminate a lot of useless positions that were allowed to accumulate during the boom times A.K.A. the excessive layers of upper management) it is less than ideal because the market is not completely efficient.

The people manning the guillotine are not going to chop their own heads off, even if they are the ones causing the most problems.

There are market inefficiencies and information asymmetries that prove that the market (and life in general) is just not fair.

Now may be a good time to stop working so hard, it is not going to save your job in the long run, and take a look around for people you can toss under the bus.

Otherwise: "You are the Weakest Link, Goodbye!"

O Hai! I Can Have Has Bailout 2 PLZ? K THX!

At first I stumbled upon this:

http://www.npr.org/templates/story/story.php?storyId=98610618&ft=1&f=1001

Here is a glimpse:

Grupe and others in the real estate industry have been meeting with officials at the Federal Reserve and asking the government for help.

The government has already announced a $200 billion plan to try to restart the market for credit cards, car loans and other consumer debt. Basically, the government is providing guarantees to get investors to buy up these securities again. So Grupe says the commercial real estate industry wants that program expanded to include these commercial loans.

"In our conversations with the Federal Reserve, I think it's fair to say that the senior staff indicated that they are open to a program like this," he says.
"They recognize the problem." Some economists think the government should take action here.

"This is the next big problem for the financial system and the broader economy," says Mark Zandi, who heads up Moody's Economy.com.

Zandi says the problem is that if all these big real estate loans can't get refinanced, that would mean more losses for the already-staggering banks.

"The banks and financial system broadly don't have enough capital as it is and if they have to take big losses on commercial real estate," he says "It undermines their capital position even more and they can't extend credit to anybody."

Zandi says this is one of the next areas we are likely to see the government trying to intervene to stop the financial crisis from getting worse.

He expects this to be the worst recession in 50 years and so he and other economists think the government should be doing all it can.

And then I found this: http://icanhazbailout.com/

Finally, my love of LOLCats is met with sarcastic pictures with captions!

How to respond to people who like to make parallels to the Great Depression

One of my professors told me that if you want to look smarter than the next guy (which is all this business is about by the way) that it helps to know obscure history and/ or obscure international events.

Everyone can quote what the hype is now, just read the headlines. But if you want to look smarter than the next guy, wait for him to open his big dumb mouth spouting off that:

"These are the worst economic conditions since the Great Depression and that valuable lessons are to be learned if only one knew the parallels that existed" (that tired and played out cliche you will soon poke holes in).

You can look puzzled for a second (as you are fake pondering your reply) and gesture with your hands implying that you are super-deep in though. Take a big breath and say:

"I am not quite following you. I thought the Great Depression was a consequence of over-large factory inventories, a stock-market crash and Germany's inability to repay back its war debts with gold, causing a strain on bank lending in Britain which then caused massive bank closings here in the United States.

It seems to me that none of these factors are an issue now.
We are no longer on a gold standard and we have the FDIC to insure that bank runs are a non-starter.

Plus, over-large factory inventories, which would lead to deflation as suppliers try to adjust their inventory, are not really a problem anymore thanks to advances in the supply chain. We do not have factories churning out tons of product and laying off a bunch of workers, although the recent moves by GM and Ford are a farce of the bygone Depression on which you speak, but it seems like the federal government is taking care of that problem this time around. (Tear it down and now build it back up before he knows what the f*&k just happened).

No, despite all the mainstream talk these days being offered by every T.V. economic pundit, I see more of a parallel between current economic conditions and the Panic of 1873. (inferring that your adversary gets his info from the sell-outs, the herd-followers, the "experts" telling you the obvious)

Unlike the "Great Depression" (Make sure you do the air quotes aggressively in his face) the Panic of 1873 was caused by a building boom in the Austro-Hungarian Empire which was formed in 1867. The emperor supported new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral.

But the economic fundamentals were shaky and as continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates.

This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default.

The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke ( the Philadelphia banker who invented the bond drive to finance the Civil War, the most famous and well respected banker of the time) proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The only people who made money at this time were self-financed capitalists like Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller who had the capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices thus starting what would later be deemed "The Gilded Age". (Aggressive air quotes needed again as you continue to pummel the schleps ego).

That is how you look smarter than the next guy, destroy the guy's notion that he knew what was going on in the first place and then bring up something he probably knows nothing about. History and international events are the clear choices.

Usually though, my mind works faster than my mouth and I screw the whole processes up or it takes 10 minutes longer to get my point across and the guy has to leave just as I was about to unload on him, or the guy asks me a tangential question and I get off subject.

But if this conversation were to take place in a a movie, and I was some economic know everything bad-ass, this was how it would go down.

San Fransisco Fed Is Not My Type Of Bank

Yesterday I talked about how much I loved the Dallas Fed, because it is concerned with things like manufacturing, transportation and commercial real estate.

Today, I want to talk about the San Fransisco Fed, which is concerned with things such as exchange rates, international trade and policy.

The SF Fed recently published a piece on monetary policy in Korea and Japan. Much like everyone else, there was talk of the Lost Decade.

I'd like to wrap these remarks up with some reflections on what Japan's experience during its "lost decade of growth" which began in the early 1990s may have to tell us about handling the financial crisis and recession here in the U.S. Needless to say, this was a frequent topic of conversation, and, also needless to say, some issues were the subject of debate.

In terms of Japan's past conduct of monetary policy, a major lesson is that, when policy interest rates approach their lower bound and there is fear of deflation, it is important to make clear and strong commitments about the future stance of policy. The Bank of Japan did this by issuing statements that it would maintain its zero interest rate policy until inflation reappeared. The central bank also engaged in quantitative easing from 2001-2006, but it was unclear if that boosted economic activity much.

In terms of the massive fiscal stimulus of the 1990s, people generally seem to agree that it failed to raise real growth and succeeded only in raising public debt to excessive levels. One possible explanation is that spending went to activities that did not yield much "bang for the yen." Another explanation is that Japanese citizens may have believed in the government's long-term commitment to balance its budget; in that case, they would expect any current fiscal stimulus to be undone in the near future through higher taxes, prompting households to save rather than spend.

Regarding the current financial turmoil, our contacts suggested several approaches for resolving it, some of which, of course, we have already implemented. One is to provide a safety net for the financial system during a crisis by extending deposit insurance and to enhance interbank liquidity by guaranteeing debt. Another emphasizes the importance of the government's role in recapitalizing the banks, provided that there are conditions about reducing risky lending and that the government stands to gain from future bank profits.

The SF Fed seems to toe the party line (We love the TARP so much and everyone is going to be OK if they only wish hard enough *hugs*.)

The Dallas Fed (at least to me) is more interested in telling it like it is. Plus they use graphs and math, and I appreciate it.

Dallas Fed Is My Kind Of Bank

Say all you want about Dallas, but the Federal Reserve Bank there is top notch. I have mentioned several times how much I admire the Fed Chairman from there, Richard Fischer, and the letter he had in April was spot on.

The article that they are talking about this month has to do with commercial real estate (I love these guys!).

You can read the whole thing here.

Some things I found useful: Stock of commercial buildings ($3 Trillion Dollars) Stock of residential buildings ($14.5 Trillion Dollars). These were 2007 numbers, the height of the run-up in prices.

Real Prices for Office and Retail (Industrial you are not immune) are declining.

Architectural Billings are lower (these are projects that are in the pipeline). 2009 is not looking so great for architects, and by extension developers, and by extension anybody in the real estate biz.

This will have extensions to the overall economy in two ways. First, construction spending has an incredibly high multiplier and is a huge stimulus to economies. Second, a fall in property values will reult in losses to the banking sector.

Construction is volitile. It is super-cyclical and leads overall GDP. Commercial construction has turned down, in virtually every recession since 1970. In 2001, commercial construction contracted 18 percent.

In the current cycle, things look ok, at least from an investment standpoint.

2001 was worse that the current situation, in regards to CRE investment. The blue line represents deviation from trend, so it can be a little tricky since these reflect the cyclical components of what is going on. (This also assumes that the trend is known and constant.)

This last chart I am going to show is kinda scary. (read the damn article if you want all the charts!) These are delinquency rates for loans. And the loans are deteriorating (nobody cares about loan quality when prices are rising, but as soon as things get bad, people get hurt).

In short, tougher times appear to lie ahead.

Worsening macroeconomic conditions, particularly in the retail and other service sectors, are hurting CRE fundamentals. Meanwhile the intensification of the credit crunch is dampening market activity.

And if commercial property’s situation does grow worse, banks are likely to face further losses.

One factor that might limit these risks is that the commercial real estate sector wasn’t as grossly overbuilt heading into the current economic slowdown as it had been in the early 1990s.

Good News!? ... Maybe?

The Fed lowered the Fed Funds Target rate to the range of 0 to 0.25 percent.

Since real estate depends heavily on borrowed money, this theoretically makes borrowed money cheaper, so this should help buyers and sellers of real estate get deals done.

SRS, the ultrashort real estate fund dropped 25 percent today, meaning that the Dow Jones Real Estate Index (IYR) went up 12.5%, so people assume that this move is a positive one for real estate.

I am mixed on the subject. For starters, where do we go from here? The Fed can only keep the rate at 0, if it lowers the rate to below 0 people will just hold cash instead. This is because people do not want a negative rate of return.

The bank of Japan did this in the early 1990's and we all know how that turned out. The called it the Lost Decade:

The economic miracle ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.

Eventually, many become unsustainable, and a wave of consolidation took place (there are now only four national banks in Japan). Critically for the long-term economic situation, it meant many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0% and have been for several years, and despite this credit is still difficult to obtain.

Overall, this has led to the phenomenon known as the "lost decade"; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life has been rather muted, however. Unemployment runs reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate - the real level is probably around twice that).

This has combined with the traditional Japanese emphasis on frugality and saving (saving money is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the
miracle.

I am starting to think that the people who are running things, nice people as they may be, have not a clue as to what they are doing. $700 billion for really no reason at all.

I am more than willing to watch events unfold from the safe distance of, say 10 years or so, but unfortunately I, you and we are all stuck here, now.

We must resist the urge to run from one end of this mess to the other, never looking back. There is no safe distance and there is no end, it extends in all directions forever.

The hope that I have is that these changes to the interest rate, the government borrowing to finance the $700 billion, the printing of money, deflation (possibly inflation again), these are not the *real* economy and monetary policy has no effect on the real economy. At least in the long term.

By the real economy I mean jobs, food, real estate, things that money can buy, etc. These things do not go away and are what most people care about when push comes to shove.

So the wealth that you built up over the past 10 years. Yeah, it is gone with diminishing prospects of returning. It was just money, and it is gone now.

Will this be the start of the American "Lost Decade"?

Every new month brings one more ditch and another last ditch effort.

Default Notices On Facebook

County of San Bernardino take note: You can serve notice via Facebook. They did it in Australia.

Orange County Office & Industrial Numbers Q4 2008

Last quarter I took over doing the office and industrial reports for Orange County. I do the numbers and my college, Michael Soto, deals with the text.

In that spirit, here are the preliminary stats for OC industrial and office.

Orange County Industrial (Preliminary):

Vacancy Rate: 4.5%
Last Quarter: 4.4%

Lease Rate: $0.75
Last Quarter: $0.80

Absorption: +3,400
Last Quarter: -311,400

Orange County Office (Preliminary):

Vacancy Rate: 18.9%
Last Quarter: 18.7%

Lease Rate: $2.61
Last Quarter: $2.62

Absorption: -149,700
Last Quarter: -255,500

Why Am I Always Surprised?

Just finished a preliminary survey of the Inland Empire industrial numbers. Not as bad as I had thought, Absorption in the West IE is in the neighborhood of -1.5 million and for the East I.E we are looking at +3 or so million. (After much consideration and deliberation, the 2.1 million SF Stater Brothers DC does count, Merry X-Mas to me!).

I cannot rule out a huge screw-up on my part or a hidden bias towards having nice positive numbers, but I was assuming that things would be more or less horrific (more horrific actually) than what I am getting.

Which begs the question: Do they really pay me for this?

Looks like I may have to revise my titles again. Thinking of something along the lines of: We're Not Dead Yet!

Next week I will start on the office numbers, I am hoping for a downer there since I have so much pent up pessimism, I am sure it is not healthy to not vent it. (+2 f0r the d0uble negatives)

533,000 Jobs In November

Gone.

Lost jobs = less demand for real estate.

As a back of the envelope calculation, lets see what the paper damage would be.

In Las Vegas, the multipliers we used (if I can remember them correctly) were as follows:
1 industrial employee = 1000 SF
1 office employee = 350 SF
1 retail employee = 250 SF

If you turn those employees into commercial space, we are looking at millions of SF of space just *poof* no longer needed.

A more sophisticated way to approach this would be to use an I-O (input-output) multiplier, where each employee is turned into a dollar amount of spending (equal to approximatly their wage), and that spending is in turn spent on goods and services, which is then used on goods and services, etc.

This process continues forever, much like fractional-reserve banking, with the end result being greater than the sum of its parts.

This is called the multiplier. If the average US wage is 36K a year, and we lose 553,000 jobs, then this would be a theoretical net loss of $19 billion dollars. If that $19 billion dollars had been allowed to flow through the economy, and using a conservative consumption multiplier of 1.4, we just lost (or know that we lost) around 26.8 billion dollars of spending.

This is called in the macro-economics business as a "decrease in aggregate demand".

The sad thing is that these are official numbers, there are a large number of people who are not counted that probably should be.

For example is a little known unemployment number U-6, which counts unemployed, discouraged workers and full-time downgrades into part-time employment (underemployment as opposed to un-employment).

This number is 12.5%

Simply in order to keep up with population growth, employment needs to increase by 125,000 jobs per month. Note also that the length of the typical workweek dropped to 33.5 hours. That's the shortest number of hours since the Department of Labor began keeping records on hours worked, back in 1964. A significant number of people are working part-time who'd rather be working full time.

Coupled with those who are too discouraged even to look for work, I'd estimate that the percentage of Americans who need work right now is approaching 11 percent of the workforce. And that percent is likely to raise...

-Robert Reich

That Minsky Moment

I talked about this before, but it bears repeating: Everybody is wrong about everything, just about all of the time.

The greatest irony is then being completely right about something, capturing and defining an idea or an event so completely that your name will be forever linked to it, and not being around to take credit for it.

For some, I suppose it is a good thing. As is the case of Charles Ponzi.

For the purposes of this post, it is a bad thing.

As is the case of Hymann Minsky, who would later be attributed the phrase "a Minsky moment", the point in time when the willful ignorance of the general public can no longer be maintained, when collapse and the giant flushing sound of the overall economy can be heard by all.

Minsky's insight was on business cycles and their interdependence with financial markets.

Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

This slow movement of the financial system from stability to crisis is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.

Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt (the greatest American export over the past 30 years).

He identified 3 types of borrowers that contribute to the accumulation of insolvent debt: Hedge Borrowers; Speculative Borrowers; and Ponzi Borrowers.

The "hedge borrower" is one who borrows with the intent of making debt payments from cash flows from other investments;

The "speculative borrower" who borrows based on the belief that they can service interest on the loan but who must continually roll over the principal into new investments;

and

the "Ponzi borrower" who relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off their debt but who does not have sufficient resources to repay the original loan, otherwise.

Minsky, to my knowledge, did not offer any advice on what to do when the terror came.

Panic being essentially a psychological term, not an economic one, is hard for economists to deal with since we more or less assume people are optimizing robots immune to fear.

Being a Keynesian he probably would have advocated some sort of government intervention, although I am not sure if he would support Paulson's current "dump the money in a giant hole" philosophy.

Econolog has some further ruminations on the Ponzi borrowers.

In unrelated (mostly) news, tomorrow (December 5th) is the 75th anniversary of the repeal of prohibition.

Did you know that over 1.4% of the US GDP comes from the beer industry? That Americans drink more beer than wine and spirits combined (do most likely to its lower alcohol content and tastiness)

Help support America and do your part!

Working on the Industrial Numbers For the Inland Empire

I am already thinking of headline titles, which is arguably the most entertaining part of the job. It is also the part of the report most likely to be read.

So far I am mulling:

We are already in Hell,

End of a Year Gone Bad,

If you can read this, please send help,

If you build it, it will fail

Bonfire of the Misguided Vanities

Scraping the bottom of the barrel of demand,

Fear and leasing in the IE

Recession has lost its meaning, painful lessons to be relearned

Frightening belt-tightening

Managing the Decline Of A Once Great and Mighty Empire

None of these will be used by the way, sadly this is the only platform for my linguistic genius. I find it easier to write in a down cycle, the adjectives for fear, greed and descriptions of the collective flogging we all deserve come much more naturally.

Optimism is a forced habit for researchers I feel, otherwise we would be immune to risk and toss our hat into the brokerage field.

Are things really as bad as these titles suggest? Maybe not really. Nobody knows, which is why I am tasked with putting a smile on this ghost story. Nobody else really gives a crap about the numbers the way that I do, or is as intimately involved, and there are limits to the horrors one brain can comprehend.

The combination of ugly math and isolation is volatile trending to the damaging.

So I decided to meet with some of the other researchers at the "competing" firms.

I put competing in quotes because right now we are all in the same boat together. Even in the good times there was little to separate us. We are like foot-soldiers in opposing armies, more sympathetic to our enemies who share our struggles than the revolving generals that lead this suicide march.

Yes, we all share the same boat. And that boat is sinking.

The numbers are pretty bad, everyone can agree on that. They have some tricks that will save them though, Stater Brothers completed their 3 million SF center.

Colliers does not count that absorption since it is owner occupied. Like being a Jewish kid on Christmas day, this is a present I cannot claim.

Other than that, some tweaking of the numbers is to be expected and some liberties are going to be taken on items that might have been passed on in previous quarters.

Sublease vacant space, now how vacant is that space actually? Isn't it much more likely that the space is occupied, since the rent is still being paid? Hmmm?

And For-Sale only product, certain grey areas exist as to the vacant nature of these buildings, right? If these buildings weren't, say, occupied, then they would lease them right? So one could deduce that these buildings are not in fact vacant, but probably mostly vacant, or occupied.

And if the lease rate is TBD, then the landlords don't really have that building on the market then, right? I mean, if they can't make up their minds in this market, then they are obviously "off" market, catch my drift?

Truth is much too complicated to allow anything but approximation, and the collective approximation, at least so far, feels like a bad dream without end.

Which is why me and my fellow researchers raised our glasses and announced:

"Here's to being a salaried employee during an economic collapse"

This Just In: Recession Started in 2007

Thanks NBER for officially saying what was most apparent to everyone months and months ago: The United States is in a recession.

I wonder if the timing of this release was politically motivated, until after a certain election perhaps?

President Bush issued an apology.

"What the American people have got to know is we've taken the steps to unthaw
it, which is the first step to recovery"

Unthaw? Really?

In graduate school we would make fun of the MBA students, since the program was not as "intense" as the economic program. Entire papers have been written on the subject of MBA's and the ruinous effect they have on this county.

Those looking for proof that MBA degrees promote the worst excesses of management practices need look no farther than the insulting and bumbling career of President Bush, our first MBA president. Or, as he may now be called, our recession sandwich president.

Of course, if this was Latvia, all this nay-saying would be illegal, as only optimism is permitted there there.

The Nightmare Before Christmas

Here is my newest article.

Please forgive the sensationalist headline, the opportunity was too good to pass up.

The "actual" results were not as bad as predicted. Spending was 3% higher this year over last. The estimate called for a 1% decline. So, obviously, things are better than they seem.

As a expatriate of Las Vegas (and more importantly as a practitioner of statistics and a strong believer of Bayesian probability) I know enough to never bet against the American Consumer.

It is a little surprising to me then, since I automatically assume that everyone is as concerned with the minutiea of every bit of economic news as much as I am, that the stock market took a huge dump today.

My reasoning is this: If consumer spending makes up the majority of GDP, and Black Friday is the most important spending day of the year, if the results are better than predicted then stocks should be valued at a higher rate. Since, theoretically, the bind we are in is not the worse possible state of affairs.

Granted, consumer spending on the day after Christmas is a barometer reading and not a prediction, since the majority of spending is still yet to come. Also, one should not get into the habit of making stock market predictions, especially in the short run. At least one should not if he wishes to remain credible in the eyes of a thinking society, as applying a ration model of behavior to an irrational voting machine is absurd.

How not to conduct your business in a down market

I am currently in my office today getting ready to do the preliminary work for the 4th quarter numbers. I am overhearing a conversation a team of brokers is having with a potential client. They are arguing (negotiating) over commission costs, a fairly common argument I am sure with fairly common rebuttals justifying the commission my guys earn.

Now is not the time to be unreasonable and blow-up a deal over a 0.5% commission. There are many buildings on the market and being cheap with the agents you employ is not in your best interests.

For about an hour the back and forth went on, to the point where everyone in the office gathered round, silently cheering our side on. At one point or another, everyone has been on that side of the call, trying to convince someone that being cheap is not a way to win friends or to incentivize your brokers.

This is, after all, a relationship driven business. It is still a business and the bottom line still matters, but being a penny wise and a pound foolish will not be forgiven in times like these.

The relationships are changing, the residential and amateur brokers are moving in. It is easier to get and share the information and the competition is looking to get fierce for the first time in a long time.

After the hour long conversation I was reminded that we are indeed professionals, and when push comes to shove, we are able to get people to sign on the dotted line. The sad part is, the work has just begun, we have the listing but now need to market it and find a buyer. The end of this conversation is just the beginning of another one.

No Deal Friday

In a passionate and thought provoking lunch encounter, some of my more intelligent brokers I have the pleasure of doing business with, shared some of the common concerns and trends they are witnessing lately.

The first observation is that tenants are choosing to renewals without consulting a real estate broker. The landlord, scared to death over the sudden reality that vacant space is taking six months or longer to lease, are more willing then ever to "discuss" renewal options with their existing tenant, sans the broker.

Landlords are scared shit-less over the possibility of having vacant space at a time like this. Likewise, tenants who are used to yearly escalations of around 4% for the past several years, are thrilled by the idea of a "rent reduction". Little do they realize that what they consider a "rent reduction" is actually just the going market rate at the moment and a much better deal could be had if they consulted the wisdom of a listing broker.

The second insight occurred when the discussion shifted towards the topic of listings. Listings are easier to come by than in years past, no doubt in part due to the fact of a rapidly rising vacancy rate, and the more listing a broker has the better off he is. As a bench-mark, 100 listings was deemed a satisfactory number. If a broker had 100 freaking listings, there is a good chance that at least some of them would move in this market. The more listing, the wider the net, the more fish/flies/tenants one was likely to catch.

The next insight was concerning the nature of deal volume and time on market. Deal volume is down considerably, whereas the time on market was up considerably, leading to the profound realization that keeping your clients happy was paramount. Beg, let them know you are hungry and willing to work and setting yourself apart from the competition are all ways to keep your client sympathetic to your needs and aware of the dire current market conditions. Client retention is key.

In sum, No Deal Friday, is an important aspect of my job and profession. Just one way I am giving back to the community and discussing the issues of utmost importance to today's Real Estate Professional.

Results of 2008 Warehouse Survey

Logistics Management has a very comprehensive survey done every year that examines the issues facing todays supply chain professionals. Here are the results of the survey.

Warehouse and Distribution Center Management: Sitting Tight
The results of our 3rd Annual Warehouse/DC Operations Survey reveal that the struggling economy and reduced consumer demand have forced warehouse and distribution decision makers to become much more cautious.

OH NOES!! Drop in aggregate demand, the fourth horseman

This is what happens when demand changes faster than supply, and not in a good way. This is the sad realization of current affairs. The kind of sadness that can only occur when all hope of a better world evaporates from your heart.

I remember reading a passage from my macro-economics textbook where a foreman at a Ford plant comments on how the automobiles were starting to back up. This was right before the Great Depression and was to illustrate the effects of changes in aggregate demand.

Here is an except from a good book on the history of American automobile workers, the working conditions and uncertainty that was faced during the early days of manufacturing, before the large scale unionization took place. When the layoffs occurred in 1931, production was cut back to their lowest level since 1916. People would line up the night before, insulating their feet with newspapers, just to be close to the door when that days hiring started.

I don't think it will get to that level again, simply because manufacturing is a much smaller component of our economy and the government has a much greater role in the security of its citizens, but one should not be naive in considering the depth of the suffering that could occur.

From NY Times: A Sea of Unwanted Imports

November 19, 2008

By MATT RICHTEL

LONG BEACH, Calif. — Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.
And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

“This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars.

“And it scares you to death.”

The backlog at the port is just part of a broader rise in the nation’s inventories, which were up 5.5 percent in September from a year earlier, according to the Commerce Department. The car industry has been hurt particularly, with sales down nearly 15 percent this year. General Motors has said it would run out of operating cash by the end of the year if it does not receive a government bailout.

But the inventory glut in Long Beach is not limited to imported cars. There has also been a sharp drop in demand for the port’s single largest export: recycled cardboard and paper products.

This material typically goes to China, where it is used to make boxes for new electronics and other products that are sent back to the United States. But Chinese factories reacting to sharply falling demand are slowing production, so they need less cardboard. Tons of paper are piling up recycling businesses around the port, the detritus of economies on hold.

Long Beach is an important port, particularly for the West. It is where imported products arrive and filter through the tributary of trucks, trains and retailers into the hands of consumers. But now, products are just sitting.

“We’re supposed to move things, not store them,” Mr. Wong said.

Roughly 20 percent of the nation’s container imports last year came through Long Beach, putting it close behind the largest container port, Los Angeles. This year, shipping volume at Long Beach is down 10 percent from 2007, and nearly all major ports around the country have seen similar declines. Veteran port workers say the slowdown since mid-October is like nothing they have ever seen. And it is having a cascading impact on other businesses and workers.
In the 150-acre terminal where Toyotas are unloaded, there is a sea of Corollas, Camrys and RAV4s. The mere presence of so many cars is not unusual, given that Toyota brings in 250,000 cars a year in biweekly shipments. But in a sign that something is amiss, dozens of tractor-trailers that transport new cars to dealers sat empty last week amid the rows of Toyotas.
Kurt Golledge, 48, was one of just two truckers loading his green, 75-foot-long hauler with cars last week. Mr. Golledge said eight of his colleagues were laid off this month because Toyota dealers did not want more deliveries.

“I was dropping cars in Henderson, Nev., about a month ago and the dealer told me: ‘Take ’em somewhere else and dump ’em,’ ” said Mr. Golledge, who works for a company called Allied Systems. “All the dealers are telling us the same thing.”

Auto dealers typically place orders with manufacturers months in advance, but they can modify their orders to receive fewer vehicles.

“The ships keep coming, but there’s nowhere for the cars to go,” Mr. Golledge said. He said he believed the vehicles he was loading would be his last before he was laid off, and he was already considering where he might find a new job.

While shipments for some items have slowed, the cars have kept coming in at their regular pace partly because the auto factories can take months to adjust to changes in demand. Toyota is wrapping up a deal to use six acres to park cars at the port, and is seeking more space.

“Toyota wants as much as we can give them,” said Gail Wasil, assistant director of the port’s real estate division.

For its part, Toyota says the higher-than-usual inventories at the Long Beach port are a result of shrinking demand, particularly in Southern California, which is one of its biggest markets. The company declined to say how many cars were at the port or how long they would be warehoused.

Toyota has adjusted its output to reflect falling demand, said Sona Iliffe-Moon, a Toyota spokeswoman.

Ms. Wasil said Nissan, whose cars arrive through the port of Los Angeles, sought a deal with Long Beach to park its overflow vehicles there. Mercedes struck a deal to use more acres just a few weeks ago, she said.

Officials from Mercedes and Nissan did not return calls seeking comment.

The mothballing of cars is nothing new for Detroit, where thousands of unwanted American-made cars have been parked over the last two years at Michigan’s state fairground and in lots at its airports.

It is more unusual to see a lot at the California port filled with thousands of unsold Mercedeses, most of them gathering dirt on the plastic white film that protects their hoods and trunks. Some appeared to have been stashed at the port for several months.

Last week, Mercedes delivered around 1,000 more cars to Long Beach on the Grus, a 580-foot container ship.

“A year ago, I was looking into buying one of these for my wife,” said Kurt Garland, the terminal manager overseeing the unloading of the white, silver and black sports cars, sport utility vehicles and sedans. “Now I’m not. I’m saving money, paying bills, hunkering down.”

Not far away, metal, cardboard, paper and plastic are piling up in the lot of Corridor Recycling. The company takes in refuse from around the country, then bales it for shipment to China. The cardboard is used to make new boxes while used shrink wrap is turned into shoe soles and insulation for sleeping bags and coats.

For much of this year, the company shipped about 25 containers a day, each filled with 23 tons of refuse to be recycled. But after the Olympics, demand slowed for recycled metal. In October, demand for everything else took a sharp downturn, and for the last two weeks the company has not shipped a single container.

“It just came to a complete stop. Absolutely a stop,” said Gilbert Dodson, the recycling company’s co-owner. “I’ve seen it slow over the last 25 years, but this is the worst,” he said of the current downturn.

Like his counterparts in the auto industry, Mr. Dodson is looking for extra space to accommodate the growing number of bales on his three-acre property. The recycled goods keep arriving in big trucks, even though he now pays only $21 a ton for refuse he paid $120 a ton for earlier this year, but there is nowhere for him to export.

“It keeps coming in,” he says. “But no one is buying.”

Victorville - The Best Stuff On Earth?

Dr. Pepper Snapple Group (DPS) has finalized an agreement to open a world-class production and distribution center here at the Southern California Logistics Airport (SCLA).

The $120 million facility is expected to employ 200 workers and will become the company's Western hub in a regional manufacturing and distribution footprint serving California and parts of the desert Southwest.

The company will produce a range of soft drinks, juices, juice drinks, ready-to-drink teas, energy drinks and other premium beverages at the Victorville plant.

The plant will consist of an 850,000 square-foot building on 57 acres, including 550,000 square feet of warehouse space and a 300,000 square foot manufacturing plant with up to six manufacturing lines.

Construction is set to begin in October. Upon opening in early 2010, the facility will have the capacity to annually produce as many as 40 million cases of product and will serve nearly 20 percent of the U.S. population.

From Expansion Management.

I am a little bummed. There is a former cheese plant in Corona that I hope DPS checked first. It is an 80 acre plant with 400,000 SF of warehouse already standing. It also includes co-generated power and 100,000 gallons of water use a day.

AMB suspends its dividend

I am not sure if now is the time to jump into REITS. The ones I do own have already suspended their dividends, so I am not sure if that is a good sign or not. REITS need to pay 90% of their income out in dividends. However, no income means that shareholders will get nothing.

ProLogis (PLD) took a sharp nosedive earlier this month. It went down sharply from $40 a share at the end of September to about $13 a share at the end of October. I was thinking that $12 seemed like a fair price and then it went down to $8 and is now at $5.

AMB has held up a lot better, only declining from $40 to around $14.


ASSOCIATED PRESS

SAN FRANCISCO (AP) - AMB Property Corp. announced Monday it is suspending its fourth-quarter dividend as part of an overhaul of its dividend policy aimed at increasing cash reserves.

AMB said it will now determine its regular dividend payments by aligning them with its projected taxable income from recurring operations. Under that guideline, AMB expects the company's common stock dividend rate next year will be $1.12 per share.

The company said its board of directors suspended the fourth-quarter dividend because it projects the company has already met its dividend distribution requirement for 2008.
AMB expects the new dividend policy will enable the company to save $53 million in the fourth quarter and $98 million in 2009.

In a regulatory filing last week, AMB said it paid common stock dividends of $1.56 per share for the first nine months of 2008, compared with $1.50 for the same portion of 2007.

The developer of industrial real estate also said it plans to curtail development until the financial markets stabilize, going ahead only with projects to which it has already fully committed or negotiated certain agreements.

The company noted it has sufficient financial capacity to complete building projects in its development pipeline.

As of Oct. 31, the company had $238 million in cash and access to $689 million in credit.

"We believe AMB's actions to suspend the fourth-quarter dividend and to further rationalize capital deployment and expenses ... will better position AMB for the future by enabling the company to take advantage of opportunities that may arise once the economy and financial markets stabilize," Hamid Moghadam, AMB's chairman and chief executive, said in a statement.
AMB shares added 58 cents, or 3.9 percent, to $15.33 in afternoon trading.

The company's shares have traded between $12.88 and $64.32 during the past year.

It Begins ...

In what amounts to a recreation of depression-era preconditions, Russia establishes protectionist measures designed to protect the Russian auto industry. If other countries follow suit, you can start saving your potato sacks and barrel suits in anticipation of the impending economic apocalypse.

From FT.com

Russia said on Monday that it would push ahead with sharp rises in import duties in the near future in spite of signing the Group of 20 communiqué that promised not to introduce protectionist measures for a year.

Dmitry Pankin, deputy finance minister, said Moscow would increase tariffs on imported cars, a move that had already been planned to protect Russian car producers. Russia has also announced a general review of trade agreements, including commitments made as part of its application to join the World Trade Organisation.

The review may result in duties being increased and import quotas for sensitive products being cut.

Mr Pankin said there was no contradiction between Russia’s actions and the communiqué it signed as a member of the G20 leading economies in Washington on Saturday. The agreement was portrayed by the UK and US as a powerful statement against protectionism.
“The wording is sufficiently fluid . . . The formulation is careful,” Mr Pankin told reporters. “No one said that anyone should scrap existing barriers or go back on existing decisions. There were no calls for this.”

The US and UK governments did not return requests for comment. The European Commission said the news was not particularly troubling, as the duties would cover only a small part of trade.
But independent trade experts said Moscow’s actions revealed the flimsiness of the G20’s pledge to refrain from new trade protections in the next year. Fredrik Erixon, director of the European Centre for International Political Economy, a free-trade Brussels think-tank, said: “I am not surprised at all. I don’t think the G20 was a meaningful exercise in trying to tie down its governments’ trade policies.”

Those present at the meeting said the communiqué would permit countries to impose so-called anti-dumping duties and other emergency blocks against imports. Such actions have increased rapidly in recent months as commodity prices have fallen, making it easier for companies to argue that they are being hit by dumped imports.

Mr Erixon said that such emergency actions, together with state aid to politically sensitive industries, were supplanting permanent import tariffs as the main tool of trade protectionism, and were not covered by the G20 statement.

Saturday’s G20 communiqué said: “We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services.”

Declining Exports - Trouble

Brad Setser has an interesting piece on exports.

Rising fuel prices led to declining petrol imports. This led the trade deficit to narrow. Fear in credit markets has led to a flight to dollar denominated assets, which are seen as safer, increasing the value of the dollar. This has driving down oil prices and reduced exports.

Paul Krugman notes that:

Exports have been the one good thing about the US economic situation; in fact, the reason the economy didn’t fall off a cliff immediately when the housing bubble burst was that, for a while, export growth took up the slack.

What the nation needs is a weak dollar in order for exports to rise and imports to fall. Looks like that is not going to happen.

Declining Consumption - Trouble

Most people assume deflation right now and estimate that to be at around -0.7%.

Even when this is factored in, retail consumption is lower now than in the previous 12 month period.

Econbrowser has a good post on the 12 month drop in retail sales of -.08% (-0.5% if you factor in deflation).

You would have to go back to 1981, when Reagan first took office, to see a drop of this magnitude.

Retailers are getting and will continue to get hammered. Another casuality in the too big / too quick constant and forever growth scenario.

Tough times for CB Richard Ellis brokerage

Tough times for CB Richard Ellis brokerage

Silicon Valley / San Jose Business Journal - by Katherine Conrad
It’s a tough time to be a commercial real estate brokerage.

But CB Richard Ellis Group Inc. insists its picture isn’t as bleak as what was painted by a report from Morningstar Inc. earlier this month.

The report described CBRE’s position as “precarious” because of massive debt and noted that cash flow was a negative $380 million in the first half of 2008 compared with a positive $163 million for the same period in 2007.

The report further stated that as much as 40 percent of CBRE’s revenue is tied to commercial real estate deals in a market that has “plummeted” as the economy falters.

Morningstar indicated that the company has $3 billion in debt and faces a funding shortfall of $500 million in the upcoming year.

Despite the downbeat tone of the report, Morningstar values the stock above where it has been trading. The company is trading at $3.77 per share as of Nov. 11, off its 52-week high of close to $25. Morningstar is pricing the stock at $6.50.

Mark Schmidt, head of CBRE’s Silicon Valley office, agreed that the economic situation is challenging and said that while other offices have cut staff, he does not plan to let any of his 40-plus brokers go. He noted that CB Richard Ellis was founded more than 100 years ago and has faced difficult times before.

“Everybody is struggling with the economy. We all have to get as lean and mean as possible and watch expenses more than we ever have,” he said. “CB is no different. We’re cutting expenses like everyone else and trying to be prudent to stockholders.”

Brett White, CBRE’s president and CEO, responded to the Morningstar report with a letter to shareholders that said the firm’s revenue was $1.3 billion for the third quarter and earnings per share totaled 27 cents, exceeding analysts’ expectation by 4 cents.

“These are certainly very challenging times for everyone,” wrote White. “Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago.”

CBRE announced as of Nov. 11 that it would offer 50 million shares of stock for sale, to deal with its 65 percent drop in net income in the third quarter. The stock offering comes on top of a reduction of $190 million in costs, which include layoffs.

CBRE, with 300 offices around the world, stands out as the largest and most public of commercial real estate firms facing an increasingly tough market. Because it is public, the firm must disclose its finances.

But CBRE is not alone.

Privately held Cushman & Wakefield Inc. and publicly held Grubb & Ellis Co. are rumored to have laid off brokers. Neither company would return telephone calls seeking comment. Grubb & Ellis’ stock has dropped to around $1 from a 52-week high of $7.50.

Mark Ritchie, whose firm Ritchie Commercial Inc. had four offices throughout the Bay Area including locations in San Francisco, San Jose, Oakland and Walnut Creek, said he plans to consolidate his East Bay offices into the Walnut Creek location. While Ritchie is saving rent through consolidation, he has added brokers in San Jose and San Francisco to his staff of 45 brokers.

“I’m so different from all of them because my firm is so small,” Ritchie said. “We’re making deals. They’re small, but they are deals.”

Phil Mahoney, principal and executive vice president of Cornish & Carey Commercial/ONCOR International, said his firm, which has been profitable for decades, also has added brokers.

“It’s a good time to be private,” he said. “We don’t have the stockholders looking over our shoulders. We don’t have debt to service and we’re not in the public eye. Pubic entities that do have debt are under severe strain.”

Retail Real Estate: The Next Shoe To Drop?

Richard Green has an interesting piece on why retail real estate is likely to suffer for awhile. A brief summary:


1. Increase in retail space over last 15 years.

2. Depression era cohorts (people born during the Depression) spend less on retail.

3. As these people die, spending should increase.

4. Baby Boomers spend more on retail, financed heavily by credit.

5. Retail margins reached high and possibly unsustainable levels.

6. Inheritances and immigration are possible ways out of this.

8. Consumption cannot lead us out of this recession. Investment or Net Exports are the only way. (Richard leaves out government spending, which was the path of the last depression.)


We can expect retail to take further hits. Major companies are going bankrupt (Circut City, Mervyns etc.) due to rapid, unsustainable expansion. And things are likely to get worse, with all the layoffs and decreased access to debt the American consumer is tapped out.


In my belief, some new and radical form of debt will have to be created to continue to allow American consumers to live beyond their means, or we are going to see a more frugal and thrifty nation.


Imagine the end of Walle, when all the obese space travelers depart the ship. I believe we will finally have to come down from the clouds.

Office and industrial vacancy rates continue to rise on weakened economy

My newest article from The SB Sun:

It is widely acknowledged that things grew too fast out here in the Inland Empire (houses, debt and commercial development), and we are now beginning to realize the seriousness of an inevitable contraction period. The U.S. economy shrank in the third quarter of this year at an annual rate of 0.3 percent, the sharpest decline since 2001.

The office and industrial real estate markets are responding to these conditions as vacancy rates continue to rise, asking rents begin to fall, and landlords worry about empty buildings and tenant bankruptcies.

For the Inland Empire office market, new developments over the past year have totaled 1.99 million square feet, increasing the amount of office space by 9.7 percent. Most of this new space has been delivered to the market vacant, causing the direct vacancy rate to increase from 11.9 percent last year to 17 percent this year.

Despite these large changes in the vacancy rate, asking rates have been slow to respond, dropping only five cents over the previous year to end at $1.95 per square foot per month.
While these rates are the lowest in the five-county Los Angeles Basin, further declines will be necessary due to the sheer volume of vacant space.

Deteriorating market conditions leading to softening rents and increased vacancies throughout Southern California have eroded the competitive aspects of the Inland Empire office market. As a result, things are unlikely to rebound until office markets in Los Angeles and Orange County return to normal. Local demand is not sufficient to deal with existing vacant space.

"The industrial market in the Inland Empire is also showing signs of weakness due to oversupply issues and fundamental changes in the global supply chain" says Tom Taylor, senior vice president of Colliers International. "The Inland Empire is the premier gathering point for foreign goods entering the country from Asia. Declining imports, rising fuel costs, declining consumption and poor economic conditions means that profit margins are down, and everyone has to work harder and cut costs just to stay in the same place. "

Vacancy rates in the east Inland Empire now stand at 19.9 percent, up considerably from 12.3 percent a year ago due to construction completions. For the west Inland Empire, the vacancy rate is also rising, now at 7.6 percent up from 2.5 percent a year ago. This is due to firms shrinking their operations or going out of business as the economy contracts.
Things are already bad for the Inland Empire.

According to the Wall Street Journal, the region had the nation's highest unemployment rate of 9.2 percent in August. The second-highest rate was metropolitan Detroit at 8.8 percent. We are in the transition period after the housing peak, where uncertainty is the greatest, and the largest changes are still yet to come.

Thomas Galvin is a research associate at Colliers International commercial brokerage firm in Ontario who uses econometrics to study Inland Empire real-estate trends and produce theory models.

ProLogis Ceo Quits

CBRE Stock Declines 30%

Inland Empire Housing Blogger

I stumbled upon a well written housing blog Housing-Kaboom. The focus in on home prices in the Inland Empire, notably pointing out the expectation gap between buyer and seller.

Take a look, he puts a lot of time into his blog and there are plenty of interesting reads.

DHL CLOSES SHOP

From Businessweek:

DHL to Halt Express Deliveries in the U.S.
Deutsche Post's U.S. division will also close its 18 main distribution hubs and lay off most of its workers in the country

Package delivery company DHL may have conquered the world, but it admitted on Nov. 10 that it couldn't conquer the U.S. The unit of Germany's Deutsche Post (DPWGN.DE) announced it will stop making express deliveries within the U.S., close all of its 18 main distribution hubs there, and lay off all but a few thousand of its remaining 13,000 U.S. workers.

DHL has lost nearly $10 billion in the U.S. in the five years since it purchased Airborne Express in an attempt to challenge FedEx (FDX) and United Parcel Service (UPS). Despite its dominance in the rest of the world, DHL was never able to take enough share from the two major carriers in their home market. The company's decision to largely withdraw from the U.S. will push parent Deutsche Post to an estimated $1 billion loss for the full year as it books writedowns totaling $3.9 million to cover severance payments to workers and other restructuring.


UPS has been hurting as well, but existing the market completely?

I have talked about the problems DHL has faced back in May and the possibility of closing shop and merging with UPS was very real.
13,000 U.S. workers real.
12 million SF of warehouse space real.

I guess the takeaway message is to focus on what you are good at, although all those inefficiencies paid a lot of bills for a lot of people in the past.

Another Shipper Reduces Capacity

From Financial Times:

Neptune Orient Lines to cut capacity

Singapore’s Neptune Orient Lines is to slash capacity on the most important trade routes in what is expected to be the first of many responses by container shipping lines to rapidly slowing demand.

NOL, the number seven container line, is making the cuts in conjunction with the other members of the New World Alliance, Japan’s Mitsui OSK and Korea’s Hyundai Merchant Marine.

NOL, whose ships are operated by its APL subsidiary, said it was cutting the available space on Asia-Europe services by close to 25 per cent and transpacific capacity by 20 per cent.
It is also cutting capacity in the previously healthy trade within Asia, which accounts for more container movements than any other container trade.

Container shipping lines have been hit by the world economic slowdown because their main cargo is consumer goods bound for the slowing economies of Europe and North America.
There are growing signs that demand for their services has been hit by problems arranging letters of credit, instruments which assure sellers that they will be paid for their goods once they have been delivered to a buyer.

Banks are increasingly unwilling to issue such letters of credit, while many are sceptical about accepting them out of fear their issuers might collapse before goods arrive.
The collapse of demand in the Asia-Europe trade has been striking.

Volumes last year were around 20 per cent higher than the year before, but figures released last week by the Far Eastern Freight Conference showed that volumes moved between Asia and Europe by the conference’s members were 2.43 per cent lower in the third quarter this year than last.

Container lines’ problems are compounded by the large numbers of expensive new ships on order from shipyards, many of them due to enter the Asia-Europe trades.
Container lines have been vulnerable to high fuel prices because their ships need more fuel to maintain their high speeds.

Many lines have responded to slowing demand by slowing ships down.
Extra vessels are then added to services, to ensure that a weekly service from each port can be maintained.

NOL announced one such change to its South China Express service to Europe.
It added several new port calls to the service to make up for the withdrawal of another service and added a ninth ship to the service.

Eng Aik Meng, APL’s president, said the traditional softening of demand in the main container trades – which follows the northern hemisphere summer and Christmas demand – had been compounded by the financial crisis.

“In response to these factors, APL is taking quick and decisive action to adjust to this reduced demand and reconfigure our service networks,” he said.

On October 10, NOL allowed its bid to buy Germany’s Hapag-Lloyd, the world number five container carrier, to lapse, apparently over concerns over slowing demand.

There has been speculation that other big container operators will announce similar measures.



We built the tools of consumption, more and bigger ships, more and bigger distribution centers, higher capacity trains and trucks. If you take away the consumption, the tools are without merit. Each warehouse then becomes a headstone for a ruined business cycle, that of perpetual consumption and perpetual debt.

Homebuilding Index: Worst Reading Ever

A report from Wells Fargo and the National Association of Home Builders (NAHB) reports that confidence amongst homebuilders has plummeted to an all-time low in October.

The housing market index, a measure of builder confidence in the U.S., fell three points to 14, following a downwardly revised reading of 17 in the prior month. The index cited "profound uncertainties" in the outlook.

"This was one area that had been showing some tentative signs of life over the past few months, as prospective buyers, tempted by low prices, dip their toes back into the housing market," said BMO's Jennifer Lee. "Unfortunately, recent developments have clearly caused a rethink."
The index, which consists of three components, has a 22-year history.

The sales expectations index tumbled nine points to 19, while the present housing index for single-family homes fell three point to 13, and the component looking at traffic of prospective buyers fell two points to 12.

A rating above 50 indicates optimism from homebuilders. Since March 2007, the index has fallen from a reading of 36.

Ian Pollick, economics strategist at TD Securities, commented: "This was a terribly weak report and suggests to us that U.S. home prices may still have room to fall before activity begins to pick up."

The latest mortgage averages will provide little solace to homebuilders. According to Bankrate.com, the rate for a 30-year fixed mortgage rose to 6.38% on Thursday, up from 5.87% last week.

Holy Christ, a reading of 14? Here you can see the index for yourself. It looks like most of the index depends on home sales, projected home sales and foot traffic to see homes. Looks like all your variables are strongly correlated without leading or lagging indicators.

Here is a little info on how the index is constructed. I am not saying I could create a better model, but it seems like the current version just measures how good builders feel about the housing market, which is not so good (take a look at the chart).

Paul Krugman Earns The Nobel In Economics

Perhaps better known for his New York Times Columns rather than his contributions to economics, Paul Krugman has earned the Nobel Prize in economics.

For his analysis of trade patterns and location of economic activity. Location and spacial economics has been shelved for some time, getting renown in the 1950's but falling out of favor since then. Since this is my token profession, it is reassuring to see some life being breathed back into the subject.

Especially now that tools to analyze and use locational economics are coming into vogue, such as GIS and aerial photography.

What I respect most about Krugman is that he has taken his field far from academics and brought it into the mainstream, essentially making himself a target from non-academics.

Likewise, he received heavy criticism despite his earning the Nobel Prize for work he did 30 years ago and not his recent contributions to the New York Times.

Here is a synopsis of how Krugman characterizes his work, broken into 4 categories.

1. Listen to the Gentiles - Do not be afraid to talk to member of other professions or backgrounds to get an idea of the bigger picture..

2. Question the question - Question initial assumptions and even if what you are trying to solve is worth solving.

3. Dare to be silly - (my personal favorite) A lot of economics is about a silly procedure to solve a serious problem. Krugman likes to turn things on their heads by using serious procedures to solve a silly problem. In my analysis of Rock-Paper-Scissors I did the same thing, put rigorous experimentation and modeling techniques on a somewhat trivial subject.

4. Simplify, simplify - (This one I have a hard time doing) Krugman is the master of an elegant simple model using theory rather than a "robust" complex model using econometrics. He is able to be very poignant and getting to the heart of the matter, whereas I get pleasure in making simple things brain-stumpingly complex (like rock-paper-scissors).

So to all of Krugmans critics who criticize him for his criticisms of the Bush administration's war against science, reason and criticism, revenge is a dish best served on top of a Nobel Prize.

Capacity Glut?

From WSJ:

Last year, the basic price of shipping a large container of goods from Asia to Europe, the world's busiest route, was $2,800. This week, with demand plunging amid a worsening economy, that price was an unprofitable $700.

That rate is "unsustainable," says Eivind Kolding, chief executive of Copenhagen-based A.P. Moller Maersk AS, the world's biggest shipping company by sales. The industry would be crippled if that price doesn't rise soon, he says.

Hit by the global economic downturn and a financial meltdown that promises an even sharper drop in once-hot trade flows, container-shipping companies are cutting routes and capacity to stem a sudden flow of red ink.

The past 10 years were a gold rush for shippers. China joined the World Trade Organization and sold hundreds of billions of dollar of goods to European and American consumers, who were enjoying low interest rates and steady economic growth. Factories relocated to Asia, stretching supply chains around the globe. Oil was cheap, ships were relatively scarce and shipping prices soared.

Container-shipping traffic on the Asia-Europe route rose at roughly 15% a year through the period. This year it will increase just 5%, says Philip Damas, of London-based maritime consultant Drewry Shipping Consultants Ltd. Capacity is growing much faster. "There's a glut of new large container ships entering the market," Mr. Damas says.

Other shipping routes, including Asia-U.S. lanes, also are suffering from declining demand. But the U.S. has tighter harbor space than Europe. Prices for the smaller ships docking in California, Texas and the East Coast have settled around a barely profitable $1,500 a container, analysts say.

Hurt all around. Fewer goods, means fewer ships are needed and fewer large warehouses and distribution centers. At least you can relocate a boat to a more profitable route, these warehouses are not going anywhere.

Sub-Prime Fiasco

Here is a pretty good summary I found of the current situation.

Sorry I have not been writing as much lately, but the end of the quarter is here, and I still have to finish my reports. I will be posting them here shortly along with my commentary so stay tuned.

This is the way of the future

There are so many inefficiencies that we live with everyday. For the most part, people do not notice until some outside event forces them to re-evaluate the way they do business.

Here is a piece on how milk is transported.

In the future, everything will work.

Highway Trust Fund Made Official

From Logistics Management:

WASHINGTON-Days after Federal highway funding received a much-needed boost, when the US House of Representatives last week voted by a 376-29 margin to sign off on H.R. 6532, the Highway Trust fund Restoration Act, the bill was officially signed into law by President George W. Bush.

This bill calls for a transfer of more than $8 billion from the United States Treasury General Fund to the Highway Trust Fund.

This vote paves the way for a transfer of more than $8 billion from the United States Treasury General Fund to the Highway Trust Fund. The legislation will now be sent to President Bush to be signed.

This news comes at a time when the future of the Highway Trust Fund was dire, as it was facing the prospect of running out of money entirely. At the end of July, the US House of Representatives approved H.R. 6532 to restore more than $8 billion to the Highway Trust Fund balance, which the White House said was soon to be facing a deficit of more than $4.3 billion. And earlier this week the US Senate approved the transfer of funds, too.

Last week, Department of Transportation Secretary Mary E. Peters called out Congress for the Highway Trust Fund’s financial situation, saying that President Bush has warned Congress of the pending shortfall and submitted budgets with fiscally prudent steps to close the gap. And she has called on Congress to go forward with passing “a fiscally responsible and effective transportation spending bill for the coming fiscal year—one that is free of waste and free of earmarks…and promotes solutions to our most pressing transportation challenges instead of ignoring them.

She added that that the situation has been exacerbated due to the oil and gas price spikes that have occurred this year and have resulted in vehicle miles traveled dropping by more than 50 billion miles in the last eight months. This is especially relevant, considering that the Highway Trust Fund is largely financed by the motor fuel federal tax, which is 18.4 cents per gallon for gasoline and 24.4 cents for diesel, and it has not been raised since 1993.

In 1993 a gallon of gas cost $1.04, so a 18.4 cent tax was equivalent to a 17.7% tax. If this tax would have been a percentage of a gallon instead of a flat rate, it would be 68 cents at today's prices.

Considering this, it is not hard to see how and why our nations highways and infrastructure is seriously under-funded.